Gatx Corp 10-Q for FY2020 Q3
Gatx Corp (GATX)
10-Q
2020-10-30
For: 2020-09-30
View Original
Added on
April 09, 2026
About this 10-Q
Gatx Corp filed this 10-Q on October 30, 2020, covering the quarter ended September 30, 2020 (FY2020 Q3).
Headline figures
Quarter ended September 30, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $304.4M
- up 1.9% from $298.8M a year earlier
- Net income
- $47.9M
- up 6.2% from net income of $45.1M a year earlier
- Diluted EPS
- $1.35
- up 8.0% from $1.25 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, 2020
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 35.0 million common shares outstanding at September 30, 2020.
GATX CORPORATION
FORM 10-Q
QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 2020
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. These 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.
A detailed discussion of the known material risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in our Annual Report on Form 10-K for the year ended December 31, 2019, and in our other filings with the Securities and Exchange Commission ("SEC"). The following factors, in addition to those discussed under "Risk Factors", in our Annual Report on Form 10-K for the year ended December 31, 2019, and Part II, Item 1A of this Quarterly Report on Form 10-Q, could cause actual results to differ materially from our current expectations expressed in forward looking statements:
•the severity and duration of the global COVID-19 pandemic, including impacts of the pandemic and of businesses’, governments’, and suppliers' responses to the pandemic on our personnel, operations, commercial activity, supply chain, the demand for our assets, the value of our assets and our liquidity •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 railcars and other 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 assets or services, including as a result of: ◦weak macroeconomic conditions ◦weak market conditions in our customers' businesses ◦declines in harvest or production volumes ◦adverse changes in the price of, or demand for, commodities ◦changes in railroad operations or efficiency ◦changes in railroad pricing and service offerings, including those related to "precision scheduled railroading" ◦changes in supply chains ◦availability of pipelines, trucks, and other alternative modes of transportation ◦changes in conditions affecting the aviation industry, including 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 railcar purchase commitments, including increased costs due to tariffs or trade disputes •reduced opportunities to generate asset remarketing income •inability to successfully consummate and manage ongoing acquisition and divestiture activities •operational and financial risks related to our affiliate investments, including the Rolls-Royce & Partners Finance joint ventures, and the durability and reliability of aircraft engines •fluctuations in foreign exchange rates •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 •uncertainty relating to the LIBOR calculation process and potential phasing out of LIBOR after 2021 •competitive factors in our primary markets, including competitors with a significantly lower cost of capital than GATX •risks related to our international operations and expansion into new geographic markets, including the inability to access railcar supply and the imposition of new or additional tariffs, quotas, or trade barriers •changes in, or failure to comply with, laws, rules, and regulations •inability to obtain cost-effective insurance •environmental 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 | |||||||
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In millions, except share data)
| September 30 | December 31 | ||||||||||
| 2020 | 2019 | ||||||||||
Assets | |||||||||||
Cash and Cash Equivalents | $ | $ | |||||||||
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 | |||||||||||
Assets of Discontinued Operations | |||||||||||
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 | |||||||||||
Liabilities of Discontinued Operations | |||||||||||
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 consolidated financial statements.
2
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In millions, except per share data)
| Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
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, net of taxes | |||||||||||||||||||||||
Net Income from Continuing Operations | $ | $ | $ | $ | |||||||||||||||||||
Discontinued Operations, Net of Taxes | |||||||||||||||||||||||
Net income (loss) from discontinued operations, net of taxes | $ | $ | $ | ( | $ | ||||||||||||||||||
(Loss) gain on sale of discontinued operations, net of taxes | ( | ||||||||||||||||||||||
Total Discontinued Operations, Net of Taxes | $ | ( | $ | $ | $ | ||||||||||||||||||
Net Income | $ | $ | $ | $ | |||||||||||||||||||
Other Comprehensive Income, Net of Taxes | |||||||||||||||||||||||
Foreign currency translation adjustments | ( | ( | ( | ||||||||||||||||||||
Unrealized gain (loss) on derivative instruments | ( | ( | |||||||||||||||||||||
Post-retirement benefit plans | |||||||||||||||||||||||
Other comprehensive income (loss) | ( | ( | |||||||||||||||||||||
Comprehensive Income | $ | $ | $ | $ | |||||||||||||||||||
Share Data | |||||||||||||||||||||||
Basic earnings per share from continuing operations | $ | $ | $ | $ | |||||||||||||||||||
Basic earnings per share from discontinued operations | ( | ||||||||||||||||||||||
Basic earnings per share from consolidated operations | $ | $ | $ | $ | |||||||||||||||||||
Average number of common shares | |||||||||||||||||||||||
Diluted earnings per share from continuing operations | $ | $ | $ | $ | |||||||||||||||||||
Diluted earnings per share from discontinued operations | ( | ||||||||||||||||||||||
Diluted earnings per share from consolidated operations | $ | $ | $ | $ | |||||||||||||||||||
Average number of common shares and common share equivalents | |||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
3
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In millions)
| Nine Months Ended September 30 | |||||||||||
| 2020 | 2019 | ||||||||||
Operating Activities | |||||||||||
Net income | $ | $ | |||||||||
Income from discontinued operations, net of taxes | |||||||||||
Net income from continuing operations | |||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Depreciation expense | |||||||||||
Net gains on sales of assets | ( | ( | |||||||||
Deferred income taxes | |||||||||||
Share of affiliates’ earnings, net of dividends | ( | ( | |||||||||
Changes in working capital items | ( | ( | |||||||||
Net cash provided by operating activities of continuing operations | |||||||||||
Investing Activities | |||||||||||
Portfolio investments and capital additions | ( | ( | |||||||||
Purchases of assets previously leased | — | ( | |||||||||
Portfolio proceeds | |||||||||||
Proceeds from sales of other assets | |||||||||||
Other | |||||||||||
Net cash used in investing activities of continuing operations | ( | ( | |||||||||
Financing Activities | |||||||||||
Net proceeds from issuances of debt (original maturities longer than 90 days) | |||||||||||
Repayments of debt (original maturities longer than 90 days) | ( | ( | |||||||||
Net decrease in debt with original maturities of 90 days or less | ( | ||||||||||
Stock repurchases | ( | ||||||||||
Dividends | ( | ( | |||||||||
| Purchases of assets previously leased | ( | ||||||||||
| Other | ( | ||||||||||
Net cash provided by (used in) financing activities of continuing operations | ( | ||||||||||
Effect of Exchange Rate Changes on Cash and Cash Equivalents | ( | ( | |||||||||
Net cash used in (provided by) operating activities from discontinued operations | ( | ||||||||||
Net cash provided by (used in) investing activities from discontinued operations | ( | ||||||||||
Net cash provided by (used in) financing activities from discontinued operations | ( | ||||||||||
Cash provided by discontinued operations, net | |||||||||||
Net increase (decrease) in Cash and Cash Equivalents during the period | ( | ||||||||||
Cash and Cash Equivalents at beginning of the period | |||||||||||
Cash and Cash Equivalents at end of the period | $ | $ | |||||||||
See accompanying notes to consolidated financial statements.
4
GATX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
(In millions)
| Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||
| 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 ($ | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
Cumulative impact of accounting standard adoption | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at end of the period | |||||||||||||||||||||||||||||||||||||||||||||||
Accumulated Other Comprehensive Loss | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at beginning of the period | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
Balance at end of the period | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
Total Shareholders’ Equity | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
5
GATX CORPORATION AND SUBSIDIARIES
NOTES TO 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. Historically, we also reported financial results for American Steamship Company ("ASC") as a fourth segment.
On May 14, 2020, we completed the sale of our ASC business, subject to customary post-closing adjustments. As a result, ASC is now reported as discontinued operations, and financial data for the ASC segment has been segregated and presented as discontinued operations for all periods presented. See "Note 16. Discontinued Operations" of this Form 10-Q for additional information.
NOTE 2. Coronavirus Impacts
NOTE 3. Basis of Presentation
We prepared the accompanying unaudited 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 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. Certain prior year amounts have been reclassified to conform to the 2020 presentation, including the separate presentation and reporting of discontinued operations.
Operating results for the nine months ended September 30, 2020 are not necessarily indicative of the results we may achieve for the entire year ending December 31, 2020. 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, 2019.
6
GATX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
New Accounting Pronouncements Adopted
| Standard/Description | Effective Date and Adoption Considerations | Effect on Financial Statements or Other Significant Matters | ||||||
Credit Losses In June 2016, the FASB issued ASU 2016-13, Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which supersedes previous guidance. The FASB subsequently issued ASU 2018-19, clarifying operating lease receivables are not within the scope of subtopic 326-20 and should be accounted for in accordance with Topic 842, Leases. The new guidance modifies the impairment model to be based on expected losses rather than incurred losses. | We adopted the new guidance in the first quarter of 2020. | The adoption of this standard required us to modify our assessment for a limited population of receivables, including the net investment in our finance leases, as well as our trade receivables at ASC. As part of our modified assessment, we considered historical information as well as current and future economic conditions. The application of this new guidance did not impact our financial statements or related disclosures. | ||||||
New Accounting Pronouncements Not Yet Adopted
| Standard/Description | Effective Date and Adoption Considerations | Effect on Financial Statements or Other Significant Matters | ||||||
Income Taxes In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which eliminates exceptions for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. | The new guidance is effective for us in the first quarter of 2021, with early adoption permitted. We plan to adopt this standard on January 1, 2021. | We are evaluating the potential impact the new guidance will have on our financial statements and related disclosures. | ||||||
NOTE 4. 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 income statement:
Lease Revenue
Lease revenue, which includes operating lease revenue and finance lease revenue, is our primary source of revenue. In accordance with ASU 2016-02, Leases (Topic 842) ("Topic 842"), we utilize the practical expedient that allows lessors to not separate non-lease components from the associated lease components for our operating leases.
Operating Lease Revenue
We lease railcars 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 do not 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
7
GATX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
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 5. Leases".
Finance Lease Revenue
In certain cases, we lease railcars and other operating assets that, at lease inception, are classified as finance leases. In accordance with Topic 842, we recognize finance lease revenue 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 5. Leases".
Marine Operating Revenue
We generate marine operating revenue through shipping services completed by our marine vessels. In accordance with ASU 2014-09, Revenue from Contracts and Customers (Topic 606) ("Topic 606"), marine operating revenue is recognized over time as the performance obligation is satisfied, beginning when cargo is loaded through its delivery and discharge. Revenue is recognized pro rata over the projected duration of each voyage, which is derived from historical voyage data.
Other Revenue
Other revenue is comprised 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.
NOTE 5. Leases
GATX as Lessor
We lease railcars 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. Upon adoption of the new lease accounting standard in 2019, we elected the lessor practical expedient which allows us not to separate lease and non-lease components when reporting revenue for our full-service operating leases. In some cases, we lease railcars 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 | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
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 are reported in other revenue in the statements of comprehensive income and were $22.7 million and $69.1 million for the three and nine months ended September 30, 2020 and $22.3 million and $66.6 million for the three and nine months ended September 30, 2019.
8
NOTE 6. Investments in Affiliated Companies
Our affiliate investments primarily include interests in each of the Rolls-Royce & Partners Finance joint ventures (collectively the “RRPF affiliates”), a group of 50% owned domestic and foreign joint ventures with Rolls-Royce plc, a leading manufacturer of commercial aircraft jet engines.
In accordance with Regulation S-X, we must assess if any of our investments in affiliated companies is a “significant subsidiary”. As of September 30, 2020, we determined that Alpha Partners Leasing Limited, which is part of the RRPF affiliates, triggered at least one of the significance tests. As a result, and in accordance with Rule 10-01(b) of Regulation S-X, the following table shows summarized unaudited financial information for Alpha Partners Leasing Limited (in millions):
| Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
| Total expenses | ( | ( | ( | ( | |||||||||||||||||||
| Other income, including net gains on sales of assets | |||||||||||||||||||||||
| Net income | |||||||||||||||||||||||
NOTE 7. Fair Value Disclosure
The assets and liabilities that GATX records at fair value on a recurring basis consisted entirely of derivatives at September 30, 2020 and December 31, 2019.
In addition, we review long-lived assets, such as operating assets and facilities, investments in affiliates, and goodwill, 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 considered COVID-19 as part of our assessment during the quarter and determined there were no material impacts on our final conclusions. We will continue to monitor our long-lived assets, investments in affiliates, and goodwill for indicators of impairment as COVID-19 continues to impact the global economy.
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 five instruments outstanding with an aggregate notional amount of $300.0 million as of September 30, 2020 with maturities ranging from 2021 to 2022 and eight instruments outstanding with an aggregate notional amount of $450.0 million as of December 31, 2019 with maturities ranging from 2020 to 2022.
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 $136.1 million as of September 30, 2020 that mature from 2020 to 2022 and seven instruments outstanding with an aggregate notional amount of $336.5 million as of December 31, 2019 with maturities ranging from 2020 to 2022. Within the next 12 months, we expect to reclassify $2.1 million ($1.6 million after-tax) of net losses on previously terminated derivatives from accumulated other comprehensive income (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 (income) 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
9
GATX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
with credit risk related contingent features that are in a liability position as of September 30, 2020 was $9.0 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 tables show our derivative assets and liabilities that are measured at fair value (in millions):
| Balance Sheet Location | Fair Value September 30, 2020 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||||||||
| Derivative Assets | |||||||||||||||||||||||||||||
Interest rate contracts (1) | Other assets | $ | $ | $ | $ | ||||||||||||||||||||||||
Total derivative assets | $ | $ | $ | $ | |||||||||||||||||||||||||
| Derivative Liabilities | |||||||||||||||||||||||||||||
Foreign exchange contracts (1) | Other liabilities | $ | $ | $ | $ | ||||||||||||||||||||||||
Foreign exchange contracts (2) | Other liabilities | ||||||||||||||||||||||||||||
Total derivative liabilities | $ | $ | $ | $ | |||||||||||||||||||||||||
| Balance Sheet Location | Fair Value December 31, 2019 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||||
Foreign exchange contracts (2) | Other liabilities | ||||||||||||||||||||||||||||
Total derivative liabilities | $ | $ | $ | $ | |||||||||||||||||||||||||
_________
(1) Designated as hedges.
(2) Not designated as hedges.
10
GATX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
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, 2020 and December 31, 2019, all derivatives were classified as Level 2 in the fair value hierarchy. There were no derivatives classified as Level 1 or Level 3.
