Gatx Corp 10-Q for FY2022 Q3
Gatx Corp (GATX)
10-Q
2022-10-28
For: 2022-09-30
View Original
Added on
April 09, 2026
About this 10-Q
Gatx Corp filed this 10-Q on October 28, 2022, covering the quarter ended September 30, 2022 (FY2022 Q3).
Headline figures
Quarter ended September 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $321M
- up 2.4% from $313.5M a year earlier
- Net income
- $29.1M
- down 27.4% from net income of $40.1M a year earlier
- Diluted EPS
- $0.81
- down 27.0% from $1.11 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________
FORM 10-Q
__________________________________________
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended September 30, 2022
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
Commission File Number: 1-2328
(Exact name of registrant as specified in its charter)
| (State of incorporation) | (I.R.S. Employer Identification No.) | ||||
(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:
| Title of each class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||||||
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ☒ | Smaller reporting company | ||||||||||||||||
☐ | Non-accelerated filer | Emerging growth company | |||||||||||||||
☐ | Accelerated filer | ||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
There were 35.2 million common shares outstanding at September 30, 2022.
GATX CORPORATION
FORM 10-Q
QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 2022
INDEX
| Item No. | Page No. | |||||||
| Part I - FINANCIAL INFORMATION | ||||||||
| Item 1 | ||||||||
| Item 2 | ||||||||
| Item 3 | ||||||||
| Item 4 | ||||||||
| Part II - OTHER INFORMATION | ||||||||
| Item 1 | ||||||||
| Item 1A | ||||||||
| Item 2 | ||||||||
| Item 6 | ||||||||
FORWARD-LOOKING STATEMENTS
Statements in this report not based on historical facts are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and, accordingly, involve known and unknown risks and uncertainties that are difficult to predict and could cause our actual results, performance, or achievements to differ materially from those discussed. Forward-looking statements include statements as to our future expectations, beliefs, plans, strategies, objectives, events, conditions, financial performance, prospects, or future events. In some cases, forward-looking statements can be identified by the use of words such as "may," "could," "expect," "intend," "plan," "seek," "anticipate," "believe," "estimate," "predict," "potential," "outlook," "continue," "likely," "will," "would", and similar words and phrases. Forward-looking statements are necessarily based on estimates and assumptions that, while considered reasonable by us and our management, are inherently uncertain. Accordingly, you should not place undue reliance on forward-looking statements, which speak only as of the date they are made, and are not guarantees of future performance. We do not undertake any obligation to publicly update or revise these forward-looking statements.
The following factors, in addition to those discussed under "Risk Factors" and elsewhere in our other filings with the U.S. Securities and Exchange Commission, including our Form 10-K for the year ended December 31, 2021 and in any subsequent reports on Form 10-Q, could cause actual results to differ materially from our current expectations expressed in forward looking statements:
•the duration and effects of the global COVID-19 pandemic and any mandated pandemic mitigation requirements, including adverse impacts on our business, personnel, operations, commercial activity, supply chain, the demand for our transportation assets, the value of our assets, our liquidity, and macroeconomic conditions •exposure to damages, fines, criminal and civil penalties, and reputational harm arising from a negative outcome in litigation, including claims arising from an accident involving our transportation assets •inability to maintain our transportation assets on lease at satisfactory rates due to oversupply of assets in the market or other changes in supply and demand •a significant decline in customer demand for our transportation assets or services, including as a result of: ◦weak macroeconomic conditions ◦weak market conditions in our customers' businesses ◦adverse changes in the price of, or demand for, commodities ◦changes in railroad operations, efficiency, pricing and service offerings, including those related to "precision scheduled railroading" ◦changes in, or disruptions to, supply chains ◦availability of pipelines, trucks, and other alternative modes of transportation ◦changes in conditions affecting the aviation industry, including reduced demand for air travel, geographic exposure and customer concentrations ◦other operational or commercial needs or decisions of our customers ◦customers' desire to buy, rather than lease, our transportation assets •higher costs associated with increased assignments of our transportation assets following non-renewal of leases, customer defaults, and compliance maintenance programs or other maintenance initiatives •events having an adverse impact on assets, customers, or regions where we have a concentrated investment exposure •financial and operational risks associated with long-term purchase commitments for transportation assets •reduced opportunities to generate asset remarketing income | •inability to successfully consummate and manage ongoing acquisition and divestiture activities •reliance on Rolls-Royce in connection with our aircraft spare engine leasing businesses, and the risks that certain factors that adversely affect Rolls-Royce could have an adverse effect on our businesses •fluctuations in foreign exchange rates •inflation and deflation •failure to successfully negotiate collective bargaining agreements with the unions representing a substantial portion of our employees •asset impairment charges we may be required to recognize •deterioration of conditions in the capital markets, reductions in our credit ratings, or increases in our financing costs •changes in banks' inter-lending rate reporting practices and the phasing out of LIBOR •competitive factors in our primary markets, including competitors with significantly lower costs of capital •risks related to our international operations and expansion into new geographic markets, including laws, regulations, tariffs, taxes, treaties or trade barriers affecting our activities in the countries where we do business •changes in, or failure to comply with, laws, rules, and regulations •U.S. and global political conditions, including the ongoing military action between Russia and Ukraine •inability to obtain cost-effective insurance •environmental liabilities and remediation costs •potential obsolescence of our assets •inadequate allowances to cover credit losses in our portfolio •operational, functional and regulatory risks associated with severe weather events, climate change and natural disasters •inability to maintain and secure our information technology infrastructure from cybersecurity threats and related disruption of our business •changes in assumptions, increases in funding requirements or investment losses in our pension and post-retirement plans •inability to maintain effective internal control over financial reporting and disclosure controls and procedures | |||||||
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
GATX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In millions, except share data)
| September 30 | December 31 | ||||||||||
| 2022 | 2021 | ||||||||||
Assets | |||||||||||
Cash and Cash Equivalents | $ | $ | |||||||||
Restricted Cash | |||||||||||
Receivables | |||||||||||
Rent and other receivables | |||||||||||
Finance leases (as lessor) | |||||||||||
Less: allowance for losses | ( | ( | |||||||||
Operating Assets and Facilities | |||||||||||
Less: allowance for depreciation | ( | ( | |||||||||
Lease Assets (as lessee) | |||||||||||
Right-of-use assets, net of accumulated depreciation | |||||||||||
Finance leases, net of accumulated depreciation | |||||||||||
Investments in Affiliated Companies | |||||||||||
Goodwill | |||||||||||
Other Assets (including $ | |||||||||||
Total Assets | $ | $ | |||||||||
Liabilities and Shareholders’ Equity | |||||||||||
Accounts Payable and Accrued Expenses | $ | $ | |||||||||
Debt | |||||||||||
Commercial paper and borrowings under bank credit facilities | |||||||||||
Recourse | |||||||||||
Lease Obligations (as lessee) | |||||||||||
Operating leases | |||||||||||
Finance leases | |||||||||||
Deferred Income Taxes | |||||||||||
Other Liabilities | |||||||||||
Total Liabilities | |||||||||||
Shareholders’ Equity | |||||||||||
Common stock, $ Authorized shares — Issued shares — Outstanding shares — | |||||||||||
Additional paid in capital | |||||||||||
Retained earnings | |||||||||||
Accumulated other comprehensive loss | ( | ( | |||||||||
Treasury stock at cost ( | ( | ( | |||||||||
Total Shareholders’ Equity | |||||||||||
Total Liabilities and Shareholders’ Equity | $ | $ | |||||||||
See accompanying notes to condensed consolidated financial statements.
2
GATX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited)
(In millions, except per share data)
| Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
Revenues | |||||||||||||||||||||||
Lease revenue | $ | $ | $ | $ | |||||||||||||||||||
Marine operating revenue | |||||||||||||||||||||||
Other revenue | |||||||||||||||||||||||
Total Revenues | |||||||||||||||||||||||
Expenses | |||||||||||||||||||||||
Maintenance expense | |||||||||||||||||||||||
Marine operating expense | |||||||||||||||||||||||
Depreciation expense | |||||||||||||||||||||||
Operating lease expense | |||||||||||||||||||||||
Other operating expense | |||||||||||||||||||||||
Selling, general and administrative expense | |||||||||||||||||||||||
Total Expenses | |||||||||||||||||||||||
Other Income (Expense) | |||||||||||||||||||||||
Net gain on asset dispositions | |||||||||||||||||||||||
Interest expense, net | ( | ( | ( | ( | |||||||||||||||||||
Other expense | ( | ( | ( | ( | |||||||||||||||||||
Income before Income Taxes and Share of Affiliates’ Earnings | |||||||||||||||||||||||
Income taxes | ( | ( | ( | ( | |||||||||||||||||||
Share of affiliates’ earnings (losses), net of taxes | ( | ||||||||||||||||||||||
Net Income | $ | $ | $ | $ | |||||||||||||||||||
Other Comprehensive (Loss) Income, Net of Taxes | |||||||||||||||||||||||
Foreign currency translation adjustments | ( | ( | ( | ( | |||||||||||||||||||
Unrealized gain on derivative instruments | |||||||||||||||||||||||
Post-retirement benefit plans | |||||||||||||||||||||||
Other comprehensive loss | ( | ( | ( | ( | |||||||||||||||||||
Comprehensive (Loss) Income | $ | ( | $ | $ | $ | ||||||||||||||||||
Share Data | |||||||||||||||||||||||
Basic earnings per share | $ | $ | $ | $ | |||||||||||||||||||
Average number of common shares | |||||||||||||||||||||||
Diluted earnings per share | $ | $ | $ | $ | |||||||||||||||||||
Average number of common shares and common share equivalents | |||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
3
GATX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In millions)
| Nine Months Ended September 30 | |||||||||||
| 2022 | 2021 | ||||||||||
Operating Activities | |||||||||||
Net income | $ | $ | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Depreciation and amortization expense | |||||||||||
Net gains on disposition of owned assets | ( | ( | |||||||||
| Asset impairments | |||||||||||
Deferred income taxes | |||||||||||
Share of affiliates’ earnings (losses), net of dividends | ( | ||||||||||
Changes in working capital items | |||||||||||
Net cash provided by operating activities | |||||||||||
Investing Activities | |||||||||||
Portfolio investments and capital additions | ( | ( | |||||||||
Portfolio proceeds | |||||||||||
Proceeds from sales of other assets | |||||||||||
Other | |||||||||||
Net cash used in investing activities | ( | ( | |||||||||
Financing Activities | |||||||||||
Net proceeds from issuances of debt (original maturities longer than 90 days) | |||||||||||
Repayments of debt (original maturities longer than 90 days) | ( | ( | |||||||||
Net increase (decrease) in debt with original maturities of 90 days or less | ( | ||||||||||
Stock repurchases | ( | ( | |||||||||
Dividends | ( | ( | |||||||||
| Purchases of assets previously leased | ( | ( | |||||||||
| Other | |||||||||||
Net cash provided by financing activities | |||||||||||
Effect of Exchange Rate Changes on Cash and Cash Equivalents | ( | ( | |||||||||
Cash provided by discontinued operations, net (1) | |||||||||||
Net increase in Cash, Cash Equivalents, and Restricted Cash during the period | |||||||||||
Cash, Cash Equivalents, and Restricted Cash at beginning of the period | |||||||||||
Cash, Cash Equivalents, and Restricted Cash at end of the period | $ | $ | |||||||||
| Non-Cash Financing Transactions | |||||||||||
| Non-cash financing lease transactions (2) | $ | $ | |||||||||
_______
(1) Cash provided by discontinued operations included $1.1 million in 2021 for the final proceeds from the sale of ASC that had been held in escrow funds.
(2) Non-cash financing lease transactions are a result of the reclassification from operating lease liability to finance lease liability upon notice of the intent to exercise an early buy-out option.
See accompanying notes to condensed consolidated financial statements.
4
GATX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
(In millions)
| Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| Shares | Dollars | Shares | Dollars | Shares | Dollars | Shares | Dollars | ||||||||||||||||||||||||||||||||||||||||
Common Stock | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at beginning of the period | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at end of the period | |||||||||||||||||||||||||||||||||||||||||||||||
Treasury Stock | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at beginning of the period | ( | ( | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
Stock repurchases | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||
Balance at end of the period | ( | ( | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
Additional Paid In Capital | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at beginning of the period | |||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation effects | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at end of the period | |||||||||||||||||||||||||||||||||||||||||||||||
Retained Earnings | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at beginning of the period | |||||||||||||||||||||||||||||||||||||||||||||||
Net income | |||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared ($ | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
Balance at end of the period | |||||||||||||||||||||||||||||||||||||||||||||||
Accumulated Other Comprehensive Loss | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at beginning of the period | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
Balance at end of the period | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
Total Shareholders’ Equity | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
5
GATX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. Description of Business
As used herein, "GATX," "we," "us," "our," and similar terms refer to GATX Corporation and its subsidiaries, unless indicated otherwise.
We lease, operate, manage, and remarket long-lived, widely used assets, primarily in the rail market. We report our financial results through three primary business segments: Rail North America, Rail International, and Portfolio Management. Financial results for our tank container leasing business ("Trifleet Leasing") are reported in the Other segment.
After a thorough strategic review, in the third quarter of 2022 we decided to exit our rail business in Russia ("Rail Russia"), which is reported within the Rail International segment. This decision is due to the impacts of the Russia/Ukraine conflict on our business and the business risks associated with the geopolitical environment resulting from that conflict. As such, the net assets of Rail Russia have been classified as held for sale and an impairment loss of $10.8 million was recognized in the third quarter of 2022.
During the second quarter of 2022, GATX management made the decision to sell its five liquefied gas-carrying vessels (the "Specialized Gas Vessels") within the Portfolio Management segment. As such, the Specialized Gas Vessels were classified as held for sale and an aggregate impairment loss of $31.5 million was recognized in the second quarter of 2022. During the third quarter of 2022, GATX sold two of the Specialized Gas Vessels, and the net proceeds received approximated the carrying value of these vessels.
In the first quarter of 2021, GATX invested directly in aircraft spare engines through its entity, GATX Engine Leasing ("GEL"). GEL acquired 14 aircraft spare engines for approximately $352 million, including 4 engines for $120 million from the Rolls-Royce & Partners Finance joint ventures (collectively the “RRPF affiliates” or "RRPF"). Financial results for this business are reported in the Portfolio Management segment.
NOTE 2. Basis of Presentation
We prepared the accompanying unaudited condensed consolidated financial statements in accordance with U.S. Generally Accepted Accounting Principles ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, our unaudited condensed consolidated financial statements do not include all of the information and footnotes required for complete financial statements. We have included all of the normal recurring adjustments that we deemed necessary for a fair presentation.
Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results we may achieve for the entire year ending December 31, 2022. In particular, asset remarketing income does not occur evenly throughout the year. For more information, refer to the consolidated financial statements and footnotes in our Annual Report on Form 10-K for the year ended December 31, 2021.
New Accounting Pronouncements Adopted
| Standard/Description | Effective Date and Adoption Considerations | Effect on Financial Statements or Other Significant Matters | ||||||
Variable Lease Payments In July 2021, the FASB issued ASU 2021-05, Leases (Topic 842) - Lessors - Certain Leases with Variable Lease Payments, which requires lessors to classify leases as operating leases if they have variable lease payments that do not depend on an index or rate and would have selling losses if they were classified as finance leases. | The new guidance was effective for us in the first quarter of 2022. | The application of this guidance did not impact our financial statements or related disclosures. | ||||||
6
GATX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
New Accounting Pronouncements Not Yet Adopted
| Standard/Description | Effective Date and Adoption Considerations | Effect on Financial Statements or Other Significant Matters | ||||||
Reference Rate Reform In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional practical expedients and exceptions in the application of GAAP principles to contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates being discontinued as a result of reference rate reform. | Optional expedients are available for adoption from March 12, 2020 through December 31, 2022. | For any contracts that reference LIBOR, we are currently assessing how this standard may be applied to specific contract modifications through December 31, 2022. | ||||||
NOTE 3. Revenue
Revenue Recognition
Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
We disaggregate revenue into three categories as presented on our statement of comprehensive (loss) income:
Lease Revenue
Lease revenue, which includes operating lease revenue and finance lease revenue, is our primary source of revenue.
Operating Lease Revenue
We lease railcars, aircraft spare engines, tank containers, and other operating assets under full-service and net operating leases. We price full-service leases as an integrated service that includes amounts related to maintenance, insurance, and ad valorem taxes. We do not offer stand-alone maintenance service contracts. Operating lease revenue is within the scope of Topic 842, and we have elected not to separate non-lease components from the associated lease component for qualifying leases. Operating lease revenue is recognized on a straight-line basis over the term of the underlying lease. As a result, lease revenue may not be recognized in the same period as maintenance and other costs, which we expense as incurred. Variable rents are recognized when applicable contingencies are resolved. Revenue is not recognized if collectability is not reasonably assured. See "Note 4. Leases".
Finance Lease Revenue
In certain cases, we lease railcars, tank containers, and other operating assets that, at lease inception, are classified as finance leases. In accordance with Topic 842, finance lease revenue is recognized using the interest method, which produces a constant yield over the lease term. Initial unearned income is the amount by which the original lease payment receivable and the estimated residual value of the leased asset exceeds the original cost or carrying value of the leased asset. See "Note 4. Leases".
Marine Operating Revenue
We generate marine operating revenue through shipping services completed by our marine vessels. For vessels operating in a pooling arrangement, we recognize pool revenue based on the right to receive our portion of net distributions reported by the pool, with net distributions being the net voyage revenue of the pool after deduction of voyage expenses. For vessels operating out of the pool, we recognize revenue over time as the performance obligation is satisfied, beginning when cargo is loaded through its delivery and discharge.
Other Revenue
Other revenue is composed of customer liability repair revenue, termination fees, utilization income, fee income, and other miscellaneous revenues. Select components of other revenue are within the scope of Topic 606. Revenue attributable to terms provided in our lease contracts are variable lease components that are recognized when earned, in accordance with Topic 842.
7
GATX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
NOTE 4. Leases
GATX as Lessor
We lease railcars, aircraft spare engines, tank containers, and other operating assets under full-service and net operating leases. We price full-service leases as an integrated service that includes amounts related to maintenance, insurance, and ad valorem taxes. In accordance with applicable guidance, we do not separate lease and non-lease components when reporting revenue for our full-service operating leases. In some cases, we lease railcars and tank containers that, at commencement, are classified as finance leases. For certain operating leases, revenue is based on equipment usage and is recognized when earned. Typically, our leases do not provide customers with renewal options or options to purchase the asset. Our lease agreements do not generally have residual value guarantees. We collect reimbursements from customers for damage to our railcars, as well as additional rental payments for usage above specified levels, as provided in the lease agreements.
The following table shows the components of our lease income (in millions):
| Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
Operating lease income: | |||||||||||||||||||||||
Fixed lease income | $ | $ | $ | $ | |||||||||||||||||||
Variable lease income | |||||||||||||||||||||||
Total operating lease income | $ | $ | $ | $ | |||||||||||||||||||
Finance lease income | |||||||||||||||||||||||
Total lease income | $ | $ | $ | $ | |||||||||||||||||||
In accordance with the terms of our leases with customers, we may earn additional revenue, primarily for customer liability repairs. These amounts, reported in other revenue in the statements of comprehensive (loss) income, were $20.3 million and $61.2 million for the three and nine months ended September 30, 2022 and $18.9 million and $54.6 million for the three and nine months ended September 30, 2021.
NOTE 5. Fair Value
The assets and liabilities that GATX records at fair value on a recurring basis consisted entirely of derivatives at September 30, 2022 and December 31, 2021.
In addition, we review long-lived assets, such as operating assets and facilities, investments in affiliates, and goodwill, for impairment whenever circumstances indicate that the carrying amount of these assets may not be recoverable or when assets may be classified as held for sale. We determine the fair value of the respective assets using Level 3 inputs, including estimates of discounted future cash flows (including net proceeds from sale), independent appraisals, and market comparables, as appropriate. See "Note 6. Asset Impairments and Assets Held for Sale" for further information.
Derivative Instruments
Fair Value Hedges
We use interest rate swaps to manage the fixed-to-floating rate mix of our debt obligations by converting a portion of our fixed rate debt to floating rate debt. For fair value hedges, we recognize changes in fair value of both the derivative and the hedged item as interest expense. We had four instruments outstanding with an aggregate notional amount of $200.0 million as of September 30, 2022 with maturities ranging from 2025 to 2027 and five instruments outstanding with an aggregate notional amount of $300.0 million as of December 31, 2021 with maturities ranging from 2022 to 2027.
8
GATX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Cash Flow Hedges
We use Treasury rate locks and swap rate locks to hedge our exposure to interest rate risk on anticipated transactions. We also use currency swaps, forwards, and put/call options to hedge our exposure to fluctuations in the exchange rates of foreign currencies for certain loans and operating expenses denominated in non-functional currencies. We had six instruments outstanding with an aggregate notional amount of $110.8 million as of September 30, 2022 that mature in 2022 and one instrument outstanding with an aggregate notional amount of $101.7 million as of December 31, 2021 that matured in 2022. Within the next 12 months, we expect to reclassify $1.6 million ($1.2 million after-tax) of net losses on previously terminated derivatives from accumulated other comprehensive loss to interest expense or operating lease expense, as applicable. We reclassify these amounts when interest and operating lease expense on the related hedged transactions affect earnings.
Non-Designated Derivatives
We do not hold derivative financial instruments for purposes other than hedging, although certain of our derivatives are not designated as accounting hedges. We recognize changes in the fair value of these derivatives in other expense immediately.
Certain of our derivative instruments contain credit risk provisions that could require us to make immediate payment on net liability positions in the event that we default on certain outstanding debt obligations. The aggregate fair value of our derivative instruments with credit risk related contingent features that were in a liability position as of September 30, 2022 was $12.6 million. We are not required to post any collateral on our derivative instruments and do not expect the credit risk provisions to be triggered.
In the event that a counterparty fails to meet the terms of an interest rate swap agreement or a foreign exchange contract, our exposure is limited to the fair value of the swap, if in our favor. We manage the credit risk of counterparties by transacting with institutions that we consider financially sound and by avoiding concentrations of risk with a single counterparty. We believe that the risk of non-performance by any of our counterparties is remote.
The following table shows our derivative assets and liabilities that are measured at fair value (in millions):
| Significant Observable Inputs (Level 2) | |||||||||||||||||
| Balance Sheet Location | Fair Value September 30, 2022 | Fair Value December 31, 2021 | |||||||||||||||
| Derivative Assets | |||||||||||||||||
Interest rate contracts (1) | Other assets | $ | $ | ||||||||||||||
Foreign exchange contracts (1) | Other assets | ||||||||||||||||
Foreign exchange contracts (2) | Other assets | ||||||||||||||||
| Total derivative assets | $ | $ | |||||||||||||||
| Derivative Liabilities | |||||||||||||||||
Interest rate contracts (1) | Other liabilities | $ | $ | ||||||||||||||
Foreign exchange contracts (1) | Other liabilities | ||||||||||||||||
| Total derivative liabilities | $ | $ | |||||||||||||||
(1) Designated as hedges.
(2) Not designated as hedges.
We value derivatives using a pricing model with inputs (such as yield curves and foreign currency rates) that are observable in the market or that can be derived principally from observable market data. As of September 30, 2022 and December 31, 2021, all derivatives were classified as Level 2 in the fair value hierarchy. There were no derivatives classified as Level 1 or Level 3.
9
GATX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The following table shows the amounts recorded on the balance sheet related to cumulative basis adjustments for fair value hedges as of September 30, 2022 and December 31, 2021 (in millions):
| Carrying Amount of the Hedged Assets/(Liabilities) | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/(Liabilities) | |||||||||||||||||||||||||
| Line Item in the Balance Sheet in Which the Hedged Item is Included | September 30 2022 | December 31 2021 | September 30 2022 | December 31 2021 | ||||||||||||||||||||||
| Recourse debt | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||
The following table shows the impacts of our derivative instruments on our statements of comprehensive (loss) income for the three and nine months ended September 30, 2022 and 2021 (in millions):
| Amount of Loss (Gain) Recognized in Other Comprehensive (Loss) Income | Location of Loss (Gain) Reclassified from Accumulated Other Comprehensive (Loss) Income into Income | Amount of Loss (Gain) Reclassified from Accumulated Other Comprehensive (Loss) Income into Income | |||||||||||||||||||||||||||||||||||||||
| Three Months Ended September 30 | Three Months Ended September 30 | ||||||||||||||||||||||||||||||||||||||||
| Derivative Designation | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||
| Derivatives in cash flow hedging relationships: | |||||||||||||||||||||||||||||||||||||||||
| Interest rate contracts | $ | — | $ | — | Interest expense | $ | $ | ||||||||||||||||||||||||||||||||||
| Foreign exchange contracts | ( | ( | Other expense | ( | ( | ||||||||||||||||||||||||||||||||||||
| Total | $ | ( | $ | ( | Total | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||
| Amount of Loss (Gain) Recognized in Other Comprehensive (Loss) Income | Location of Loss (Gain) Reclassified from Accumulated Other Comprehensive (Loss) Income into Income | Amount of Loss (Gain) Reclassified from Accumulated Other Comprehensive (Loss) Income into Income | |||||||||||||||||||||||||||||||||||||||
| Nine Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||||||||||||||||||||
| Derivative Designation | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||
| Derivatives in cash flow hedging relationships: | |||||||||||||||||||||||||||||||||||||||||
Interest rate contracts | $ | $ | Interest expense | $ | $ | ||||||||||||||||||||||||||||||||||||
Foreign exchange contracts | ( | ( | Other expense | ( | ( | ||||||||||||||||||||||||||||||||||||
Total | $ | ( | $ | ( | Total | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||
10
GATX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The following table shows the impact of our fair value and cash flow hedge accounting relationships, as well as the impact of our non-designated derivatives, on the statements of comprehensive (loss) income for the three and nine months ended September 30, 2022 and 2021 (in millions):
| Location and Amount of Gain (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships | ||||||||||||||||||||||||||||||||
| Three Months Ended September 30 | Three Months Ended September 30 | |||||||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||||||||
| | Interest (expense), net | Other expense | Interest (expense), net | Other expense | ||||||||||||||||||||||||||||
| Total amounts of income and expense presented in the statements of comprehensive income in which the effects of fair value or cash flow hedges are recorded | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||
| Gain (loss) on fair value hedging relationships | ||||||||||||||||||||||||||||||||
Interest rate contracts: | ||||||||||||||||||||||||||||||||
Hedged items | ||||||||||||||||||||||||||||||||
Derivatives designated as hedging instruments | ( | ( | ||||||||||||||||||||||||||||||
| Gain (loss) on cash flow hedging relationships | ||||||||||||||||||||||||||||||||
Interest rate contracts: | ||||||||||||||||||||||||||||||||
| Amount of gain (loss) reclassified from accumulated other comprehensive loss into income | ( | ( | ||||||||||||||||||||||||||||||
Foreign exchange contracts: | ||||||||||||||||||||||||||||||||
| Amount of gain (loss) reclassified from accumulated other comprehensive loss into income (1) | ||||||||||||||||||||||||||||||||
| Gain (loss) on non-designated derivative contracts | ||||||||||||||||||||||||||||||||
| Location and Amount of Gain (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships | ||||||||||||||||||||||||||||||||
| Nine Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||||||||
| | Interest (expense), net | Other expense | Interest (expense), net | Other expense | ||||||||||||||||||||||||||||
| Total amounts of income and expense presented in the statements of comprehensive income in which the effects of fair value or cash flow hedges are recorded | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||
| Gain (loss) on fair value hedging relationships | ||||||||||||||||||||||||||||||||
Interest rate contracts: | ||||||||||||||||||||||||||||||||
Hedged items | ||||||||||||||||||||||||||||||||
Derivatives designated as hedging instruments | ( | ( | ||||||||||||||||||||||||||||||
| Gain (loss) on cash flow hedging relationships | ||||||||||||||||||||||||||||||||
Interest rate contracts: | ||||||||||||||||||||||||||||||||
| Amount of gain (loss) reclassified from accumulated other comprehensive loss into income | ( | ( | ||||||||||||||||||||||||||||||
Foreign exchange contracts: | ||||||||||||||||||||||||||||||||
| Amount of gain (loss) reclassified from accumulated other comprehensive loss into income (1) | ||||||||||||||||||||||||||||||||
| Gain (loss) on non-designated derivative contracts | ||||||||||||||||||||||||||||||||
(1) These amounts are substantially offset by foreign currency remeasurement adjustments on related hedged instruments, also recognized in other income (expense).