The following table shows the amounts recorded on the balance sheet related to cumulative basis adjustments for fair value hedges as of September 30, 2020 and December 31, 2019 (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 2020 | December 31 2019 | September 30 2020 | December 31 2019 | ||||||||||||||||||||||
Recourse debt | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||
The following tables show the impacts of our derivative instruments on our statement of comprehensive income for the three and nine months ended September 30, 2020 and 2019 (in millions):
| Amount of Loss (Gain) Recognized in Other Comprehensive Income | Location of Loss (Gain) Reclassified from Accumulated Other Comprehensive Income into Income | Amount of Loss (Gain) Reclassified from Accumulated Other Comprehensive Income into Income | |||||||||||||||||||||||||||||||||||||||
| Three Months Ended September 30 | Three Months Ended September 30 | ||||||||||||||||||||||||||||||||||||||||
| Derivative Designation | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||
| Derivatives in cash flow hedging relationships: | |||||||||||||||||||||||||||||||||||||||||
Interest rate contracts | $ | $ | Interest expense | $ | $ | ||||||||||||||||||||||||||||||||||||
Foreign exchange contracts | ( | Other (income) expense | ( | ||||||||||||||||||||||||||||||||||||||
Total | $ | $ | ( | Total | $ | $ | ( | ||||||||||||||||||||||||||||||||||
| Amount of Loss (Gain) Recognized in Other Comprehensive Income | Location of Loss (Gain) Reclassified from Accumulated Other Comprehensive Income into Income | Amount of Loss (Gain) Reclassified from Accumulated Other Comprehensive Income into Income | |||||||||||||||||||||||||||||||||||||||
| Nine Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||||||||||||||||||||
| Derivative Designation | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||
| Derivatives in cash flow hedging relationships: | |||||||||||||||||||||||||||||||||||||||||
Interest rate contracts | $ | ( | $ | Interest expense | $ | $ | |||||||||||||||||||||||||||||||||||
Foreign exchange contracts | ( | Other (income) expense | ( | ||||||||||||||||||||||||||||||||||||||
Total | $ | $ | ( | Total | $ | $ | ( | ||||||||||||||||||||||||||||||||||
11
GATX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The following tables show the impact of our fair value and cash flow hedge accounting relationships, as well as the impact of our non-designated derivatives, on the statement of comprehensive income for the three and nine months ended September 30, 2020 and 2019 (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 | ||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||
| | Interest (expense), net | Other income (expense) | Interest (expense), net | Other income (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 income into income | ( | ( | |||||||||||||||||||||||||||
Foreign exchange contracts: | |||||||||||||||||||||||||||||
Amount of gain (loss) reclassified from accumulated other comprehensive income 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 | |||||||||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||||||||||
| Interest (expense), net | Other income (expense) | Interest (expense), net | Other income (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 income into income | ( | ( | ||||||||||||||||||||||||||||||
Foreign exchange contracts: | ||||||||||||||||||||||||||||||||
Amount of gain (loss) reclassified from accumulated other comprehensive income 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).
12
GATX CORPORATION AND SUBSIDIARIES
NOTES TO 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, 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, 2020 | December 31, 2019 | ||||||||||||||||||||||
| | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Recourse fixed rate debt | $ | $ | $ | $ | |||||||||||||||||||
| Recourse floating rate debt | |||||||||||||||||||||||
NOTE 8. Pension and Other Post-Retirement Benefits
The following table shows the components of our pension and other post-retirement net periodic cost for the three months ended September 30, 2020 and 2019 (in millions):
| 2020 Pension Benefits | 2019 Pension Benefits | 2020 Retiree Health and Life | 2019 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 our pension and other post-retirement benefits expense for the nine months ended September 30, 2020 and 2019 (in millions):
| 2020 Pension Benefits | 2019 Pension Benefits | 2020 Retiree Health and Life | 2019 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 | $ | $ | $ | $ | |||||||||||||||||||
_______
(1) Amounts reclassified from accumulated other comprehensive loss.
13
GATX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
NOTE 9. Share-Based Compensation
During the nine months ended September 30, 2020, we granted 288,000 non-qualified employee stock options, 34,950 restricted stock units, 54,270 performance shares, and 20,361 phantom stock units. For the three months and nine months ended September 30, 2020, total share-based compensation expense was $3.9 million and $9.8 million and the related tax benefits were $1.0 million and $2.5 million. For the three months and nine months ended September 30, 2019, total share-based compensation expense was $4.1 million and $13.7 million the related tax benefits were $1.0 million and $3.4 million.
The estimated fair value of our 2020 non-qualified employee stock option awards and related underlying assumptions are shown in the table below.
| 2020 | |||||
| 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 10. Income Taxes
Our effective income tax rate for continuing operations was 29.1 % for the nine months ended September 30, 2020, compared to 24.7 % for the nine months ended September 30, 2019. The difference in the effective rate for the current year compared to the prior year is primarily attributable to the prior year reduction of the corporate income tax rate enacted in Alberta, Canada. Additionally, the effective tax rate was impacted by the mix of pre-tax income among domestic and foreign jurisdictions, which are taxed at different rates, and the reduction of the corporate income tax rate enacted in India in the current year. Incremental tax benefits associated with share-based compensation were also recognized in each period.
Our effective income tax rate for discontinued operations was 93.0 % for the nine months ended September 30, 2020, compared to 23.1 % for the nine months ended September 30, 2019. The difference in the effective tax rate in the current year compared to the prior year is primarily attributable to the tax impacts from the sale of our ASC business on May 14, 2020.
NOTE 11. Commercial Commitments
We have entered into various commercial commitments, such as 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 2020 | December 31 2019 | ||||||||||
| 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, 2020 and December 31, 2019. As of September 30, 2020, our outstanding commitments expire in 2020 through 2023. We are not aware of any event that would require us to satisfy any of our commitments.
14
GATX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
NOTE 12. 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 net income per common share (in millions, except per share amounts):
| Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
Numerator: | |||||||||||||||||||||||
Net income from continuing operations | $ | $ | $ | $ | |||||||||||||||||||
Net (loss) income from discontinued operations | ( | ||||||||||||||||||||||
Net income | $ | $ | $ | $ | |||||||||||||||||||
Denominator: | |||||||||||||||||||||||
Weighted-average shares outstanding - basic | |||||||||||||||||||||||
Effect of dilutive securities: | |||||||||||||||||||||||
| Equity compensation plans | |||||||||||||||||||||||
Weighted-average shares outstanding - diluted | |||||||||||||||||||||||
Basic earnings per share from continuing operations | $ | $ | $ | $ | |||||||||||||||||||
Basic earnings per share from discontinued operations | ( | ||||||||||||||||||||||
Basic earnings per share from consolidated operations | $ | $ | $ | $ | |||||||||||||||||||
Diluted earnings per share from continuing operations | $ | $ | $ | $ | |||||||||||||||||||
Diluted earnings per share from discontinued operations | ( | ||||||||||||||||||||||
Diluted earnings per share from consolidated operations | $ | $ | $ | $ | |||||||||||||||||||
15
GATX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
NOTE 13. Accumulated Other Comprehensive Income (Loss)
The following table shows the change in components for accumulated other comprehensive loss (in millions):
| Foreign Currency Translation Gain (Loss) | Unrealized Loss on Derivative Instruments | Post-Retirement Benefit Plans | Total | ||||||||||||||||||||||||||
Balance at December 31, 2019 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||
| Change in component | ( | ( | ( | ||||||||||||||||||||||||||
| Reclassification adjustments into earnings (1) | ( | ( | |||||||||||||||||||||||||||
| Income tax effect | ( | ( | |||||||||||||||||||||||||||
Balance at March 31, 2020 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||
| Change in component | ( | ||||||||||||||||||||||||||||
| Reclassification adjustments into earnings (1) | |||||||||||||||||||||||||||||
Income tax effect | ( | ||||||||||||||||||||||||||||
Balance at June 30, 2020 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||
| Change in component | ( | ||||||||||||||||||||||||||||
| Reclassification adjustments into earnings (1) | |||||||||||||||||||||||||||||
Income tax effect | ( | ( | ( | ||||||||||||||||||||||||||
Balance at September 30, 2020 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||
________
(1) See "Note 7. Fair Value Disclosure" and "Note 8. Pension and Other Post-Retirement Benefits" for impacts of the reclassification adjustments on the statement of comprehensive income.
NOTE 14. Legal Proceedings and Other Contingencies
Various legal actions, claims, assessments and other contingencies arising in the ordinary course of business are pending against GATX and certain of our subsidiaries. These matters are subject to many uncertainties, and it is possible that some of these matters could ultimately be decided, resolved or settled adversely. For a full discussion of our pending legal matters, please refer to the notes included with our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2019.
Viareggio Derailment
In June 2009, tank cars owned by GATX Rail Austria GmbH and its subsidiaries (collectively, “GRA”) and leased to a subsidiary of the Italian state-owned railway (the "Italian Railway") were involved in a train derailment in Viareggio, Italy, resulting in personal injuries, deaths, and property damage. Claimants filed numerous civil claims and Italian prosecutors brought criminal charges against GRA, various Italian Railway companies, and certain of their current or former employees. The insurers for the Italian Railway and GRA have fully settled and resolved most of the civil claims. In January 2017, an Italian trial court in Lucca, Italy found the defendants guilty of negligence-based crimes related to the accident. The court imposed a fine of 1.4 million Euros against GRA and prison sentences against its employees. GRA appealed the trial court's ruling to the Court of Appeals in Florence, and on June 20, 2019, the appellate court affirmed the guilty verdicts, with minor reductions in fines and penalties. GRA and the employees appealed to the Supreme Court in Rome, Italy, which scheduled the commencement of oral argument for December 2, 2020. The length and schedule for the parties’ oral arguments are currently unknown, but we expect the Italian Supreme Court to render its decision immediately following the conclusion of the oral argument phase. GRA will continue to incur legal expenses and related costs in connection with the appeal, although these expenses are not expected to be material. We cannot predict the outcome of the appellate process and thus cannot reasonably estimate the possible amount or range of loss that ultimately may be incurred in connection with this litigation.
16
GATX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
NOTE 15. 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. Historically, we also reported financial results for American Steamship Company ("ASC") as a fourth segment.
On May 14, 2020, we completed the sale of our ASC business, subject to customary post-closing adjustments. As a result, ASC is now reported as discontinued operations, and financial data for the ASC segment has been segregated and presented as discontinued operations for all periods presented. See "Note 16. Discontinued Operations" of this Form 10-Q for additional information.
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 ("GRI"), 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-adding services according to customer requirements.
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, as well as five liquefied gas carrying vessels (the "Specialized Gas Vessels").
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. These amounts are included in Other.
17
GATX CORPORATION AND SUBSIDIARIES
NOTES TO 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, 2020 | |||||||||||||||||||||||||||||
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) income, net | ( | ( | ( | ( | |||||||||||||||||||||||||
Other (expense) income | ( | ( | ( | ||||||||||||||||||||||||||
Share of affiliates' pre-tax income | |||||||||||||||||||||||||||||
Segment profit | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Less: | |||||||||||||||||||||||||||||
Selling, general and administrative expense | |||||||||||||||||||||||||||||
Income taxes (includes $ | |||||||||||||||||||||||||||||
Net income from continuing operations | $ | ||||||||||||||||||||||||||||
Discontinued Operations, Net of Taxes | |||||||||||||||||||||||||||||
Net income from discontinued operations, net of taxes | $ | ||||||||||||||||||||||||||||
Loss on sale of discontinued operations, net of taxes | ( | ||||||||||||||||||||||||||||
Total discontinued operations, net of taxes | $ | ( | |||||||||||||||||||||||||||
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 September 30, 2020 | |||||||||||||||||||||||||||||
Investments in affiliated companies | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Identifiable assets from continuing operations | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
__________
(1) Includes net gains (losses) from scrapping of railcars.
18
GATX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Rail North America | Rail International | Portfolio Management | Other | GATX Consolidated | |||||||||||||||||||||||||
Three Months Ended September 30, 2019 | |||||||||||||||||||||||||||||
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) income, net | ( | ( | ( | ( | |||||||||||||||||||||||||
Other expense | ( | ( | ( | ( | |||||||||||||||||||||||||
Share of affiliates' pre-tax income | |||||||||||||||||||||||||||||
Segment profit | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Less: | |||||||||||||||||||||||||||||
Selling, general and administrative expense | |||||||||||||||||||||||||||||
Income taxes (includes $ | |||||||||||||||||||||||||||||
Net income from continuing operations | $ | ||||||||||||||||||||||||||||
Discontinued Operations, Net of Taxes | |||||||||||||||||||||||||||||
Net income from discontinued operations, net of taxes | $ | ||||||||||||||||||||||||||||
Gain on sale of discontinued operations, net of taxes | |||||||||||||||||||||||||||||
Total discontinued operations, net of taxes | $ | ||||||||||||||||||||||||||||
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, 2019 | |||||||||||||||||||||||||||||
Investments in affiliated companies | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Identifiable assets from continuing operations | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Identifiable assets from discontinued operations | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
__________
(1) Includes net gains (losses) from scrapping of railcars.
19
GATX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Rail North America | Rail International | Portfolio Management | Other | GATX Consolidated | |||||||||||||||||||||||||
Nine Months Ended September 30, 2020 | |||||||||||||||||||||||||||||
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) income, net | ( | ( | ( | ( | |||||||||||||||||||||||||
Other expense | ( | ( | ( | ( | |||||||||||||||||||||||||
Share of affiliates' pre-tax income | |||||||||||||||||||||||||||||
Segment profit | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Less: | |||||||||||||||||||||||||||||
Selling, general and administrative expense | |||||||||||||||||||||||||||||
Income taxes (includes $ | |||||||||||||||||||||||||||||
Net income from continuing operations | $ | ||||||||||||||||||||||||||||
Discontinued operations, net of taxes | |||||||||||||||||||||||||||||
Net loss from discontinued operations, net of taxes | $ | ( | |||||||||||||||||||||||||||
Gain on sale of discontinued operations, net of taxes | |||||||||||||||||||||||||||||
Total discontinued operations, net of taxes | $ | ||||||||||||||||||||||||||||
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
GATX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Rail North America | Rail International | Portfolio Management | Other | GATX Consolidated | |||||||||||||||||||||||||
Nine Months Ended September 30, 2019 | |||||||||||||||||||||||||||||
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) income, net | ( | ( | ( | ( | |||||||||||||||||||||||||
Other expense | ( | ( | ( | ( | |||||||||||||||||||||||||
Share of affiliates' pre-tax income | |||||||||||||||||||||||||||||
Segment profit | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Less: | |||||||||||||||||||||||||||||
Selling, general and administrative expense | |||||||||||||||||||||||||||||
Income taxes (includes $ | |||||||||||||||||||||||||||||
Net income from continuing operations | $ | ||||||||||||||||||||||||||||
Discontinued operations, net of taxes | |||||||||||||||||||||||||||||
Net income from discontinued operations, net of taxes | $ | ||||||||||||||||||||||||||||
Gain on sale of discontinued operations, net of taxes | |||||||||||||||||||||||||||||
Total discontinued operations, net of taxes | $ | ||||||||||||||||||||||||||||
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.
21
GATX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
NOTE 16. Discontinued Operations
On May 14, 2020, we completed the sale of our ASC business for estimated proceeds of $258.3 million in cash, of which $1.1 million was held in escrow as of September 30, 2020 to satisfy potential indemnification claims for one year after the sale date.
Accordingly, the results of operations from our ASC business and gain on sale of ASC are reported in the accompanying consolidated statements of operations as “discontinued operations, net of taxes” for the periods ended September 30, 2020 and 2019. The related assets and liabilities are classified as assets and liabilities of discontinued operations as of September 30, 2020 and December 31, 2019 in the accompanying balance sheets. We recognized a net gain of $3.6 million, net of taxes, during the second quarter of 2020 in connection with this sale. In the third quarter of 2020, we recognized a net loss of $0.3 million, net of taxes. The net loss on sale recognized in the current quarter was attributable to final post-closing adjustments and expenses related to the sale.
Results of discontinued operations reflect directly attributable revenues, operating and ownership expenses, and income taxes. Results also reflect intercompany allocations for interest. Interest expense was zero and $2.0 million for the three and nine months ended September 30, 2020, compared to $1.6 million and $4.6 million for the same periods in 2019. Interest was allocated consistent with GATX's risk-adjusted approach for continuing operations.
The following table shows the financial results of our discontinued operations (in millions):
| Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
Revenues | $ | $ | $ | $ | |||||||||||||||||||
Expenses | |||||||||||||||||||||||
Operating expense | |||||||||||||||||||||||
Depreciation expense | |||||||||||||||||||||||
Selling, general and administrative expense | |||||||||||||||||||||||
Total Expenses | |||||||||||||||||||||||
Other expense | ( | ( | ( | ||||||||||||||||||||
Income (Loss) from Discontinued Operations Before Taxes | $ | $ | $ | ( | $ | ||||||||||||||||||
Income tax (expense) benefit | ( | ( | |||||||||||||||||||||
Income (Loss) from Discontinued Operations, Net of Taxes | $ | $ | $ | ( | $ | ||||||||||||||||||
(Loss) Gain on Sale of Discontinued Operations, Net of Taxes | ( | ||||||||||||||||||||||
Discontinued Operations, Net of Taxes | $ | ( | $ | $ | $ | ||||||||||||||||||
The following table shows the assets and liabilities of the discontinued ASC business (in millions):
| September 30 | December 31 | ||||||||||
| 2020 | 2019 | ||||||||||
| Assets of Discontinued Operations: | |||||||||||
| Rent and other receivables | $ | $ | |||||||||
| Operating assets and facilities, net | |||||||||||
| Other | |||||||||||
| Total Assets of Discontinued Operations | $ | $ | |||||||||
| Liabilities of Discontinued Operations: | |||||||||||
| Accounts payable and accrued expenses | $ | $ | |||||||||
| Deferred income taxes | |||||||||||
| Other | |||||||||||
| Total Liabilities of Discontinued Operations | $ | $ | |||||||||
22
GATX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The following table shows cash flow information for our discontinued operations (in millions):
| Nine Months Ended September 30 | |||||||||||
| 2020 | 2019 | ||||||||||
Net Cash (Used In) Provided By Operating Activities | $ | ( | $ | ||||||||
Net Cash Provided By (Used In) Investing Activities (1) | ( | ||||||||||
Net Cash Provided By (Used In) Financing Activities | ( | ||||||||||
Cash provided by discontinued operations, net | $ | $ | |||||||||
________
(1) Net cash provided by investing activities for the nine months ended September 30, 2020 includes proceeds from the sale of ASC of $257.2 million.
23
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. Historically, we also reported financial results for American Steamship Company ("ASC") as a fourth segment. On May 14, 2020, we completed the sale of our ASC business, subject to customary post-closing adjustments. As a result, ASC is now reported as discontinued operations, and financial data for the ASC segment has been segregated and presented as discontinued operations for all periods presented. See "Note 16. Discontinued Operations" in Item 1 of this Form 10-Q for additional information.
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, 2019. 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, 2020 are not necessarily indicative of the results we may achieve for the entire year ending December 31, 2020. 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, 2019.
Coronavirus Disease 2019 ("COVID-19")
COVID-19 negatively impacted operating conditions for all of our business segments in the third quarter. We expect COVID-19 will continue to have negative impacts on our operating results in future periods, the magnitude and duration of which are still uncertain. To limit the spread of COVID-19, governments have taken various actions, including travel bans and restrictions, the issuance of stay-at-home orders, and social distancing guidelines. These actions caused many businesses to reduce or suspend operations, negatively impacting economic conditions and many of the markets we serve. While certain of these restrictions were temporarily eased, some have been subsequently reinstated, and the economy continues to be impacted by the effects of COVID-19. The global economic recovery remains tenuous due to a potential COVID-19 resurgence. Our top priorities continue to be ensuring the health and safety of our global workforce and serving our various stakeholders with minimal disruptions.
Across our operating segments, we have implemented business continuity and crisis management plans. We have a strong liquidity position, solid balance sheet, and access to capital which we expect will enable GATX to effectively manage through the COVID-19 pandemic. We have no outstanding debt maturities due until June 2021. The COVID-19 pandemic continues to evolve rapidly, including the scope and duration of disruptions and the pace and timing of the eventual recovery.
Rail North America & Rail International
Industry railcar loadings have declined as the impact of COVID-19 has disrupted global manufacturing, supply chains, and consumer spending. While COVID-19 has not had a material impact on the financial performance of our global rail operations to date, we expect the reduction in economic activity to continue to impact our customers, which we expect, in turn, to impact the demand for our global railcar fleet.
Rail freight transportation and railcar repair have been deemed essential businesses globally. Our rail operations teams have implemented COVID-19 preparation and response programs to ensure the health and safety of our employees while continuing to provide critical railcar maintenance services. While our railcar repair facilities continue to operate, some have periodically reduced operating levels or closed on a temporary basis, and future disruptions may occur as the impacts of COVID-19 continue.
Rolls-Royce & Partners Finance Joint Ventures ("RRPF affiliates")
Global air travel continues to be significantly impacted by COVID-19. In response to the drastic decline in demand, airlines have reduced system-wide capacity and grounded large portions or all of their fleets. Although some flight operations resumed in a limited capacity, air travel remains significantly below pre-COVID-19 levels. Many airlines are currently focused on managing their near-term liquidity positions, restructuring operations, and obtaining government financial support. While the major reduction in global air travel and the disruption across the aviation industry has not had a material impact on the profitability of our aircraft spare engine leasing business and operating results to date, we expect that it will have a negative impact on our future operating results, the magnitude and duration of which are still uncertain.
24
DISCUSSION OF OPERATING RESULTS
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 | ||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||
| Segment Revenues | |||||||||||||||||||||||||||||
| Rail North America | $ | 232.1 | $ | 238.5 | $ | 703.3 | $ | 728.0 | |||||||||||||||||||||
| Rail International | 67.1 | 58.0 | 188.4 | 167.9 | |||||||||||||||||||||||||
| Portfolio Management | 5.2 | 2.3 | 12.6 | 5.7 | |||||||||||||||||||||||||
| $ | 304.4 | $ | 298.8 | $ | 904.3 | $ | 901.6 | ||||||||||||||||||||||
| Segment Profit | |||||||||||||||||||||||||||||
| Rail North America | $ | 56.1 | $ | 60.9 | $ | 178.1 | $ | 215.1 | |||||||||||||||||||||
| Rail International | 24.0 | 19.9 | 57.9 | 56.0 | |||||||||||||||||||||||||
| Portfolio Management | 44.3 | 10.7 | 83.1 | 34.9 | |||||||||||||||||||||||||
| 124.4 | 91.5 | 319.1 | 306.0 | ||||||||||||||||||||||||||
| Less: | |||||||||||||||||||||||||||||
| Selling, general and administrative expense | 42.0 | 42.6 | 125.8 | 129.6 | |||||||||||||||||||||||||
| Unallocated interest (income) expense | (2.2) | (1.4) | (5.1) | (4.6) | |||||||||||||||||||||||||
| Other, including eliminations | 0.6 | 0.6 | 3.3 | 1.2 | |||||||||||||||||||||||||
Income taxes (includes $24.0 and $3.0 QTR and $33.1 and $10.0 YTD related to affiliates' earnings) | 35.8 | 12.5 | 62.7 | 41.1 | |||||||||||||||||||||||||
| Net Income from Continuing Operations (GAAP) | $ | 48.2 | $ | 37.2 | $ | 132.4 | $ | 138.7 | |||||||||||||||||||||
| Discontinued Operations, Net of Taxes | |||||||||||||||||||||||||||||
| Net income (loss) from discontinued operations, net of taxes | — | 7.9 | (2.2) | 15.9 | |||||||||||||||||||||||||
| (Loss) gain on sale of discontinued operation, net of taxes | (0.3) | — | 3.3 | — | |||||||||||||||||||||||||
| (Loss) Income from Discontinued Operations, Net of Taxes | $ | (0.3) | $ | 7.9 | $ | 1.1 | $ | 15.9 | |||||||||||||||||||||
| Net Income (GAAP) | $ | 47.9 | $ | 45.1 | $ | 133.5 | $ | 154.6 | |||||||||||||||||||||
| Net income from continuing operations, excluding tax adjustments and other items (non-GAAP) | $ | 60.5 | $ | 37.2 | $ | 144.7 | $ | 135.9 | |||||||||||||||||||||
| Net (loss) income from discontinued operations, excluding tax adjustments and other items (non-GAAP) | (0.3) | 7.9 | 1.1 | 15.9 | |||||||||||||||||||||||||
| Net income from consolidated operations, excluding tax adjustments and other items (non-GAAP) | $ | 60.2 | $ | 45.1 | $ | 145.8 | $ | 151.8 | |||||||||||||||||||||
| Diluted earnings per share from continuing operations (GAAP) | $ | 1.36 | $ | 1.03 | $ | 3.74 | $ | 3.79 | |||||||||||||||||||||
| Diluted earnings per share from discontinued operations (GAAP) | (0.01) | 0.22 | 0.03 | 0.43 | |||||||||||||||||||||||||
| Diluted earnings per share from consolidated operations (GAAP) | $ | 1.35 | $ | 1.25 | $ | 3.77 | $ | 4.22 | |||||||||||||||||||||
| Diluted earnings per share from continuing operations, excluding tax adjustments and other items (non-GAAP) (1) | $ | 1.71 | $ | 1.03 | $ | 4.09 | $ | 3.72 | |||||||||||||||||||||
| Diluted earnings per share from discontinued operations, excluding tax adjustments and other items (non-GAAP) (1) | (0.01) | 0.22 | 0.03 | 0.43 | |||||||||||||||||||||||||
| Diluted earnings per share from consolidated operations, excluding tax adjustments and other items (non-GAAP) (1) | $ | 1.70 | $ | 1.25 | $ | 4.12 | $ | 4.15 | |||||||||||||||||||||
| Investment Volume | $ | 249.9 | $ | 190.8 | $ | 641.4 | $ | 503.8 | |||||||||||||||||||||
25
The following table shows our return on equity ("ROE") for the trailing 12 months ended September 30:
| 2020 | 2019 | ||||||||||
| Return on Equity (GAAP) | 10.2 | % | 11.2 | % | |||||||
| Return on Equity, excluding tax adjustments and other items (non-GAAP) (1) | 12.7 | % | 12.3 | % | |||||||
_________
(1) See "Non-GAAP Financial Measures" at the end of this item for further details.
Net income from continuing operations for the first nine months of 2020 was $132.4 million, or $3.74 per diluted share, compared to $138.7 million, or $3.79 per diluted share, in 2019. Results for the nine months ended September 30, 2020 included a net deferred income tax expense of $12.3 million, or $0.35 per diluted share, related to the elimination of a previously announced corporate income tax rate reduction in the United Kingdom. Results for the nine months ended September 30, 2019 included a net deferred tax benefit of $2.8 million, or $0.07 per diluted share, related to a reduction of the corporate income tax rate enacted in Alberta, Canada (see "Non-GAAP Financial Measures" at the end of this item for further details). Excluding the impact of these items, net income from continuing operations increased $8.8 million compared to the prior year, largely due to higher share of affiliates' earnings and higher contribution from our marine operations, partially offset by lower asset disposition gains at Rail North America and higher maintenance expenses.
Net income from continuing operations for the third quarter of 2020 was $48.2 million, or $1.36 per diluted share, compared to $37.2 million, or $1.03 per diluted share, in 2019. Results for the three months ended September 30, 2020 included a net deferred income tax expense of $12.3 million, or $0.35 diluted share, related to the elimination of a previously announced corporate income tax rate reduction in the United Kingdom. Excluding the impact of this item, net income from continuing operations increased $23.3 million compared to the prior year, largely due to higher share of affiliates' earnings and higher asset disposition gains at Rail North America.
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. These amounts are included in Other.
RAIL NORTH AMERICA
Segment Summary
During the quarter ended September 30, 2020, the North American railcar leasing market remained challenged due to a persistent oversupply of railcars and weakness in certain markets, exacerbated by COVID-19's impact. While absolute rates were generally flat to slightly higher for most car types compared to the second quarter, railcar lessors continued to compete aggressively to place new and existing railcars, resulting in significant pressure on lease rates. Despite this, our commercial team continued to deploy railcars and displace competitors, resulting in fleet utilization of 98.2% at the end of the quarter.
Although COVID-19 continued to challenge the operating environment at Rail North America, it has not had a material impact on Rail North America's financial results. Rail North America did not receive any new restructuring requests from customers during the third quarter, and to date, restructuring requests that have been approved did not have a significant impact on Rail North America's financial results. Railcar repair facilities continued to operate, but some experienced periodic operating disruptions in the quarter. As a result of the aforementioned factors, Rail North America expects ongoing pressure on future railcar utilization, lease rates, and other key performance metrics, the magnitude and duration of which are still uncertain.