11
GATX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Other Financial Instruments
Except for derivatives, as disclosed above, GATX has no other assets and liabilities measured at fair value on a recurring basis. The carrying amounts of cash and cash equivalents, restricted cash, rent and other receivables, accounts payable, and commercial paper and borrowings under bank credit facilities with maturities under one year approximate fair value due to the short maturity of those instruments. We estimate the fair values of fixed and floating rate debt using discounted cash flow analyses that are based on interest rates currently offered for loans with similar terms to borrowers of similar credit quality. The inputs we use to estimate each of these values are classified in Level 2 of the fair value hierarchy because they are directly or indirectly observable inputs.
The following table shows the carrying amounts and fair values of our other financial instruments (in millions):
| September 30, 2022 | December 31, 2021 | ||||||||||||||||||||||
| | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Recourse fixed rate debt | $ | $ | $ | $ | |||||||||||||||||||
| Recourse floating rate debt | |||||||||||||||||||||||
NOTE 6. Asset Impairments and Assets Held for Sale
After a thorough strategic review, in the third quarter of 2022 we decided to exit Rail Russia, which is reported within the Rail International segment. This decision is due to the impacts of the Russia/Ukraine conflict on our business and the business risks associated with the geopolitical environment resulting from that conflict. As such, the net assets of Rail Russia have been classified as held for sale and adjusted to the lower of their respective carrying amounts or fair value less costs to dispose. As a result, an impairment loss of $10.8 million was recognized in the third quarter of 2022 and recorded in net gain on asset dispositions. The impairment charge included $1.2 million for the anticipated liquidation of the cumulative translation adjustment. We based the fair value of the net assets on our estimate of the expected sale proceeds.
During the second quarter of 2022, GATX management made the decision to sell the Specialized Gas Vessels within the Portfolio Management segment. As such, the Specialized Gas Vessels have been classified as held for sale and adjusted to the lower of their respective carrying amounts or fair value less costs to dispose. As a result, an aggregate impairment loss of $31.5 million was recognized in the second quarter of 2022. These impairments were driven by our decision to sell these vessels and resulted from the associated change in our expected use and holding periods for these assets. The impairment losses were included in net gain on asset dispositions. The fair value of the impaired assets was $70.3 million as of the end of the second quarter. We based the fair value of these assets on our estimate of the expected sales proceeds. During the third quarter of 2022, GATX sold two of the Specialized Gas Vessels, and the net proceeds received approximated the carrying value of these vessels.
The following table summarizes assets held for sale by business segment (in millions):
| September 30 2022 | December 31 2021 | ||||||||||
| Rail North America | $ | $ | |||||||||
| Rail International | — | ||||||||||
| Portfolio Management | |||||||||||
| Total assets held for sale | $ | $ | |||||||||
All assets held for sale at September 30, 2022 are expected to be sold within one year and are included in Other Assets on the balance sheet.
12
GATX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
NOTE 7. Pension and Other Post-Retirement Benefits
The following table shows the components of net periodic cost for the three months ended September 30, 2022 and 2021 (in millions):
| 2022 Pension Benefits | 2021 Pension Benefits | 2022 Retiree Health and Life | 2021 Retiree Health and Life | ||||||||||||||||||||
Service cost | $ | $ | $ | $ | |||||||||||||||||||
Interest cost | |||||||||||||||||||||||
Expected return on plan assets | ( | ( | |||||||||||||||||||||
Amortization of (1): | |||||||||||||||||||||||
Unrecognized prior service credit | — | ( | |||||||||||||||||||||
Unrecognized net actuarial loss (gain) | ( | ( | |||||||||||||||||||||
Net periodic cost | $ | $ | $ | ( | $ | ||||||||||||||||||
The following table shows the components of net periodic cost for the nine months ended September 30, 2022 and 2021 (in millions):
| 2022 Pension Benefits | 2021 Pension Benefits | 2022 Retiree Health and Life | 2021 Retiree Health and Life | ||||||||||||||||||||
Service cost | $ | $ | $ | $ | |||||||||||||||||||
Interest cost | |||||||||||||||||||||||
Expected return on plan assets | ( | ( | |||||||||||||||||||||
Settlement accounting adjustment | — | — | — | ||||||||||||||||||||
Amortization of (1): | |||||||||||||||||||||||
Unrecognized prior service credit | — | ( | ( | ||||||||||||||||||||
Unrecognized net actuarial loss (gain) | ( | ( | |||||||||||||||||||||
Net periodic cost | $ | $ | $ | ( | $ | ||||||||||||||||||
_______
(1) Amounts reclassified from accumulated other comprehensive loss.
The service cost component of net periodic cost is recorded in selling, general and administrative expense in the statements of comprehensive (loss) income, and the non-service components are recorded in other expense.
In the nine months ended September 30, 2022, certain lump sum distributions paid to retirees triggered settlement accounting, resulting in the recognition of $0.9 million of expense.
13
GATX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
NOTE 8. Share-Based Compensation
During the nine months ended September 30, 2022, we granted 284,400 non-qualified employee stock options, 49,966 restricted stock units, 62,350 performance shares, and 9,185 phantom stock units. For the three and nine months ended September 30, 2022, total share-based compensation expense was $3.4 million and $10.5 million and the related tax benefits were $0.9 million and $2.6 million. For the three and nine months ended September 30, 2021 total share-based compensation expense was $4.3 million and $14.2 million and the related tax benefits were $1.1 million and $3.6 million.
The estimated fair value of our 2022 non-qualified employee stock option awards and related underlying assumptions are shown in the table below:
| 2022 | |||||
| Weighted-average estimated fair value | $ | ||||
| Quarterly dividend rate | $ | ||||
| Expected term of stock options, in years | |||||
| Risk-free interest rate | % | ||||
| Dividend yield | % | ||||
| Expected stock price volatility | % | ||||
| Present value of dividends | $ | ||||
NOTE 9. Income Taxes
The following table shows our effective income tax rate for the nine months ended September 30:
| 2022 | 2021 | ||||||||||
| Effective income tax rate | % | % | |||||||||
The increase in the effective rate compared to the prior year is primarily due to impairments of the Rail Russia business and the Specialized Gas Vessels, for both of which no tax benefit is allowed. These impacts were partially offset by benefits related to a reduction in the statutory tax rate of Austria in the current year, as well as the mix of pre-tax income among domestic and foreign jurisdictions, which are taxed at different rates.
NOTE 10. Commercial Commitments
We have entered into various commercial commitments, such as guarantees, standby letters of credit, performance bonds, and guarantees related to certain transactions. These commercial commitments require us to fulfill specific obligations in the event of third-party demands. Similar to our balance sheet investments, these commitments expose us to credit, market, and equipment risk. Accordingly, we evaluate these commitments and other contingent obligations using techniques similar to those we use to evaluate funded transactions.
The following table shows our commercial commitments (in millions):
| September 30 2022 | December 31 2021 | ||||||||||
| Standby letters of credit and performance bonds | $ | $ | |||||||||
| Derivative guarantees | |||||||||||
| Total commercial commitments (1) | $ | $ | |||||||||
_______
(1) There were no liabilities recorded on the balance sheet for commercial commitments at September 30, 2022 and December 31, 2021. As of September 30, 2022, our outstanding commitments expire in 2023 through 2026. We are not aware of any event that would require us to satisfy any of our commitments.
14
GATX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
NOTE 11. Earnings per Share
We compute basic earnings per share by dividing net income available to our common shareholders by the weighted-average number of shares of our common stock outstanding. We weight shares issued or reacquired for the portion of the period that they were outstanding. Our diluted earnings per share reflect the impacts of our potentially dilutive securities, which include our equity compensation awards.
The following table shows the computation of our basic and diluted earnings per common share (in millions, except per share amounts):
| Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
Numerator: | |||||||||||||||||||||||
Net income | $ | $ | $ | $ | |||||||||||||||||||
Denominator: | |||||||||||||||||||||||
Weighted-average shares outstanding - basic | |||||||||||||||||||||||
Effect of dilutive securities: | |||||||||||||||||||||||
| Equity compensation plans | |||||||||||||||||||||||
Weighted-average shares outstanding - diluted | |||||||||||||||||||||||
Basic earnings per share | $ | $ | $ | $ | |||||||||||||||||||
Diluted earnings per share | $ | $ | $ | $ | |||||||||||||||||||
NOTE 12. Accumulated Other Comprehensive Loss
The following table shows the change in components for accumulated other comprehensive loss (in millions):
| Foreign Currency Translation Loss | Unrealized Gain (Loss) on Derivative Instruments | Post-Retirement Benefit Plans | Total | ||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||
| Change in component | ( | ( | ( | ||||||||||||||||||||||||||
| Reclassification adjustments into earnings (1) | ( | ( | |||||||||||||||||||||||||||
| Income tax effect | ( | ( | ( | ||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||
| Change in component | ( | ( | |||||||||||||||||||||||||||
| Reclassification adjustments into earnings (1) | ( | ( | |||||||||||||||||||||||||||
| Income tax effect | ( | ( | |||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||
| Change in component | ( | ( | |||||||||||||||||||||||||||
| Reclassification adjustments into earnings (1) | ( | ( | |||||||||||||||||||||||||||
| Income tax effect | ( | ( | ( | ||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||
________
(1) See "Note 5. Fair Value" and "Note 7. Pension and Other Post-Retirement Benefits" for impacts of the reclassification adjustments on the statements of comprehensive (loss) income.
15
GATX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
NOTE 13. Legal Proceedings and Other Contingencies
NOTE 14. Financial Data of Business Segments
The financial data presented below depicts the profitability, financial position, and capital expenditures of each of our business segments.
We lease, operate, manage, and remarket long-lived, widely used assets, primarily in the rail market. We report our financial results through three primary business segments: Rail North America, Rail International, and Portfolio Management. Financial results for Trifleet Leasing are reported in the Other segment.
In the first quarter of 2021, GATX invested directly in aircraft spare engines through its entity, GEL. GEL acquired 14 aircraft spare engines for approximately $352 million, including 4 engines for $120 million from the RRPF affiliates. Financial results for this business are reported in the Portfolio Management segment.
Rail North America is composed of our operations in the United States, Canada, and Mexico. Rail North America 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 International is composed of our operations in Europe ("GATX Rail Europe" or "GRE"), India ("Rail India"), and Russia ("Rail Russia"). GRE leases railcars to customers throughout Europe pursuant to full-service leases under which it maintains the railcars and provides value-added services according to customer requirements. After a thorough strategic review, in the third quarter of 2022,we decided to exit Rail Russia. As such, we have classified the net assets of Rail Russia as held for sale as of September 30, 2022. See "Note 6. Asset Impairments and Assets Held for Sale" for further information.
Portfolio Management is composed primarily of our ownership in the RRPF affiliates, a group of joint ventures with Rolls-Royce plc that lease aircraft spare engines, GEL, our direct ownership of aircraft spare engines that we lease, as well as liquefied gas carrying vessels (the "Specialized Gas Vessels"). In the second quarter of 2022, we made the decision to sell the Specialized Gas Vessels. As a result of this decision, we classified the Specialized Gas Vessels as held for sale. During the third quarter of 2022, GATX sold two of the Specialized Gas Vessels. See "Note 6. Asset Impairments and Assets Held for Sale" for further information.
Other includes our Trifleet Leasing business, as well as selling, general and administrative expenses, income taxes, and certain other amounts not allocated to the segments.
Segment profit is an internal performance measure used by the Chief Executive Officer to assess the profitability of each segment. Segment profit includes all revenues, expenses, pre-tax earnings from affiliates, and net gains on asset dispositions that are directly attributable to each segment. We allocate interest expense to the segments based on what we believe to be the appropriate risk-adjusted borrowing costs for each segment. Segment profit excludes selling, general and administrative expenses, income taxes, and certain other amounts not allocated to the segments.
16
GATX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The following tables show certain segment data for each of our business segments (in millions):
Rail North America | Rail International | Portfolio Management | Other | GATX Consolidated | |||||||||||||||||||||||||
Three Months Ended September 30, 2022 | |||||||||||||||||||||||||||||
Revenues | |||||||||||||||||||||||||||||
Lease revenue | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Marine operating revenue | |||||||||||||||||||||||||||||
Other revenue | |||||||||||||||||||||||||||||
Total Revenues | |||||||||||||||||||||||||||||
Expenses | |||||||||||||||||||||||||||||
Maintenance expense | |||||||||||||||||||||||||||||
Marine operating expense | |||||||||||||||||||||||||||||
Depreciation expense | |||||||||||||||||||||||||||||
Operating lease expense | |||||||||||||||||||||||||||||
Other operating expense | |||||||||||||||||||||||||||||
Total Expenses | |||||||||||||||||||||||||||||
Other Income (Expense) | |||||||||||||||||||||||||||||
Net gain (loss) on asset dispositions | ( | ||||||||||||||||||||||||||||
Interest expense, net | ( | ( | ( | ( | ( | ||||||||||||||||||||||||
Other (expense) income | ( | ( | ( | ( | |||||||||||||||||||||||||
Share of affiliates' pre-tax earnings | |||||||||||||||||||||||||||||
Segment profit | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Less: | |||||||||||||||||||||||||||||
Selling, general and administrative expense | |||||||||||||||||||||||||||||
Income taxes (includes $ | |||||||||||||||||||||||||||||
Net income | $ | ||||||||||||||||||||||||||||
Net Gain (Loss) on Asset Dispositions | |||||||||||||||||||||||||||||
Asset Remarketing Income: | |||||||||||||||||||||||||||||
Net gains on disposition of owned assets | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Residual sharing income | |||||||||||||||||||||||||||||
Non-remarketing net gains (1) | |||||||||||||||||||||||||||||
Asset impairments | ( | ( | |||||||||||||||||||||||||||
| $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||
Capital Expenditures | |||||||||||||||||||||||||||||
Portfolio investments and capital additions | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Selected Balance Sheet Data at September 30, 2022 | |||||||||||||||||||||||||||||
Investments in affiliated companies | $ | $ | — | $ | $ | — | $ | ||||||||||||||||||||||
Identifiable assets | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
__________
(1) Includes net gains (losses) from scrapping of railcars.
17
GATX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Rail North America | Rail International | Portfolio Management | Other | GATX Consolidated | |||||||||||||||||||||||||
Three Months Ended September 30, 2021 | |||||||||||||||||||||||||||||
Revenues | |||||||||||||||||||||||||||||
Lease revenue | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Marine operating revenue | |||||||||||||||||||||||||||||
Other revenue | |||||||||||||||||||||||||||||
Total Revenues | |||||||||||||||||||||||||||||
Expenses | |||||||||||||||||||||||||||||
Maintenance expense | |||||||||||||||||||||||||||||
Marine operating expense | |||||||||||||||||||||||||||||
Depreciation expense | |||||||||||||||||||||||||||||
Operating lease expense | |||||||||||||||||||||||||||||
Other operating expense | |||||||||||||||||||||||||||||
Total Expenses | |||||||||||||||||||||||||||||
Other Income (Expense) | |||||||||||||||||||||||||||||
Net gain on asset dispositions | |||||||||||||||||||||||||||||
Interest expense, net | ( | ( | ( | ( | ( | ||||||||||||||||||||||||
Other (expense) income | ( | ( | ( | ( | |||||||||||||||||||||||||
Share of affiliates' pre-tax (loss) earnings | ( | ||||||||||||||||||||||||||||
Segment profit | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Less: | |||||||||||||||||||||||||||||
Selling, general and administrative expense | |||||||||||||||||||||||||||||
Income taxes (includes $ | |||||||||||||||||||||||||||||
| Net income | $ | ||||||||||||||||||||||||||||
Net Gain on Asset Dispositions | |||||||||||||||||||||||||||||
Asset Remarketing Income: | |||||||||||||||||||||||||||||
Net gains on disposition of owned assets | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Residual sharing income | |||||||||||||||||||||||||||||
Non-remarketing net gains (1) | |||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | |||||||||||||||||||||||||
Capital Expenditures | |||||||||||||||||||||||||||||
Portfolio investments and capital additions | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Selected Balance Sheet Data at December 31, 2021 | |||||||||||||||||||||||||||||
Investments in affiliated companies | $ | $ | — | $ | $ | — | $ | ||||||||||||||||||||||
Identifiable assets | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
__________
18
GATX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Rail North America | Rail International | Portfolio Management | Other | GATX Consolidated | |||||||||||||||||||||||||
Nine Months Ended September 30, 2022 | |||||||||||||||||||||||||||||
Revenues | |||||||||||||||||||||||||||||
Lease revenue | $ | $ | $ | $ | |||||||||||||||||||||||||
Marine operating revenue | |||||||||||||||||||||||||||||
Other revenue | |||||||||||||||||||||||||||||
Total Revenues | |||||||||||||||||||||||||||||
| Expenses | |||||||||||||||||||||||||||||
Maintenance expense | |||||||||||||||||||||||||||||
Marine operating expense | |||||||||||||||||||||||||||||
Depreciation expense | |||||||||||||||||||||||||||||
Operating lease expense | |||||||||||||||||||||||||||||
Other operating expense | |||||||||||||||||||||||||||||
Total Expenses | |||||||||||||||||||||||||||||
Other Income (Expense) | |||||||||||||||||||||||||||||
Net gain (loss) on asset dispositions | ( | ( | |||||||||||||||||||||||||||
Interest expense, net | ( | ( | ( | ( | ( | ||||||||||||||||||||||||
Other (expense) income | ( | ( | ( | ||||||||||||||||||||||||||
Share of affiliates' pre-tax earnings | |||||||||||||||||||||||||||||
Segment profit (loss) | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
Less: | |||||||||||||||||||||||||||||
Selling, general and administrative expense | |||||||||||||||||||||||||||||
Income taxes (includes $ | |||||||||||||||||||||||||||||
Net income | $ | ||||||||||||||||||||||||||||
Net Gain (Loss) on Asset Dispositions | |||||||||||||||||||||||||||||
Asset Remarketing Income: | |||||||||||||||||||||||||||||
Net gains on disposition of owned assets | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Residual sharing income | |||||||||||||||||||||||||||||
Non-remarketing net gains (1) | |||||||||||||||||||||||||||||
Asset impairments | ( | ( | ( | ||||||||||||||||||||||||||
| $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||
Capital Expenditures | |||||||||||||||||||||||||||||
Portfolio investments and capital additions | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
__________
(1) Includes net gains (losses) from scrapping of railcars.
19
GATX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Rail North America | Rail International | Portfolio Management | Other | GATX Consolidated | |||||||||||||||||||||||||
Nine Months Ended September 30, 2021 | |||||||||||||||||||||||||||||
Revenues | |||||||||||||||||||||||||||||
Lease revenue | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Marine operating revenue | |||||||||||||||||||||||||||||
Other revenue | |||||||||||||||||||||||||||||
Total Revenues | |||||||||||||||||||||||||||||
Expenses | |||||||||||||||||||||||||||||
Maintenance expense | |||||||||||||||||||||||||||||
Marine operating expense | |||||||||||||||||||||||||||||
Depreciation expense | |||||||||||||||||||||||||||||
Operating lease expense | |||||||||||||||||||||||||||||
Other operating expense | |||||||||||||||||||||||||||||
Total Expenses | |||||||||||||||||||||||||||||
Other Income (Expense) | |||||||||||||||||||||||||||||
Net gain on asset dispositions | |||||||||||||||||||||||||||||
Interest expense, net | ( | ( | ( | ( | ( | ||||||||||||||||||||||||
Other (expense) income | ( | ( | ( | ||||||||||||||||||||||||||
Share of affiliates' pre-tax (loss) earnings | ( | ||||||||||||||||||||||||||||
Segment profit (loss) | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||
Less: | |||||||||||||||||||||||||||||
Selling, general and administrative expense | |||||||||||||||||||||||||||||
Income taxes (includes $ | |||||||||||||||||||||||||||||
| Net income | $ | ||||||||||||||||||||||||||||
Net Gain on Asset Dispositions | |||||||||||||||||||||||||||||
Asset Remarketing Income: | |||||||||||||||||||||||||||||
Net gains on disposition of owned assets | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Residual sharing income | |||||||||||||||||||||||||||||
Non-remarketing net gains (1) | |||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | |||||||||||||||||||||||||
Capital Expenditures | |||||||||||||||||||||||||||||
Portfolio investments and capital additions | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
__________
(1) Includes net gains (losses) from scrapping of railcars.
20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
We lease, operate, manage, and remarket long-lived, widely used assets, primarily in the rail market. We report our financial results through three primary business segments: Rail North America, Rail International, and Portfolio Management. Financial results for our tank container leasing business ("Trifleet Leasing") are reported in the Other segment.
After a thorough strategic review, in the third quarter of 2022 we decided to exit our rail business in Russia ("Rail Russia"), which is reported within the Rail International segment. This decision is due to the impacts of the Russia/Ukraine conflict on our business and the business risks associated with the geopolitical environment resulting from that conflict. As such, the net assets of Rail Russia have been classified as held for sale and an impairment loss of $10.8 million was recognized in the third quarter of 2022.
During the second quarter of 2022, GATX management made the decision to sell its five liquefied gas-carrying vessels (the "Specialized Gas Vessels") within the Portfolio Management segment. As such, the Specialized Gas Vessels were classified as held for sale and an aggregate impairment loss of $31.5 million was recognized in the second quarter of 2022. During the third quarter of 2022, GATX sold two of the Specialized Gas Vessels, and the net proceeds received approximated the carrying value of these vessels.
In the first quarter of 2021, GATX invested directly in aircraft spare engines through its entity, GATX Engine Leasing ("GEL"). GEL acquired 14 aircraft spare engines for approximately $352 million, including 4 engines for $120 million from the Rolls-Royce & Partners Finance joint ventures (collectively the “RRPF affiliates” or "RRPF"). All engines are on long-term leases with airline customers and are managed by RRPF. Financial results for this business are reported in the Portfolio Management segment.
The following discussion and analysis should be read in conjunction with the Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended December 31, 2021. We based the discussion and analysis that follows on financial data we derived from the financial statements prepared in accordance with U.S. Generally Accepted Accounting Standards ("GAAP") and on certain other financial data that we prepared using non-GAAP components. For a reconciliation of these non-GAAP components to the most comparable GAAP components, see "Non-GAAP Financial Measures" at the end of this item.
Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results we may achieve for the entire year ending December 31, 2022. In particular, asset remarketing income does not occur evenly throughout the year. For more information, refer to the consolidated financial statements and footnotes in our Annual Report on Form 10-K for the year ended December 31, 2021.
Russia/Ukraine Conflict
On February 24, 2022, Russian military forces launched a military action in Ukraine. In response to this action, the U.S. and other countries imposed various economic sanctions and measures against Russia, Belarus, certain sections of Ukraine, and related persons and entities. Russia subsequently enacted countermeasures. Additional sanctions and countermeasures have continued to be imposed throughout 2022 as the conflict continues. We continue to closely monitor developments and potential impacts from enacted sanctions and countermeasures and will take mitigating actions as appropriate. This conflict and resulting response has impacted the global economy, financial markets, and supply chains and could adversely affect our business, financial condition, and results of operations.
To date, the conflict has not had a material impact on business operations at our global railcar and tank container leasing businesses. Furthermore, the nature of the impact on financial results varies across our business units. Rising steel prices have led to higher new asset costs across our rail and tank container leasing businesses, a trend that supports higher lease rates on many existing assets but that makes new investments more challenging. Supply chain disruptions, slower new railcar deliveries, and limited access to key components such as wheelsets have been more impactful in Europe and India. We are monitoring the nature and magnitude of these impacts across our rail and tank container leasing businesses.
We have limited rail operations in Russia, which consists of 380 railcars on lease to three customers and approximately 1% of GATX's consolidated net income for the nine months ended September 30, 2022. After a thorough strategic review, in the third quarter of 2022 we decided to exit Rail Russia. This decision is due to the impacts of the Russia/Ukraine conflict on our business and the business risks associated with the geopolitical environment resulting from that conflict. As such, the net assets have been classified as held for sale as of September 30, 2022 and an impairment loss of $10.8 million was recognized in the third quarter of 2022. See "Note 6. Asset Impairments and Assets Held for Sale " in Part I, Item 1 of this Form 10-Q for further information.
RRPF financial results have also been affected by the conflict. In the first quarter of 2022, RRPF terminated leases for three aircraft spare engines leased to a Russian airline. The Russian government is prohibiting these engines from leaving the country; therefore,
21
RRPF recorded an impairment charge associated with these three engines in the first quarter. GATX's 50% share of this net impairment was $15.3 million ($11.5 million after tax).
DISCUSSION OF OPERATING RESULTS
Net income for the first nine months of 2022 was $107.5 million, or $2.99 per diluted share, compared to $82.1 million, or $2.28 per diluted share, in 2021. Results for the nine months ended September 30, 2022 included a net negative impact of $55.2 million (net of tax) from tax adjustments and other items. Results for the nine months ended September 30, 2021 included a net negative impact of $43.1 million (net of tax) from tax adjustments and other items. See "Non-GAAP Financial Measures" at the end of this item for further details. Excluding the impact of these items, net income increased $37.5 million compared to the prior year, largely due to higher asset disposition gains at Rail North America, higher share of affiliates' earnings at the RRPF affiliates, and higher results from our marine operations.
Net income for the third quarter of 2022 was $29.1 million, or $0.81 per diluted share, compared to $40.1 million, or $1.11 per diluted share, in 2021. Results for the three months ended September 30, 2022 included a net negative impact of $10.8 million (net of tax) from tax adjustments and other items. See "Non-GAAP Financial Measures" at the end of this item for further details. Excluding the impact of these items, net income decreased $0.2 million compared to the prior year, largely due to lower asset disposition gains at Rail North America, partially offset by higher share of affiliate's earnings at the RRPF affiliates.