26
The following table shows Rail North America's segment results (in millions):
| Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||||||||||||||
| Lease revenue | $ | 208.7 | $ | 214.6 | $ | 630.8 | $ | 654.3 | |||||||||||||||||||||||||||||||||
| Other revenue | 23.4 | 23.9 | 72.5 | 73.7 | |||||||||||||||||||||||||||||||||||||
| Total Revenues | 232.1 | 238.5 | 703.3 | 728.0 | |||||||||||||||||||||||||||||||||||||
| Expenses | |||||||||||||||||||||||||||||||||||||||||
| Maintenance expense | 63.2 | 64.0 | 206.5 | 199.8 | |||||||||||||||||||||||||||||||||||||
| Depreciation expense | 65.0 | 63.9 | 193.0 | 192.6 | |||||||||||||||||||||||||||||||||||||
| Operating lease expense | 12.3 | 13.7 | 38.1 | 41.1 | |||||||||||||||||||||||||||||||||||||
| Other operating expense | 6.6 | 6.2 | 20.8 | 19.0 | |||||||||||||||||||||||||||||||||||||
| Total Expenses | 147.1 | 147.8 | 458.4 | 452.5 | |||||||||||||||||||||||||||||||||||||
| Other Income (Expense) | |||||||||||||||||||||||||||||||||||||||||
| Net gain on asset dispositions | 7.9 | 4.3 | 39.9 | 44.6 | |||||||||||||||||||||||||||||||||||||
| Interest expense, net | (35.7) | (33.1) | (103.5) | (101.4) | |||||||||||||||||||||||||||||||||||||
| Other expense | (1.1) | (1.0) | (3.2) | (3.6) | |||||||||||||||||||||||||||||||||||||
Segment Profit | $ | 56.1 | $ | 60.9 | $ | 178.1 | $ | 215.1 | |||||||||||||||||||||||||||||||||
| Investment Volume | $ | 204.1 | $ | 138.1 | $ | 474.6 | $ | 342.4 | |||||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Railcars | $ | 184.8 | $ | 187.3 | $ | 558.3 | $ | 570.8 | |||||||||||||||
| Boxcars | 16.5 | 17.9 | 50.0 | 55.7 | |||||||||||||||||||
| Locomotives | 7.4 | 9.4 | 22.5 | 27.8 | |||||||||||||||||||
| Total | $ | 208.7 | $ | 214.6 | $ | 630.8 | $ | 654.3 | |||||||||||||||
Rail North America Fleet Data
At September 30, 2020, Rail North America's wholly owned fleet, excluding boxcars, consisted of approximately 103,400 cars, and fleet utilization was 98.2%, compared to 98.7% at the end of the prior quarter, and 99.2% at September 30, 2019. Fleet utilization for our approximately 14,800 boxcars was 94.5% at September 30, 2020, compared to 94.6% at the end of the prior quarter, and 93.5% at September 30, 2019. Utilization is calculated as the number of railcars on lease as a percentage of total railcars in the fleet.
During the third quarter of 2020, an average of approximately 101,600 railcars, excluding boxcars, were on lease, compared to 101,600 in the prior quarter and 102,700 for the quarter ended September 30, 2019. Changes in railcars on lease compared to prior periods are impacted by the number of new railcars purchased under our supply agreements or 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, 2020, leases for approximately 5,800 tank cars and freight cars and approximately 1,600 boxcars are scheduled to expire over the remainder of 2020. These amounts exclude railcars on leases expiring in 2020 that have already been renewed or assigned to a new lessee.
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The following table shows fleet activity for Rail North America railcars, excluding boxcars, for the quarter ended:
| September 30 2019 | December 31 2019 | March 31 2020 | June 30 2020 | September 30 2020 | |||||||||||||||||||||||||
| Beginning balance | 103,554 | 103,255 | 102,845 | 102,558 | 102,891 | ||||||||||||||||||||||||
| Cars added | 902 | 965 | 883 | 1,220 | 1,578 | ||||||||||||||||||||||||
| Cars scrapped | (513) | (620) | (389) | (570) | (623) | ||||||||||||||||||||||||
| Cars sold | (688) | (755) | (781) | (317) | (483) | ||||||||||||||||||||||||
| Ending balance | 103,255 | 102,845 | 102,558 | 102,891 | 103,363 | ||||||||||||||||||||||||
| Utilization rate at quarter end | 99.2 | % | 99.3 | % | 99.0 | % | 98.7 | % | 98.2 | % | |||||||||||||||||||
| Average active railcars | 102,653 | 102,309 | 101,668 | 101,600 | 101,552 | ||||||||||||||||||||||||
The following table shows fleet statistics for Rail North America boxcars for the quarter ended:
| September 30 2019 | December 31 2019 | March 31 2020 | June 30 2020 | September 30 2020 | |||||||||||||||||||||||||
| Ending balance | 15,803 | 15,264 | 15,026 | 14,936 | 14,753 | ||||||||||||||||||||||||
| Utilization | 93.5 | % | 95.0 | % | 94.6 | % | 94.6 | % | 94.5 | % | |||||||||||||||||||
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.
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During the third quarter of 2020, the renewal rate change of the LPI was negative 29.4%, compared to negative 28.0% in the prior quarter, and negative 7.7% in the third quarter of 2019. Lease terms on renewals for cars in the LPI averaged 29 months in the current quarter, compared to 31 months in the prior quarter, and 40 months in the third quarter of 2019. Additionally, the renewal success rate, which represents the percentage of expiring leases that were renewed with the existing lessee, was 58.1% in the current quarter, compared to 71.8% in the prior quarter, and 75.2% in the third quarter of 2019. 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.
Comparison of the First Nine Months of 2020 to the First Nine Months of 2019
Segment Profit
In the first nine months of 2020, segment profit of $178.1 million decreased 17.2% compared to $215.1 million for the same period in the prior year. The decrease was primarily driven by lower lease revenue, higher maintenance expense, and lower net gains on asset dispositions in the current year. The timing of asset dispositions varies throughout the year.
Revenues
In the first nine months of 2020, lease revenue decreased $23.5 million, or 3.6%, a result of fewer railcars and locomotives on lease, lower lease rates, and lower boxcar revenue. Other revenue decreased $1.2 million, due to lower lease termination fees, offset by higher repair revenue.
Expenses
In the first nine months of 2020, maintenance expense increased $6.7 million, driven by higher assignment activity, partially offset by lower repairs performed by the railroads. Depreciation expense increased $0.4 million due to the timing of new railcar investments and dispositions. Operating lease expense decreased $3.0 million, resulting from the purchase of railcars previously on operating leases. Other operating expense increased $1.8 million due to higher switching, freight, and storage costs.
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Other Income (Expense)
In the first nine months of 2020, net gain on asset dispositions decreased $4.7 million, due to fewer railcars sold and lower net scrapping gains. Net interest expense increased $2.1 million, primarily driven by a higher average debt balance and a higher average interest rate.
Investment Volume
During the first nine months of 2020, investment volume was $474.6 million compared to $342.4 million in the same period in 2019. We acquired 3,533 newly built railcars and purchased 355 railcars in the secondary market in the first nine months of 2020, compared to 1,814 newly built railcars and 366 railcars purchased in the secondary market in the same period in 2019.
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 2020 to the Third Quarter of 2019
Segment Profit
In the third quarter of 2020, segment profit of $56.1 million decreased 7.9% compared to $60.9 million for the same period in the prior year. The decrease was primarily driven by lower lease revenue, partially offset by higher net gains on asset dispositions. The timing of asset dispositions varies throughout the year.
Revenues
In the third quarter of 2020, lease revenue decreased $5.9 million, or 2.7%, primarily due to lower utilization. Other revenue decreased $0.5 million, driven by lower lease termination fees, partially offset by higher repair revenue.
Expenses
In the third quarter of 2020, maintenance expense decreased $0.8 million, primarily driven by lower repairs performed by the railroads. Depreciation expense increased $1.1 million, due to the timing of railcar investments and dispositions. Operating lease expense decreased $1.4 million, due to the purchase of railcars previously on operating leases. Other operating expense increased $0.4 million due to higher switching, freight, and storage costs.
Other Income (Expense)
In the third quarter of 2020, net gain on asset dispositions increased $3.6 million, attributable to higher net gains on railcars sold in the secondary market. Net interest expense increased $2.6 million, driven by a higher average debt balance and a higher average interest rate. Other expense was comparable to the same period in the prior year.
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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 2020. GRE experienced small lease renewal rate increases in the quarter, as demand for railcars in Europe remained stable. COVID-19 did not have a material impact on GRE's third quarter operating results. However, GRE continued to experience delays in new railcar investments due to COVID-19 related interruptions at railcar manufacturing facilities. There were no new customer lease restructuring requests in the third quarter, and requests approved to date have had a minimal impact on GRE's financial results. GRE expects ongoing pressure on future railcar utilization and lease rates, the magnitude and duration of which are still uncertain.
The following table shows Rail International's segment results (in millions):
| Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||||||||||||||
| Lease revenue | $ | 64.5 | $ | 55.6 | $ | 181.9 | $ | 161.7 | |||||||||||||||||||||||||||||||||
| Other revenue | 2.6 | 2.4 | 6.5 | 6.2 | |||||||||||||||||||||||||||||||||||||
| Total Revenues | 67.1 | 58.0 | 188.4 | 167.9 | |||||||||||||||||||||||||||||||||||||
| Expenses | |||||||||||||||||||||||||||||||||||||||||
| Maintenance expense | 13.5 | 12.2 | 38.3 | 35.5 | |||||||||||||||||||||||||||||||||||||
| Depreciation expense | 17.1 | 14.5 | 48.4 | 42.7 | |||||||||||||||||||||||||||||||||||||
| Other operating expense | 1.6 | 1.4 | 4.9 | 4.2 | |||||||||||||||||||||||||||||||||||||
| Total Expenses | 32.2 | 28.1 | 91.6 | 82.4 | |||||||||||||||||||||||||||||||||||||
| Other Income (Expense) | |||||||||||||||||||||||||||||||||||||||||
| Net gain on asset dispositions | 0.5 | 0.3 | 0.8 | 1.2 | |||||||||||||||||||||||||||||||||||||
| Interest expense, net | (11.9) | (10.2) | (34.0) | (30.2) | |||||||||||||||||||||||||||||||||||||
| Other income (expense) | 0.5 | (0.1) | (5.7) | (0.5) | |||||||||||||||||||||||||||||||||||||
Segment Profit | $ | 24.0 | $ | 19.9 | $ | 57.9 | $ | 56.0 | |||||||||||||||||||||||||||||||||
| Investment Volume | $ | 45.3 | $ | 51.8 | $ | 164.5 | $ | 158.6 | |||||||||||||||||||||||||||||||||
GRE Fleet Data
At September 30, 2020, GRE's wholly owned fleet consisted of approximately 26,000 cars, and fleet utilization was 98.2% at September 30, 2020, compared to 98.4% at the end of the prior quarter and 99.4% at September 30, 2019. Utilization is calculated as the number of railcars on lease as a percentage of total railcars in the fleet.
During the third quarter of 2020, an average of approximately 25,400 railcars were on lease, compared to 25,100 in the prior quarter and 23,900 for the quarter ended September 30, 2019. Changes in railcars on lease compared to prior periods are impacted by the number 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 2019 | December 31 2019 | March 31 2020 | June 30 2020 | September 30 2020 | |||||||||||||||||||||||||
| Beginning balance | 23,967 | 24,211 | 24,561 | 25,352 | 25,705 | ||||||||||||||||||||||||
| Cars added | 325 | 416 | 871 | 423 | 331 | ||||||||||||||||||||||||
| Cars scrapped or sold | (81) | (66) | (80) | (70) | (80) | ||||||||||||||||||||||||
| Ending balance | 24,211 | 24,561 | 25,352 | 25,705 | 25,956 | ||||||||||||||||||||||||
| Utilization rate at quarter end | 99.4 | % | 99.3 | % | 98.5 | % | 98.4 | % | 98.2 | % | |||||||||||||||||||
| Average active railcars | 23,877 | 24,216 | 24,622 | 25,100 | 25,369 | ||||||||||||||||||||||||
\Comparison of the First Nine Months of 2020 to the First Nine Months of 2019
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 of 2020, fluctuations in the value of the euro, relative to the U.S. dollar, did not have a meaningful impact on lease revenue or segment profit, excluding other income (expense), compared to the same period in 2019.
Segment Profit
In the first nine months of 2020, segment profit of $57.9 million increased 3.4% compared to $56.0 million for the same period in the prior year. The increase was primarily due to higher lease revenue from more railcars on lease, offset by higher depreciation expense and the negative impact of changes in foreign exchange rates on non-functional currency items.
Revenues
In the first nine months of 2020, lease revenue increased $20.2 million, or 12.5%, due to more railcars on lease at GRE and Rail India.
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Expenses
In the first nine months of 2020, maintenance expense increased $2.8 million, primarily due to higher wheelset costs and other repairs. Depreciation expense increased $5.7 million, resulting from the impact of new railcars added to the fleet.
Other Income (Expense)
In the first nine months of 2020, net gain on asset dispositions decreased $0.4 million, attributable to lower net scrapping gains. Net interest expense increased $3.8 million, due to a higher average debt balance, partially offset by a lower average interest rate. Other expense increased $5.2 million, driven by the negative impact of changes in foreign exchange rates on non-functional currency items and higher net litigation costs related to the Viareggio matter, which reflected the absence of insurance proceeds received in the prior year.
Investment Volume
During the first nine months of 2020, investment volume was $164.5 million compared to $158.6 million in the same period in 2019. In the first nine months of 2020, GRE acquired 1,194 newly built railcars and purchased 431 railcars in the secondary market and Rail India acquired 353 railcars compared to 1,001 newly built railcars at GRE, 1,161 railcars at Rail India and 26 railcars at Rail Russia for the same period in 2019.
Our investment volume is predominantly composed of acquired railcars, but may also include 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 2020 to the Third Quarter of 2019
Foreign Currency
Rail International's reported financial results 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 2020, a stronger euro, relative to the U.S. dollar, positively impacted lease revenue by approximately $2.5 million and segment profit, excluding other income (expense), by approximately $1.6 million compared to the same period in 2019.
Segment Profit
In the third quarter of 2020, segment profit of $24.0 million increased 20.6% compared to $19.9 million for the same period in the prior year. The increase was primarily due to higher lease revenue from more railcars on lease, partially offset by higher depreciation expense.
Revenues
In the third quarter of 2020, lease revenue increased $8.9 million, or 16.0%, due to more railcars on lease at GRE and Rail India and the impact of foreign exchange rates.
Expenses
In the third quarter of 2020, maintenance expense increased $1.3 million, driven by higher wheelset costs and the impact of foreign exchange rates. Depreciation expense increased $2.6 million due to new railcars added to the fleet and the impact of foreign exchange rates.
Other Income (Expense)
In the third quarter of 2020, net gain on asset dispositions increased $0.2 million, attributable to higher net gains on railcars sold in the secondary market. Net interest expense increased $1.7 million, due to a higher average debt balance, partially offset by a lower average interest rate. Other expense decreased $0.6 million, largely due to the positive impact of changes in foreign exchange rates on non-functional currency items.
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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 $92.8 million and $46.8 million for the nine months and three months ended September 30, 2020, compared to $53.6 million and $15.8 million for the same periods in 2019. Financial results for the current year included a transaction involving the refinancing and sale of a group of aircraft spare engines at the RRPF affiliates, which impacted both quarterly and full-year results. In this transaction, the RRPF affiliates sold 21 aircraft spare engines for total proceeds of $233.0 million in the nine months ended September 30, 2020. 18 of these aircraft spare engines were sold in the three months ended September 30, 2020 for total proceeds of $216.0 million. GATX's 50% share of the resulting pre-tax net gains were $35.3 million and $32.1 million for the nine months and three months ended September 30, 2020, respectively.
COVID-19 continued to severely impact global air travel in the third quarter. As a result, RRPF has granted significant rent deferrals and a number of its customers have declared bankruptcy or undertaken restructuring processes. Despite this, RRPF maintained strong utilization, with 94.3% of its engines on lease at the end of the quarter, and is focused on preserving a strong liquidity position in the current environment. RRPF continues to expect pressure on both engine utilization and lease rates, which will impact future operating results, the magnitude and duration of which are still uncertain.
Portfolio Management also owns marine assets, consisting of five liquefied gas-carrying vessels (the "Specialized Gas Vessels"). During the second quarter of 2019, the prior commercial management agreement with Norgas Carriers Private Limited, and related pooling arrangement, was terminated, and we entered into a new agreement with Anthony Veder Group B.V. ("Veder") to commercially manage these vessels. The Specialized Gas Vessels are utilized to transport pressurized gases and chemicals, such as liquefied petroleum gas, liquefied natural gas, and ethylene, primarily on short-term spot contracts for major oil and chemical customers worldwide.
While COVID-19 continued to have a significant impact on the gas shipping market, there were signs of improvement in the third quarter as charter rates and utilization increased modestly. We expect COVID-19 will likely continue to have a negative impact on future results, the magnitude and duration of which are still uncertain.
Portfolio Management's total asset base was $709.7 million at September 30, 2020, compared to $676.3 million at June 30, 2020, and $639.6 million at September 30, 2019.
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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 | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||||||||
| Lease revenue | $ | 0.1 | $ | 0.3 | $ | 0.6 | $ | 0.8 | |||||||||||||||||||||||||||
| Marine operating revenue | 5.0 | 1.9 | 11.6 | 4.4 | |||||||||||||||||||||||||||||||
| Other revenue | 0.1 | 0.1 | 0.4 | 0.5 | |||||||||||||||||||||||||||||||
| Total Revenues | 5.2 | 2.3 | 12.6 | 5.7 | |||||||||||||||||||||||||||||||
| Expenses | |||||||||||||||||||||||||||||||||||
| Marine operating expense | 3.6 | 3.4 | 10.9 | 12.0 | |||||||||||||||||||||||||||||||
| Depreciation expense | 1.3 | 1.6 | 4.0 | 4.9 | |||||||||||||||||||||||||||||||
| Other operating expense | 0.1 | 0.1 | 0.3 | 0.3 | |||||||||||||||||||||||||||||||
| Total Expenses | 5.0 | 5.1 | 15.2 | 17.2 | |||||||||||||||||||||||||||||||
| Other Income (Expense) | |||||||||||||||||||||||||||||||||||
| Net gain on asset dispositions | 0.5 | 0.5 | 1.6 | 1.1 | |||||||||||||||||||||||||||||||
| Interest expense, net | (3.2) | (2.8) | (9.1) | (8.3) | |||||||||||||||||||||||||||||||
| Share of affiliates' pre-tax income | 46.8 | 15.8 | 93.2 | 53.6 | |||||||||||||||||||||||||||||||
Segment Profit | $ | 44.3 | $ | 10.7 | $ | 83.1 | $ | 34.9 | |||||||||||||||||||||||||||
| Investment Volume | $ | — | $ | — | $ | 0.3 | $ | — | |||||||||||||||||||||||||||
The following table shows the net book values of Portfolio Management's assets (in millions):
| September 30 2019 | December 31 2019 | March 31 2020 | June 30 2020 | September 30 2020 | |||||||||||||||||||||||||
| Investment in RRPF Affiliates | $ | 506.5 | $ | 512.4 | $ | 532.2 | $ | 551.2 | $ | 582.3 | |||||||||||||||||||
| Owned assets | 133.1 | 141.3 | 125.1 | 125.1 | 127.4 | ||||||||||||||||||||||||
| Managed assets (1) | 26.6 | 24.8 | 22.9 | 21.0 | 19.1 | ||||||||||||||||||||||||
________
(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, 2020, the RRPF affiliates' fleet consisted of 439 aircraft spare engines with a net book value of $4,641.4 million, compared to 470 aircraft spare engines with a net book value of $4,897.9 million at June 30, 2020 and 456 aircraft spare engines with a net book value of $4,556.2 million at September 30, 2019. Engine utilization for the RRPF affiliates was 94.3% at September 30, 2020, compared to 95.1% at the end of the prior quarter and 95.6% at September 30, 2019. 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 2019 | December 31 2019 | March 31 2020 | June 30 2020 | September 30 2020 | |||||||||||||||||||||||||
| Beginning balance | 461 | 456 | 478 | 478 | 470 | ||||||||||||||||||||||||
| Engine acquisitions | 5 | 27 | 8 | 2 | — | ||||||||||||||||||||||||
| Engine dispositions | (10) | (5) | (8) | (10) | (31) | ||||||||||||||||||||||||
| Ending balance | 456 | 478 | 478 | 470 | 439 | ||||||||||||||||||||||||
| Utilization rate at quarter end | 95.6 | % | 96.9 | % | 95.8 | % | 95.1 | % | 94.3 | % | |||||||||||||||||||
Comparison of the First Nine Months of 2020 to the First Nine Months of 2019
Segment Profit
In the first nine months of 2020, segment profit was $83.1 million, compared to $34.9 million for the same period in the prior year. The increase reflects higher earnings at the RRPF affiliates, primarily driven by higher net disposition gains, as well as an improved contribution from the Specialized Gas Vessels.
Revenues
In the first nine months of 2020, lease revenue was comparable to the same period in the prior year. Marine operating revenue increased $7.2 million, driven by higher utilization and increased charter rates from the Specialized Gas Vessels and the transition to the new commercial manager in the prior year.
Expenses
In the first nine months of 2020, marine operating expense decreased $1.1 million, due to lower operating expenses and management fees for the Specialized Gas Vessels. The lower management fees were a result of the change in commercial manager.
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Other Income (Expense)
In the first nine months of 2020, income from our share of affiliates' earnings increased $39.6 million, driven by higher net disposition gains, including $35.3 million of gains from a a transaction involving the refinancing and sale of a group of aircraft spare engines. Operating results were lower, primarily due to higher depreciation and bad debt expense.
Comparison of the Third Quarter of 2020 to the Third Quarter of 2019
Segment Profit
In the third quarter of 2020, segment profit was $44.3 million, compared to $10.7 million in the prior year period. The increase reflects higher earnings at the RRPF affiliates, primarily driven by higher net disposition gains, as well as an improved contribution from the Specialized Gas Vessels.
Revenues
In the third quarter of 2020, lease revenue was comparable to the same period in 2019. Marine operating revenue increased $3.1 million, due to higher utilization and increased charter rates from the Specialized Gas Vessels and the transition to the new commercial manager in the prior year.
Expenses
In the third quarter of 2020, marine operating expense increased $0.2 million, due to higher operating expenses for the Specialized Gas Vessels.
Other Income (Expense)
In the third quarter of 2020, income from our share of affiliates' earnings increased $31.0 million, driven by higher net disposition gains, including $32.1 million of gains from a transaction involving the refinancing and sale of a group of aircraft spare engines. Operating results were lower, primarily due to higher depreciation and bad debt expense.
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OTHER
Other comprises selling, general and administrative expenses ("SG&A"), unallocated interest expense, and miscellaneous income and expense not directly associated with the reporting segments and eliminations.
The following table shows components of Other (in millions):
| Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||
| Selling, general and administrative expense | $ | 42.0 | $ | 42.6 | $ | 125.8 | $ | 129.6 | |||||||||||||||||||||
| Unallocated interest (income) expense | (2.2) | (1.4) | (5.1) | (4.6) | |||||||||||||||||||||||||
| Other expense (income), including eliminations | 0.6 | 0.6 | 3.3 | 1.2 | |||||||||||||||||||||||||
SG&A, Unallocated Interest and Other
SG&A decreased $3.8 million for the first nine months of 2020 compared to the same period in the prior year. The decrease was largely due to lower discretionary expenses as a result of COVID-19, as well as lower employee compensation expenses.
SG&A decreased $0.6 million for the third quarter of 2020 compared to the same period in the prior year. The decrease was largely due to lower discretionary expenses as a result of COVID-19, as well as lower employee 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 (income), including eliminations increased $2.1 million for the first nine months of 2020 compared to the same period in the prior year. The increase was primarily due to higher non-service pension expense in the current year.
Other expense (income), including eliminations for the third quarter of 2020 was comparable to the same period in the prior year, as higher non-service pension expense was offset by the positive impact of foreign exchange rates on a foreign pension plan.
Consolidated Income Taxes
See "Note 10. Income Taxes" in Part I, Item 1 of this Form 10-Q.
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DISCONTINUED OPERATIONS
On May 14, 2020, we completed the sale of our ASC business, subject to customary post-closing adjustments. As a result, ASC is now reported as discontinued operations, and financial data for the ASC segment has been segregated and presented as discontinued operations for all periods presented. See "Note 16. Discontinued Operations" in Item 1 of this Form 10-Q for additional information. The ASC business comprises the entirety of GATX's discontinued operations.
The following table shows the components of discontinued operations, net of taxes (in millions):
Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Discontinued operations, net of taxes | |||||||||||||||||||||||
| Net income (loss) from discontinued operations, net of taxes | $ | — | 7.9 | $ | (2.2) | 15.9 | |||||||||||||||||
| (Loss) gain on sale of discontinued operations, net of taxes | (0.3) | — | 3.3 | — | |||||||||||||||||||
| Discontinued operations, net of taxes | $ | (0.3) | $ | 7.9 | $ | 1.1 | $ | 15.9 | |||||||||||||||
In the first nine months of 2020, net loss from discontinued operations, net of taxes, was $2.2 million, compared to net income of $15.9 million for the same period in the prior year. As a result of the sale, there were no operations during the third quarter of the current year, compared to net income of $7.9 million for the same period in the prior year. Both variances were driven by lower volume, primarily resulting from the impacts of COVID-19, as well as the timing of the sale of the ASC business in the second quarter of 2020.
We recognized a gain of $3.6 million net of taxes, during the second quarter of 2020 in connection with this sale. In the third quarter of 2020, we recognized a loss of $0.3 million, net of taxes, attributable to final post-closing adjustments and expenses related to the sale.
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.
While COVID-19 has negatively impacted all of our business segments, the impact on our financial results for the three and nine months ended September 30, 2020 was not significant. We expect COVID-19 will continue to have negative impacts on our operating and financial results in future periods, the magnitude and duration of which are still uncertain. We also expect COVID-19 to have an ongoing negative impact on our customers, including their ability to make their lease payments timely, as well as their willingness to renew existing leases or enter into new lease contracts. During the year, we have received specific requests from customers for relief through deferral of lease payments, lease rate reductions, and new car order postponement. While we have granted certain requests, the impact on our financial results was limited. However, this places increasing pressure on our cash flow and liquidity. We have a strong liquidity position, solid balance sheet, and access to capital that we expect will enable GATX to effectively manage through the COVID-19 pandemic. As of September 30, 2020, we had an unrestricted cash balance of $459.8 million. We also have a $250 million 3-year unsecured revolving credit facility in the U.S. that matures in 2022 and a $600 million, 5-year unsecured credit facility in the U.S. that matures in 2024, both of which are fully available as of September 30, 2020. In addition, we have no outstanding debt maturities due until June 2021.
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The following table shows our principal sources and uses of cash from continuing operations for the nine months ended September 30 (in millions):
| 2020 | 2019 | ||||||||||||||||
Principal sources of cash | |||||||||||||||||
Net cash provided by operating activities | $ | 302.1 | $ | 278.2 | |||||||||||||
Portfolio proceeds | 120.2 | 185.6 | |||||||||||||||
Other asset sales | 17.5 | 18.9 | |||||||||||||||
Proceeds from issuance of debt, commercial paper, and credit facilities | 1,465.8 | 551.7 | |||||||||||||||
Total | $ | 1,905.6 | $ | 1,034.4 | |||||||||||||
Principal uses of cash | |||||||||||||||||
Portfolio investments and capital additions | $ | (641.4) | $ | (503.8) | |||||||||||||
Repayments of debt, commercial paper, and credit facilities | (1,103.1) | (410.0) | |||||||||||||||
Purchases of assets previously leased | — | (1.0) | |||||||||||||||
Payments on finance lease obligations | (40.0) | — | |||||||||||||||
Stock repurchases | — | (129.0) | |||||||||||||||
Dividends | (53.7) | (52.8) | |||||||||||||||
Total | $ | (1,838.2) | $ | (1,096.6) | |||||||||||||
Additionally, net cash from discontinued operations, including proceeds from the sale of ASC, for the first nine months of 2020 was $254.2 million, compared to zero in the same period in the prior year.
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the first nine months of 2020 was $302.1 million, an increase of $23.9 million compared to the same period in 2019. Comparability among reporting periods is impacted by the timing of changes in working capital items. Specifically, lower cash payments for employee compensation costs, SG&A expenses, and other operating expenses were partially offset by higher payments for interest expense and income taxes.
Portfolio Proceeds
Portfolio proceeds primarily consist of proceeds from sales of operating assets and finance lease receipts, as well as capital distributions from affiliates. Portfolio proceeds of $120.2 million for the nine months of 2020 decreased by $65.4 million from the prior year, primarily due to lower proceeds from railcar and locomotive sales at Rail North America.