22
The following table shows a summary of our reporting segments and consolidated financial results (in millions, except per share data):
| Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||
| Segment Revenues | |||||||||||||||||||||||||||||
| Rail North America | $ | 231.3 | $ | 219.8 | $ | 676.8 | $ | 667.8 | |||||||||||||||||||||
| Rail International | 67.6 | 71.5 | 205.9 | 212.6 | |||||||||||||||||||||||||
| Portfolio Management | 13.1 | 13.3 | 41.1 | 34.0 | |||||||||||||||||||||||||
| Other | 9.0 | 8.9 | 26.5 | 22.0 | |||||||||||||||||||||||||
| $ | 321.0 | $ | 313.5 | $ | 950.3 | $ | 936.4 | ||||||||||||||||||||||
| Segment Profit (Loss) | |||||||||||||||||||||||||||||
| Rail North America | $ | 64.3 | $ | 66.5 | $ | 237.8 | $ | 209.8 | |||||||||||||||||||||
| Rail International | 14.5 | 27.0 | 67.7 | 76.1 | |||||||||||||||||||||||||
| Portfolio Management | 11.2 | 6.2 | (8.4) | 24.5 | |||||||||||||||||||||||||
| Other | 2.9 | 1.7 | (2.1) | (3.3) | |||||||||||||||||||||||||
| 92.9 | 101.4 | 295.0 | 307.1 | ||||||||||||||||||||||||||
| Less: | |||||||||||||||||||||||||||||
| Selling, general and administrative expense | 47.6 | 45.9 | 142.7 | 140.8 | |||||||||||||||||||||||||
Income taxes (includes $2.5 and $1.0 QTR and $6.0 and $47.8 YTD related to affiliates' earnings) | 16.2 | 15.4 | 44.8 | 84.2 | |||||||||||||||||||||||||
| Net Income (GAAP) | $ | 29.1 | $ | 40.1 | $ | 107.5 | $ | 82.1 | |||||||||||||||||||||
| Net income, excluding tax adjustments and other items (non-GAAP) (1) | $ | 39.9 | $ | 40.1 | $ | 162.7 | $ | 125.2 | |||||||||||||||||||||
| Diluted earnings per share (GAAP) | $ | 0.81 | $ | 1.11 | $ | 2.99 | $ | 2.28 | |||||||||||||||||||||
| Diluted earnings per share, excluding tax adjustments and other items (non-GAAP) (1) | $ | 1.12 | $ | 1.11 | $ | 4.53 | $ | 3.48 | |||||||||||||||||||||
| Investment Volume | $ | 203.4 | $ | 229.8 | $ | 887.9 | $ | 893.2 | |||||||||||||||||||||
The following table shows our return on equity for the trailing 12 months ended September 30:
| 2022 | 2021 | ||||||||||
| Return on Equity (GAAP) | 8.6 | % | 5.1 | % | |||||||
| Return on Equity, excluding tax adjustments and other items (non-GAAP) (1) | 13.5 | % | 8.8 | % | |||||||
_________
(1) See "Non-GAAP Financial Measures" at the end of this item for further details.
Segment Operations
Segment profit is an internal performance measure used by the Chief Executive Officer to assess the profitability of each segment. Segment profit includes all revenues, expenses, pre-tax earnings from affiliates, and net gains on asset dispositions that are directly attributable to each segment. We allocate interest expense to the segments based on what we believe to be the appropriate risk-adjusted borrowing costs for each segment. Segment profit excludes selling, general and administrative expenses, income taxes, and certain other amounts not allocated to the segments.
23
RAIL NORTH AMERICA
Segment Summary
The North American railcar leasing market remained strong in the quarter. Demand for the majority of railcar types remained robust, and absolute lease rates continued to increase quarter over quarter. Utilization increased to 99.6% at the end of the quarter.
The following table shows Rail North America's segment results (in millions):
| Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||||||||||||||
| Lease revenue | $ | 211.3 | $ | 200.4 | $ | 615.0 | $ | 611.4 | |||||||||||||||||||||||||||||||||
| Other revenue | 20.0 | 19.4 | 61.8 | 56.4 | |||||||||||||||||||||||||||||||||||||
| Total Revenues | 231.3 | 219.8 | 676.8 | 667.8 | |||||||||||||||||||||||||||||||||||||
| Expenses | |||||||||||||||||||||||||||||||||||||||||
| Maintenance expense | 62.4 | 58.9 | 180.1 | 178.8 | |||||||||||||||||||||||||||||||||||||
| Depreciation expense | 65.3 | 64.8 | 193.7 | 195.7 | |||||||||||||||||||||||||||||||||||||
| Operating lease expense | 9.0 | 9.0 | 27.1 | 30.1 | |||||||||||||||||||||||||||||||||||||
| Other operating expense | 6.0 | 6.6 | 19.2 | 22.6 | |||||||||||||||||||||||||||||||||||||
| Total Expenses | 142.7 | 139.3 | 420.1 | 427.2 | |||||||||||||||||||||||||||||||||||||
| Other Income (Expense) | |||||||||||||||||||||||||||||||||||||||||
| Net gain on asset dispositions | 13.3 | 20.2 | 90.0 | 74.8 | |||||||||||||||||||||||||||||||||||||
| Interest expense, net | (36.5) | (32.9) | (105.8) | (102.5) | |||||||||||||||||||||||||||||||||||||
| Other expense | (1.4) | (1.1) | (3.4) | (2.9) | |||||||||||||||||||||||||||||||||||||
| Share of affiliates' pre-tax earnings (loss) | 0.3 | (0.2) | 0.3 | (0.2) | |||||||||||||||||||||||||||||||||||||
| Segment Profit | $ | 64.3 | $ | 66.5 | $ | 237.8 | $ | 209.8 | |||||||||||||||||||||||||||||||||
| Investment Volume | $ | 142.5 | $ | 178.9 | $ | 676.6 | $ | 394.4 | |||||||||||||||||||||||||||||||||
The following table shows the components of Rail North America's lease revenue (in millions):
| Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Railcars | $ | 190.0 | $ | 177.1 | $ | 549.2 | $ | 540.6 | |||||||||||||||
| Boxcars | 14.8 | 16.7 | 46.5 | 51.0 | |||||||||||||||||||
| Locomotives | 6.5 | 6.6 | 19.3 | 19.8 | |||||||||||||||||||
| Total | $ | 211.3 | $ | 200.4 | $ | 615.0 | $ | 611.4 | |||||||||||||||
Rail North America Fleet Data
At September 30, 2022, Rail North America's wholly owned fleet, excluding boxcars, consisted of approximately 101,300 railcars. Fleet utilization, excluding boxcars, was 99.6% at September 30, 2022, compared to 99.4% at the end of the prior quarter, and 99.2% at September 30, 2021. Fleet utilization for approximately 10,200 boxcars was 100.0% at September 30, 2022, compared to 99.9% at the end of the prior quarter, and 98.4% at September 30, 2021. Utilization is calculated as the number of railcars on lease as a percentage of total railcars in the fleet.
24
During the third quarter of 2022, an average of approximately 100,800 railcars, excluding boxcars, were on lease, compared to 100,100 in the prior quarter and 100,500 for the quarter ended September 30, 2021. Changes in railcars on lease compared to prior periods are impacted by the timing of deliveries of new railcars purchased under our supply agreements, the number and timing of railcars acquired in the secondary market and the disposition of railcars that were sold or scrapped, as well as the fleet utilization rate.
As of September 30, 2022, leases for approximately 4,600 tank cars and freight cars and approximately 300 boxcars are scheduled to expire over the remainder of 2022. These amounts exclude railcars on leases expiring in 2022 that have already been renewed or assigned to a new lessee.
On September 30, 2022 we entered into a new long-term railcar supply agreement with a subsidiary of Trinity Industries, Inc. ("Trinity") to purchase 15,000 newly built railcars through 2028, with an option to order up to an additional 500 railcars each year from 2023 to 2028. The agreement enables us to order a broad mix of tank and freight cars. Trinity will deliver 6,000 tank cars (1,200 per year) from 2024 through 2028. The remaining 9,000 railcars, which can be a mix of freight and tank cars, will be ordered at a rate of 1,500 railcars per order year from 2023 to 2028 and delivered under a schedule to be determined.
The following table shows fleet activity for Rail North America railcars, excluding boxcars, for the quarter ended:
| September 30 2021 | December 31 2021 | March 31 2022 | June 30 2022 | September 30 2022 | |||||||||||||||||||||||||
| Beginning balance | 102,144 | 101,341 | 101,570 | 100,452 | 101,272 | ||||||||||||||||||||||||
| Railcars added | 742 | 959 | 943 | 1,414 | 772 | ||||||||||||||||||||||||
| Railcars scrapped | (947) | (358) | (547) | (594) | (506) | ||||||||||||||||||||||||
| Railcars sold | (598) | (372) | (1,514) | — | (249) | ||||||||||||||||||||||||
| Ending balance | 101,341 | 101,570 | 100,452 | 101,272 | 101,289 | ||||||||||||||||||||||||
| Utilization rate at quarter end | 99.2 | % | 99.2 | % | 99.3 | % | 99.4 | % | 99.6 | % | |||||||||||||||||||
| Average active railcars | 100,467 | 100,658 | 100,253 | 100,079 | 100,783 | ||||||||||||||||||||||||
25
The following table shows fleet statistics for Rail North America boxcars for the quarter ended:
| September 30 2021 | December 31 2021 | March 31 2022 | June 30 2022 | September 30 2022 | |||||||||||||||||||||||||
| Beginning balance | 12,659 | 12,809 | 12,946 | 10,283 | 10,315 | ||||||||||||||||||||||||
| Boxcars added | 277 | 421 | 352 | 85 | — | ||||||||||||||||||||||||
| Boxcars scrapped | (127) | (184) | (109) | 64 | (91) | ||||||||||||||||||||||||
| Boxcars sold | — | (100) | (2,906) | (117) | — | ||||||||||||||||||||||||
| Ending balance | 12,809 | 12,946 | 10,283 | 10,315 | 10,224 | ||||||||||||||||||||||||
| Utilization rate at quarter end | 98.4 | % | 99.7 | % | 99.8 | % | 99.9 | % | 100.0 | % | |||||||||||||||||||
| Average active railcars | 12,432 | 12,747 | 10,856 | 10,239 | 10,267 | ||||||||||||||||||||||||
Lease Price Index
Our Lease Price Index ("LPI") is an internally-generated business indicator that measures lease rate pricing on renewals for our North American railcar fleet, excluding boxcars. We calculate the index using the weighted-average lease rate for a group of railcar types that we believe best represents our overall North American fleet, excluding boxcars. The average renewal lease rate change is reported as the percentage change between the average renewal lease rate and the average expiring lease rate, weighted by fleet composition. The average renewal lease term is reported in months and reflects the average renewal lease term of railcar types in the LPI, weighted by fleet composition.
During the third quarter of 2022, the renewal rate change of the LPI was positive 37.5%, compared to positive 18.3% in the prior quarter, and negative 8.1% in the third quarter of 2021. Lease terms on renewals for cars in the LPI averaged 33 months in the current quarter, compared to 34 months in the prior quarter, and 32 months in the third quarter of 2021. Additionally, the renewal success rate, which represents the percentage of railcars on expiring leases that were renewed with the existing lessee, was 87.2% in the current quarter, compared to 87.7% in the prior quarter, and 84.0% in the third quarter of 2021. The renewal success rate is an important metric because railcars returned by our customers may remain idle or incur additional maintenance and freight costs prior to being leased to new customers.
26
Comparison of the First Nine Months of 2022 to the First Nine Months of 2021
Segment Profit
In the first nine months of 2022, segment profit of $237.8 million increased 13.3% compared to $209.8 million for the same period in the prior year. The increase was primarily driven by higher net gains on asset dispositions. The amount and timing of disposition gains is dependent on a number of factors and may vary materially from year to year.
Revenues
In the first nine months of 2022, lease revenue increased $3.6 million, or 0.6%, driven by higher lease rates. Other revenue increased $5.4 million due to higher repair revenue and higher lease termination fees.
Expenses
In the first nine months of 2022, maintenance expense increased $1.3 million, driven by more repair events and more repairs performed by the railroads, partially offset by the absence of costs incurred at owned maintenance facilities sold in 2021 and 2022. Depreciation expense decreased $2.0 million due to fewer railcars in the fleet during the current year. Operating lease expense decreased $3.0 million, resulting from the purchase of railcars previously on operating leases. Other operating expense decreased $3.4 million due to lower switching, storage, and freight costs.
Other Income (Expense)
In the first nine months of 2022, net gain on asset dispositions increased $15.2 million due to more railcars sold and higher net scrapping gains. The amount and timing of disposition gains is dependent on a number of factors and may vary materially from year to year. Net interest expense increased $3.3 million, primarily driven by a higher average debt balance, partially offset by a lower average interest rate.
27
Investment Volume
During the first nine months of 2022, investment volume was $676.6 million compared to $394.4 million in the same period in 2021. We acquired 3,529 newly built railcars and purchased 420 railcars in the secondary market in the first nine months of 2022, compared to 2,560 newly built railcars and 309 railcars purchased in the secondary market in the same period in 2021.
Our investment volume is predominantly composed of acquired railcars, but also includes certain capitalized repairs and improvements to owned railcars and our maintenance facilities. As a result, the dollar value of investment volume does not necessarily correspond to the number of railcars acquired in any given period. In addition, the comparability of amounts invested and the number of railcars acquired in each period is impacted by the mix of railcars purchased, which may include tank cars and freight cars, as well as newly manufactured railcars or those purchased in the secondary market.
Comparison of the Third Quarter of 2022 to the Third Quarter of 2021
Segment Profit
In the third quarter of 2022, segment profit of $64.3 million decreased 3.3% compared to $66.5 million for the same period in the prior year. The decrease was primarily driven by lower net gains on asset dispositions and higher maintenance expense, offset by higher lease revenue. The amount and timing of disposition gains is dependent on a number of factors and will vary from quarter to quarter.
Revenues
In the third quarter of 2022, lease revenue increased $10.9 million, or 5.4%, driven by higher lease rates. Other revenue increased $0.6 million due to higher repair revenue.
Expenses
In the third quarter of 2022, maintenance expense increased $3.5 million, driven by more repair events and more repairs performed by the railroads, partially offset by the absence of costs incurred at owned maintenance facilities sold in 2021 and 2022. Depreciation expense increased $0.5 million due to the timing of new railcar investments and dispositions. Operating lease expense was comparable to the same period in the prior year. Other operating expense decreased $0.6 million due to lower storage expense.
Other Income (Expense)
In the third quarter of 2022, net gain on asset dispositions decreased $6.9 million, due to fewer railcars and locomotives sold and lower net scrapping gains as a result of fewer railcars scrapped. The amount and timing of disposition gains is dependent on a number of factors and will vary from quarter to quarter. Net interest expense increased $3.6 million, driven by a higher average debt balance and a higher average interest rate.
28
RAIL INTERNATIONAL
Segment Summary
Rail International, composed primarily of GATX Rail Europe ("GRE"), continued to produce strong operating results in the first nine months of 2022. Despite a weakening global economy, demand for railcars in Europe remained robust, and GRE continued to experience renewal lease rate increases for most railcar types in the quarter.
Our rail operations in India ("Rail India") continued to focus on investment opportunities, diversification of its fleet, and developing relationships with customers, suppliers and the Indian Railways.
Our rail operations in Russia consisted of 380 railcars on lease to three customers, and financial results were not material to Rail International's segment profit. After a thorough strategic review, in the third quarter of 2022 we decided to exit Rail Russia. This decision is due to the impacts of the Russia/Ukraine conflict on our business and the business risks associated with the geopolitical environment resulting from that conflict. As such, the net assets of Rail Russia have been classified as held for sale as of September 30, 2022 and an impairment loss of $10.8 million was recognized in the third quarter of 2022. See "Note 6. Asset Impairments and Assets Held for Sale " in Part I, Item 1 of this Form 10-Q for further information.
The following table shows Rail International's segment results (in millions):
| Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||||||||||||||
| Lease revenue | $ | 65.3 | $ | 68.8 | $ | 199.4 | $ | 204.7 | |||||||||||||||||||||||||||||||||
| Other revenue | 2.3 | 2.7 | 6.5 | 7.9 | |||||||||||||||||||||||||||||||||||||
| Total Revenues | 67.6 | 71.5 | 205.9 | 212.6 | |||||||||||||||||||||||||||||||||||||
| Expenses | |||||||||||||||||||||||||||||||||||||||||
| Maintenance expense | 12.8 | 14.0 | 39.0 | 43.6 | |||||||||||||||||||||||||||||||||||||
| Depreciation expense | 16.8 | 18.5 | 52.0 | 55.2 | |||||||||||||||||||||||||||||||||||||
| Other operating expense | 1.5 | 1.8 | 6.0 | 5.5 | |||||||||||||||||||||||||||||||||||||
| Total Expenses | 31.1 | 34.3 | 97.0 | 104.3 | |||||||||||||||||||||||||||||||||||||
| Other Income (Expense) | |||||||||||||||||||||||||||||||||||||||||
| Net (loss) gain on asset dispositions | (10.3) | 0.9 | (7.9) | 2.0 | |||||||||||||||||||||||||||||||||||||
| Interest expense, net | (11.2) | (10.9) | (33.5) | (34.2) | |||||||||||||||||||||||||||||||||||||
| Other (expense) income | (0.5) | (0.2) | 0.2 | — | |||||||||||||||||||||||||||||||||||||
| Segment Profit | $ | 14.5 | $ | 27.0 | $ | 67.7 | $ | 76.1 | |||||||||||||||||||||||||||||||||
| Investment Volume | $ | 50.1 | $ | 40.9 | $ | 177.8 | $ | 126.1 | |||||||||||||||||||||||||||||||||
GRE Fleet Data
At September 30, 2022, GRE's wholly owned fleet consisted of approximately 27,700 railcars. Fleet utilization was 99.4% at September 30, 2022, compared to 99.9% at the end of the prior quarter and 98.1% at September 30, 2021. Utilization is calculated as the number of railcars on lease as a percentage of total railcars in the fleet.
During the third quarter of 2022, an average of approximately 27,500 railcars were on lease, compared to 27,200 in the prior quarter and 26,300 for the quarter ended September 30, 2021. Changes in railcars on lease compared to prior periods are impacted by the number and timing of new railcars purchased or acquired in the secondary market and the disposition of railcars that were sold or scrapped, as well as the fleet utilization rate.
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The following table shows fleet activity for GRE railcars for the quarter ended:
| September 30 2021 | December 31 2021 | March 31 2022 | June 30 2022 | September 30 2022 | |||||||||||||||||||||||||
| Beginning balance | 26,727 | 26,840 | 27,109 | 27,192 | 27,470 | ||||||||||||||||||||||||
| Railcars added | 213 | 333 | 225 | 347 | 277 | ||||||||||||||||||||||||
| Railcars scrapped or sold | (100) | (64) | (142) | (69) | (46) | ||||||||||||||||||||||||
| Ending balance | 26,840 | 27,109 | 27,192 | 27,470 | 27,701 | ||||||||||||||||||||||||
| Utilization rate at quarter end | 98.1 | % | 98.7 | % | 99 | % | 99.9 | % | 99.4 | % | |||||||||||||||||||
| Average active railcars | 26,310 | 26,562 | 26,850 | 27,158 | 27,489 | ||||||||||||||||||||||||
Rail India Fleet Data
The following table shows fleet activity for Rail India railcars for the quarter ended:
| September 30 2021 | December 31 2021 | March 31 2022 | June 30 2022 | September 30 2022 | |||||||||||||||||||||||||
| Beginning balance | 4,292 | 4,417 | 4,830 | 5,198 | 5,503 | ||||||||||||||||||||||||
| Railcars added | 125 | 454 | 368 | 305 | 61 | ||||||||||||||||||||||||
| Railcars scrapped or sold | — | (41) | — | — | — | ||||||||||||||||||||||||
| Ending balance | 4,417 | 4,830 | 5,198 | 5,503 | 5,564 | ||||||||||||||||||||||||
| Utilization rate at quarter end | 99.1 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||||||
Comparison of the First Nine Months of 2022 to the First Nine Months of 2021
Foreign Currency
Rail International's reported results of operations are impacted by fluctuations in the exchange rates of the U.S. dollar versus foreign currencies in which it conducts business, primarily the euro. In the first nine months ended September 30, 2022, fluctuations in the
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value of the euro, relative to the U.S. dollar, negatively impacted lease revenue by approximately $20.9 million and segment profit, excluding other income (expense), by approximately $10.4 million compared to the same period in 2021.
Segment Profit
In the first nine months of 2022, segment profit of $67.7 million decreased 11.0% compared to $76.1 million for the same period in the prior year. Segment profit in 2022 included a $10.8 million impairment charge recorded as a result of the decision to exit the Rail Russia business. Excluding this impairment, results for Rail International were $2.4 million higher than 2021. The increase was primarily due to more railcars on lease, partially offset by changes in foreign exchange rates.
Revenues
In the first nine months of 2022, lease revenue decreased $5.3 million, or 2.6%, due to the impact of foreign exchange rates, partially offset by more railcars on lease at GRE and Rail India. Other revenue decreased $1.4 million, driven by lower repair revenue.
Expenses
In the first nine months of 2022, maintenance expense decreased $4.6 million, primarily due to fewer repairs performed by third-party shops and the impact of foreign exchange rates, partially offset by higher costs for other repairs. Depreciation expense decreased $3.2 million, as the impact of foreign exchange rates more than offset the impact of new railcars added to the fleet.
Other Income (Expense)
In the first nine months of 2022, net gain on asset dispositions decreased $9.9 million, driven by impairment losses recorded as a result of the decision to exit the Rail Russia business. Net interest expense decreased $0.7 million, due to a lower average interest rate, partially offset by a higher average debt balance. Other (expense) income was favorable $0.2 million, driven by the impact of changes in foreign exchange rates on non-functional currency items, partially offset by higher litigation costs related to the Viareggio matter.
Investment Volume
During the first nine months of 2022, investment volume was $177.8 million compared to $126.1 million in the same period in 2021. In the first nine months ended September 30, 2022, GRE acquired 801 newly built railcars (including 195 assembled at the GRE Ostróda, Poland facility) and 48 railcars purchased in the secondary market compared to 798 newly built railcars (including 253 assembled at the GRE Ostróda, Poland facility) for the same period in 2021. In the first nine months ended September 30, 2022, Rail India acquired 734 newly built railcars, compared to 261 newly built railcars for the same period in 2021.
Our investment volume is predominantly composed of acquired railcars, but also includes certain capitalized repairs and improvements to owned railcars. As a result, the dollar value of investment volume does not necessarily correspond to the number of railcars acquired in any given period. In addition, the comparability of amounts invested and the number of railcars acquired in each period is impacted by the mix of the various car types acquired, as well as fluctuations in the exchange rates of the foreign currencies in which Rail International conducts business.
Comparison of the Third Quarter of 2022 to the Third Quarter of 2021
Foreign Currency
Rail International's reported results of operations are impacted by fluctuations in the exchange rates of the U.S. dollar versus foreign currencies in which it conducts business, primarily the euro. In the third quarter of 2022, fluctuations in the value of the euro, relative to the U.S. dollar, negatively impacted lease revenue by approximately $9.2 million and segment profit, excluding other income (expense), by approximately $4.7 million compared to the same period in 2021.
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Segment Profit
In the third quarter of 2022, segment profit of $14.5 million decreased 46.3% compared to $27.0 million for the same period in the prior year. Segment profit in 2022 included a $10.8 million impairment charge recorded as a result of the decision to exit the Rail Russia business. Excluding this impairment, results for Rail International were $1.7 million lower than 2021. The decrease was primarily due to changes in foreign exchange rates, partially offset by more railcars on lease.
Revenues
In the third quarter of 2022, lease revenue decreased $3.5 million, or 5.1%, due to the changes in foreign exchange rates, partially offset by more railcars on lease at GRE and Rail India.
Expenses
In the third quarter of 2022, maintenance expense decreased $1.2 million, due to the impact of foreign exchange rates, partially offset by higher costs for repairs. Depreciation expense decreased $1.7 million, as the impact of foreign exchange rates more than offset the impact of new railcars added to the fleet.
Other Income (Expense)
In the third quarter of 2022, net gain on asset dispositions decreased $11.2 million, driven by impairment losses recorded as a result of the decision to exit the Rail Russia business. Net interest expense increased $0.3 million due to a higher average debt balance and a higher average interest rate. Other (expense) income was unfavorable $0.3 million, driven by the impact of changes in foreign exchange rates on non-functional currency items and higher litigation costs related to the Viareggio matter.
PORTFOLIO MANAGEMENT
Segment Summary
Portfolio Management's segment profit is attributable primarily to income from the RRPF affiliates, a group of 50% owned domestic and foreign joint ventures with Rolls-Royce plc (or affiliates thereof, collectively "Rolls-Royce"), a leading manufacturer of commercial aircraft jet engines. Segment profit included earnings from the RRPF affiliates of $20.5 million and $9.7 million for the nine months and three months ended September 30, 2022, compared to $26.4 million and $4.0 million for the same periods in 2021. In the first quarter of 2022, RRPF terminated leases for three aircraft spare engines leased to a Russian airline. The Russian government is prohibiting these engines from leaving the country; therefore, RRPF recorded an impairment charge associated with these three engines in the first quarter. GATX's 50% share of this net impairment was $15.3 million ($11.5 million after tax).
While global air travel has modestly improved in recent quarters, the operating environment for the RRPF affiliates continued to be impacted by the ongoing adverse impact of COVID-19 and the uncertainty due to the Russia/Ukraine conflict. RRPF continues to face pressure on both utilization and lease rates. RRPF remains focused on preserving a strong liquidity position in the current environment. The risk of ongoing volatility as a result of the uncertainty of the Russia/Ukraine conflict persists, and the long-term impact on international air travel and demand for RRPF engines is not known at this time.
Portfolio Management also owns marine assets (the "Specialized Gas Vessels") that are utilized to transport pressurized gases and chemicals, such as liquefied petroleum gas and ethylene, primarily on short- and medium-term spot contracts for major oil and chemical customers worldwide. In the second quarter of 2022, we made the decision to sell the Specialized Gas Vessels. We believe selling these vessels will better align our strategic focus. As a result of this decision, we classified the Specialized Gas Vessels as held for sale and recorded impairment losses of $31.5 million related to these assets during the second quarter of 2022. During the third quarter of 2022, GATX sold two of the Specialized Gas Vessels, and the net proceeds received approximated the carrying value of these vessels. The three remaining vessels continue to be classified as held for sale as of September 30, 2022.
In the first quarter of 2021, GATX invested directly in aircraft spare engines through its entity, GEL. GEL acquired 14 aircraft spare engines for approximately $352 million, including 4 engines for $120 million from the RRPF affiliates. All engines are on long-term leases with airline customers and are managed by RRPF.
Portfolio Management's total asset base was $991.1 million at September 30, 2022, compared to $1,023.7 million at June 30, 2022, and $1,030.1 million at September 30, 2021.