Proceeds From Issuance of Debt
Proceeds from the issuance of debt for the nine months ended September 30, 2020 were $1,465.8 million (net of hedges and debt issuance costs). In the first nine months of 2020, we issued a $500 million 10-year unsecured note with a 4.00% interest rate in the U.S. We also entered into a €100 million 5-year bilateral term loan with a 1.00% interest rate and a €100 million 5-year unsecured bank term loan with a 1.13% interest rate, both in Europe. In addition, we entered into a $500 million, 364-day, floating rate term loan and drew the full $250 million on our 3-year credit facility, both of which were subsequently repaid.
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 $641.4 million for the first nine months of 2020 increased $137.6 million compared to 2019, due to more railcars acquired at Rail North America.
Repayments of Debt
Debt repayments of $1,103.1 million for the first nine months of 2020 were $693.1 million higher than prior year. Repayments in the current year consisted of $350 million of scheduled maturity payments, the prepayment of our $500 million, 364-day, floating rate term loan and the repayment of the $250 million drawn on our 3-year credit facility.
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Discontinued Operations
Proceeds from the sale of ASC were $257.2 million for the first nine months of 2020. The proceeds from this sale were used to repay the $250 million drawn on our 3-year credit facility.
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 program 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. No share repurchases were completed during the nine months ended September 30, 2020, compared to 1.7 million shares of common stock for $129.9 million during the same period in 2019. Actual cash payments in any period consist of those transactions that settled during the current period. As of September 30, 2020, $150.0 million remained available under the repurchase authorization.
Contractual and Other Commercial Commitments
The following table shows our contractual commitments, including debt principal and related interest payments, lease payments, and purchase commitments at September 30, 2020 (in millions):
| Payments Due by Period | |||||||||||||||||||||||||||||||||||||||||
| Total | 2020 (1) | 2021 | 2022 | 2023 | 2024 | Thereafter | |||||||||||||||||||||||||||||||||||
Recourse debt | $ | 5,212.6 | $ | — | $ | 600.0 | $ | 250.0 | $ | 250.0 | $ | 540.3 | $ | 3,572.3 | |||||||||||||||||||||||||||
Interest on recourse debt (2) | 1,962.2 | 48.8 | 186.2 | 170.6 | 159.2 | 147.0 | 1,250.4 | ||||||||||||||||||||||||||||||||||
Commercial paper and credit facilities | 13.5 | 13.5 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Operating lease obligations | 433.9 | 8.2 | 57.3 | 52.4 | 50.4 | 47.5 | 218.1 | ||||||||||||||||||||||||||||||||||
Purchase commitments (3) | 1,262.3 | 164.6 | 455.8 | 346.9 | 295.0 | — | — | ||||||||||||||||||||||||||||||||||
Total | $ | 8,884.5 | $ | 235.1 | $ | 1,299.3 | $ | 819.9 | $ | 754.6 | $ | 734.8 | $ | 5,040.8 | |||||||||||||||||||||||||||
__________
(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, 2020.
(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 2014, we entered into a long-term supply agreement with Trinity Rail Group, LLC ("Trinity"), a subsidiary of Trinity Industries. Under the terms of that agreement, we agreed to order 8,950 newly built railcars. As of September 30, 2020, all 8,950 railcars have been ordered, of which 8,749 railcars have been delivered. On May 24, 2018, we amended our long-term supply agreement with Trinity to extend the term to December 2023, and we agreed to purchase an additional 4,800 tank cars (1,200 per year) beginning in January 2020 and continuing through the expiration of the extended term. At September 30, 2020, 1,672 railcars have been ordered, of which 908 railcars have been delivered, pursuant to the amended terms of the agreement.
In 2018, we entered into a multi-year railcar supply agreement with American Railcar Industries, Inc. ("ARI"), pursuant to which we will 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. ARI's railcar manufacturing business was subsequently acquired by The Greenbrier Companies, Inc. ("Greenbrier") on July 26, 2019, and Greenbrier assumed all of ARI's obligations under our long-term supply agreement. Under this agreement 450 railcars were to be delivered in 2019, with the remaining 7,200 to be delivered ratably over the four-year period of 2020 to 2023. As of September 30, 2020, 3,473 railcars have been ordered, of which 1,846 have been delivered. The agreement also includes an option to order up to an additional 4,400 railcars subject to certain restrictions.
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Short-Term Borrowings
The following table shows additional information regarding our short-term borrowings for the nine months ended September 30, 2020:
| Europe (1) | |||||
Balance as of September 30 (in millions) | $ | 13.5 | |||
Weighted-average interest rate | 0.9 | % | |||
Euro/dollar exchange rate | 1.17 | ||||
Average daily amount outstanding year to date (in millions) | $ | 17.6 | |||
Weighted-average interest rate | 0.8 | % | |||
Average Euro/dollar exchange rate | 1.12 | ||||
Average daily amount outstanding during 3rd quarter (in millions) | $ | 18.0 | |||
Weighted-average interest rate | 0.8 | % | |||
Average Euro/dollar exchange rate | 1.17 | ||||
Maximum daily amount outstanding (in millions) | $ | 30.9 | |||
Euro/dollar exchange rate | 1.13 | ||||
__________
(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. that matures in May 2024. This credit facility contains two one-year extension options from its then scheduled expiration date. As of September 30, 2020, 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. that matures in May 2022 and also has two one-year extension options from its then scheduled expiration date. As of September 30, 2020, 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, 2020, €23.5 million was available under these credit facilities.
Restrictive Covenants
Our $600 million revolving credit facility and $250 million revolving credit facility contain various restrictive covenants, including requirements to maintain a fixed charge coverage ratio and an asset coverage test. Our bank term loans have the same financial covenants as the 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, 2020, our European rail subsidiaries had outstanding term loan and private placement debt balances totaling €480.0 million. The loans are guaranteed by GATX Corporation and are subject to similar restrictive covenants as the revolving credit facilities noted above.
At September 30, 2020, 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
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September 30, 2020, 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 2020 | June 30 2020 | March 31 2020 | December 31 2019 | September 30 2019 | |||||||||||||||||||||||||
| Debt and lease obligations, net of unrestricted cash: | |||||||||||||||||||||||||||||
Unrestricted cash | $ | (459.8) | $ | (492.9) | $ | (570.7) | $ | (151.0) | $ | (48.6) | |||||||||||||||||||
Commercial paper and bank credit facilities | 13.5 | 5.9 | 275.5 | 15.8 | 112.0 | ||||||||||||||||||||||||
Recourse debt | 5,183.0 | 5,047.5 | 5,043.7 | 4,780.4 | 4,580.2 | ||||||||||||||||||||||||
Operating lease obligations | 368.0 | 372.3 | 399.3 | 432.3 | 440.3 | ||||||||||||||||||||||||
Finance lease obligations | — | 31.8 | — | 7.9 | — | ||||||||||||||||||||||||
| Total debt and lease obligations, net of unrestricted cash | $ | 5,104.7 | $ | 4,964.6 | $ | 5,147.8 | $ | 5,085.4 | $ | 5,083.9 | |||||||||||||||||||
| Total recourse debt (1) | $ | 5,104.7 | $ | 4,964.6 | $ | 5,147.8 | $ | 5,085.4 | $ | 5,083.9 | |||||||||||||||||||
| Shareholders' Equity | $ | 1,930.0 | $ | 1,875.3 | $ | 1,831.0 | $ | 1,835.1 | $ | 1,786.5 | |||||||||||||||||||
| Recourse Leverage (2) | 2.6 | 2.6 | 2.8 | 2.8 | 2.8 | ||||||||||||||||||||||||
________
(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, 2020. Refer to our Annual Report on Form 10-K for the year ended December 31, 2019, for a summary of our policies.
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.
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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 | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net income (GAAP) | $ | 47.9 | $ | 45.1 | $ | 133.5 | $ | 154.6 | |||||||||||||||
| Less: Net income from discontinued operations (GAAP) | (0.3) | 7.9 | 1.1 | 15.9 | |||||||||||||||||||
| Net income from continuing operations (GAAP) | $ | 48.2 | $ | 37.2 | $ | 132.4 | $ | 138.7 | |||||||||||||||
| Other income tax adjustments attributable to income from continuing operations: | |||||||||||||||||||||||
| Income tax rate change (1) | — | — | — | (2.8) | |||||||||||||||||||
| Adjustments attributable to affiliates' earnings, net of taxes: | |||||||||||||||||||||||
| Income tax rate change (2) | 12.3 | — | 12.3 | — | |||||||||||||||||||
| Net income from continuing operations, excluding tax adjustments and other items (non-GAAP) | $ | 60.5 | $ | 37.2 | $ | 144.7 | $ | 135.9 | |||||||||||||||
| Net income from discontinued operations, excluding tax adjustments and other items (non-GAAP) | $ | (0.3) | $ | 7.9 | $ | 1.1 | $ | 15.9 | |||||||||||||||
| Net income from consolidated operations, excluding tax adjustments and other items (non-GAAP) | $ | 60.2 | $ | 45.1 | $ | 145.8 | $ | 151.8 | |||||||||||||||
Impact of Tax Adjustments and Other Items on Diluted Earnings per Share:
| Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Diluted earnings per share from consolidated operations (GAAP) | $ | 1.35 | $ | 1.25 | $ | 3.77 | $ | 4.22 | |||||||||||||||
| Less: Diluted earnings per share from discontinued operations (GAAP) | (0.01) | 0.22 | 0.03 | 0.43 | |||||||||||||||||||
| Diluted earnings per share from continuing operations (GAAP) | $ | 1.36 | $ | 1.03 | $ | 3.74 | $ | 3.79 | |||||||||||||||
| Adjustments attributable to income from continuing operations, net of taxes: | |||||||||||||||||||||||
| Income tax rate change (1) | — | — | — | (0.07) | |||||||||||||||||||
| Adjustments attributable to affiliates' earnings, net of taxes: | |||||||||||||||||||||||
| Income tax rate change (2) | 0.35 | — | 0.35 | — | |||||||||||||||||||
| Diluted earnings per share from continuing operations, excluding tax adjustments and other items (non-GAAP) | $ | 1.71 | $ | 1.03 | $ | 4.09 | $ | 3.72 | |||||||||||||||
| Diluted earnings per share from discontinued operations, excluding tax adjustments and other items (non-GAAP) | $ | (0.01) | $ | 0.22 | $ | 0.03 | $ | 0.43 | |||||||||||||||
| Diluted earnings per share from consolidated operations, excluding tax adjustments and other items (non-GAAP) | $ | 1.70 | $ | 1.25 | $ | 4.12 | $ | 4.15 | |||||||||||||||
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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):
| 2020 | 2019 | ||||||||||
| Net income (GAAP) | $ | 190.1 | $ | 203.8 | |||||||
| Less: Net income from discontinued operations (GAAP) | 15.6 | 25.4 | |||||||||
| Net income from continuing operations (GAAP) | $ | 174.5 | $ | 178.4 | |||||||
| Adjustments attributable to pre-tax income from continuing operations: | |||||||||||
| Costs attributable to the closure of a maintenance facility at Rail International (3) | — | 0.9 | |||||||||
| Total adjustments attributable to pre-tax income from continuing operations | $ | — | $ | 0.9 | |||||||
| Income taxes thereon, based on applicable effective tax rate | $ | — | $ | (0.3) | |||||||
| Other income tax adjustments attributable to income from continuing operations: | |||||||||||
| Income tax rate change (1) | — | (2.8) | |||||||||
| Impact of the Tax Cuts and Jobs Act of 2017 (4) | — | (16.7) | |||||||||
| Foreign tax credit utilization (5) | — | (1.4) | |||||||||
| Total other income tax adjustments attributable to income from continuing operations | $ | — | $ | (20.9) | |||||||
| Adjustments attributable to affiliates' earnings, net of taxes: | |||||||||||
| Income tax rate change (2) | 12.3 | — | |||||||||
| Total adjustments attributable to affiliates' earnings, net of taxes | $ | 12.3 | $ | — | |||||||
| Net income from continuing operations, excluding tax adjustments and other items (non-GAAP) | $ | 186.8 | $ | 158.1 | |||||||
| Adjustments attributable to discontinued operations, net of taxes: | |||||||||||
| Net casualty gain at ASC (6) | (8.1) | — | |||||||||
| Impact of the Tax Cuts and Jobs Act of 2017 (4) | — | 0.2 | |||||||||
| Total adjustments attributable to discontinued operations, net of taxes | $ | (8.1) | $ | 0.2 | |||||||
| Net income from discontinued operations, excluding tax adjustments and other items (non-GAAP) | $ | 7.5 | $ | 25.6 | |||||||
| Net income from consolidated operations, excluding tax adjustments and other items (non-GAAP) | $ | 194.3 | $ | 183.7 | |||||||
| Return on Equity (GAAP) | 10.2 | % | 11.2 | % | |||||||
| Return on Equity, excluding tax adjustments and other items (non-GAAP) (7) | 12.7 | % | 12.3 | % | |||||||
_______
(1) Deferred income tax adjustment due to a reduction of the corporate income tax rate enacted in Alberta, Canada.
(2) Deferred income tax adjustment due to the elimination of a previously announced corporate income tax rate reduction in the United Kingdom.
(3) Expenses related to the closure of a maintenance facility.
(4) Amount attributable to the impact of corporate income tax changes enacted by the Tax Cuts and Jobs Act of 2017 (the "Tax Act").
(5) Benefits attributable to the utilization of foreign tax credits.
(6) Net casualty gain attributable to insurance recovery for a vessel at ASC.
(7) Shareholders' equity used in this calculation excludes the increases resulting from the impact of the Tax Act, as described above.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Since December 31, 2019, 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, 2019. The capital markets have been impacted by COVID-19, with recent debt transactions, although improving, generally having higher credit spreads than similar transactions in 2019 and earlier in 2020.
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, 2020, 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 14. 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 global COVID-19 pandemic has had an adverse impact on our businesses and financial performance, and the duration and extent of the pandemic could prolong or increase the adverse impact. We are unable to predict the extent to which the pandemic and measures taken in response to the pandemic will adversely affect our personnel, operations, commercial activity, asset values, financial position or liquidity in the future.