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The following table shows Portfolio Management’s segment results (in millions):
| Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||||||||
| Lease revenue | $ | 8.3 | $ | 8.2 | $ | 24.8 | $ | 19.8 | |||||||||||||||||||||||||||
| Marine operating revenue | 4.8 | 5.0 | 16.2 | 13.7 | |||||||||||||||||||||||||||||||
| Other revenue | — | 0.1 | 0.1 | 0.5 | |||||||||||||||||||||||||||||||
| Total Revenues | 13.1 | 13.3 | 41.1 | 34.0 | |||||||||||||||||||||||||||||||
| Expenses | |||||||||||||||||||||||||||||||||||
| Marine operating expense | 3.6 | 3.7 | 11.7 | 13.8 | |||||||||||||||||||||||||||||||
| Depreciation expense | 3.7 | 4.9 | 13.6 | 12.6 | |||||||||||||||||||||||||||||||
| Other operating expense | 0.6 | 0.6 | 1.7 | 1.2 | |||||||||||||||||||||||||||||||
| Total Expenses | 7.9 | 9.2 | 27.0 | 27.6 | |||||||||||||||||||||||||||||||
| Other Income (Expense) | |||||||||||||||||||||||||||||||||||
| Net gain (loss) on asset dispositions | 0.8 | 0.6 | (29.1) | 1.7 | |||||||||||||||||||||||||||||||
| Interest expense, net | (4.6) | (4.5) | (13.9) | (12.0) | |||||||||||||||||||||||||||||||
| Other income | 0.1 | 2.0 | — | 2.0 | |||||||||||||||||||||||||||||||
| Share of affiliates' pre-tax earnings | 9.7 | 4.0 | 20.5 | 26.4 | |||||||||||||||||||||||||||||||
| Segment Profit (Loss) | $ | 11.2 | $ | 6.2 | $ | (8.4) | $ | 24.5 | |||||||||||||||||||||||||||
| Investment Volume | $ | — | $ | — | $ | — | $ | 353.0 | |||||||||||||||||||||||||||
The following table shows the net book values of Portfolio Management's assets (in millions):
| September 31 2021 | December 31 2021 | March 31 2022 | June 30 2022 | September 30 2022 | |||||||||||||||||||||||||
| Investment in RRPF Affiliates | $ | 564.2 | $ | 588.1 | $ | 584.7 | $ | 596.2 | $ | 603.7 | |||||||||||||||||||
| GEL owned aircraft spare engines | 344.1 | 340.4 | 336.8 | 333.2 | 329.5 | ||||||||||||||||||||||||
| Specialized Gas Vessels | 104.1 | 103.6 | 101.7 | 70.3 | 28.4 | ||||||||||||||||||||||||
| Other owned assets | 17.7 | 16.6 | 16.9 | 24.0 | 29.5 | ||||||||||||||||||||||||
| Managed assets (1) | 11.6 | 9.8 | 7.9 | 6.0 | 4.1 | ||||||||||||||||||||||||
________
(1) Amounts shown represent the estimated net book value of assets managed for third parties and are not included in our consolidated balance sheets.
RRPF Affiliates Engine Portfolio Data
As of September 30, 2022, the RRPF affiliates' portfolio consisted of 394 aircraft spare engines with a net book value of $4,178.6 million, compared to 396 aircraft spare engines with a net book value of $4,218.9 million at the end of the prior quarter and 428 aircraft spare engines with a net book value of $4,478.4 million at September 30, 2021.
Engine utilization for the RRPF affiliates was 93.7% at September 30, 2022, compared to 91.9% at the end of the prior quarter and 92.1% at September 30, 2021. Utilization is calculated as the number of engines on lease as a percentage of total engines in the fleet.
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The following table shows portfolio activity for the RRPF affiliates' aircraft spare engines for the quarter ended:
| September 30 2021 | December 31 2021 | March 31 2022 | June 30 2022 | September 30 2022 | |||||||||||||||||||||||||
| Beginning balance | 429 | 428 | 407 | 398 | 396 | ||||||||||||||||||||||||
| Engine acquisitions | — | 3 | — | 1 | 3 | ||||||||||||||||||||||||
| Engine dispositions | (1) | (24) | (9) | (3) | (5) | ||||||||||||||||||||||||
| Ending balance | 428 | 407 | 398 | 396 | 394 | ||||||||||||||||||||||||
| Utilization rate at quarter end | 92.1 | % | 94.3 | % | 92.2 | % | 91.9 | % | 93.7 | % | |||||||||||||||||||
Comparison of the First Nine Months of 2022 to the First Nine Months of 2021
Segment Profit
In the first nine months of 2022, segment loss was $8.4 million, compared to segment profit of $24.5 million for the same period in the prior year. Segment loss in 2022 included a $31.5 million impairment charge recorded as a result of the decision to sell the Specialized Gas Vessels and a $15.3 million net impairment charge (GATX's 50% share) for aircraft spare engines in Russia that RRPF does not expect to recover. Excluding these losses, results for Portfolio Management were $13.9 million higher than 2021, driven by higher share of affiliates' earnings at the RRPF affiliates and higher results from our marine operations.
Revenues
In the first nine months of 2022, lease revenue increased $5.0 million, due to a full nine months of operations at GEL. Marine operating revenue increased $2.5 million, driven by higher utilization and charter rates from the Specialized Gas Vessels.
Expenses
In the first nine months of 2022, marine operating expense decreased $2.1 million, due to lower bunker fuel expense and lower repairs and maintenance costs. Depreciation expense increased $1.0 million, due to a full nine months of depreciation on aircraft spare engines acquired at GEL in the prior year, partially offset by the absence of depreciation expense on the Specialized Gas Vessels due to the classification of the vessels as held for sale in 2022.
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Other Income (Expense)
In the first nine months of 2022, net gain (loss) on asset dispositions was unfavorable by $30.8 million, driven by impairment losses recorded as a result of the decision to sell the Specialized Gas Vessels.
In the first nine months of 2022, income from our share of affiliates' earnings decreased $5.9 million, driven by the impairment charge on aircraft spare engines in Russia that RRPF does not expect to recover. Absent this, financial results were higher in 2022, due to higher income from operations.
Investment Volume
In the first nine months of 2022, investment volume was zero, compared to $353.0 million in the same period in 2021. During 2021, GEL acquired 14 aircraft spare engines.
Comparison of the Third Quarter of 2022 to the Third Quarter of 2021
Segment Profit
In the third quarter of 2022, segment profit was $11.2 million, compared to segment profit of $6.2 million for the same period in the prior year. The increase was primarily driven by higher share of affiliates' earnings at the RRPF affiliates.
Revenues
In the third quarter of 2022, lease revenue and marine operating revenue were comparable to the same period in the prior year.
Expenses
In the third quarter of 2022, marine operating expense was comparable to the same period in the prior year. Depreciation expense decreased $1.2 million, as a result of the absence of depreciation expense on the Specialized Gas Vessels due to the classification of the vessels as held for sale in 2022.
Other Income (Expense)
In the third quarter of 2022, net gain (loss) on asset dispositions was comparable to the same period in the prior year.
In the third quarter of 2022, income from our share of affiliates' earnings increased $5.7 million, due to higher income from operations, offset by lower remarketing income.
OTHER
Other comprises our Trifleet Leasing business, as well as selling, general and administrative expenses ("SG&A"), unallocated interest expense, and miscellaneous income and expense not directly associated with the reporting segments and certain eliminations.
In the second quarter of 2022, GATX executed a multi-party amended and restated settlement agreement related to its share of estimated environmental remediation costs to be incurred at a previously owned facility that was sold in 1974. This agreement establishes a limit on GATX's share of responsibility for future costs required to complete the remediation and closure of the site. As a result, GATX recorded $5.9 million of expense to establish a reserve for its share of the remaining anticipated remediation and related costs.
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The following table shows components of Other (in millions):
| Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||
| Trifleet Leasing revenue | $ | 9.0 | $ | 8.9 | $ | 26.5 | $ | 22.0 | |||||||||||||||||||||
| Trifleet Leasing segment profit | $ | 3.8 | $ | 3.0 | $ | 10.2 | $ | 6.3 | |||||||||||||||||||||
| Unallocated interest income (expense) | 0.2 | (0.2) | 0.8 | (0.6) | |||||||||||||||||||||||||
| Other expense, including eliminations | (1.1) | (1.1) | (13.1) | (9.0) | |||||||||||||||||||||||||
| Segment Profit (Loss) | $ | 2.9 | $ | 1.7 | $ | (2.1) | $ | (3.3) | |||||||||||||||||||||
| Selling, general and administrative expense | $ | 47.6 | $ | 45.9 | $ | 142.7 | $ | 140.8 | |||||||||||||||||||||
Trifleet Leasing Summary
The tank container leasing market remained strong in the third quarter, and demand for tank containers was robust. As a result, utilization increased to 93.1% at the end of the quarter.
Trifleet Leasing Tank Container Data
At September 30, 2022, Trifleet Leasing's owned and managed fleet consisted of approximately 21,200 tank containers compared to 20,600 in the prior quarter and 19,700 for the quarter ended September 30, 2021. Fleet utilization was 93.1% at September 30, 2022 compared to 92.4% at the end of the prior quarter and 87.5% at September 30, 2021. Utilization is calculated as the number of tank containers on lease as a percentage of total tank containers in the fleet.
The following table shows fleet statistics for Trifleet Leasing's tank containers for the quarter ended:
| September 30 2021 | December 31 2021 | March 31 2022 | June 30 2022 | September 30 2022 | |||||||||||||||||||||||||
| Ending balance - owned and managed | 19,703 | 19,996 | 20,258 | 20,576 | 21,187 | ||||||||||||||||||||||||
| Utilization rate at quarter-end - owned and managed | 87.5 | % | 89.2 | % | 91.6 | % | 92.4 | % | 93.1 | % | |||||||||||||||||||
SG&A, Unallocated Interest and Other
SG&A increased $1.9 million for the first nine months of 2022 compared to the same period in the prior year, driven by higher employee-related expenses, information services costs, and discretionary travel and entertainment expenses, partially offset by the impacts of share-based compensation expenses.
SG&A increased $1.7 million for the third quarter of 2022 compared to the same period in the prior year, driven by higher employee-related expenses and higher discretionary travel and entertainment expenses, partially offset by the impacts of share-based compensation expenses.
Unallocated interest expense (the difference between external interest expense and interest expense allocated to the reporting segments) in any year is affected by our consolidated leverage position, the timing of debt issuances and investing activities, and intercompany allocations.
Other expense, including eliminations increased $4.1 million in the first nine months of 2022 compared to the same period in the prior year, driven by higher environmental remediation costs and higher pension-related expenses, including a settlement charge recorded during the current year.
Other expense, including eliminations was comparable to the same period in the prior year.
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Consolidated Income Taxes
See "Note 9. Income Taxes" in Part I, Item 1 of this Form 10-Q.
CASH FLOW AND LIQUIDITY
We generate a significant amount of cash from operating activities and investment portfolio proceeds. We also access domestic and international capital markets by issuing unsecured or secured debt and commercial paper. We use these resources, along with available cash balances, to fulfill our debt, lease, and dividend obligations, to support our share repurchase programs, and to fund portfolio investments and capital additions. We primarily use cash from operations to fund daily operations. The timing of asset dispositions and changes in working capital impact cash flows from portfolio proceeds and operations. As a result, these cash flow components may vary materially from quarter to quarter and year to year.
As of September 30, 2022, we had an unrestricted cash balance of $596.3 million. We also have a $250 million 3-year unsecured revolving credit facility in the U.S. that matures in 2025 and a $600 million, 5-year unsecured credit facility in the U.S. that matures in 2027, both of which are fully available as of September 30, 2022.
The following table shows our principal sources and uses of cash for the nine months ended September 30 (in millions):
| 2022 | 2021 | ||||||||||||||||
Principal sources of cash | |||||||||||||||||
Net cash provided by operating activities | $ | 352.6 | $ | 340.0 | |||||||||||||
Portfolio proceeds | 224.9 | 159.0 | |||||||||||||||
Other asset sales | 26.4 | 43.7 | |||||||||||||||
Proceeds from issuance of debt, commercial paper, and credit facilities | 838.5 | 1,319.1 | |||||||||||||||
Total | $ | 1,442.4 | $ | 1,861.8 | |||||||||||||
Principal uses of cash | |||||||||||||||||
Portfolio investments and capital additions | $ | (887.9) | $ | (893.2) | |||||||||||||
Repayments of debt, commercial paper, and credit facilities | (250.0) | (585.9) | |||||||||||||||
Purchases of assets previously leased - financing activities | (1.5) | (77.2) | |||||||||||||||
Stock repurchases | (47.2) | (0.4) | |||||||||||||||
Dividends | (57.9) | (56.2) | |||||||||||||||
Total | $ | (1,244.5) | $ | (1,612.9) | |||||||||||||
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the first nine months of 2022 was $352.6 million, an increase of $12.6 million compared to the same period in 2021. Comparability among reporting periods is impacted by the timing of changes in working capital items. Specifically, lower cash payments for operating leases and interest were partially offset by higher payments for other operating expenses and income taxes.
Portfolio Proceeds
Portfolio proceeds primarily consist of proceeds from sales of operating assets and finance lease receipts. Portfolio proceeds of $224.9 million for the first nine months of 2022 increased by $65.9 million from the prior year, primarily due to proceeds from the sale of two of the Specialized Gas Vessels at Portfolio Management and more railcars sold at Rail North America.
Proceeds From Issuance of Debt
Proceeds from the issuance of debt for the first nine months ended September 30, 2022 were $838.5 million (net of hedges and debt issuance costs). In the first nine months of 2022, we issued $400 million of 10-year unsecured debt at a 3.528% yield, $400 million of 10-year unsecured debt at a 5.016% yield and $50 million of 7-year unsecured floating rate private placement debt at a 3-month Term Secured Overnight Financing Rate (“SOFR”) plus 220 bps.
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Portfolio Investments and Capital Additions
Portfolio investments and capital additions primarily consist of purchases of operating assets and capitalized asset improvements. Portfolio investments and capital additions of $887.9 million for the first nine months of 2022 decreased $5.3 million compared to 2021, primarily due to the acquisition of 14 aircraft spare engines at GEL in 2021, partially offset by more railcars acquired at Rail North America and Rail International and more tank containers acquired at Trifleet Leasing in the current year.
Repayments of Debt
Debt repayments of $250.0 million in the first nine months of 2022 were $335.9 million lower than in the period year. In the first nine months of 2022, repayments included the redemption of $250 million of our 4.75% public notes.
Purchases of Assets Previously Leased
In the nine months ended September 30, 2022, we exercised options to acquire 21 railcars previously recorded on the balance sheet as a finance lease for $1.5 million, compared to the exercise of options to acquire 898 railcars previously recorded on the balance sheet as a finance lease for $77.2 million in 2021.
Share Repurchase Program
On January 25, 2019, our board of directors approved a $300.0 million share repurchase program, pursuant to which we are authorized to purchase shares of our common stock in the open market, in privately negotiated transactions, or otherwise, including pursuant to Rule 10b5-1 plans. The share repurchase authorization does not have an expiration date, does not obligate the Company to repurchase any dollar amount or number of shares of common stock, and may be suspended or discontinued at any time. The timing of repurchases will be dependent on market conditions and other factors. During the nine months ended September 30, 2022, we repurchased 472,609 shares of common stock for $47.2 million, excluding commissions, compared to 4,228 shares of common stock for $0.4 million during the same period in 2021. As of September 30, 2022, $89.6 million remained available under the repurchase authorization.
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Material Cash Obligations
The following table shows our material cash obligations, including debt principal and related interest payments, lease payments, and purchase commitments at September 30, 2022 (in millions):
| Material Cash Obligations by Period | |||||||||||||||||||||||||||||||||||||||||
| Total | 2022 (1) | 2023 | 2024 | 2025 | 2026 | Thereafter | |||||||||||||||||||||||||||||||||||
Recourse debt | $ | 6,415.5 | $ | 98.0 | $ | 500.0 | $ | 500.9 | $ | 496.0 | $ | 446.1 | $ | 4,374.5 | |||||||||||||||||||||||||||
Interest on recourse debt (2) | 2,139.1 | 56.3 | 221.3 | 197.1 | 183.2 | 177.4 | 1,303.8 | ||||||||||||||||||||||||||||||||||
Commercial paper and credit facilities | 16.3 | 16.3 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Operating lease obligations | 300.5 | 8.4 | 40.0 | 37.9 | 35.2 | 43.8 | 135.2 | ||||||||||||||||||||||||||||||||||
Purchase commitments (3) | 2,759.0 | 217.0 | 786.0 | 304.2 | 330.6 | 334.4 | 786.8 | ||||||||||||||||||||||||||||||||||
Total | $ | 11,630.4 | $ | 396.0 | $ | 1,547.3 | $ | 1,040.1 | $ | 1,045.0 | $ | 1,001.7 | $ | 6,600.3 | |||||||||||||||||||||||||||
__________
(1) For the remainder of the year.
(2) For floating rate debt, future interest payments are based on the applicable interest rate as of September 30, 2022.
(3) Primarily railcar purchase commitments. The amounts shown for all years are based on management's estimates of the timing, anticipated car types, and related costs of railcars to be purchased under its agreements.
In 2018, we amended a long-term supply agreement with a subsidiary of Trinity Industries, Inc. ("Trinity") to extend the term to December 2023, and we agreed to purchase 4,800 tank cars (1,200 per year) beginning in January 2020 and continuing through 2023. At September 30, 2022, 4,002 railcars have been ordered pursuant to the amended terms of the agreement, of which 3,285 railcars have been delivered.
On September 30, 2022 we entered into a new long-term railcar supply agreement with Trinity to purchase 15,000 newly built railcars through 2028, with an option to order up to an additional 500 railcars each year from 2023 to 2028. The agreement enables us to order a broad mix of tank and freight cars. Trinity will deliver 6,000 tank cars (1,200 per year) from 2024 through 2028. The remaining 9,000 railcars, which can be a mix of freight and tank cars, will be ordered at a rate of 1,500 railcars per order year from 2023 to 2028 and delivered under a schedule to be determined. At September 30, 2022, 307 railcars have been ordered pursuant to the terms of the agreement, of which no railcars have been delivered.
In 2018, we entered into a multi-year railcar supply agreement with American Railcar Industries, Inc. ("ARI"), pursuant to which we agreed to purchase 7,650 newly built railcars. The order encompasses a mix of tank and freight cars that are to be delivered over a five-year period, beginning in April 2019 and ending in December 2023. ARI's railcar manufacturing business was acquired by a subsidiary of The Greenbrier Companies, Inc. ("Greenbrier") on July 26, 2019, and such subsidiary assumed all of ARI's obligations under our long-term supply agreement. As of September 30, 2022, 7,650 railcars have been ordered, of which 5,552 have been delivered. The agreement included an option to order additional railcars subject to certain restrictions and, as of September 30, 2022, we have the option to order 1,375 additional railcars during the remaining term of the agreement.
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Short-Term Borrowings
We primarily use short-term borrowings as a source of working capital and to temporarily fund differences between our operating cash flows and portfolio proceeds, and our capital investments and debt maturities. We do not maintain or target any particular level of short-term borrowings on a permanent basis. Rather, we will temporarily utilize short-term borrowings at levels we deem appropriate until we decide to pay down these balances.
The following table shows additional information regarding our short-term borrowings for the nine months ended September 30, 2022:
| Europe (1) | |||||
Balance as of September 30 (in millions) | $ | 16.3 | |||
Weighted-average interest rate | 1.5 | % | |||
Euro/dollar exchange rate | 0.98 | ||||
Average daily amount outstanding year to date (in millions) | $ | 18.1 | |||
Weighted-average interest rate | 0.9 | % | |||
Average Euro/dollar exchange rate | 1.06 | ||||
Average daily amount outstanding during the third quarter (in millions) | $ | 17.2 | |||
Weighted-average interest rate | 1.0 | % | |||
Average Euro/dollar exchange rate | 1.01 | ||||
Maximum daily amount outstanding (in millions) | $ | 27.6 | |||
Euro/dollar exchange rate | 1.14 | ||||
__________
(1)Short-term borrowings in Europe are composed of borrowings under bank credit facilities.
Credit Lines and Facilities
We have a $600 million, 5-year unsecured revolving credit facility in the U.S. In the second quarter of 2022, we entered into an amendment, which extended the maturity on this facility by one year from May 2026 to May 2027 and replaced the LIBOR interest rate with a Term SOFR. This credit facility contains one additional extension option. As of September 30, 2022, the full $600 million was available under this facility. Additionally we have a $250 million 3-year unsecured revolving credit facility in the U.S. In the second quarter of 2022, we also entered into an amendment to this facility to extend the maturity by one year from May 2024 to May 2025 and to replace the LIBOR interest rate with SOFR. This credit facility contains one additional extension option as well. As of September 30, 2022, the full $250 million was available on this facility.
Our European subsidiaries have unsecured credit facilities with an aggregate limit of €35.0 million. As of September 30, 2022, €18.4 million was available under these credit facilities.
Delayed Draw Term Loan
On September 12, 2022, we executed a delayed draw term loan agreement in India which provided for a 5-year unsecured term loan in the aggregate principal amount of up to 2.3 billion Indian Rupees ($28.3 million as of September 30, 2022). Advances are allowed through March 31, 2023 pursuant to the terms of the agreement and any amounts borrowed and repaid may not be re-borrowed. The amounts borrowed under the loan agreement are required to be repaid no later than 5 years from the first drawdown date. As of September 30, 2022, no amount was drawn on this loan.
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Restrictive Covenants
Our $600 million and $250 million revolving credit facilities contain various restrictive covenants, including requirements to maintain a fixed charge coverage ratio and an asset coverage test. Some of our bank term loans have the same financial covenants as these facilities.
The indentures for our public debt also contain various restrictive covenants, including limitations on liens provisions that restrict the amount of additional secured indebtedness that we may incur. Additionally, certain exceptions to the covenants permit us to incur an unlimited amount of purchase money and nonrecourse indebtedness.
At September 30, 2022, our European rail subsidiaries had outstanding term loans, public debt, and private placement debt balances totaling €730.0 million. The loans are guaranteed by GATX Corporation and are subject to similar restrictive covenants as the revolving credit facility noted above.
At September 30, 2022, we were in compliance with all covenants and conditions of all of our credit agreements. We do not anticipate any covenant violations nor do we expect that any of these covenants will restrict our operations or our ability to obtain additional financing.
Credit Ratings
The global capital market environment and outlook may affect our funding options and our financial performance. Our access to capital markets at competitive rates depends on our credit rating and rating outlook, as determined by rating agencies. As of September 30, 2022, our long-term unsecured debt was rated BBB by Standard & Poor's and Baa2 by Moody’s Investor Service and our short-term unsecured debt was rated A-2 by Standard & Poor's and P-2 by Moody’s Investor Service. Our rating outlook from both agencies was stable.
Leverage
Leverage is expressed as a ratio of debt (including debt and lease obligations, net of unrestricted cash) to equity. The following table shows the components of recourse leverage (in millions, except recourse leverage ratio):
| September 30 2022 | June 30 2022 | March 31 2022 | December 31 2021 | September 30 2021 | |||||||||||||||||||||||||
| Debt and lease obligations, net of unrestricted cash: | |||||||||||||||||||||||||||||
Unrestricted cash | $ | (596.3) | $ | (180.3) | $ | (649.3) | $ | (344.3) | $ | (566.0) | |||||||||||||||||||
Commercial paper and bank credit facilities | 16.3 | 20.0 | 18.6 | 18.1 | 20.7 | ||||||||||||||||||||||||
Recourse debt | 6,353.1 | 5,964.4 | 6,256.9 | 5,887.5 | 6,029.8 | ||||||||||||||||||||||||
Operating lease obligations | 259.0 | 266.7 | 273.4 | 286.2 | 292.1 | ||||||||||||||||||||||||
Finance lease obligations | — | — | — | 1.5 | — | ||||||||||||||||||||||||
| Total debt and lease obligations, net of unrestricted cash | $ | 6,032.1 | $ | 6,070.8 | $ | 5,899.6 | $ | 5,849.0 | $ | 5,776.6 | |||||||||||||||||||
| Total recourse debt (1) | $ | 6,032.1 | $ | 6,070.8 | $ | 5,899.6 | $ | 5,849.0 | $ | 5,776.6 | |||||||||||||||||||
| Shareholders' Equity | $ | 1,940.5 | $ | 1,981.5 | $ | 2,060.8 | $ | 2,019.2 | $ | 1,976.9 | |||||||||||||||||||
| Recourse Leverage (2) | 3.1 | 3.1 | 2.9 | 2.9 | 2.9 | ||||||||||||||||||||||||
________
(1) Includes recourse debt, commercial paper and bank credit facilities, and operating and finance lease obligations, net of unrestricted cash.
(2) Calculated as total recourse debt / shareholder's equity.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no changes to our critical accounting policies during the nine months ended September 30, 2022. Refer to our Annual Report on Form 10-K for the year ended December 31, 2021, for a summary of our policies.
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NON-GAAP FINANCIAL MEASURES
In addition to financial results reported in accordance with GAAP, we compute certain financial measures using non-GAAP components, as defined by the SEC. These measures are not in accordance with, or a substitute for, GAAP, and our financial measures may be different from non-GAAP financial measures used by other companies. We have provided a reconciliation of our non-GAAP components to the most directly comparable GAAP components.
Reconciliation of Non-GAAP Components Used in the Computation of Certain Financial Measures
Net Income Measures
We exclude the effects of certain tax adjustments and other items for purposes of presenting net income, diluted earnings per share, and return on equity because we believe these items are not attributable to our business operations. Management utilizes net income, excluding tax adjustments and other items, when analyzing financial performance because such amounts reflect the underlying operating results that are within management’s ability to influence. Accordingly, we believe presenting this information provides investors and other users of our financial statements with meaningful supplemental information for purposes of analyzing year-to-year financial performance on a comparable basis and assessing trends.
The following tables show our net income and diluted earnings per share, excluding tax adjustments and other items (in millions, except per share data):
| Impact of Tax Adjustments and Other Items on Net Income: | |||||||||||||||||||||||
| Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net income (GAAP) | $ | 29.1 | $ | 40.1 | $ | 107.5 | $ | 82.1 | |||||||||||||||
| Adjustments attributable to consolidated pre-tax income: | |||||||||||||||||||||||
| Rail Russia impairment at Rail International (1) | 10.8 | — | 10.8 | — | |||||||||||||||||||
| Specialized Gas Vessels impairment at Portfolio Management (2) | — | — | 31.5 | — | |||||||||||||||||||
| Environmental remediation costs (3) | — | — | 5.9 | — | |||||||||||||||||||
| Debt extinguishment costs (4) | — | — | — | 4.5 | |||||||||||||||||||
| Total adjustments attributable to consolidated pre-tax income | $ | 10.8 | $ | — | $ | 48.2 | $ | 4.5 | |||||||||||||||
| Income taxes thereon, based on applicable effective tax rate | $ | — | $ | — | $ | (1.5) | $ | (1.1) | |||||||||||||||
| Other income tax adjustments attributable to consolidated income: | |||||||||||||||||||||||
| Income tax rate change (5) | — | — | (3.0) | — | |||||||||||||||||||
| Total other income tax adjustments attributable to consolidated income | $ | — | $ | — | $ | (3.0) | $ | — | |||||||||||||||
| Adjustments attributable to affiliates' earnings, net of taxes: | |||||||||||||||||||||||
| Aircraft spare engine impairment at RRPF (6) | — | — | $ | 11.5 | $ | — | |||||||||||||||||
| Income tax rate change (7) | — | — | — | 39.7 | |||||||||||||||||||
| Total adjustments attributable to affiliates' earnings, net of taxes | $ | — | $ | — | $ | 11.5 | $ | 39.7 | |||||||||||||||
| Net income, excluding tax adjustments and other items (non-GAAP) | $ | 39.9 | $ | 40.1 | $ | 162.7 | $ | 125.2 | |||||||||||||||
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| Impact of Tax Adjustments and Other Items on Diluted Earnings per Share: | |||||||||||||||||||||||
| Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Diluted earnings per share (GAAP) | $ | 0.81 | $ | 1.11 | $ | 2.99 | $ | 2.28 | |||||||||||||||
| Adjustments attributable to consolidated income, net of taxes: | |||||||||||||||||||||||
| Rail Russia impairment at Rail International (1) | 0.30 | — | 0.30 | — | |||||||||||||||||||
| Specialized Gas Vessels impairment at Portfolio Management (2) | — | — | 0.88 | — | |||||||||||||||||||
| Environmental remediation costs (3) | — | — | 0.12 | — | |||||||||||||||||||
| Debt extinguishment costs (4) | — | — | — | 0.09 | |||||||||||||||||||
| Other income tax adjustments attributable to consolidated income: | |||||||||||||||||||||||
| Income tax rate change (5) | — | — | (0.08) | — | |||||||||||||||||||
| Adjustments attributable to affiliates' earnings, net of taxes: | |||||||||||||||||||||||
| Aircraft spare engine impairment at RRPF (6) | — | — | 0.32 | — | |||||||||||||||||||
| Income tax rate change (7) | — | — | — | 1.10 | |||||||||||||||||||
| Diluted earnings per share, excluding tax adjustments and other items (non-GAAP) * | $ | 1.12 | $ | 1.11 | $ | 4.53 | $ | 3.48 | |||||||||||||||
_______
* Sum of individual components may not be additive due to rounding.