We depend on continued demand from our customers to lease or use our transportation assets and services and on our customers’ ability to pay for leased assets and services. The ongoing COVID-19 pandemic has caused, and is expected to continue to cause, the slowdown of economic activity around the world (including a decrease in demand for a broad variety of goods and services), disruptions in global supply chains, a dramatic reduction in air travel, and significant volatility and disruption of financial markets. As a result, there has been reduced demand for leasing of certain railcar types and for aircraft spare engines, as well as downward pressure on asset utilization, lease rates and renewals, and asset disposition activity across our segments, which adversely affects our financial performance. Prolonged weakness in certain sectors of the global economy may make it difficult for us to lease certain types of our transportation assets that are returned either at lease end or due to customer bankruptcies or defaults. Additionally, there have been a number of requests from certain railcar- and aircraft spare engine-leasing customers for payment deferrals and rate restructurings, and we and our RRPF affiliates have made such accommodations for certain of those customers. Although these lease restructurings primarily provide for delays in the receipt of lease revenues, the pandemic may threaten the solvency of customers in certain industries and lead to an increase in customer bankruptcies. We are facing increased operational challenges from the need to protect employee health and safety, workplace disruptions and restrictions on the movement of people, raw materials and goods. The situation surrounding COVID-19 is fluid and, depending on how long markets remain disrupted, financial and market dynamics and volatility may heighten risks related to our financing activities. Conditions in the financial and credit markets may also limit the availability of funding or increase the cost of funding, which could adversely affect our business, financial position, and results of operations. Because the severity, magnitude, and duration of the COVID-19 pandemic and its economic consequences are uncertain, rapidly changing, and difficult to predict, the pandemic’s impact on our operations, financial performance, and liquidity, as well as its impact on our ability to successfully execute our business strategy, remains uncertain and difficult to predict. Further, the ultimate impact of the COVID-19 pandemic on our operations and financial performance depends on many factors that are not within our control, including, but not limited, to: governmental, business, suppliers', and individuals’ actions that have been and continue to be taken in response to the pandemic; the impact of the pandemic and actions taken in response on global and regional economies, travel, and economic activity; general economic uncertainty in the global markets we serve and volatility in financial markets; global economic conditions and levels of economic growth; and the pace of recovery when the COVID-19 pandemic subsides. As a result, we expect COVID-19 to continue to negatively impact our operating results in future periods. However, we are currently unable to provide any assurance as to the magnitude and duration of any such impact.
We also expect that the COVID-19 pandemic will increase many of the risks described in “Item 1A, Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019.
Other than as described in this item, there have been no material changes in our risk factors since December 31, 2019. 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, 2019.
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 program 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.
No share repurchases were completed during the third quarter of 2020. As of September 30, 2020, $150.0 million remained available under the repurchase authorization.
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Item 6. Exhibits
Exhibit Number | Exhibit Description | |||||||
Filed with this Report: | ||||||||
| 10.1 | ||||||||
31A | ||||||||
31B | ||||||||
| 32 | ||||||||
| 101 | The following materials from GATX Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, are formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at September 30, 2020 and December 31, 2019, (ii) Consolidated Statements of Comprehensive Income for the three months and nine months ended September 30, 2020 and 2019, (iii) Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019, (iv) Consolidated Statements of Changes in Shareholders' Equity for the three months and nine months ended September 30, 2020 and 2019, and (v) Notes to the 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.
48
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 30, 2020
49
EXECUTION VERSION Portions of this Exhibit have been redacted because they are both (i) not material and (ii) would be competitively harmful if publicly disclosed. Information that was omitted has been noted in this document with a placeholder identified by the mark “[***]”. SUPPLY AGREEMENT This Supply Agreement (this “Agreement”) is made as of this 3rd day of November, 2014 (the “Effective Date”), by and between GATX Corporation, a corporation organized under the laws of the State of New York (“Buyer”), and Trinity Rail Group, LLC, a limited liability company organized under the laws of the State of Delaware (“Seller”) (collectively, the “Parties” and individually, a “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 March 13, 2020; 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 Agreement shall expire on the date the last Railcar is Delivered (the “Term”). 2. PURCHASE COMMITMENT AND QUANTITY. Except to the extent earlier terminated pursuant to the terms hereof, (i) Buyer hereby commits to purchase during the Term a total of eight thousand nine hundred fifty (8,950) Railcars (the “Base Order Quantity”) and to submit to Seller, pursuant to the terms of this Agreement, Buyer’s purchase orders to fulfill such commitment, and (ii) Seller agrees to manufacture, sell and Deliver to Buyer during the Term the 8,950 Railcars as ordered by Buyer. 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 the Base Order Quantity under the terms of this Agreement. 3. RAILCARS AVAILABLE FOR PURCHASE. 3.1. Except to the extent later removed from Exhibits A, B or C pursuant to Section 3.5, Seller shall make available for sale, and Buyer shall purchase, Railcars consisting of one or more of (i) the types of Railcar listed in Exhibits A, B, and C (the “Railcar Types”) as of the Effective Date; (ii) the Modified Railcars (including those Railcars and Railcar Types treated as a Modified Railcar under Section 3.4); and (iii) those railcars and railcar types, if any, that are added to Exhibits A, B, or C after the Effective Date in accordance with Sections 3.3 or 3.4, or by mutual written agreement of the Parties (collectively, “Railcars” and individually, a “Railcar”). For the avoidance of doubt, each unit within an articulated or drawbar-coupled string of railcars shall be considered a single Railcar for all purposes hereunder. US-DOCS\118388455.1
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, individually, a “Modified Railcar” and collectively, “Modified Railcars”), and Exhibit A, B, and/or C, respectively, shall be amended without further action by the Parties to include each such Modified Railcar. [***] 3.3. Buyer may not purchase “Excluded Railcars” as defined in this Section 3.3. “Excluded Railcars” are (i) railcars or railcar types that are not listed on Exhibits A, B, or C; (ii) railcars and railcar types [***] (each of the foregoing described in clause (ii) above, individually, a “Developed Railcar” and collectively, “Developed Railcars”); or [***]. [***], then, in any such case, such Excluded Railcar shall thereafter constitute a Railcar which Buyer may purchase from Seller and Exhibit A, B or C (as applicable) shall be amended without further action by the Parties to include such Excluded Railcar (except, in the case of clause (y) above, to the extent prohibited under a written agreement between Seller and the Third Party that had previously been the exclusive purchaser of such Excluded Railcar); [***]. 3.4. If a Railcar and/or Railcar Type meet the definition of a Developed Railcar set out in Section 3.3 as well as the definition of a Modified Railcar set out in Section 3.2, the Railcar shall be a Developed Railcar for all purposes under this Agreement. 3.5. Once a Railcar is included on Exhibit A, B or C, Buyer may submit an Order for such Railcar from Seller hereunder until such time that the Parties mutually agree to remove such Railcar from such Exhibit. 3.6. For purposes of this Agreement: 3.6.1. “Third Party” shall mean any Person that is not a (i) Party to this Agreement or (ii) an Affiliate (as hereinafter defined) of a Party to this Agreement; 3.6.2. “Affiliate” shall mean, with respect to any Person, any other Person controlling, controlled by, or under common control with the first Person. 3.6.3. “Control” (including the terms “controlling,” “controlled by” and “under common control with”) means the possession, directly or indirectly, 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 3.6.4. “Person” shall mean an individual, partnership, limited partnership, limited liability company, trust, business trust, estate, corporation, custodian, trustee, executor, administrator, nominee, business trust, registered limited liability partnership, association, government, governmental subdivision, 2 US-DOCS\118388455.1
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, B, and C 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” shall consist of (i) Seller’s then-current standard specification as of the date of the applicable Seller’s Order Confirmation (as hereinafter defined) for such Railcar as designated by the applicable “Seller Spec. No.” (hereinafter referred to as “Seller Specification”), (ii) any materials, parts, Components, or railcar configuration alternatives requested by Buyer (subject to Seller’s consent, such consent not to be unreasonably withheld or delayed) specified in the applicable Seller’s Order Confirmation (“Alternates”) and (iii) as subsequently modified after the date of Seller’s Order Confirmation in any Change 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 without Buyer’s prior written 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, B, and C to Buyer (and, in the case of Railcar Types added to Exhibits A, B, or C 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 Term, which updates to the Seller Specification shall be identifiable by revision date and version number and copies of which will be made available to Buyer upon Buyer’s written request. 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. 5.1.1. Buyer’s Estimated Base Sales Price and Seller’s Order Confirmation Price for Railcars listed on Exhibit A. The “Buyer’s Estimated Base Sales Price” for Railcars listed on Exhibit A shall be calculated by [***]. “Seller’s Order Confirmation Price” for Railcars listed on Exhibit A shall equal [***]. 3 US-DOCS\118388455.1
5.1.2. Invoice Price for Railcars on Exhibit A. Seller’s “Invoice Price” for a Railcar listed on Exhibit A shall be [***]. 5.1.3. [***] 5.2. Pricing for Railcars Listed on Exhibits B and C. 5.2.1. Buyer’s Price for Railcars Listed on Exhibits B and C. “Seller’s Order Confirmation Price” for Railcars listed on Exhibits B or C shall be [***]. 5.2.2. [***]. 5.2.3. Invoice Prices for Railcars on Exhibits B and C. The “Invoice Price” for a Railcar listed on Exhibits B or C shall be equal to [***]. 5.2.4. [***]. 5.2.5. [***] 5.3. Pricing Examples. The Parties agree that the pricing examples dated as of the Effective Date and initialed by the Parties reflect the methodology by which calculations shall be made for Railcar pricing pursuant to Sections 5 and 6 hereunder. 5.4. Review of Margin Schedule. During the period of January 1, 2017 through January 31, 2017, either Party may deliver a written notice (a “Review Notice”) to the other Party requesting a meeting if it believes that the pricing in the Margin Schedule is not reflective of then-current market pricing. Upon the other Party’s receipt of the Review Notice, the Parties shall (a) schedule a meeting to occur no later than ten (10) business days after the date of such notice, and (b) work in good faith to agree on a revised Margin Schedule reflective of then- current market pricing, with the understanding that such revised pricing should reflect an appropriate discount to the then-current pricing that Seller offers to its best customers. If, within thirty (30) days of the date of the Review Notice, the Parties have not agreed (a) on a revised Margin Schedule or (b) that the Margin Schedule does not need to be revised, then either Party may, at its sole option, give irrevocable written notice of its intention to terminate the Agreement (an “Intent to Terminate Notice”). The Agreement shall automatically terminate thirty (30) days after the date of such notice, except that the Parties’ obligations shall survive with respect to (x) all Scheduled Cars with Allocated Production Slots scheduled to Deliver on or before December 31, 2017, and (y) all Unscheduled Cars for which Buyer had submitted an Order as of the date of the Intent to Terminate Notice, unless the Party receiving such Intent to Terminate Notice agrees in writing before the effective date of such termination to revise the Margin Schedule as follows: 4 US-DOCS\118388455.1
5.4.1. If Buyer is the recipient of the Intent to Terminate Notice, Buyer must agree in writing to increase each of the Margins set forth in the Margin Schedule by [***]for all tank cars on Exhibit A ordered as (A) Scheduled Cars with Allocated Production Slots scheduled to Deliver on or after January 1, 2018, and (B) Unscheduled Cars for which the date of the applicable Order is on or after the effective date of such increase of the Margins; or 5.4.2. If Seller is the recipient of the Intent to Terminate Notice, Seller must agree in writing to decrease each of the Margins set forth in the Margin Schedule by [***] for all tank cars on Exhibit A ordered as (A) Scheduled Cars with Allocated Production Slots scheduled to Deliver on or after January 1, 2018, and (B) Unscheduled Cars for which the date of the applicable Order is on or after the effective date of such decrease of the Margins; or 5.4.3. Irrespective of which Party is the recipient of the Intent to Terminate Notice, the Parties mutually agree in writing to revise the Margin Schedule. 5.4.4. For clarity and by means of example only, if one of the Margins was equal to twenty percent (20%) before Seller’s receipt of an Intent to Terminate Notice, and Seller agreed to decrease the Margins by [***] pursuant to Section 5.4.2 above, the resulting Margin in this example would be [***]. Similarly, if Buyer received an Intent to Terminate Notice, and Buyer agreed to increase the Margins by [***] pursuant to Section 5.4.1 above, the resulting Margin in this example would be [***]. 6. SELLER’S STANDARD MANUFACTURING COST. 6.1. Except as otherwise expressly provided herein, all calculations of Seller’s Standard Manufacturing Cost (as defined below) shall conform to and be made using Seller’s Cost Accounting Policy and Procedure, dated and current as of the Effective Date and initialed by the Parties (“Seller’s Costing Policy”). 6.1.1. Seller may modify Seller’s Costing Policy to the extent necessary to comply 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. Following any modifications to Seller’s Costing Policy pursuant to Section 6.1.1, [***], Seller shall promptly provide an updated copy (which shall indicate the date of most recent revision) of Seller’s Costing Policy to Buyer, which shall be initialed by the Parties and replace the prior version of Seller’s Costing Policy as of the date of such revision without further action of the Parties. 5 US-DOCS\118388455.1
6.1.4. Notwithstanding anything to the contrary contained in Seller’s Costing Policy, in the event of any conflicts between this Agreement and the Seller’s Costing Policy, the terms of this Agreement shall control. 6.2. “Seller’s Standard Manufacturing Cost” means, with respect to any Railcar, an amount equal to [***] for such Railcar. 6.3. [***]. “Components” means, for all 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. Seller’s compliance with Sections 5 and 6 of this Agreement is subject to Third Party review (“Third Party Review”), and the terms and conditions of such Third Party Review are set forth on Exhibit G attached hereto. 8. [***]. 9. ORDERS. 9.1. Order Quantities. 9.1.1. “Order Year” means from March 14, 2016 through March 13, 2017 for the first Order Year, and thereafter each following period of twelve (12) consecutive months. 9.1.2. Buyer shall place orders for tank cars from Exhibit A that will be scheduled to deliver at the rate of 150 tank cars per month between the months of August 2016 through December 2019, inclusive (the “Monthly Order Quantity”) for a total of 6,150 tank cars (“Scheduled Cars”). 9.1.3. During each Order Year, Buyer will order 700 Railcars, which can be a mix of either tank cars or freight cars from Exhibits A, B, and C for a total of 2,800 Railcars (“Unscheduled Cars”). 9.2. Production Slot Allocation for Scheduled Cars. Seller shall schedule [***] production slots in each month for the months of August 2016 through December 2019, inclusive, for Scheduled Cars (“Allocated Production Slots”). Notwithstanding the foregoing or anything to the contrary contained in this Agreement, Seller will have no obligation to schedule more than [***] Allocated Production Slots in any one month 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. Buyer’s Order(s) accepted by Seller’s Order Confirmation for Unscheduled Cars will be placed in the next available production slot in 6 US-DOCS\118388455.1