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The following table shows our net income and return on equity, excluding tax adjustments and other items, for the trailing 12 months ended September 30 (in millions):
| 2022 | 2021 | ||||||||||
| Net income (GAAP) | $ | 168.5 | $ | 99.9 | |||||||
| Adjustments attributable to consolidated pre-tax income: | |||||||||||
| Rail Russia impairment at Rail International (1) | 10.8 | — | |||||||||
| Specialized Gas Vessels impairment at Portfolio Management (2) | 31.5 | — | |||||||||
| Environmental remediation costs (3) | 5.9 | — | |||||||||
| Net insurance proceeds (8) | (5.3) | — | |||||||||
| Debt extinguishment costs (4) | — | 4.5 | |||||||||
| Total adjustments attributable to pre-tax income | $ | 42.9 | $ | 4.5 | |||||||
| Income taxes thereon, based on applicable effective tax rate | $ | (0.2) | $ | (1.1) | |||||||
| Other income tax adjustments attributable to income: | |||||||||||
| Income tax rate change (5) | (3.0) | — | |||||||||
| Total other income tax adjustments attributable to consolidated income | $ | (3.0) | $ | — | |||||||
| Adjustments attributable to affiliates' earnings, net of taxes: | |||||||||||
| Aircraft spare engine impairment at RRPF (6) | 11.5 | — | |||||||||
| Income tax rate changes (7) | — | 39.7 | |||||||||
| Total adjustments attributable to affiliates' earnings, net of taxes | $ | 11.5 | $ | 39.7 | |||||||
| Net income, excluding tax adjustments and other items (non-GAAP) | $ | 219.7 | $ | 143.0 | |||||||
(1) In the third quarter of 2022, we made the decision to exit our rail business in Russia. As a result, we recorded losses associated with the impairment of the net assets.
(2) In the second quarter of 2022, we made the decision to sell the Specialized Gas Vessels. As a result, we recorded losses associated with the impairments of these assets.
(3) Reserve recorded as part of an executed agreement for anticipated remediation costs at a previously owned property, sold in 1974.
(4) Write-off of unamortized deferred financing costs associated with the early redemption of our $150 million 5.625% Senior Notes due 2066.
(5) Deferred income tax adjustment due to an enacted corporate income tax rate reduction in Austria in 2022.
(6) Impairment losses related to aircraft spare engines in Russia that RRPF does not expect to recover.
(7) Deferred income tax adjustment due to an enacted corporate income tax rate increase in the United Kingdom in 2021.
(8) Net gain from insurance recoveries for storm damage to a maintenance facility at Rail North America.
| 2022 | 2021 | ||||||||||
| Return on Equity (GAAP) | 8.6 | % | 5.1 | % | |||||||
| Return on Equity, excluding tax adjustments and other items (non-GAAP) (1) | 13.5 | % | 8.8 | % | |||||||
_______
(1) Shareholders' equity used in this calculation excludes the increases resulting from the impact of the Tax Cuts and Jobs Act of 2017.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Since December 31, 2021, there have been no material changes in our interest rate and foreign currency exposures or types of derivative instruments used to hedge these exposures. For a discussion of our exposure to market risk, refer to "Item 7A. Quantitative and Qualitative Disclosure about Market Risk" of our Annual Report on Form 10-K for the year ended December 31, 2021.
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GATX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Item 4. Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act")). Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures were effective.
No changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) occurred during the quarter ended September 30, 2022, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Information concerning litigation and other contingencies is described in "Note 13. Legal Proceedings and Other Contingencies" in Part I, Item 1 of this Form 10-Q and is incorporated herein by reference.
Item 1A. Risk Factors
The ongoing military action between Russia and Ukraine could adversely affect our business, financial condition and results of operations.
On February 24, 2022, Russian military forces launched a military action in Ukraine. Although the length, impact and outcome of the ongoing military conflict in Ukraine is highly unpredictable, this conflict could lead to significant market and other disruptions, including extreme volatility in commodity prices and supply of energy resources, instability in financial markets, supply chain interruptions, political and social instability, as well as an increase in cyberattacks and espionage, any of which could adversely impact our business, financial condition and results of operations.
As a result of the conflict in Ukraine, the United States, the European Union, the United Kingdom and other countries have implemented, and may implement additional, sanctions, export controls and other measures against Russia, Belarus and other countries, regions, officials, individuals or industries in the respective territories. Such sanctions and other measures, as well as the existing and potential further responses from Russia or other countries to such sanctions, tensions and military actions, could adversely affect the global economy and financial markets and could adversely affect our business, financial condition and results of operations.
Our rail operations in Russia consist of a fleet of 380 railcars on lease to three customers managed by three employees. Although our limited railcar leasing business in Russia has not been materially impacted by the ongoing military conflict between Russia and Ukraine to date, it is impossible to predict the extent to which the conflict and related sanctions and other measures may impact our business. During the third quarter of 2022, as a result of our decision to exit Russia, the net assets have been classified as held for sale and an impairment loss was recognized. The Russian government recently promulgated regulations that will require review and approval by a governmental commission of the terms of any sale transaction that we may enter into. Given the evolving nature of such governmental action, we may not be able to receive the fully negotiated value for our Russian business and a further impairment charge may be required.
Our spare aircraft engine leasing joint ventures with Rolls-Royce plc (“RRPF”) have terminated direct leases for three engines, leased to a Russian airline customer, that are currently prohibited from leaving Russia by the Russian government. RRPF recognized an impairment charge on these three engines in the first quarter of 2022, and while efforts to recover some value through insurance claims is being undertaken, the outcome of these efforts is uncertain. Furthermore, if the conflict between Russia and Ukraine has a longer-term impact on international air travel, or adversely impacts aircraft spare engine leasing, it is possible that the value of other engines in the RRPF portfolio may be negatively affected and additional asset impairments may occur, the magnitude of which is unknown.
Our business must be conducted in compliance with applicable economic and trade sanctions laws and regulations, including those administered and enforced by the U.S. Department of Treasury’s Office of Foreign Assets Control, the U.S. Department of State, the U.S. Department of Commerce, the United Nations Security Council and other relevant governmental authorities. Failure to comply with the sanctions, laws and regulations could result in monetary fines or other penalties, which could have an adverse impact on our reputation, business, financial condition and results of operations.
Any of the above-mentioned factors could adversely affect our business, financial condition and results of operations. Any such disruptions may also magnify the impact of other risks described in our Annual Report on Form 10-K and in our subsequent reports on Form 10-Q or other filings with the SEC.
Other than as described in this item and a prior update to this risk factor in our 10-Q for the quarterly period ended March 31, 2022, there have been no material changes in our risk factors since December 31, 2021. For a discussion of our risk factors, refer to "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2021.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On January 25, 2019, our board of directors approved a $300.0 million share repurchase program, pursuant to which we are authorized to purchase shares of our common stock in the open market, in privately negotiated transactions, or otherwise, including pursuant to Rule 10b5-1 plans. The share repurchase authorization does not have an expiration date, does not obligate the Company to repurchase any dollar amount or number of shares of common stock, and may be suspended or discontinued at any time. The timing of share repurchases will be dependent on market conditions and other factors. As of September 30, 2022, $89.6 million remained available under the repurchase authorization.
The following is a summary of common stock repurchases completed by month during the third quarter of 2022:
| Issuer Purchases of Equity Securities | ||||||||||||||||||||||||||||||||||||||
| (a) | (b) | (c) | (d) | |||||||||||||||||||||||||||||||||||
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (in millions) | ||||||||||||||||||||||||||||||||||
| July 1, 2022 - July 30, 2022 | 53,852 | $ | 92.63 | 53,852 | $ | 89.6 | ||||||||||||||||||||||||||||||||
| Total | 53,852 | $ | 92.63 | 53,852 | ||||||||||||||||||||||||||||||||||
Item 6. Exhibits
Exhibit Number | Exhibit Description | |||||||
Filed with this Report: | ||||||||
| 31A | ||||||||
| 31B | ||||||||
| 32 | ||||||||
| 10.1 | ||||||||
| 101 | The following materials from GATX Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, are formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at September 30, 2022 and December 31, 2021, (ii) Condensed Consolidated Statements of Comprehensive (Loss) Income for the three months and nine months ended September 30, 2022 and 2021, (iii) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021, (iv) Condensed Consolidated Statements of Changes in Shareholders' Equity for the three months and nine months ended September 30, 2022 and 2021, and (v) Notes to Condensed Consolidated Financial Statements. | |||||||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document). | |||||||
Incorporated by Reference: | ||||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
Certain instruments evidencing long-term indebtedness of GATX Corporation are not being filed as exhibits to this Report because the total amount of securities authorized under any such instrument does not exceed 10% of GATX Corporation's total assets. GATX Corporation will furnish copies of any such instruments upon request of the Securities and Exchange Commission.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| GATX CORPORATION (Registrant) | ||
| /s/ Thomas A. Ellman | ||
| Thomas A. Ellman | ||
| Executive Vice President and Chief Financial Officer | ||
| (Duly Authorized Officer) | ||
Date: October 28, 2022
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Exhibit 10.1 Pursuant to Item 601 of Regulation S-K, certain identified information has been excluded from the exhibit because it both (i) is not material and (ii) would be competitively harmful if publicly disclosed. Information that was omitted has been noted in this document with a placeholder ** SUPPLY AGREEMENT This Agreement 30th day of September, 2022 Effective Date Buyer Seller Parties Party . In consideration of the mutual promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller and Buyer agree as follows: 1. TERM. Except to the extent earlier terminated pursuant to the terms hereof, the term of this Agreement shall commence on the Effective Date and end on December 31, 2028; provided, that if Seller has not Delivered (as hereinafter defined) all of the Railcars (as hereinafter defined) ordered by Buyer hereunder on or before such end date, this Term . 2. PURCHASE COMMITMENT AND QUANTITY. 2.1. Base Order Quantity. Except to the extent earlier terminated pursuant to the terms hereof, (i) Buyer hereby commits to purchase during the Term a total of Base Order Quantity such commitment, and (ii) Seller agrees to manufacture, sell and Deliver to Buyer during the Term the 15,000 Railcars as ordered by Buyer. 2.2. Additional Railcars and Cost Policy Review. Buyer and Seller agree to meet either electronically or in-person during the fourth calendar quarter of each year of the Term (or at some other time mutually agreeable to the Parties) to discuss production for the following Order Year defined below) ( Production and Cost Policy Review Meeting . Buyer shall have the option (but not the obligation) to purchase up to an additional five hundred (500 Additional Railcar Yearly Cap Order Year Additional Railcars year-by-year basis, scheduled to Deliver during the Term at the earliest available Delivery slot current backlog Additional Railcar Option notice in accordance with Section 9.1.4. From October 1 through December 31 of each Order Year, Buyer shall have the option (but not the obligation) to exercise one or more Additional Railcar Options. At least thirty (30) days (but not more than sixty (60) days) prior to each Production and Cost Policy Review Meeting, Seller shall provide Buyer with a then-current
2 Policy which have occurred since Seller last provided Buyer with a copy of olicy. If Buyer reasonably objects to any such changes in and the Parties cannot resolve such objection, Seller shall and Seller shall promptly issue a refund or credit, as applicable, to Buyer within ten (10) business days in the full amount of any discrepancy caused by . 2.3. Notwithstanding anything to the contrary contained herein, Buyer shall not be required to purchase, and Seller shall not be required to manufacture, sell and Deliver, any Railcars in excess of (i) the Base Order Quantity or (ii) in the event any Additional Railcar Options are exercised, the applicable amount of Additional Railcars in addition to the Base Order Quantity, under the terms of this Agreement. 3. RAILCARS AVAILABLE FOR PURCHASE. 3.1. Except to the extent the Parties mutually agree in writing to remove such Railcar or Railcar Type from Exhibit A or Exhibit B (as applicable), Seller shall make available for sale, and Buyer may Order and shall purchase, Railcars consisting of one or more of (i) the types of Railcar listed in Exhibits A and Railcar Types ; (ii) the Modified Railcars; (iii) those Railcars and Railcar Types, if any, that are added to Exhibits A or B after the Effective Date by mutual written agreement of the Parties; and (iv) any railcar or railcar type that Seller or any Seller Affiliate offers for sale to any Third Party (for the avoidance of doubt, (a) to the extent any such railcar or railcar type is not included on the Margin Schedule railcar or railcar type will receive the Margin associated with the Railcar or Railcar Type that the Parties mutually agree has the most similar characteristics to such railcar or railcar type and (b) Exhibit A or B (as applicable) shall be amended without further action by the Parties to include such railcar or railcar type; provided, that if such railcar or railcar type is a tank car, it shall be added to Exhibit A and assigned to the applicable Exhibit A Pricing Group (defined below), which assignment shall be determined by adding such railcar or railcar type to the Exhibit A Pricing Group that has other Railcars that have the most similar characteristics to such railcar or railcar type) Railcars , Railcar avoidance of doubt, each unit within an articulated or drawbar-coupled string of railcars shall be considered a single Railcar for all purposes hereunder. 3.2. Buyer may purchase from Seller hereunder, Railcar Types (i) that, on or after the Effective Date, [*****] (each of the foregoing described in clauses (i) and (ii) above, Modified Railcar Modified Railcars and Exhibit A and/or B, respectively, shall be amended without further action by the Parties to include each such Modified Railcar. If a Modified Railcar is a [*****] Exhibit A Pricing Group determined by adding the Modified Railcar to the Exhibit A Pricing Group that
3 has other Railcars that have the most similar characteristics to the Modified Railcar. 3.3. For purposes of this Agreement: 3.3.1. Third Party or (ii) an Affiliate (as hereinafter defined) of a Party to this Agreement; 3.3.2. Affiliate ean, with respect to any Person, any other Person controlling, controlled by, or under common control with the first Person. 3.3.3. Control directly, of the power to direct or cause the direction of the management or the policies of a Person, whether through the ownership of at least 51% of the voting securities, by contract or otherwise; and 3.3.4. Person mited partnership, limited liability company, trust, business trust, estate, corporation, custodian, trustee, executor, administrator, nominee, business trust, registered limited liability partnership, association, government, governmental subdivision, governmental agency, governmental instrumentality and any other legal or commercial entity in its own or in a representative capacity. 4. SPECIFICATION. 4.1. With respect to each Railcar Type set forth on Exhibits A and B as of the Effective Date, including a Railcar Type added pursuant to Section 3 hereof or by mutual agreement of the Parties after the Effective Date, the applicable Railcar Specification -current standard specification as of rder Confirmation (as hereinafter defined) for Seller Specification configuration alternatives requested by Bu consent not to be unreasonably withheld or delayed) specified in the applicable Alternates Orders (as defined in Section 9.8), if applicable. The Seller Specification shall not provide for, and Seller may not use, non-new parts (other than non-new Buyer-Supplied Components) on Railcars manufactured for Buyer hereunder tten consent. 4.2. As of the Effective Date, Seller has provided a copy of the Seller Specification for each Railcar Type set forth on Exhibits A and B to Buyer (and, in the case of Railcar Types added to Exhibits A or B after the Effective Date, a copy will be promptly provided to Buyer after such Railcar Type is added to the applicable Exhibit). Seller may reasonably modify the Seller Specification from time to time during the Term, which updates to the Seller Specification shall be identifiable by revision
4 date and version number and copies of which will be made available to Buyer upon Notwithstanding the foregoing, at least sixty (60) days prior to implementation, Seller shall notify Buyer in writing and provide a copy of any updated Seller Specification that would reasonably be considered a significant or material change to such Seller Specification, e.g., structural changes to the Railcar Type, changes in Component manufacturer, make or model, and changes to safety systems. 5. RAILCAR PRICING. 5.1. Pricing for Railcars Listed on Exhibit A and Exhibit B. 5.1.1. Price for Railcars listed on Exhibit A or Exhibit B Estimated Base Sales Price or Exhibit B shall be calculated by [*****] Price listed on Exhibit A or Exhibit B shall equal [*****]. 5.1.2. Invoice Price for Railcars on Exhibit A or Exhibit B Invoice Price or Exhibit B shall be either [*****]. 5.1.3. [*****] 5.1.3.1.[*****] (a) [*****] (b) [*****] (c) [*****] 5.1.3.2.[*****] 5.2. [*****] 5.3. Pricing Examples. The Parties agree that the pricing examples dated as of the Effective Date reflect the methodology by which calculations shall be made for Railcar pricing pursuant to Section 5, Section 6 and Section 9.7 hereunder. 6. . 6.1. Except as otherwise expressly provided herein, all Cost Accounting Policy and Procedure, dated and current as of the Effective Date ; [*****]
5 6.1.1. Seller may modify Se with any changes in U.S. generally accepted accounting procedures (GAAP), international financial reporting standards (IFRS) or other applicable accounting regulatory mandates. 6.1.2. [*****] 6.1.3. 6.1.1, [*****], Seller shall promptly provide an updated copy (which shall indicate the , which shall replace the pr of such revision without further action of the Parties. 6.1.4. in the event of any conflicts between this Agreement and the Sel Policy, the terms of this Agreement shall control. 6.2. or lining, an amount equal to [*****] for such Railcar. 6.3. [*****] Components Railcars, wheels, axles, sideframes, bolsters, couplers, draft gear, air brake equipment, bearings and yokes and, as applicable for certain Railcar Types, heads, nozzles, valves, fittings, gates, hatches and doors. [*****]. 7. THIRD PARTY REVIEW ompliance with Sections 5 and 6 of this Third Party Review , and the terms and conditions of such Third Party Review are set forth on Exhibit F attached hereto. 8. [*****] 9. ORDERS. 9.1. Order Quantities. 9.1.1. Order Year (i) for tank cars on Exhibit A, January 1, 2024 through December 31, 2024 for the first Order Year, and thereafter each following period of twelve (12) consecutive months and (ii) for freight cars on Exhibit B or Exhibit A Unscheduled Cars (defined in Section 9.6.2 below), the Effective Date through December 31, 2023 for the first Order Year (which is greater than twelve (12) consecutive months), and thereafter each following period of twelve (12) consecutive months. The final Order Year during the Term of this Agreement shall be from January 1, 2028 through December 31, 2028.
6 9.1.2. Buyer shall place orders for tank cars from Exhibit A that will be scheduled to Deliver at the rate of [*****] per month between the months of January 2024 through December 2028, inclusive, (as applicable for any particular month, Monthly Order Quantity [*****] Scheduled Cars . 9.1.3. During each Order Year, Buyer will order [*****], which can be a mix of either tank cars or freight cars from Exhibits A and B for a total of [*****] Unscheduled Cars ; provided, that in any given Order Year, Buyer (i) may, but is not obligated to, order up to [*****] Unscheduled Cars as Exhibit A Unscheduled Cars (as defined in Section 9.6.2) in accordance with Section 9.6.2 and (ii) will order at least [*****] Unscheduled Cars as Exhibit B Unscheduled Cars (as defined in Section 9.6.2) in accordance with Section 9.6.2. For clarity, Buyer shall have no obligation to order any Unscheduled Cars during the Term after the conclusion of the final Order Year, which shall conclude on December 31, 2028. 9.1.4. Up in any Order Year Buyer may Order Additional Railcars by electing to exercise Additional Railcar Options up to the Additional Railcar Yearly Cap. In the event that an Additional Railcar Option is exercised, Buyer shall place one (1) or more Orders for Additional Railcars up to the Additional Railcar Yearly Cap that will be Delivery Schedule, in accordance with Section 9.3 and Section 9.6. For the avoidance of doubt, Additional Railcars can be a mix of either tank cars or freight cars from Exhibits A and B. 9.2. Production Slot Allocation for Scheduled Cars. Seller shall schedule [*****] production slots in each month for the months of January 2024 through December 2028 Allocated Production Slots Notwithstanding the foregoing or anything to the contrary contained in this Agreement, Seller will have no obligation to schedule more than (x) [*****] Allocated Production Slots in any one month for the months of January 2024 through December 2028, inclusive, during the Term. For the avoidance of doubt, accepted Orders for Unscheduled Cars are not eligible for Allocated Production Slots and shall not impact the scheduling or Delivery of Scheduled Cars in accordance with Section 9.6.1. 9.3. Unscheduled Cars and Additional Railcars (other than Exhibit A Unscheduled Cars) and/or Additional Railcars (if any) will be placed in the next Order the [*****] Unscheduled Cars per Order Year is firm and the duration of y of Unscheduled Cars shall not permit Buyer to avoid placing its required Order per Order Year for Unscheduled Cars. [*****].
7 9.4. Quarterly Price Lists; Pricing Proposals. At the beginning of each Order Year, Seller and Buyer shall mutually agree to a list totaling [*****] Railcars from Exhibits A and B for which Seller shall provide Buyer with quarterly (or more updates Quarterly Price List In the event a Railcar is not listed on the Quarter provide Buyer with a written pricing proposal for the requested Railcars within ten (10) business days following such request, which pricing proposal shall be consistent with the terms of this Agreement. 9.5. Order Form. Each order submitted by Buyer shall be in the form set forth on Exhibit D attached hereto and shall be subject to the terms and conditions of this Order Each Order shall specify (i) the Railcar Type; (ii) the quantity of Railcars for each Railcar Type; (iii) any Alternates for the Railcars ordered; (iv) any new Buyer-Supplied Components that Buyer will be providing; (v) any non-new Buyer-Supplied Components that Buyer will be providing; and (vi) the price agreed upon by the Parties (if applicable pursuant to Section 5.1) for the Railcar(s) ordered. der that does not conform to the form set forth on Exhibit D. 9.6. Order Placement. 9.6.1. Orders for Scheduled Cars must be placed by Buyer [*****] (collectively, Scheduled Car Lead Times delivering each such Order per the instructions on the Order form. [*****]. Unless otherwise agreed by the Parties, such Orders for Scheduled Cars shall be (i) filled in the order in which they were placed, and (ii) Delivered by Seller within the final month of the applicable Scheduled Car Lead Times. Seller shall Deliver at least [*****]. If Buyer fails to place one or more Orders for all or any portion of the Scheduled Cars within the Scheduled Car Lead Times, Seller shall place the Order(s) for Buyer Default Scheduled Car Order Instructions J hereto; which Exhibit shall identify specific Railcar(s). Subject to Section 9.7 (unless otherwise agreed by the Parties), Buyer may update the Default Scheduled Car Order Instructions at any time by delivery of written notice to Seller, provided each such update identifies specific Railcars, in which case Exhibit J shall be amended without further action by the Parties to include such updated Default Scheduled Car Order Instructions in Exhibit J and such update shall be effective for all Orders following each such update. 9.6.2. Orders for Railcars on Exhibit B that constitute Unscheduled Cars Exhibit B Unscheduled Cars and orders for Additional Railcars will be placed by Buyer from time to time by delivering each such Order per the instructions on the Order form. In accordance with the procedures set forth in Section 9.6.3,
8 such Exhibit B Unscheduled Cars and/or Additional Railcars shall be added to Sell Schedule. [*****]. If Buyer fails to place one or more Orders for all or any portion of an Order Year Unscheduled Cars requirement by the first day of the last month of such Order Year, Seller shall place the Order for Buyer with Default Unscheduled Car Order Instructions J hereto; which Exhibit shall identify specific Railcar(s). Subject to Section 9.7 (unless otherwise agreed by the Parties), Buyer may update the Default Unscheduled Car Order Instructions at any time by delivery of written notice to Seller, provided each such update identifies specific Railcar(s), in which case Exhibit J shall be amended without further action by the Parties to include such updated Default Unscheduled Car Order Instructions in Exhibit J and such update shall be effective for all Orders following each such update. 9.6.3. an Order, and provided Seller has not rejected the Order pursuant to Section 9.7, Seller shall provide Buyer with an order confirmation, substantially in the form of Exhibit K and Confirmation Price for Railcars on Exhibits A or B and (ii) the month the Schedule Committed Delivery Month to Buyer. Within sixty (60) days prior to the first Railcar Delivery in a Committed Delivery Date Any change of both Buyer and Seller. 9.6.4. Each Order for Railcars that (i) complies with this Section 9, (ii) has been delivered to Seller in accordance with this Section 9, and (iii) has not been rejected by Seller within five (5) business days of its placement pursuant to Section 9.7, shall be deemed to have been accepted by Seller and shall represent a firm commitment by Seller to manufacture, sell, and Deliver, and for Buyer to purchase and take Delivery of, the Railcars specified in such Order in accordance herewith, regardless of whether Seller has complied with its obligation to return a signed Order Confirmation to Buyer in the time specified under Section 9.6.3. 9.6.5. Except to the extent the Parties otherwise mutually agree in a writing signed Order Confirmation, or other documentation by or from either Party relating to the subject matter of the Order or of this Agreement conflicts with or adds
9 to or supplements a term or condition of this Agreement, the terms or conditions of this Agreement shall control and the conflicting, additional or supplemental term or condition, as the case may be, shall be without force or effect with respect to such subject matter or Order. 9.7. Seller Order Delay/Rejection. [*****] Notwithstanding anything to the contrary in this Agreement, (1) Seller shall ensure that, during the Term of this Agreement, [*****]. [*****]. Railcar Family , as applicable, the grouping of Railcar Types on Exhibit B labeled [*****], respectively, as the case may be and including any amendments to Exhibit B and the Railcar families listed therein and any new groupings of Railcar Types that are added to Exhibit B and labeled as a new Railcar family. [*****] 9.8. Change Order. Buyer may request in writing a change in an Order specifying the particular Railcars quested change. Within ten (10) business days following receipt of such request, Seller shall provide Buyer with a Change Order Quote Change Order Change Order after receipt of the Change Order Quote. If Seller does not receive a timely Change be modified, and the affected Railcars shall be built in accordance with the original Specification and subject to the original Seller Order Confirmation Price. 9.9. Regulation-Mandated Changes. Seller will promptly notify Buyer of any changes or additions to the Seller Specification mandated by changes in the Regulations and provide to Buyer a copy of any such updated or additional Seller Specification. Any such changes or additions to the Specification that arise Delivery for such Railcar shall be treated as a Change Order in accordance with the procedures set forth in Section 9.8. 9.10. Lead Time Estimates. provide Buyer with its then-current estimate of the next available delivery dates for a Railcar Type as of the date of such request.
10 10. DELIVERY AND SHIPMENT. 10.1. Delivery and Title. 10.1.1. Unless otherwise agreed to in writing and signed by both Seller and Buyer, Delivery Deliver Delivered shall be defined as (i) in the case of Railcars manufactured in the United States, actual delivery of such Railcars manufactured in Mexico, actual delivery of such Railcars, F.O.B. site on the United States side of the border at a site to be mutually agreed between Buyer and Seller or, if no agreement has been reached by the time such Railcar is ready for Delivery, at a site on the United States side of the border determined by Seller. Unless otherwise agreed to in writing and signed by both Seller and Buyer, Buyer agrees to Delivery of all or any number of the Railcars as they are accepted pursuant to Section 11.1. 10.1.2. Subject to Section 10.1.3 below, exclusive ownership, rights of possession and control, and risk of loss to each Railcar manufactured by Seller, whether in the United States or Mexico, will pass to Buyer at the time of Delivery of such Railcar. 10.1.3. Unless otherwise agreed to in writing and signed by both Seller and Buyer, with respect to Railcars manufactured in Mexico, the acceptance of such Seller to ship such Railcars to Buyer for Delivery, and (ii) shall not transfer title or risk of loss of such Railcars until they have been Delivered by Seller to Buyer at the F.O.B. site on the United States side of the border set forth in Section 10.1.1 above. 10.2. request, Seller will place designated by Buyer to Seller and any resulting freight charges shall be for for the Railcars if Sell 10.3. [*****] 10.4. Force Majeure Events. 10.4.1. Seller shall not be liable for any delay or failure to perform in whole or in part Force Majeure Events to, restrictions or Regulations imposed by the federal or any state government or any subdivision or agency thereof or by acts of God; acts of Buyer, its officers, directors, employees, agents or contractors, including, but not limited
11 equipment or labor, including plans, drawings or engineers, which it has agreed to supply; war, preparation for war or the acts or interventions of naval or military executives or other agencies of government; acts of terrorists; blockade, sabotage, vandalism, malicious mischief, bomb scares, insurrection or threats thereof; rain that requires a shutdown of a substantial portion of painting/coating area of such facility prior to 12:00 noon (local time) on a regularly scheduled work day; landslides, hurricanes, earthquakes or other natural calamity; delays of subcontractors or of carriers by land, sea or air; delays due to changes in drawings or Specification; collisions or fires, floods, strikes, work stoppages, shortage of labor, lockouts or other industrial disturbances, accidents, casualties, shortages or late delivery of supplies (including, without limitation, fuel supplies) or raw materials (including, without limitation, steel) from usual sources at customary pricing, or other ontrol. 10.4.2. In the event of any Force Majeure Event, the Parties agree the date of Delivery or performance shall be extended for a period equal to the time lost by reason of the delay; provided, however, that if the period of delay exceeds one hundred eighty (180) days from the original Committed Delivery Date, Buyer may cancel the Delivery of such Railcar subject to the delay due to the Force Majeure Event. Any cancelled Railcar shall be treated as having been validly Base Order Quantity required under Section 2 and the applicable Monthly Order Quantity required under Section 9.1. If delivery of any items necessary for the Delivery of such Railcars is delayed by Buyer for more than thirty (30) days, Seller may adjust the Invoice Price payable hereunder to reflect the direct damages attributable to such delay (e.g., increases in cost of supplies, shipping and the like), but not to include indirect or consequential damages. Nothing hereunder shall require Seller to arrange for shipment and acceptance of any required materials in a obligations hereunder for more than 240 consecutive days, the other Party may terminate this Agreement thereafter upon 30 days advance written notice. 11. QUALITY OF RAILCARS. 11.1. Inspection and Acceptance. In the case of Railcars, Seller shall give Buyer reasonable access to S to inspect the Railcars during construction. Such inspections shall be so conducted as to not interfere operations. Acceptance or rejection of a Railcar shall be made by Buyer before shipment of such Railcar if manufactured in Mexico and before Delivery of such Railcar if manufactured in the United States. In the event Buyer chooses to inspect the Railcars, upon completion of such inspection, Buyer shall execute a certificate of acceptance covering all Railcars found to be completed in accordance with the Specification and shall deliver the executed certificates of
12 Certificate of Acceptance Acceptance, with respect to Railcars covered thereby, shall indicate that, based upon such inspection, such Railcars conform in workmanship, material and construction, and in all other respects, to the applicable Specification and the requirements and provisions of the applicable Order. If Buyer, upon receiving notice of when the Railcars will be ready for inspection and provided that such Railcars are available for inspection, chooses not to have an inspector present within three (3) business days (five (5) business days for any Railcars manufactured in Mexico) after the date that the notice states that the Railcars shall be ready for days (five (5) business days for any Railcars manufactured in Mexico) after the date that the notice states the Railcars will be ready for inspection, Buyer shall be deemed to have accepted the applicable Railcars at the close of business on the day that is three (3) business days (five (5) business days for any Railcars manufactured in Mexico) after the date that such Railcars were ready for inspection and Seller will execute, on behalf of Buyer, a Certificate of Acceptance dated as of the day that is three (3) business days (five (5) business days for any Railcars manufactured in Mexico) after the date that such Railcars were ready for inspection. Notwithstanding the foregoing, notification to Seller that it will not inspect Railcars for which Seller has provided notice that Railcars are available for inspection. The execution of a Certificate of Acceptance shall not relieve Seller of any of its obligations under this Agreement nor shall it constitute a waiver by Buyer with respect to any defect or deficiency of workmanship, materials, construction or other deviation from the terms and conditions of this Agreement. Once a Certificate of Acceptance with respect to a Railcar has been executed, Buyer shall have no rights of inspection under this Section 11.1, nor any rights of rejection and cancellation under Section 11.2 with respect to such Railcar. 11.2. [*****] 11.3. Premises Liability Indemnification. BUYER AGREES TO DEFEND, HOLD HARMLESS AND INDEMNIFY SELLER AND ITS AFFILIATES, SUBSIDIARIES, RELATED ENTITIES, OFFICERS, DIRECTORS, SHAREHOLDERS, AGENTS AND EMPLOYEES (COLLECTIVELY SELLER INDEMNITEES AGAINST ANY AND ALL CAUSES OF ACTION, SUITS, DEBTS, CLAIMS, LIABILITIES, LOSSES, BODILY INJURIES OR DEATH, DAMAGE TO REAL OR PERSONAL PROPERTY (INCLUDING THE LOSS OR USE THEREOF), JUDGMENTS, COSTS, INCLUDING, BUT NOT LIMITED TO, ACTUAL, INCIDENTAL AND COVER DAMAGES, NATURE OR KIND, IN LAW OR IN EQUITY, INCURRED IN THE DEFENSE OF THE SELLER INDEMNITEES OR OTHERWISE, [*****].
13 12. PAYMENT AND CLOSING. 12.1. Payment of Purchase Price and Closing of Sale. On or before ten (10) business tor, or the acceptance of any for such Railcar(s) with the Invoice Price broken down to detail the components thereof, if applicable, and substantially in the form attached hereto as Exhibit L attached hereto as Exhibit G, Buyer shall pay the Invoice Price (plus, if applicable, the Production Fee) for each Railcar manufactured and Delivered by Seller and accepted by Buyer via wire transfer to Seller (pursuant to such wire transfer instructions as Seller shall provide to Buyer in advance of the due date for such amounts). [*****]. 12.2. Taxes. Unless Buyer has provided Seller with a duly executed resale or sales tax exemption certificate, Buyer is solely responsible for all international, federal, state, or local VAT, GST, sales, use, or other taxes, tariffs, duties, or charges imposed by any governmental authority or agency, foreign or domestic, upon any Railcar purchased and sold hereunder or upon the manufacture, sale, transportation, use, or Taxes provided, however, that Taxes shall not me. While it is the the payment Standard Manufacturing Cost for such Railcar. Seller shall provide receipts to Notwithstanding anything to the contrary contained in this Section 12.2, for any Directed Railcar, the applicable Buyer Managed Person will be solely responsible for all Taxes and Buyer, as agent for such Buyer Managed Person, will cause such Buyer Managed Person to pay such Taxes when due and payable. 12.3. Late Payments. Other than with respect to amounts disputed up to a maximum of $[*****] of unpaid disputed amounts, if any payment is not received by a Party on the due date for such payment, and such failure continues for five (5) days after such due date, such Party shall charge the other Party interest on any unpaid balance at the prime rate per annum in effect on such due date at Bank of America, Illinois, plus [*****] percent ([*****]%) or the highest rate permitted by law, whichever is lower, from the date such payment was due through and including the date on which actual payment in full is made by such other Party.
14 13. MANUFACTURING WARRANTIES AND DISCLAIMERS; IP INDEMNITY 13.1. Manufacturing Warranties. 13.1.1. Seller warrants solely to Buyer that the assembly, construction and subcontractors will be in accordance with the Specification and Regulations (as defined in Section 13.1.8) for a period of [*****] after Delivery of the applicable Railcars, and that the material and workmanship of the Railcars from defects under normal use and service for the [*****] warranty period. This warranty shall not apply to, and Seller shall not be responsible for, any failure of any Railcar purchased hereunder which has been subjected to misuse, negligence, alteration, accident, misloading, mishandling, improper or deficient maintenance, or physical abuse. Further, this warranty by Seller shall not apply to, and Seller shall not be responsible for, the deterioration of any Railcar purchased hereunder which results from normal wear and tear during the [*****] warranty period. Except as otherwise provided in Section 21.6.1, workmanship of the Railcar that is not in conformity with this warranty. Transportation charges and charges associated with the removal of any commodity shall be prepaid by Buyer. Seller shall determine, in its sole discretion, the place where any defective Railcar will be replaced or repaired. Seller shall not be required to repair or replace any defective Railcar, however, unless Buyer first provides the defective Railcar to Seller for an examination he part or parts confirms the existence of a warranted defect. [*****]. 13.1.2. With respect to interior and exterior primers, paints, coatings, linings, and/or Coatings selected by Buyer in a specifications and recommendations, and, except as set forth in this Section 13.1.2, Seller makes no other warranty, express or implied, with respect to the pecifications and recommendations. Seller may offer various choices of Coatings at various prices and of various qualities. The Coatings actually applied by Seller shall to appl risk and, except as set forth below in this Section 13.1.2, Seller makes no warranty, express or implied, regarding the suitability or effectiveness of any Coatings. With respect to the Coatings, except as otherwise provided in Section 21.6.1, repair or replacement, at the election of Seller, a
15 or at a shop selected by Seller, of the Coatings installed by Seller in any Railcar that shall, within [*****] after Delivery be returned to Seller with transportation charges and charges associated with the removal of any commodity prepaid by Buyer; provided, however, that Buyer provides such Railcar for an examination by Seller within sixty (60) days of written notification by Buyer of a potential defective installation of Coatings and such an examination confirms that the Coatings were defectively installed by Seller. [*****]. 13.1.3. In the event that Buyer sells, leases, or otherwise assigns the Railcars, any such [*****]. 13.1.4. In no event and under no circumstances shall Seller ever be liable to Buyer for actual cost of repairing or replacing the defective Railcar that Buyer purchased from Seller. Under no circumstances shall Seller ever have liability to any Third Party who asserts any claim by or through Buyer alleging a breach of the warranty expressly set forth herein, which Seller makes solely and exclusively to Buyer. Any repair or replacement by Seller pursuant to this warranty will not serve to extend the warranty in any way beyond [*****] from the date the Railcar is Delivered to Buyer. 13.1.5. SELLER MAKES NO EXPRESS OR IMPLIED WARRANTY THAT ANY PARTS, MATERIAL, EQUIPMENT OR COMPONENTS PURCHASED FROM THIRD PARTY SUPPLIERS OR MANUFACTURERS SUPPLIER OR MANUFACTURER INSTALLED IN OR ON THE RAILCARS ARE FREE FROM DEFECTS. ANY PARTS, MATERIAL, EQUIPMENT OR COMPONENTS PURCHASED FROM SUPPLIERS OR MANUFACTURERS AND INSTALLED IN OR ON THE RAILCARS WILL BE COVERED UNDER THE WARRANTY GIVEN BY THE SPECIFIC SUPPLIER OR MANUFACTURER AND THE TERMS SET FORTH THEREIN. SELLER AGREES TO COOPERATE WITH BUYER TO ENFORCE ANY SUCH SUPPLIER OR MANUFACTURER WARRANTIES, BUT WILL NOT FILE ANY LAWSUIT OR INSTITUTE OTHER LEGAL PROCEEDING OSTS OR EXPENSES. TO THE EXTENT EXPRESSLY PERMITTED BY ANY SUCH SUPPLIER OR MANUFACTURER, SELLER AGREES TO TRANSFER AND ASSIGN TO BUYER, WITHOUT WARRANTY OR ASSUMPTION BY SELLER WITH RESPECT THEREOF, SUCH PARTS, MATERIAL, EQUIPMENT OR COMPONENTS FURNISHED BY INSTALLATION OF PARTS, COMPONENTS OR EQUIPMENT MANUFACTURED BY SUPPLIERS OR MANUFACTURERS, IF SUCH SUPPLIER OR MANUFACTURER HAS A REPRESENTATIVE AT THE
16 JOB SITE DURING SUCH INSTALLATION, AND IF THE INSTALLATION IS COMPLETED TO THE SATISFACTION OF SUCH REPRESENTATIVE, IT SHALL BE PRESUMED, SUBJECT TO COMPLETED BY SELLER IN ACCORDANCE WITH SUCH GOOD AND WORKMANLIKE MANNER AND IN ACCORDANCE WITH THE TERMS OF THIS AGREEMENT. 13.1.6. SELLER DOES NOT WARRANT ANY COMPONENTS, EQUIPMENT, ENGINEERING, DESIGNS, PLANS OR WORKMANSHIP SPECIFIED SUBCONTRACTORS, EMPLOYEES, ARCHITECTS OR ENGINEERS, OR ANY LABOR PERFORMED BY OTHERS AT THE DIRECTION OR REQUEST OF SPECIFICALLY DISCLAIMS ANY AND ALL WARRANTIES, EXPRESS OR IMPLIED, IN CONNECTION THEREWITH. 13.1.7. THE WARRANTIES STATED HEREIN ARE EXCLUSIVE AND ARE MADE BY SELLER SOLELY TO BUYER EXPRESSLY IN LIEU OF ANY AND ALL OTHER WARRANTIES AND REMEDIES: (1) EXPRESS OR IMPLIED; (2) WRITTEN OR ORAL; (3) AT LAW, IN EQUITY OR UNDER CONTRACT, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE; AND (4) NOTWITHSTANDING ANY COURSE OF DEALING BETWEEN THE PARTIES OR CUSTOM AND USAGE IN THE TRADE TO THE CONTRARY. OTHER THAN AS EXPRESSLY SET FORTH IN SECTION 13.1.1, SELLER SHALL HAVE NO LIABILITY TO BUYER AND BUYER SHALL NOT MAKE ANY CLAIM AGAINST SELLER OR RECOVER ANY AMOUNT WHATSOEVER FROM SELLER FOR ANY INDIRECT, SPECIAL, CONSEQUENTIAL, INCIDENTAL, COVER, OR PUNITIVE DAMAGES THAT ARISE OUT OF OR RESULT FROM ANY BREACH BY SELLER OF THE WARRANTIES EXPRESSLY SET FORTH IN THIS AGREEMENT; PROVIDED, THAT, TO THE EXTENT IT RELATES TO A RAILCAR PURCHASED OR SOLD UNDER THIS AGREEMENT, [*****]. 13.1.8. Regulations standards for new railcar equipment, including without limitation, all rules, statutes, regulations, directives and requirements of the United States of America (including without limitation those of the United States Department of Transportation) and the specifications and standards of the Association of American Railroads applicable to new railroad equipment, in each case as may be in effect on the date of construction of the applicable Railcars.
17 13.1.9. With respect to any material and workmanship of a Railcar that is not in conformity with Seller , Seller shall (i) engineering or quality group and be reasonably available to discuss the specifics of such corrective action plan, in each case within thirty (30) days of written notice of a warranty claim from Buyer. 13.2. Intellectual Property Infringement. 13.2.1. Subject to Section 13.2.2 below, Seller shall defend any suit or proceeding brought against Buyer based on a claim that the Railcars, or any product, accessory, part, component, or attachment thereof, furnished by Seller under this Agreement, constitute an infringement of any patent of the United States; provided that Seller is notified promptly, in writing, and is given authority, inform s expense, for the defense of same. 13.2.2. Seller s obligation under Section 13.2.1 shall not cover or apply to (i) any product, accessory, part, component, or attachment that is not manufactured by Seller (including any Buyer-Supplied Component), except to the extent, and only to the extent, that the manufacturer of any such item provides an indemnity against patent infringement to Seller and (ii) the Railcars, or any part thereof, manufactured or supplied to Buyer's design; and, as to such Railcars, or any part thereof, Seller assumes no liability whatsoever for patent infringement. 13.2.3. Subject to Section 13.2.4 below, Buyer shall defend any suit or proceeding brought against Seller based on a claim that Railcars, or any product, accessory, part, component or attachment (including Buyer-Supplied Components), manufactured or supplied by Seller to Buy constitute an infringement of any patent of the United States; provided that Buyer is notified promptly, in writing, and is given authority, information 13.2.4. Buyer s obligation under Section 13.2.3 shall not cover or apply to (i) any product, accessory, part, component, or attachment that is not manufactured by Buyer or (ii) a Buyer-Supplied Component, except to the extent, and only to the extent, that the manufacturer or supplier of any such item provides an indemnity against patent infringement to Buyer. 13.2.5. Seller shall pay all damages and costs awarded against Buyer in an infringement claim covered under Sections 13.2.1 and 13.2.2. In the event the Railcars, or any part thereof covered under Section 13.2.1, are involved in such a suit, and are held to constitute infringement, and the use of the Railcars, or any part thereof covered under Section 13.2.1, is enjoined, Seller shall, at its own expense, and at its option, either procure for Buyer
18 the right to continue using said Railcar, replace same with non-infringing equipment, modify said Railcar so that it becomes non-infringing, or refund the Invoice Price of said Railcar. 13.2.6. Buyer shall pay all damages and costs awarded against Seller in an infringement claim covered under Sections 13.2.3 and 13.2.4. In the event the Railcars, or any part thereof covered under Section 13.2.3, are involved in such a suit, and are held to constitute infringement, and the use of the Railcars, or any part thereof covered under Section 13.2.3, is enjoined, Buyer shall, at its own expense, and at its option, either procure for itself the right to continue using said Railcar or part thereof, replace same with non-infringing equipment or modify said Railcar or part thereof so that it becomes non-infringing. 13.2.7. This Section 13.2 states the sole and entire liability of Seller and/or Buyer, as applicable, for patent infringement by the Railcars, or any part thereof. In the event of any claim for defense and indemnity under this Section 13.2, Seller and/or Buyer, as applicable, shall undertake to conduct any proceedings which Seller or Buyer, as applicable, deems necessary to defend the other Party in respect of such matter. The indemnified Party shall have the right to participate in those proceedings, at its own expense, but control of the defense, the litigation, the negotiation, and any settlement shall remain with the indemnifying Party. This indemnity shall be void if the indemnified Party fails to provide reasonable cooperation in connection with any such defense or shall take any action without the prior written consent of the indemnifying Party that unreasonably or materially prejudices the defense of any such matter. In no event shall the indemnifying Party be required to employ more than one firm of attorneys in defense of any one matter, but nothing herein shall prevent the indemnifying Party from doing so, at its option. 14. LIMITATION OF LIABILITY. WITH RESPECT TO ANY BREACH OF THIS AGREEMENT, IN NO EVENT SHALL EITHER PARTY HAVE LIABILITY TO THE OTHER PARTY AND NEITHER PARTY SHALL MAKE ANY CLAIM AGAINST THE OTHER OR RECOVER ANY AMOUNT WHATSOEVER FROM THE OTHER FOR INDIRECT, CONSEQUENTIAL, SPECIAL, AND/OR PUNITIVE DAMAGES; PROVIDED, THAT, TO THE EXTENT IT RELATES TO A RAILCAR PURCHASED OR SOLD UNDER THIS AGREEMENT, [*****]. 15. LOCK-UP, RIGHT OF FIRST REFUSAL. 15.1. Lock-Up. Buyer shall not sell a Railcar for a period of at least one hundred eighty (180) days following Delivery, provided, however, the 180-day lock-up period shall not apply to (i) any asset-backed financing transaction for the benefit of Buyer or any of its Affiliates, (ii) any merger, consolidation, business combination,
19 restructuring, reorganization, sale of all or substantially all of the assets of Buyer, or any of its Affiliates or other transaction or series of related transactions in which shares of the continuing or surviving entity immediately after such transaction(s), or to any Buyer Managed Person includes a purchase option exercisable by such customer after such lock-up period, or (v) the sale of such Railcar to a Third Party subject to a lease with another Third Party. 15.2. Right of First Refusal. In the event that, during the period beginning on the 181st day following the Delivery of a Railcar purchased hereunder and ending on the Option Period sell such Railcar to a Third Party, Buyer shall deliver to Seller a written notice of the propo Sale Notice Offer equal to the Invoice Price paid by Buyer to Seller for such Railcar pursuant to this Agreement, provided, however, no Sale Notice will be required to be delivered to Seller in connection with, and such right of first refusal shall not apply to, (i) any asset-backed financing transaction for the benefit of Buyer or any of its Affiliates, (ii) any merger, consolidation, business combination, restructuring, reorganization, sale of all or substantially all of the assets of Buyer, or any of its stockholders do not own or control a majority of the outstanding voting shares of the continuing or surviving entity immediately after such transaction(s), (iii) any or to any Buyer Managed Person, (iv) any lease of a Railcar by Buyer to on purchase option exercisable by such customer after the lock-up period described in Section 15.1, or (v) the sale of such Railcar to a Third Party subject to a lease with another Third Party. Each Sale Notice shall reasonably identify the Railcar(s) that Buyer desires to sell to a Third Party during the Option Period but shall not include the name of the proposed Third Party purchaser or any of the terms or conditions of the proposed sale. Seller may accept the Offer by delivering written Offer Notice the tenth (10th) business day following the date of such Sale Notice. If Seller fails to timely deliver an Offer Notice to Buyer, Seller shall be deemed to have rejected the Offer. If Seller accepts the Offer, Seller shall close on the purchase of such Railcar by no later than 5:00 p.m., Chicago time, on the thirtieth (30th) day (or, if such day is not a business day, the immediately following business day) following the date of such Offer Notice. The purchase price for such Railcar shall be paid in full on the closing date by wire transfer of immediately available funds to an account specified by Buyer at least two (2) days prior to the closing date. In the event Seller does not accept the Offer, Buyer may sell the Railcar that was the or other multiple-bid auction process during the Option Period, in lieu
20 of making the Offer otherwise required hereby, Buyer shall provide Seller with the opportunity to participate in such process and submit a bid to purchase such Railcar, in each case subject to the terms and conditions of such process that are no less favorable to Seller in the aggregate than the terms and conditions applicable to other participants in such process. 16. REPRESENTATIONS AND OTHER WARRANTIES OF SELLER. Seller hereby represents and warrants to and in favor of Buyer that: 16.1. at the time Seller Delivers each Railcar hereunder, Seller shall hold and convey to Buyer good and marketable title to such Railcar free and clear of all indentures, deeds of trust, mortgages, security interests, liens, claims, demands, encumbrances, privileges, pledges, residual interests, re-marketing rights, purchase options and other charges of every nature and kind whatsoever, excepting (i) any such encumbrances resulting from the acts or omissions of Buyer (or those acting under the authority of Buyer), and (ii) any rights of Seller to a purchase money security interest applicable to such Railcars; 16.2. Seller is duly formed, validly existing and in good standing in the State of Delaware and has all requisite limited liability company power and authority to own, operate or lease the properties and assets now owned, operated or leased by it and to carry on its business as currently conducted. Seller is duly qualified or licensed to do business as a foreign entity and is in good standing in each jurisdiction where the character of its properties and assets owned, operated or leased or the nature of its activities makes such qualification or license necessary, except where the failure to be so qualified or licensed or in good standing does not 16.3. this Agreement and all certificates, documents, instruments and agreements delivered under or in connection with this Agreement (i) have been properly authorized by all necessary limited liability company action and (ii) do not require the approval of any holder of units, membership interests, bonds, debentures or other securities issued by Seller or outstanding under any agreement, indenture or other instrument to which Seller is a party or by which Seller or its property may be charged or affected; 16.4. documents, instruments and agreements delivered by Seller under or in connection provisions hereof and thereof do not, and will not, (i) constitute a breach of any existing contractual obligation of Seller, (ii) violate any provision of the certificate of formation or limited liability company agreement of Seller, (iii) require the approval or the giving of prior notice to any Third Party or government agency, (iv) breach or result in the breach of, constitute a default under any of the provisions of, or result in the creation of any lien, charge, encumbrance or security interest upon any property or assets of Seller, (v) violate any judgment, order,
21 injunction, decree or award of any court, administrative agency or governmental body against, or binding upon, Seller, or (vi) constitute a violation by Seller of any law, order or regulation applicable to Seller, in each case so as to materially and hereunder; 16.5. this Agreement and all certificates, documents, instruments and agreements delivered under or in connection with this Agreement, or in connection with the consummation of the transactions contemplated hereunder, constitute legal, valid and binding obligations of Seller, enforceable in accordance with their terms except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the rights of creditors generally and by general principles of equity; and 16.6. there are no legal or governmental investigations, actions or proceedings pending or, to the knowledge of Seller, threatened in writing against Seller before any court, administrative agency or tribunal which, if determined adversely, would, individually or in the aggregate, materially adversely affect the transactions contemplated by this Agreement or the ability of Seller to perform its obligations hereunder. 17. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer hereby represents and warrants to and in favor of Seller that: 17.1. Buyer is duly incorporated, validly existing and in good standing in the State of New York and has all requisite corporate power and authority to own, operate or lease the properties and assets now owned, operated or leased by it and to carry on its business as currently conducted. Buyer is duly qualified or licensed to do business as a foreign corporation and is in good standing in each jurisdiction where the character of its properties and assets owned, operated or leased or the nature of its activities makes such qualification or license necessary, except where the failure to be so qualified or licensed or in good standing does not materially and 17.2. this Agreement and all certificates, documents, instruments and agreements delivered under or in connection with this Agreement (i) have been properly authorized by all necessary corporate action and (ii) do not require the approval of any holder of shares, stocks, bonds, debentures or other securities issued by Buyer or outstanding under any agreement, indenture or other instrument to which Buyer is a party or by which Buyer or its property may be charged or affected; 17.3. certificates, documents, instruments and agreements delivered by Buyer under or conditions and provisions hereof and thereof do not, and will not, (i) constitute a breach of any existing contractual obligation of Buyer, (ii) violate any provision
22 of the charter or by-laws of Buyer, (iii) require the approval or the giving of prior notice to any Third Party or government agency, (iv) breach or result in the breach of, constitute a default under any of the provisions of, or result in the creation of any lien, charge, encumbrance or security interest upon any property or assets of Buyer, (v) violate any judgment, order, injunction, decree or award of any court, administrative agency or governmental body against, or binding upon, Buyer, or (vi) constitute a violation by Buyer of any law, order or regulation applicable to ts hereunder; 17.4. this Agreement and all certificates, documents, instruments and agreements delivered under or in connection with this Agreement, or in connection with the consummation of the transactions contemplated hereunder, constitute legal, valid and binding obligations of Buyer, enforceable in accordance with their terms except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the rights of creditors generally and by general principles of equity; and 17.5. there are no legal or governmental investigations, actions, or proceedings pending or, to the knowledge of Buyer, threatened in writing against Buyer before any court, administrative agency or tribunal which, if determined adversely, would, individually or in the aggregate, materially adversely affect the transactions contemplated by this Agreement or the ability of Buyer to perform its obligations hereunder. 18. DEFAULT. Subject to Section 10.4 addressing Force Majeure Events, the occurrence of any one or more Event of Default 18.1. the failure of such Party to perform a material obligation hereunder; provided, that such failure to perform is not cured by such Party within thirty (30) days after receipt of written notice from the other Party specifying such failure to perform; 18.2. the failure by such Party to pay any amount due and payable pursuant to the terms of this Agreement, other than amounts disputed by such Party up to a maximum of $[*****] of unpaid disputed amounts; provided that such failure to pay is not cured by such Party within [*****] after receipt of written notice from the other Party specifying such failure to pay; 18.3. the (i) filing by such Party of a voluntary petition in bankruptcy, (ii) adjudication of such Party as bankrupt or insolvent, (iii) filing by such Party of any petition seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief for itself under the federal bankruptcy laws, (iv) consent or acquiescence of such Party to the appointment of a trustee, receiver, conservator, or liquidator of such Party for all, or any substantial portion of such ng of any involuntary petition in bankruptcy
23 against either Party (provided that any such filing is not withdrawn, vacated, removed, discharged, or stayed within sixty (60) days thereafter); 18.4. the admission in writing by such Party of its inability to pay its debts as they become due; 18.5. the notification in writing to a governmental agency by such Party of its pending insolvency, or suspension or pending suspension of its operations; 18.6. the making by such Party of any general assignment for the benefit of its creditors or the taking of similar actions for the protection or benefit of its creditors; 18.7. in the case of Seller, in the event that, during any rolling [*****] period during the Term, [*****] percent ([*****]%) or more of the Railcars have been rejected by Buyer pursuant to Section 11.2; or 18.8. in the case of Seller, in the event that, during any rolling [*****] period during the Term, [*****] percent ([*****]%) or more of the Railcars have not been Delivered within [*****] of their respective Committed Delivery Dates (excluding delayed deliveries resulting from Force Majeure Events and those resulting from quality rejection pursuant to Section 11.2). in Section 21.9 will not be a prerequisite for a Party to give a notice of an Event of Default or act to delay any of the time periods for cure specified above. 19. TERMINATION. In addition to any other rights and remedies available under this Agreement or at law, in equity or otherwise, but subject to Section 14 addressing the limitation of liability, and in addition to the termination rights relating to a Force Majeure Event as set forth in Section 10.4, upon the occurrence of an Event of Default, the non- defaulting Party may terminate this Agreement on a date that is [*****] after the date appearing in a written notice to the other Party regarding such termination. In the event of Agreement termination under this Section 19, such termination shall not affect any Order of Railcars placed prior thereto shall be Delivered by Seller, and Buyer shall accept Delivery of such Railcars that comply with the Specification as provided under Section 11.1, in accordance with the terms of this Agreement regardless of the effective date of the termination; provided that Buyer shall not be required to place any new Orders after the date of the written notice of such termination (regardless of whether Buyer has placed Orders for Railcars equal to the Base Order Quantity, or the Monthly Order Quantity for the Order Month in which such termination occurs). Notwithstanding the foregoing, in the event of a written notice of termination of this Agreement by either Party as a result of the occurrence of an Event of Default described in Section 18.3, the non-defaulting Party shall not have any further obligation to Deliver Railcars (in the case of Seller) or to accept any Railcars (in the case of Buyer), in either case arising under Orders pending as of the date of the Event of Default.
24 20. SUPPLY OF SPARE PARTS. For a period beginning on the date hereof and ending on the [*****] railcars for Third Parties or discontinues the manufacturing of aftermarket railcar parts and Components before the expiration of such [*****] Discontinued Operations make spare parts, fixtures and assemblies for the Railcars that are proprietary to Seller or Spare Parts rchase at expiration of such [*****] advance written notice of such Discontinued Operations as possible, but in no event less than [*****] notice. In addition, if Seller learns in writing that any of its Suppliers will decision promptly upon learning of same. 21. MISCELLANEOUS. 21.1. Further Assurances. Following acceptance of and payment for any Railcar hereunder, Seller shall make, do, and execute or cause to be made, done, and may, at any title, and interest in and to such Railcar in accordance with the intent and meaning of this Agreement. 21.2. Records Provided to Buyer; UMLER Reporting. Within thirty (30) days after the transfer by Bill of Sale of any Railcar to Buyer, Seller will furnish Buyer with copies, in electronic form, of documents described on Exhibit H attached hereto Records Prior to Delivery of any Railcar hereunder, Seller will Certificate of Construction Construction in electronic form, in each case as required by 49 CFR 179.5. 21.2.1. Prior to the Delivery of each Railcar, Seller shall report the following information in UMLER: 21.2.1.1. Air brake test date; 21.2.1.2. Reflectorization application date; 21.2.1.3. Comprehensive equipment performance monitoring (CEPM) component identification (CID) numbers as required by applicable Regulations (as of the date of this Agreement, CID numbers must be reported for each wheel set, couplers, bolsters and side frames).
25 21.2.2. As defined by the United States Environmental Protection Agency, Scope 1 greenhouse gas ( GHG ) emissions are direct emissions that occur from sources that are controlled or owned by an organization, including, emissions associated with fuel combustion in boilers, furnaces, and vehicles and Scope 2 GHG emissions are indirect emissions associated with the purchase of electricity, steam, heat and cooling. Within thirty (30) days of receiving request, Seller shall provide Buyer with written reports of estimated Scope 1 and Scope 2 GHG emissions associated with the manufacture of Railcars supplied in accordance with this Agreement; provided, that Buyer shall have the right to utilize a third- estimated Scope 1 and Scope 2 GHG emissions calculation methodology and Seller shall audit such methodology. Seller shall provide any additional available, non-confidential Environmental, Social and Governance data or information reasonably requested by Buyer within thirty (30) days of receiving such request from Buyer. 21.2.3. Notwithstanding anything to the contrary set forth in this Agreement, (i) Buyer may use Records in order to safely use, operate, repair, maintain, or modify any Railcar, to fabricate replacement parts and to perform engineering modelling for repair, maintenance or modification to any Railcar, and (ii) Buyer may disclose Records for any Railcar to (x) any subsidiary or affiliate of Buyer, (y) any prospective or actual Third Party purchaser of any Railcar from Buyer, or (z) any Third Party for the purpose of permitting such Third Party to safely use, operate, repair, maintain, or modify any Railcar, to fabricate replacement parts or to perform engineering modelling for repair, maintenance or modification to any Railcar. 21.3. Communication and Correspondence. Seller shall furnish to Buyer, promptly f any notice or correspondence received by Seller from any Third Party, including any governmental agency, with respect to any Railcar manufactured by Seller for Buyer pursuant to the terms hereof. Seller s receipt thereof, copies of any notice or correspondence received by Seller from any manufacturer or supplier of any part, material, equipment, or component installed in or on any Railcar manufactured by Seller for Buyer pursuant to this Agreement. 21.4. Confidentiality. 21.4.1. shall [*****] regards as proprietary and confidential, including, without limitation, [*****];; Confidential Information [*****] Confidential Information Information when the Disclosing Party is Buyer, and (3) terms of this
26 Agreement redacted in the publicly available copy of this Agreement filed with the SEC. 21.4.2. In the course of performance hereunder, each of Buyer and Seller (with respect Disclosing Party Receiving Party electronic, or oral form, Confidential Information that the Disclosing Party regards as proprietary and confidential. The Receiving Party agrees to hold the Confidential Information disclosed to it by or on behalf of the Disclosing Party in confidence, to take commercially reasonable precautions to protect such Confidential Information from disclosure and to use the Confidential Information only in connection with the performance of its obligations under this Agreement, in each case for a period of [*****] years from the date of disclosure. Subject to Section 21.4.6 hereof, the Receiving Party shall not disclose any Confidential Information to any of its employees unless such employees need to know such Confidential Information in order for the Receiving Party to perform its obligations or exercise its rights hereunder; provided, however, that the Receiving Party takes commercially reasonable precautions to prevent such employee from (i) disclosing Confidential Information to other employees who do not need to know such Confidential Information in order for the Receiving Party to perform its obligations or exercise its rights hereunder, and (ii) using Confidential Information in such performance of its obligations or exercise of its rights under this Agreement. Notwithstanding the foregoing, Buyer shall be permitted to disclose the prices paid by Buyer for Railcars under this Agreement to its employees, Affiliates, Representatives or Third Parties (excluding customers, other than pursuant to Rule 107) where Buyer reasonably believes it is necessary in connection with the operation of its business, e.g., Rule 1 lender, etc.; provided, that Buyer shall only disclose such pricing information to the extent necessary to satisfy such business requirements. 21.4.3. Notwithstanding the foregoing, the Receiving Party may disclose Confidential Information to any of its legal, financial or tax planning representatives Representatives for the Receiving Party to carry out its obligations or enforce its rights hereunder and who have been informed of such obligations, and the Receiving Party shall advise such Representatives to abide by this Section 21.4. Each Party shall be responsible for any action or failure to act that would constitute a breach or other violation of this Section 21.4 by its Representatives. 21.4.4. From and after the Effective Date, the Margin Schedule may not be disclosed n Team
27 Clean Team shall always consist of finance and compliance officers; provided, that (a) Buyer may remove without advance notice to Seller, and (b) in the event Buyer desires to add any provide Seller with the name and title of such individuals, and such individuals 21.4.5. any component thereof (including linings) Third Party Reviewer as set forth in Exhibit F. 21.4.6. Confidential Information does not include information that: (i) the Receiving Party can demonstrate was in its possession prior to being disclosed by the Disclosing Party hereunder and the source of the information was not under an obligation of confidentiality to the Disclosing Party; (ii) is now, or hereafter becomes, through no act or failure to act on the part of the Receiving Party, generally known to the public; (iii) is rightfully obtained from a Third Party not bound under an obligation of confidentiality to the Disclosing Party; or (iv) is independently developed by the Receiving Party without reference to or use of any Confidential Information. The foregoing restrictions on disclosure of Confidential Information do not apply to any disclosure of Confidential Information with respect to which the Receiving Party is advised by legal counsel that such disclosure is necessary or compelled (a) under the federal securities laws or other applicable law, or by the rules and regulations SEC exchange on which t terms of any deposition, interrogatory, formal litigation discovery request, subpoena, civil investigative demand, court order or similar process to which the Receiving Party is subject; provided, that the Receiving Party notifies the Disclosing Party (x) as promptly as reasonably possible following its determination that such disclosure is necessary or compelled under sub-clause (a) above, and (y) as promptly as reasonably possible after service of such legal process and to the extent legally permissible so that the Disclosing Party may seek an appropriate protective order, confidential treatment, or other remedy. In the event the Receiving Party is required or compelled to disclose Confidential Information pursuant to the immediately preceding sentence, the Receiving Party may disclose only that portion of such Confidential Information with respect to which the Receiving Party has been advised by its counsel is required or compelled to be disclosed. 21.4.7. Upon the request of the Disclosing Party following the expiration or termination of this Agreement, the Receiving Party will return or destroy all Party may retain Confidential Information of the Disclosing Party that is (i)
28 internal document retention policies or (iii) contained in an archived computer recovery procedures; provided, that any such retained or archived Confidential Information shall remain subject to the provisions of this Section 21.4 for so long as it is maintained or archived; provided, further legal or IT employees may access such retained or archived Confidential Information solely to the extent necessary to perform their respective functions described under this Section 21.4.7. 21.4.8. Except as may be required by the federal securities laws or other applicable law, or by the rules and regulations of the SEC or of any stock exchange on content of this Agreement or the negotiations leading to or pursuant to this Agreement without the prior written consent of the other Party; provided, that no Party will be prohibited from disclosing the general nature of the business relationship established hereby at any time; provided, further, that the Parties agree that Buyer shall be permitted to file a copy of this Agreement with the SEC and in connection therewith shall request confidential treatment for certain portions of this Agreement and certain of the Exhibits attached hereto as agreed by the Parties. 21.5. Each Party agrees to indemnify and hold the other Party harmless from and against any claims for commissions arising out of the acts of such Party and for expenses (including finder or other Person relating to a sale of the Railcars. 21.6. Successors and Permitted Assigns. Except as otherwise provided herein, neither Party may assign, transfer, sell, or convey any or all of its rights under this Agreement, including by merger (whether or not such Party is the surviving entity), consolidation, change in Control, operation of law or any other manner, without the prior written consent of the other Party, which consent will not be unreasonably withheld or delayed. Any purported assignment in violation of this Section 21.6 shall be null and void. In the event of a permitted assignment under this Section Transaction Transferee then: 21.6.1. Upon the consummation of a Transaction involving Seller, the following provisions shall apply: 21.6.1.1. The Invoice Price for any Exhibit A or Exhibit B Railcar that is charged by Transferee to Buyer shall not increase as a result of any such Railcar would have been absent the Transaction and in the
29 e, impermissible increase For purposes of determining impermissible increases, upon reasonable request from Buyer, Railcar on commercially reasonable and confidential terms and conditions (exc cost information, which access and review shall be handled in a manner similar to that described under Exhibit F hereto but without limitation as to the number of reviews). Buyer may terminate this Agreement with [*****] advance written notice in the event [*****]. 21.6.1.2. In the event that, [*****]. 21.6.1.3. In the event that, [*****]. 21.6.1.4. In addition to any remedies under Section 13, for any Railcar during the Term for which Buyer has submitted warranty claim(s) to Seller pursuant to Section 13.1 (excluding warranty claim(s) solely related to defects in Third Party parts or Components), Seller will be responsible for any applicable freight and/or cleaning charges for such Railcar related to addressing any warranty claim(s) for such Railcar. 21.6.2. In the event of a Transaction involving Buyer, Seller may terminate this Agreement with sixty (60) days advance written notice in the event (i) a or (ii) after the Transaction, the Transferee competes with Seller in railcar manufacturing in North America. 21.7. Severability. Any term, condition or provision of this Agreement which is, or is deemed to be, void, prohibited, or unenforceable in any jurisdiction shall be, as to such jurisdiction, severable here from and ineffective to the extent of such avoidance, prohibition, and unenforceability without in any way invalidating the remaining terms, conditions, and provisions hereof. Any such avoidance, prohibition, and unenforceability in any jurisdiction shall not invalidate or render unenforceable such term, condition, or provision in any other jurisdiction. 21.8. Governing Law. THIS AGREEMENT SHALL BE DEEMED TO HAVE BEEN MADE IN THE STATE OF DELAWARE AND SHALL BE CONSTRUED IN ACCORDANCE WITH, AND THE RIGHTS AND LIABILITIES OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, THE LAWS OF SUCH STATE WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICT OF LAW THEREOF.
30 21.9. Dispute Resolution. Each dispute, claim or controversy arising out of or in any manner related to this Agreement or the breach thereof (each, Dispute the Parties will be resolved or adjudicated in accordance with the provisions described in this Section 21.9. 21.9.1. In the event of a Dispute, either Party may, but is not required to, provide Dispute Notice in such event, representatives at the vice president level of each Party shall Dispute Negotiation Each Dispute Negotiation will take place at a time and place agreed to by such representatives, within thirty (30) days after the date of the Dispute Notice. At any time after delivery of a Dispute Notice, either Seller or Buyer may, at its discretion, either in addition or as an alternative to such Dispute Negotiation, initiate mediation in Delaware, administered by the American Arbitration AAA mediation procedures then in effect. While Buyer and Seller shall have an obligation to participate in each Dispute Negotiation and any mediation (provided the mediation is scheduled within sixty (60) days after the date of the Dispute Notice and at a time and place reasonably acceptable to Buyer and Seller), nothing herein shall obligate Buyer or Seller to enter into any agreement or reach any conclusion as a result of such Dispute Negotiation or mediation. 21.9.2. In the event that a Dispute Notice is provided and the Parties are unable to reach a mutually satisfactory resolution of the Dispute within ninety (90) days after the date of such Dispute Notice through Dispute Negotiation or mediation of such Dispute Notice, or at any time in the event that no Dispute Notice is provided, either Party may, upon written notice to the other (an Arbitration Demand Arbitration AAA AAA Rules provided, however, that in the event of a conflict between the AAA Rules and the provisions of this Section 21.9, the provisions of this Section 21.9 shall control. The Arbitration shall be heard and determined by a panel of three Arbitrator the Arbitration Demand, each Party shall select, and provide written notice to the other Party of the identity of, a single Arbitrator who shall be deemed non-neutral and not subject to the provisions of Rule R-17 of the AAA Rules. The third Arbitrator shall be selected in accordance with Rule R-11 of the AAA Rules within twenty (20) business days after the Arbitration Demand; provided, however, that the third Arbitrator must be a licensed Large, Complex Commercial Case Panel (or such other equivalent replacement roster of experienced arbitrators that the AAA designates), unless the matter of dispute arises under or relates to Exhibit F, in which
31 case such third Arbitrator must be an accountant with cost accounting and manufacturing experience. 21.9.3. Any issue concerning the extent to which any Dispute is subject to Arbitration, or concerning the applicability, interpretation, enforceability or validity of these procedures, shall be governed by the United States Federal Arbitration Act and not by any state arbitration law. Except in connection conservatory injunctive relief, to preserve a claim, to preserve a position superior to other creditors, to resolve any issue concerning jurisdiction, the existence or validity of the Arbitration provisions of this Section 21.9, or the extent to which any Dispute is subject to Arbitration, or to compel Arbitration in accordance with this Section 21.9, or to enforce judgment on the Arbit of competent jurisdiction, no Party may institute legal proceedings related to a Dispute. Any legal proceeding permitted by the foregoing will be heard and determined only in a state or federal court sitting in Delaware and the Parties hereby irrevocably submit to the exclusive jurisdiction of such courts in any such legal proceeding, irrevocably waive any objection to venue, including the defense of an inconvenient forum, to the maintenance of any such legal proceeding, and irrevocably agree that written notice of such legal proceeding in compliance with the notice provisions of this Agreement constitutes valid and lawful service of process against them without the necessity for service by any other means; provided, that, notwithstanding the foregoing, the Parties have the right to enforce judgment on the A 21.9.4. In any Arbitration initiated pursuant to this Section 21.9, the Parties shall be permitted to take the discovery contemplated by this Section 21.9 without seeking leave of the Arbitrators and each Party agrees to cooperate in producing all discovery contemplated by this Section 21.9 or otherwise ordered by the Arbitrators. The scope of discovery in any such Arbitration shall be that each Party may obtain discovery regarding any non-privileged 21.9.5. Each Party may serve requests for production of documents and other tangible things and such requests and the responses thereto shall be in accordance with the provisions of Rule 34 of the FRCP, as if such provisions applied to the Arbitration, and such requests may include requests for electronically stored information, which requests and responses shall be in accordance with the provisions of Rule 34 and Rule 26(b)(2)(b) of the FRCP as if such provisions applied to the Arbitration proceeding. Each Party may serve interrogatories and such interrogatories and the responses thereto shall be in accordance with the provisions of Rule 33 of the FRCP as if such provisions applied to the Arbitration. Each Party may serve requests for admission and such requests and the responses thereto
32 shall be in accordance with the provisions of Rule 36 of the FRCP as if such provisions applied to the Arbitration. Each Party may take up to ten (10) depositions of the other Party by serving a notice of deposition and the other Party must produce the deponents as requested in accordance with the provisions of Rule 30 of the FRCP, including Rule 30(b)(6), as if such provisions applied to the Arbitration; provided, however, that a Party that seeks to present the testimony of a third-party witness at the Arbitration must produce such witness for deposition prior to the Arbitration and such deposition shall not count towards the foregoing ten (10) deposition limit; provided, further, that a Party that seeks to present the opinion testimony of an expert witness at the Arbitration must produce a written expert report in accordance with the provisions of Rule 26(a)(2) of the FRCP as if such provisions applied to the Arbitration and produce such expert witness for deposition prior to the Arbitration and such deposition shall not count towards the foregoing ten (10) deposition limit. 21.9.6. The Parties agree that in the event of Arbitration and before engaging in any discovery, they will execute a Confidentiality Agreement and Agreed Protective Order in the form attached hereto as Exhibit I, which shall govern the exchange of information produced by any party or non-party in the Arbitration. In such event, the Parties agree that they will request that the Arbitrators enter the fully-executed Confidentiality Agreement and Agreed Protective Order and that, in the case of any conflict between its terms and the terms of this Agreement, the Confidentiality Agreement and Agreed Protective Order shall control. The Arbitrators may, upon written request of any Party, limit the amount or scope of written discovery described above only after all Parties have been given the opportunity to oppose such request in writing. In no event, however, may the Arbitrators reduce the number of depositions provided for above. The Arbitrators may compel a Party to comply with discovery or its obligations under the Confidentiality idence at hearing. Any Party has the right to have any hearing recorded by stenographic and video means with such Party bearing the costs of the stenographer and videographer; provided, however, that any other Party shall have to right to obtain transcripts from the transcriber at such other provided, further, however, that the Parties shall share equally the cost of any transcript requested by the Arbitrators. 21.9.7. The Arbitrators have the right to award or include in their award any relief that they deem proper, including money damages (with interest on unpaid amounts from the date due), specific performance, injunctive relief, provided, that the Arbitrators shall have no power to award punitive damages or damages inconsistent with this Agreement, and the Parties expressly waive their right to obtain such damages in the Arbitration or in any other forum. In no event
33 shall the Arbitrators have any right, power, or authority to change, alter, detract from, or add to the provisions of this Agreement, but they shall have the power only to apply and interpret the provisions of this Agreement. The Arbitrators may not consider any settlement discussions or offers that might have been made by the either Party, whether or not made in connection with a Dispute Negotiation or mediation. All aspects of the Arbitration (including the existence, content and result of the Arbitration) shall be shall be final and binding upon both Parties. Each Party shall be responsible for its own connection with any such mediation or Arbitration, subject to any award of ees and costs, and the Parties shall share equally the costs of the mediator, the Arbitrators, the AAA (to the extent in excess of filing and final fees), the mediation location, and the Arbitration location. 21.9.8. The Arbitration award shall be a reasoned award, made within the time limits imposed by R-41 of the AAA Rules; provided, however, that the Arbitrators may extend the time limits of R-41 as they deem necessary. After the award is received by the Parties and all time periods provided for in R-46 have expired, one or both of the Parties may present the award to a of the award shall be governed by Section 9 of the Federal Arbitration Act Act to vacate, modify, or correct the award shall be limited to the grounds articulated in Sections 10 and 11 of the Act. 21.10. Notices. Unless otherwise expressly provided herein, all communications, notices and requests under this Agreement shall be in writing and shall be deemed received either (i) one (1) business day after being deposited, all charges prepaid, with Federal Express or other commercial delivery service that guarantees next business day delivery and provides a written confirmation of delivery, or (ii) on the date of transmission, if sent by facsimile (receipt confirmed) or email. The addresses, facsimile numbers and email addresses for notice, unless changed by notice, are as follows: If to Seller: Trinity Rail Group, LLC 14221 Dallas Parkway, Suite 1100 Dallas, TX 75254 Attn: Steven Barnett Fax: 214-589-8819 Email: Steve.Barnett@trin.net If to Buyer: GATX Corporation 233 S. Wacker Drive Chicago, IL 60606
34 Attn: VP Fleet Management Fax: 312-499-7149 Email: vp-fpm@gatx.com For any notice relating to matters under Sections 8, 10.4, 11.3, 13, 14, 15, 16, 17, 18, 19 or 21 of this Agreement, copies of such notice shall also be delivered to the respective legal counsel in the manner set forth above. The addresses, facsimile numbers and email addresses for notices, unless changed by notice, are as follows: If to Seller: Trinity Industries, Inc. 14221 Dallas Parkway, Suite 1100 Dallas, TX 75254 Attn: Chief Legal Officer Email: Sarah.Teachout@trin.net If to Buyer: GATX Corporation 233 S. Wacker Drive Chicago, IL 60606 Attn: Assistant General Counsel, Rail Fax: 312-499-7149 Email: Joseph.Wyss@gatx.com 21.11. Counterparts. This Agreement may be executed in any number of counterparts (including by means of facsimile or .PDF) each of which will be deemed an original but all of such counterparts together shall constitute one and the same instrument. 21.12. Entire Agreement and Amendments. This Agreement, together with each Exhibit attached hereto, and the other documents explicitly referenced herein contain the entire agreement and understanding between the Parties with respect to the subject matter hereof and, as of the execution hereof, supersedes all prior agreements, understandings, and representations, whether oral or written, related to the subject matter hereof, including that certain Confidentiality Agreement, dated July 18, 2022, by and between Buyer and Seller, each of which are hereby terminated and shall be of no further force and effect following the execution and delivery hereof, provided that any confidential information disclosed under the Confidentiality Agreement dated July 18, 2022 will also be deemed to be Confidential Information under this Agreement. No amendment, modification, supplement, waiver, or release of any of the terms and conditions contained herein shall be made except by mutual agreement to that effect in writing and signed by all Parties. 21.13. Survival. Regardless of the expiration or termination for any reason of this Agreement, the rights and obligations set forth in this Agreement that require or contemplate performance by a Party after such expiration or termination shall remain in full force and effect to the extent required for their full observance and
35 performance, including, but not limited to, Sections 5.1.3, 5.2, 7, 11.3, 12, 13, 14, 15.1, 15.2, 16, 17, 19, 20 and 21. 21.14. Expenses. Except as otherwise expressly set forth in this Agreement, each Party will bear all of its own costs and expenses incurred in negotiating and complying 21.15. No Agency Relationship. Nothing contained in this Agreement will create any agency, fiduciary, joint venture, or partnership relationship between the Parties. 21.16. No Third-Party Beneficiaries. This Agreement will not confer any rights or remedies upon any Person other than the Parties, including, for the avoidance of doubt, any Buyer Managed Person. 21.17. Headings. The Section headings contained in this Agreement are inserted for convenience only and will not affect in any way the meaning or interpretation of this Agreement. 21.18. Construction. The Parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement will be construed as if drafted jointly by the Parties, and no presumption or burden of proof will arise favoring or disfavoring any Party by virtue of the authorship of any of the provisions of this Agreement. Unless the context requires otherwise, singular includes plural and vice versa and any gender includes every gender, and where any word or phrase is given a defined meaning, any other grammatical form of that word or phrase will have a corresponding ise stated. Unless the context of similar import refer to this Agreement as a whole and not to any particular Section, subparagraph, clause or other subdivision hereof. The disjunctive but not exclusive. Each reference to a Section herein is to a Section of this Agreement. Each Schedule, Exhibit, and Annex attached hereto is incorporated herein and made a part hereof as if fully set forth herein. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
[Signature page to Supply Agreement] IN WITNESS WHEREOF, Seller and Buyer have executed this Agreement as of the Effective Date. GATX CORPORATION By: Name: Paul Titterton Title: Executive Vice President and President, Rail North America TRINITY RAIL GROUP, LLC By: Name: Eric R. Marchetto Title: Executive Vice President and Chief Financial Officer
Exhibit A [*****]
Exhibit B [*****]
Exhibit C [*****]
Exhibit D Order Form RAILCAR ORDER FORM To: Company: Telephone: Order Date: GATX CPP/BO#: Car Type(s): Quantity: Alternates: New Buyer-Supplied Components: Non-New Buyer-Supplied Components: Price: [if applicable] Terms and Conditions: This Order Form is subject to the terms and conditions of the Supply Agreement dated __________, 2022, as amended. Executed by: GATX Corporation By: Name: ________________________________ Title: _________________________________ Signature: _____________________________
Exhibit E Form of Certificate of Acceptance CERTIFICATE OF ACCEPTANCE GATX PO NUMBER NUMBER RAILCAR DESCRIPTION In accordance with the Supply Agreement between GATX Corporation ("Buyer") and Trinity Rail Group, LLC ("Seller"), dated __________, 2022, as amended, the undersigned hereby certifies that on the date of this Certificate the following Railcars were accepted by Buyer in accordance with the Agreement. The execution of this Certificate of Acceptance shall not relieve Seller of any of its obligations under the Agreement nor shall it constitute a waiver by Buyer with respect to any of its rights and remedies under the Agreement. CAR NUMBER LIGHT WEIGHT GALLONS DATE AVAILABLE FOR INSPECTION OR RE- INSPECTION DATE ACCEPTED BO# Accepted Today: Cumulative Accepted by BO#:
Exhibit F Third Party Review 1. General. (a) Pursuant to Section 7 of the Supply Agreement between Buyer and Seller dated __________, 2022, as amended, upon written notice to Seller, Buyer may initiate a Third Party Review with respect to the matters set forth in Section 6 of this Exhibit F. (b) Buyer may initiate a Third Party Review after the first Order Year of the Agreement. Thereafter, Buyer may request [*****]. 2. Selection of Third Party Reviewer Third Party Review, Buyer will appoint a reputable accounting firm to conduct the Third Party Reviewer - current or past dealings with either Party. Seller agrees that [*****] is an acceptable Reviewer as of the Effective Date. 3. Confidentiality. The Parties agree that the Seller may require the Reviewer to enter into and be bound by a confidentiality agreement in the form attached hereto as Schedule 1 to this Exhibit F Reviewer Confidentiality Agreement the Reviewer receives from Seller will be considered the Reviewer Confidentiality Agreement and, except to the extent otherwise provided under this Exhibit F or the Reviewer Confidentiality Agreement, the Reviewer will be prohibited from disclosing any of such Evaluation Material, whether in writing or orally, to Buyer or any other P ees who need to know such information for purposes of the Third Party Review and who the Reviewer shall cause to comply with the provisions of the Reviewer Confidentiality Agreement) or using such Evaluation Material other than for purposes of its Third Party Review. The Parties agree that the Reviewer may disclose such Evaluation Material if (but only to the extent) required by applicable law or regulation, including any subpoena or other similar form of process; provided, that the Reviewer will provide, unless prohibited by law, Seller with prompt notice of any request that the Reviewer discloses Evaluation Material so that Seller may object to the request and/or seek an appropriate protective order. 4. Recordkeeping; Access. (a) During the Term of the Agreement and continuing thereafter for the longer of [*****] or the period necessary to (i) resolve any pending Dispute or (ii) complete any Third Party Review authorized under the Agreement, Seller shall maintain a [*****] (collectively, the Seller Records (b) personnel, accountants, and any other information that is reasonably necessary to perform a Third Party Review and for the Reviewer to prepare and issue the Report (as defined in
Section 7 of this Exhibit F business in Dallas, Texas (and/or other location(s) mutually agreed by the Reviewer, Buyer and Seller) and the Reviewer will not be permitted to (i) remove any of the books, records, copy such books, records, or information for any purpose. The Reviewer may keep its working papers, reports and copies of information obtained from Seller and/or Buyer in connection with the Third Party Review to comply with applicable law, statute, rule, regulation, or professional standards promulgated by AICPA. Any such information so kept shall be retained in accordance with the terms of the Reviewer Confidentiality Agreement. 5. Conduct of Review personnel. Reviewer and Seller will cooperate with each other as necessary for Reviewer to [*****] per Third Party Review performed hereunder; provided for access and information necessary to perform the Third Party Review. 6. Scope of Third Party Review. (a) In connection with the Third Party Review, the Reviewer shall review Records to determine whether there were any discrepancies between [*****]. (b) In addition to its obligations set forth in Section 4 of this Exhibit F, Seller will, at a minimum, prepare and deliver to the Reviewer, within thirty (30) days of its receipt of notice that Buyer has elected to initiate a Third Party Review, the following information: (i) Price Calculation List or Exhibit B to the Agreement for which Buyer received an invoice. The Price Calculation List shall consist of [*****]. (ii) [*****]. (c) [*****]. 7. Report. (a) Report [*****]: (i) [*****] (ii) [*****]. (b) [*****].
(c) [*****]. 8. Settlement Procedures. (a) [*****] or otherwise), Buyer may, at its option, request in writing a refund or credit for such discrepancies, which shall include a descrip founded upon the Report. (b) Seller does not respond by the end of such thirty (30) day period or if Seller concurs with any or Buyer in the amount that is not disputed by Seller. (c) Parties reach a settlement on any or all of the disputed findings, Seller shall issue a refund or credit to Buyer within ten (10) business days in the agreed amount. If the Parties cannot reach a settlement on the remaining disputed findings within sixty (60) days from the date resolution provisions set forth in Section 21.9 of the Agreement. 9. Buyer shall be permitted to retain copies of the Report. Notwithstanding anything to the contrary contained in this Agreement, Buyer may utilize and disclose the Report in connection with any Dispute. 10. Review Cost. Buyer shall be solely responsible for all of its costs related to the Third Party Review and the costs of the Reviewer.
Schedule 1 to Exhibit F Reviewer Confidentiality Agreement CONFIDENTIALITY AGREEMENT Agreement TRail and [*****] Reviewer Party Parties GATX Services Agreement, by and between GATX and TRail, dated __________, 2022, as amended (the Supply Agreement WHEREAS, TRail terms and conditions of this Agreement; NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows: 1. Evaluation Material Evaluation Material of any and all disclosures by Notwithstanding the foregoing, Evaluation Material shall not include any information that: a. is or becomes publicly available other than by a breach of this Agreement by Reviewer; b. under any confidentiality obligation to TRail regarding such information; c. is developed independently by Reviewer or GATX without reference to the Evaluation Material; or d. is disclosed by TRail to any person or entity free of confidentiality obligations to TRail. e. is known to Reviewer prior to the date of this Agreement. f. is disclosed by Reviewer with the written approval of TRail.
2. Disclosure to GATX. Reviewer agrees not to disclose Evaluation Material to GATX or en consent. TRail agrees that: Reviewer may (i) disclose to GATX the report containing the information described in Section 7(a) of Exhibit F Exhibit F Report may conduct general discussions with GATX and GATX overall scope or progress in the performance of the Services; provided, that with respect to (ii) above, such disclosures or general discussions do not include any Evaluation Material. ease letter in a form acceptable to Reviewer, Reviewer will provide any draft or final Report to TRail to review prior to Reviewer disclosing such draft or final Report to GATX. If TRail determines that such Report needs to be redacted to avoid disclosure of Evaluation Material in accordance with Section 7 of Exhibit F instructions. After any version of the Report has been redacted, TRail will provide its consent for Reviewer to disclose the Report to GATX, which consent shall not be unreasonably withheld or delayed and shall include an acknowledgement that Reviewer has complied with the requirements of this Agreement. 3. Responsibility. Except for Reviewer s obligations of confidentiality and restricted use expressly set forth herein, Reviewer has no obligation towards TRail in relation to the Services and TRail has no obligation to Reviewer. 4. Confidentiality and Use. Subject to Section 2 of this Agreement, Reviewer agrees to keep confidential the Evaluation Material and shall disclose such information only to its agents and those personnel at Reviewer and its agents who have a need to know such information for performance of the Services, and shall use such Evaluation Material solely for the purpose of performing its Services. Reviewer will be responsible for any 5. Disclosure Required by Law. Notwithstanding anything to the contrary in this Agreement, Reviewer may disclose Evaluation Material that Reviewer is advised by legal counsel that such disclosure is required or compelled by law, statute, rule, or regulation, including any subpoena or other legal process, but only to the extent such law, statute, rule, or regulation, subpoena, or other legal process requires disclosure. To the extent reasonably possible, Reviewer will provide TRail with prompt notice of any request that Reviewer has been advised to disclose Evaluation Material (so long as such notice is not prohibited by such law, statute, rule, or regulation, subpoena or other legal process), so that TRail may have the opportunity to object to the request and/or seek an appropriate protective order. If TRail is unable to obtain or does not timely seek a protective order and Reviewer is legally requested or required to disclose such Evaluation Material, disclosure of such Evaluation Material may be made by Reviewer without liability. 6. Return of Information destroy all Evaluation Material in its possession; provided, however, that Reviewer may keep a set of Evaluation Material in its working papers, reports and copies of information solely and specifically to comply with applicable law, statute, rule, regulation or
professional standards promulgated by the AICPA or other regulatory body with jurisdiction. 7. Remedies. Reviewer recognizes the confidential and proprietary nature of the Evaluation Material and acknowledges that, in the event it is determined by a court that a breach of the confidentiality provisions of this Agreement has occurred or is likely to occur, TRail may suffer irreparable harm. Accordingly, TRail shall be entitled to seek preliminary and permanent injunctive relief in the event of a breach or threatened breach of this Agreement, as well as all other applicable remedies at law or equity, including but not limited to injunction or specific performance. 8. Term under this Agreement will terminate five (5) years from the last date that the Services are performed. 9. Governing Law. This Agreement shall be governed and construed pursuant to the laws of the State of Delaware, without giving effect to its conflict-of-laws principles. 10. Agreement. This Agreement constitutes the only agreement between TRail and Reviewer regarding the Evaluation Material and its disclosure and use with respect to the Services, and supersedes any and all prior agreements, arrangements, and understandings between the Parties as to such subject matter. 11. Modification. This Agreement may not be modified, altered, or amended except in a writing signed by the Parties. 12. Counterparts. This Agreement may be executed in any number of counterparts (including by means of facsimile or .PDF) each of which will be deemed an original but all of such counterparts together shall constitute one and the same instrument. IN WITNESS WHEREOF, authorized representatives of the Parties have signed this Agreement as of the ___ day of _________________, 20___. TRINITY RAIL GROUP, LLC [*****] By:____________________________ By:_______________________________ Name:__________________________ Name:_____________________________ Title:___________________________ Title:______________________________
Exhibit G Form of Bill of Sale THIS BILL OF SALE is made and effective this _____ day of ________________, 20___ by TRINITY RAIL GROUP, LLC WITNESSETH: FOR AND IN CONSIDERATION of the sum of Ten Dollars ($10) and other good and valuable consideration, the sufficiency of which is hereby acknowledged, Seller bargains, grants, nd interest in and to those railcars appurtenances and privileges thereunto belonging or appertaining, for the benefit of Buyer, its successors and assigns, forever. Seller hereby makes such representations and gives such warranties with respect to the Cars as set forth in the Supply Agreement between Buyer and Seller dated __________, 2022, as amended THE WARRANTIES IN THE AGREEMENT ARE EXCLUSIVE AND ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS, IMPLIED, OR STATUTORY, INCLUDING ANY WARRANTY OF TITLE, MERCHANTABILITY, OR FITNESS FOR A PARTICULAR USE. IN WITNESS WHEREOF, this Bill of Sale has been executed and delivered effective as of the day and year first written above. TRINITY RAIL GROUP, LLC By:__________________________________________ Name:________________________________________ Title:_________________________________________
SCHEDULE A TO BILL OF SALE I. Invoice No. II. Car Type: III. Quantity of Cars: IV. Car Marks: V. Running Numbers:
Exhibit H Records DOCUMENT TYPE FORMAT REQUIRED Required for New Built Railcar Certificate of Construction Adobe PDF Yes Car Specification Sheet - to include Builder file number (BO#) Microsoft Word or Excel or Adobe PDF Yes Drawings- including but not limited to: 1. Arrangement 2. Assembly 3. Part 4. Calculation One drawing per file in (*.dwg or *.dxf drawing files) Adobe PDF files. Electronic drawing files names to include drawing number, sheet and revision. All upper level arrangement and assembly drawings used to build the Railcar, in electronic format. Seller will provide Buyer with reasonable access to, but not copies of, parts drawings. Drawing List HTML, Adobe PDF, Microsoft Excel or Plain Text (*.txt) file with entries that include the drawing number, sheet, revision and drawing title. yes Bill of Materials - to include Builder file number HTML, Microsoft Word or Excel or Adobe PDF file of the entire BOM. yes Specialty List of additional vendor components used to build the car. To include lot and model number for: 1. Trucks 2. Couplers 3. Brakes 4. Running Gear HTML, Adobe PDF, Microsoft Excel or Plain Text (*.txt) file of the entire Specialty list to include vendor name, component name, component model number, component lot number. Any drawings to follow drawing requirements above. yes Photograph - To include one full side and A & B end views. Digital high resolution color photograph or 8x10 color print. yes TCID Adobe PDF yes All tank car tests, acceptance criteria, and records associated with tank car qualification Adobe PDF yes RECORDS REQUIREMENTS: 1. All data listed herein for new built Railcars is to be in electronic format unless otherwise agreed to by Buyer. 2. All electronic Railcar data outlined in this Exhibit will be compiled onto a data CD with all data placed into a folder that carries the name of Document Type
listed above, i.e., Drawings, Photos, etc. A sample CD detailing all folders and document formats is available upon request from GATX Rail Engineering. This is a sample of the typical CD contents and folder names. 3. The CD will be presented to Buyer as the close-out package for new built Railcars. 4. The foregoing Records requirements and electronic Railcar data is subject to Instruction (ETSD-15.0
Exhibit I Confidentiality Agreement __________________, § § § Claimant, § § AMERICAN ARBITRATION ASSOCIATION CASE NO. v. § § _______________ __________________, § § § Respondent. § CONFIDENTIALITY AGREEMENT AND AGREED PROTECTIVE ORDER 1. electronic material and documents produced by any Party or non-party in response to discovery in the arbitration proceeding, _______________________, AAA Case No. ________________ (the affidavit, motion, memorandum, pleading, image, or other material presented to the arbitration panel that discloses Discovery Material designated designation. This Agreement shall govern the handling of all such Discovery Material. 2. which has been designated by the produc Attorney Ey Attorney believes contains highly sensitive business or technical information of the producing or
designation Party espective affiliates defined as any person or entity (or sub-unit of any entity) that, directly or indirectly through one or more n in the possession of, prepared by, compiled by, or that is used by a Party and (1) is proprietary to or about, or created by a Party; (2) gives a Party some competitive business advantage, the opportunity of obtaining such advantage, disclosure of which would be detrimental to the interest of the Party or contains business planning information; or (3) is not typically disclosed by a Party, or known by persons who are not employed by a Party or are not independent contractors of a Party. Confidential Information is also information regarding former and current employees, officers, and independent contractors of a Party, including information regarding their employment and/or termination therefrom, performance and compensation. Confidential Information shall also include information pertaining to past, current, and potential transactions engaged in or considered by a Party. Confidential Information shall also include any information pertaining to current, former, and prospective customers of a Party. Confidential Information shall also include any financial statements as to a Party to the extent that such information has not already been publicly disclosed. Confidential Information shall also include Agreement dated __________, 2022, as amended, 3. Attorney image, excerpt, or summary thereof shall be delivered or disclosed to any person except as hereafter provided. The contents of any such Confidential Discovery Material shall not be revealed except to persons authorized hereunder and except as so provided. This Agreement does not apply to information furnished by Parties or non-parties that (i) the Receiving Party (as defined below) can demonstrate was in its possession prior to being
disclosed by the Producing Party hereunder and the source of the information was not under an obligation of confidentiality to the Producing Party; (ii) is now, or hereafter becomes, through no act or failure to act on the part of the Receiving Party, generally known to the public; (iii) is rightfully obtained from a Third Party not bound under an obligation of confidentiality to the Producing Party; or (iv) is independently developed by the Receiving Party without reference to or use of any Confidential Information. 4. All Confidential Discovery Material produced in the Arbitration shall be used only for the prosecution and/or defense of the Arbitration, and any person in possession of Confidential Discovery Material shall maintain those materials in a reasonably secure manner so as to avoid disclosure of their contents and in a manner no less secure than that used to protect its own information of similar sensitivity or importance. 5. Agreement must be made at or prior to the time of production of documents by, to the extent deemed Confidential. Information provided in electronic format, to the extent possible, should be correspondence between counsel. Discovery Material produced - label of such information in correspondence between counsel or, if the material contains no Bates- label, by describing the information in correspondence between counsel. Discovery Material in so stating on the record at the time of such testimony or in correspondence between counsel delivered within thirty (30) days after a transcript containing such testimony is delivered to the Parties. All testimony shall be treated as Confidential until the expiration of thirty (30) days after a transcript containing such testimony is delivered to the Parties and thereafter only such testimony designated as Confidential in accordance with the foregoing shall be treated as Confidential. 6. The inadvertent or unintentional production of discovery containing Confidential Information that is not designated as Confidential Discovery Material at the time of the production
or disclosure shall not be deemed a waiver in whole or in part of a Party either as to the specific discovery produced or as to any other discovery relating thereto or on the same related subject matter. Documents containing Confidential Information inadvertently or unintentionally produced without being designated as Confidential Discovery Material may be retroactively designated by notice in writing of the designated class of each document by Bates number or other adequate description and shall be treated appropriately from the date written notice of the designation is provided to the Receiving Party. To the extent that, prior to such notice, a Party receiving the document or information may have disclosed it to others outside the parameters of this Agreement, the Party shall not be deemed to have violated this Agreement, but the Party shall cooperate with the designating Party ort to retrieve any document or information promptly from such person and to limit any further disclosure pursuant to this Agreement. 7. Receiving Party Confidential Discovery Material, shall notify counsel for the Producing Party in writing of its objection. The Producing Party and the objecting Receiving Party shall attempt to resolve all objections by agreement. If any objections cannot be resolved by agreement, the Receiving Party shall have fourteen (14) business days from the time in which the Receiving Party delivers its written objection to apply to the arbitration panel for a determination as to whether the Confidential designation is appropriate. Until an objection has been resolved by agreement of counsel or by order of the arbitration panel, the Discovery Material shall be treated as Confidential Discovery Material subject to this Agreement. In the event that a Receiving Party fails to apply to the arbitration panel for a determination as to whether the Confidential designation is appropriate within fourteen (14) business days of delivery of the written objection, the Discovery Material to which the Receiving Party objected shall be treated as Confidential Discovery Material. The burden of proof in any proceeding regarding whether the designation of any
ate is at all times on the Party designating the document as 8. No Receiving Party shall disclose, summarize, describe, characterize, or otherwise communicate Confidential Discovery Material except as permitted by this Agreement. Confidential Discovery Material shall not be disclosed, summarized, described, characterized, or otherwise communicated in any way to anyone except: a. The arbitration panel, all arbitration personnel (including all court reporters employed in connection with this action) and all mediators; b. Counsel of record in this action, and attorneys, paralegals, and other persons employed or retained by such counsel who are assisting in the conduct of this action; c. Employees of the Parties or their Affiliates; d. Actual and potential witnesses and deponents (and their counsel); e. Experts, consultants and/or litigation support personnel (and employees of such experts or consultants) who are not employees of any Party and who are retained or consulted for the purpose of being retained by any Party in connection with this action; f. written agreement; and g. Any person who was either an original author or recipient of a document containing or constituting the Confidential Discovery Material. All persons to whom Confidential Discovery Material is disclosed pursuant to Paragraphs 8 (c)- (g) above shall, prior to disclosure: (i) be advised that the Discovery Material is being disclosed pursuant to and subject to the terms of this Agreement and may not be disclosed other than pursuant to the terms hereof; and (ii) expressly agree to be bound by the terms of the Agreement. Execution of an Acknowledgement in the form attached hereto as Exhibit I-1 shall evidence such notification and agreement.
9. All pleadings, including appendices that attach Confidential Discovery Material as evidence and are presented to the arbitration panel shall be delivered in sealed envelopes marked with the style and number of this action. 10. to any discovery or to object to the authenticity or admissibility of any evidence. 11. This Agreement will continue to be binding throughout and after the final disposition of this action. Within ninety (90) days after receiving notice of the entry of an award, order, judgment or decree finally disposing of this action, all persons having received Confidential Discovery Material will either return all Confidential Discovery Material and any copies thereof (including summaries and excerpts) to the opposing Party or its attorney or destroy all such Confidential Discovery Material and certify in writing to the opposing Party and its attorney to that fact. With regard to electronic copies of Confidential Discovery Material, there is no obligation to return or destroy copies that are not reasonably accessible because of undue burden or cost. 12. This Agreement shall not be construed to affect in any way the use, presentation, introduction, or admissibility of any document, testimony, or other evidence at a deposition, trial, or hearing in this arbitration; provided that any Party may ask the arbitration panel to hold any proceeding in this action in camera on the grounds that such proceeding will involve or relate to Confidential Discovery Material. 13. Nothing in this Agreement shall operate to require the production of documents, testimony, and other materials and information that are privileged or otherwise protected from discovery. 14. If any Party to this Agreement (a) is subpoenaed in another action, or (b) is served with a demand in another action to which he or it is a Party, or (c) is served with any other legal process by one not a party to this litigation seeking Confidential Discovery Material, the Receiving Party shall give written notice to the Producing Party of such subpoena, demand, or legal process within five (5) business days of receipt, and shall not produce any Discovery Material, unless
Court-ordered, for a period of at least ten (10) business days after providing the required notice to Producing Party. If, within ten business (10) days of receiving such notice, the Producing Party gives notice to the Receiving Party that the Producing Party opposes production of its Confidential Discovery Material, the Receiving Party shall not thereafter produce such Confidential Discovery Material except pursuant to a Court order requiring compliance with the subpoena, demand, or other legal process. The Producing Party shall be solely responsible for asserting any objection to the requested production. Nothing herein shall be construed as requiring the Receiving Party to challenge or appeal any order requiring production of Confidential Discovery Material covered by this Agreement, or to subject himself or itself to any penalties for compliance with any legal process or order, or to seek any relief from the arbitration panel. Nothing herein shall prohibit the Receiving Party from producing Confidential Discovery Material to any law enforcement or ng Party and after providing the Producing Party a reasonable opportunity to object to such production, provided that the production of any 15. The Receiving Party may not disclose, summarize, describe, characterize, or Attorney Eyes paragraphs 8(a), 8(b) and 8(e), who are the only persons allowed to review such material. This category of documents is reserved for a very select group of documents and information and may only be used for that group of documents that have not been disclosed to the public and that, if disclosed to the public, may cause irreparable harm or damage to a Party. The procedures for designating documents (paragraph 5), objecting to any designation (paragraph 7), designating deposition testimony as confidential (paragraphs 1 and 5) al (paragraph 9), shall apply to documents Parties have to agree to permit retroactive designation (paragraph 6), to notify the other Party of a
subpoena or order (paragraph 14) and to return or destroy documents (paragraph 11) shall apply 16. The rights and obligations of the Parties to this Agreement are in addition to and not in lieu of the rights and obligations of the Parties pursuant to the Supply Agreement, including, without limitation, Section 21.4 thereof, which shall remain in full force and effect in accordance with the terms thereof. The provisions of this Agreement may be modified only upon written agreement of the Parties. AGREED: Claimant ___________________________ ___________________________________ By: ________________________________ Respondent ___________________________ ___________________________________ By: ________________________________
EXHIBIT I-1 ACKNOWLEDGEMENT 1. My name is _______________________________________________________. I live at______________________________________________________________________. 2. I am aware that the Confidentiality Agreement and Agreed Protective Order (the Agreement and Order have been entered in the Arbitration styled: ________________________, AAA Case No. __________________ and a copy of the Agreement and Order have been given to me. 3. I agree and promise that any documents, information, materials, or testimony, which are protected under the Agreement and Order entered in this case and designated as above-captioned matter. 4. I agree and promise that I will not disclose or discuss such protected materials with any person other than those individuals permitted by the Agreement and Order to review such materials. 5. I understand and agree that any use of such confidential documents, information, materials, or testimony obtained by me (or any portions or summaries thereof) in any manner contrary to the provisions of the Agreement and Order may cause damage to one or more of the Parties to the Arbitration and that I may be held responsible in a court of law for causing such damage. __________________________________ Signature Printed Name:______________________ SWORN TO AND SUBSCRIBED BEFORE ME this _________ day of ____________, 20____. __________________________________ NOTARY PUBLIC, STATE OF ________. __________________________________ NOTARY S PRINTED NAME MY COMMISSION EXPIRES:___________________
Exhibit J Default Order Instructions (I) Default Scheduled Car Order Instructions In the event that Buyer fails to place one or more Orders for all or any portion of the Scheduled Cars necessary to meet a Monthly Order Quantity by the applicable deadline, Seller Quantity by the applicable deadline. All of such Railcars shall be the following Railcar Type: Railcar Type [*****] Seller Specification No. [*****] Gross Rail Load [*****] Typical Commodity [*****] Car Class [*****] (II) Default Unscheduled Car Order Instructions In the event that Buyer fails to place one or more Orders for all or any portion of the Unscheduled Cars required to be Ordered during an Order Year by the first day of the last month behalf the number of Railcars necessary to fulfill the Unscheduled Car requirement for such Order Year. All of such Railcars shall be the following Default Unscheduled Tank Car Type up to and including five hundred (500) of the one thousand five hundred (1,500) Unscheduled Cars required to be Ordered during an Order Year in accordance with Section 9.1.3 and after such five hundred (500) tank car threshold has been met, any remaining Railcars to fulfill the one thousand five hundred (1,500) total Unscheduled Cars for such Order Year shall be the following Default Unscheduled Freight Car Type: Railcar Type [*****] Seller Specification No. [*****] Gross Rail Load [*****] Typical Commodity [*****] Car Class [*****] Railcar Type [*****] Seller Specification No. [*****] Gross Rail Load [*****] Typical Commodity [*****] Car Class [*****]
Exhibit K [Date] [Customer] [Address] Description of Railcar Types: Railcar Type Quantity: Estimated Base Sales Price (per Railcar): $ Estimated Scrap Surcharges (Included in Price): $ Alternates: 1. 2. Total Alternates: $ $ conditions of the Supply Agreement dated __________, 2022, as amended. Delivery: Commencing ______________
Exhibit L Form of Invoice
Exhibit M [*****]
[*****]
Exhibit 31A
Certification of Principal Executive Officer
I, Robert C. Lyons, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of GATX Corporation (the "Company");
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
4.The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and
5.The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
| /s/ Robert C. Lyons | ||
| Robert C. Lyons | ||
| President and Chief Executive Officer | ||
October 28, 2022
Exhibit 31B
Certification of Principal Financial Officer
I, Thomas A. Ellman, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of GATX Corporation (the "Company");
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
4.The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and
5.The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
| /s/ Thomas A. Ellman | ||
| Thomas A. Ellman | ||
| Executive Vice President and Chief Financial Officer | ||
October 28, 2022
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of GATX Corporation (the “Company”) on Form 10-Q for the period ended September 30, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Robert C. Lyons | /s/ Thomas A. Ellman | |||||||
| Robert C. Lyons | Thomas A. Ellman | |||||||
| President and Chief Executive Officer | Executive Vice President and Chief Financial Officer | |||||||
October 28, 2022
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by GATX Corporation for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906 has been provided to GATX Corporation and will be retained by GATX Corporation and furnished to the Securities and Exchange Commission or its staff upon request.