Seller’s then current backlog. Buyer’s obligation to order the [***] per Order Year is firm and the duration of Seller’s railcar backlog and the effect such backlog has on Delivery of Unscheduled Cars shall not permit Buyer to avoid placing its required Order per Order Year for Unscheduled Cars. [***]. 9.4. Monthly 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, B and C for which Seller shall provide Buyer with monthly updates, as to Exhibit A Railcars, to Buyer’s Estimated Base Sales Price(s), and as to Exhibit B and C Railcars, to the [***] for such Railcars under then-current market conditions, during the Order Year (the “Monthly Price List”). In the event a Railcar is not listed on the Monthly Price List, upon Buyer’s written request, Seller shall 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 E attached hereto and shall be subject to the terms and conditions of this Agreement (“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 pursuant to Section 5.2.1 for the Railcar(s) ordered. Subject to Seller’s rights of rejection under Section 9.7, upon Seller’s reasonable written request, Buyer will correct any Order that does not conform to the form set forth on Exhibit E. 9.6. Order Placement. 9.6.1. Orders for Scheduled Cars must be placed by Buyer [***]prior to their Allocated Production Slots by 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 consistent with Buyer’s default instructions for orders of Scheduled Cars (“Default Scheduled Car Order Instructions”) set forth on Exhibit K 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 K shall be amended without further action by the Parties to include such updated Default Scheduled Car Order Instructions in Exhibit K and such update shall be effective for all Orders following each such update. 7 US-DOCS\118388455.1
9.6.2. Orders for Railcars on Exhibits B and C that constitute Unscheduled Cars (“Exhibit B and C Unscheduled Cars”) 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, such Exhibit B and C Unscheduled Cars shall be added to Seller’s next available production slots and added to Buyer’s Delivery Schedule. [***]. If Buyer fails to place one or more Orders for all or any portion of the Order Year Unscheduled Cars requirement by the first day of the last month of an Order Year, Seller shall place the Order for Buyer with Buyer’s default instructions for orders of Unscheduled Cars (“Default Unscheduled Car Order Instructions”) set forth on Exhibit K hereto; which Exhibit shall identify specific Railcar(s), and unless otherwise agreed by the Parties, shall consist of Railcar(s) from Exhibit A only. 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 K shall be amended without further action by the Parties to include such updated Default Unscheduled Car Order Instructions in Exhibit K and such update shall be effective for all Orders following each such update. 9.6.3. Within five (5) business days after Seller’s receipt of 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 L and in accordance with the terms hereof, confirming (i) the Seller’s Order Confirmation Price for Railcars on Exhibits A, B, or C and (ii) the month the Railcars will commence Delivery (the “Seller’s Order Confirmation”). Within ten (10) business days of Seller’s issuance of an Order Confirmation, Seller shall add Buyer’s Order to the Buyer Delivery schedule (the “Buyer’s Delivery Schedule”) indicating the quantity of Railcars to be Delivered each month (the “Committed Delivery Month”), a copy of which shall be promptly provided to Buyer. Within sixty (60) days of the first Railcar Delivery in a Committed Delivery Month, Seller shall update Buyer’s Delivery Schedule to reflect the week in which such Railcar will be Delivered (the “Committed Delivery Date”), a copy of which update shall be promptly provided to Buyer. Any change to Buyer’s Delivery Schedule shall require the written agreement 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) which 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 8 US-DOCS\118388455.1
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 by an officer of each Party, if any term or condition in Buyer’s Order, Seller’s 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 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 Rejection. In the event that Seller does not have a production line operating to produce Unscheduled Railcars on Exhibits B or C ordered by Buyer, Seller shall notify Buyer within five (5) business days following receipt of such Order that it cannot manufacture such Railcars, in which case Buyer shall place its Order for different Railcars to replace such Railcars that Seller cannot manufacture. Notwithstanding anything to the contrary in this Agreement, Seller shall ensure that, during the Term of this Agreement, [***]. 9.8. Change Order. Once a Seller’s Order Confirmation has been issued to Buyer, Buyer may request in writing a change in an Order specifying the particular Railcars that are subject to Buyer’s request and the requested change. Within ten (10) business days following receipt of such request, Seller shall provide Buyer with a Change Order quote (“Change Order Quote”) comprised of (i) any change to the Buyer’s Delivery Schedule and (ii) any price adjustment for the Change Order Request. If Buyer accepts Seller’s Change Order Quote, Buyer shall issue a confirming change Order (“Change Order”) to Seller within five (5) business days after receipt of the Change Order Quote. If Seller does not receive a timely Change Order from Buyer accepting Seller’s Change Order Quote, Buyer’s Order will not 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 between the date of the Seller’s Order Confirmation for a Railcar and the date of 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. Upon Buyer’s reasonable written request, Seller shall provide Buyer with its then-current estimate of the next available delivery dates for a Railcar Type as of the date of such request. 9 US-DOCS\118388455.1
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” (including the terms “Deliver” and “Delivered”) of the Railcars shall be defined as (i) in the case of Railcars manufactured in the United States, actual delivery of such Railcars, F.O.B. Seller’s plant or (ii) in the case of 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 Railcars pursuant to Section 11.1 (i) represents Buyer’s authorization for 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. After Delivery of a Railcar to Buyer as provided in Section 10.1, at Buyer’s written request, Seller will ship such finished Railcar to Buyer or Buyer’s customer at the place designated by Buyer to Seller and any resulting freight charges shall be for Buyer’s account. Such freight charges may appear as a line item on Seller’s invoice for the Railcars if Seller pays such freight charges for Buyer’s account. 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 caused by “Force Majeure Events” which adversely impact the performance of Seller’s obligations regardless of when occurring, including, but not limited 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 10 US-DOCS\118388455.1
Buyer, its officers, directors, employees, agents or contractors, including, but not limited to, Buyer’s failure to provide in a timely manner any parts, Components, 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 Seller’s facility where the Railcars are being manufactured and/or the 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 causes beyond Seller’s reasonable control. 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 ordered for the purposes of Buyer’s obligations hereunder with respect to the 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 advance of Seller’s actual needs. In the event that the occurrence of a Force Majeure Event affects a Party’s performance of its 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 Seller’s manufacturing facilities to inspect the Railcars during construction. Such inspections shall be so conducted as to not interfere unreasonably with Seller’s operations. Acceptance or rejection of a Railcar shall be made by Buyer before shipment of the Railcars manufactured in Mexico and 11 US-DOCS\118388455.1
before Delivery of Railcars 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 acceptance to Seller (each, a “Certificate of Acceptance”). Each Certificate of 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 after the date that the notice states that the Railcars shall be ready for inspection or Buyer’s inspector fails to inspect the Railcars within three (3) business days 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 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 after the date that such Railcars were ready for inspection. Notwithstanding the foregoing, Seller may ship Railcars at any time upon Buyer’s 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 the Seller of any of its obligations under the Agreement nor shall it constitute a waiver by the 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 REFERRED TO AS THE “SELLER INDEMNITEES”), FROM AND 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, ATTORNEYS’ FEES, COURT COSTS AND EXPENSES OF WHATEVER NATURE OR KIND, IN LAW OR IN EQUITY, INCURRED IN THE DEFENSE OF THE SELLER INDEMNITEES OR OTHERWISE, TO THE EXTENT ARISING OUT OF, OR RESULTING FROM ANY ACT, 12 US-DOCS\118388455.1
ERROR, OMISSION, NEGLIGENCE OR MISCONDUCT OF BUYER, BUYER’S EMPLOYEES, AGENTS (OTHER THAN ANY AGENT OF BUYER WHO IS EMPLOYED BY SELLER) OR SUBCONTRACTORS, OR ANY EMPLOYEE OF BUYER’S AGENT (OTHER THAN ANY AGENT OF BUYER WHO IS EMPLOYED BY SELLER) OR SUBCONTRACTOR WHILE ON SELLER’S PROPERTY. 12. PAYMENT AND CLOSING. 12.1. Payment of Purchase Price and Closing of Sale. On or before ten (10) business days following Buyer’s receipt of (i) the shipping report for a Railcar, including the lightweight of each Railcar shipped and each Railcar’s assigned number, (ii) a Certificate of Acceptance executed by Buyer’s inspector, or the acceptance of any such Railcar has been deemed pursuant to Section 11.1 hereof, (iii) Seller’s invoice 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 M hereof, and (iv) Seller’s executed Bill of Sale substantially in the form attached hereto as Exhibit H, Buyer shall pay the Invoice Price 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. 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 Delivery thereof (collectively, “Taxes”); provided, however, that Taxes shall not include any Seller property taxes or taxes based on Seller’s income. While it is the intent of the Parties that Seller’s invoice for Railcars will include a line item for Taxes, in the event an amount for applicable Taxes is not included in Seller’s invoice for Buyer’s account, Buyer shall remain solely responsible for the payment of such Taxes. For the avoidance of doubt, no Taxes shall be included in Seller’s Standard Manufacturing Cost for such Railcar. Seller shall provide receipts to Buyer evidencing Seller’s payment of any such Taxes. 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. 13 US-DOCS\118388455.1
13. MANUFACTURING WARRANTIES AND DISCLAIMERS; IP INDEMNITY 13.1. Manufacturing Warranties. 13.1.1. Seller warrants solely to Buyer that the assembly, construction and manufacture of the Railcars by Seller, Seller’s employees and Seller’s 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 furnished by Seller, Seller’s employees and Seller’s subcontractors will be free 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. Seller’s only obligation to Buyer under this Section 13.1.1 is limited to promptly repairing or replacing, at Seller’s exclusive option, the material and 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 by Seller within sixty (60) days of Buyer’s written notice of a potential defect and Seller’s examination of the 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 sealants (the “Coatings”), Seller warrants that it will apply the Coatings selected by Buyer in accordance with the Coating manufacturer’s 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 Coatings or the adequacy of such Coating manufacturer’s specifications and recommendations. Seller may offer various choices of Coatings at various prices and of various qualities. The Coatings actually applied by Seller shall be chosen by Buyer at Buyer’s sole discretion, subject to Seller’s agreement to apply such Coatings, based on, but not limited to, Seller’s ability to obtain and apply such Coatings. Buyer’s choice of Coatings is made at Buyer’s sole 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, Seller’s sole obligation under this Section 13.1.2 is limited to repair or replacement, at the election of Seller, at Seller’s railcar repair shop or at a shop selected by Seller, of the Coatings installed by Seller in any Railcar that 14 US-DOCS\118388455.1
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 transaction shall not otherwise modify or terminate Seller’s warranty. 13.1.4. In no event and under no circumstances shall Seller ever be liable to Buyer for a breach of the warranty set forth herein in any amount greater than Seller’s 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 (HEREINAFTER, EACH A “SUPPLIER OR MANUFACTURER”) AND 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 ON BUYER’S BEHALF AND/OR INCUR OTHER LEGAL FEES, COSTS 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 SUPPLIER’S OR MANUFACTURER’S WARRANTIES COVERING PARTS, MATERIAL, EQUIPMENT OR COMPONENTS FURNISHED BY SUCH SUPPLIER OR MANUFACTURER. AS TO SELLER’S INSTALLATION OF PARTS, COMPONENTS OR EQUIPMENT MANUFACTURED BY SUPPLIERS OR MANUFACTURERS, IF SUCH SUPPLIER OR MANUFACTURER HAS A REPRESENTATIVE AT THE JOB SITE DURING SUCH INSTALLATION, AND IF THE INSTALLATION IS COMPLETED TO THE SATISFACTION OF SUCH 15 US-DOCS\118388455.1
REPRESENTATIVE, IT SHALL BE PRESUMED, SUBJECT TO REBUTTAL BY BUYER, THAT SELLER’S INSTALLATION HAS BEEN COMPLETED BY SELLER IN ACCORDANCE WITH SUCH SUPPLIER’S OR MANUFACTURER’S RECOMMENDATIONS IN A 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 OR FURNISHED BY BUYER, BUYER’S SUBCONTRACTORS, EMPLOYEES, ARCHITECTS OR ENGINEERS, OR ANY LABOR PERFORMED BY OTHERS AT THE DIRECTION OR REQUEST OF BUYER OR BUYER’S REPRESENTATIVE(S) AND SELLER 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. 13.1.8. For purposes of this Agreement, “Regulations” shall mean all industry 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. 13.1.9. With respect to any material and workmanship of a Railcar that is not in conformity with Seller’s warranty under Section 13.1.1, Seller shall (i) develop and implement a corrective action plan, and (ii) deliver to Buyer’s engineering or quality group and be reasonably available to discuss the 16 US-DOCS\118388455.1
specifics of such corrective action plan, in each case within thirty (30) days of Seller’s receipt 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, information and assistance, at Seller’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 Buyer’s designs, constitute an infringement of any patent of the United States; provided that Buyer is notified promptly, in writing, and is given authority, information and assistance, at Buyer’s expense, for the defense of same. 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 case 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 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. 17 US-DOCS\118388455.1
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 case 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 case 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 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. 15. LOCK-UP, RIGHT OF FIRST REFUSAL AND LAST LOOK. 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, 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 Buyer’s 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 sale of a Railcar to one of Buyer’s Affiliates, (iv) any lease of a Railcar by Buyer to one of Buyer’s customers that includes a 18 US-DOCS\118388455.1
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 one (1) year anniversary of such Delivery (the “Option Period”), Buyer desires to sell such Railcar to a Third Party, Buyer shall deliver to Seller a written notice of the proposed sale (a “Sale Notice”) accompanied by a written offer (the “Offer”) to sell such Railcar to Seller, on an “as is”, “where is” basis, for an amount in cash equal to the Invoice Price paid by Buyer to Seller for such Railcar pursuant to this Agreement, provided, however, no Sale Notice 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 Affiliates or other transaction or series of related transactions in which Buyer’s 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 sale of a Railcar to one of Buyer’s Affiliates, (iv) any lease of a Railcar by Buyer to one of Buyer’s customers that includes a 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 notice (an “Offer Notice”) to Buyer by no later than 5:00 p.m., Chicago time, on 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 subject of such Sale Notice to any Third Party purchaser following Seller’s rejection of the Offer. If, at any time, Buyer includes a Railcar in a “request for proposal” or other multiple-bid auction process during the Option Period, in lieu 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. 19 US-DOCS\118388455.1
15.3. [***]. 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 materially and adversely affect Seller’s ability to perform hereunder; 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. Seller’s execution, delivery and performance of this Agreement and all certificates, documents, instruments and agreements delivered by Seller under or in connection with this Agreement, and Seller’s compliance with the terms, conditions and 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, 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 20 US-DOCS\118388455.1
case so as to materially and adversely affect Seller’s ability to perform or Buyer’s enjoyment of its rights 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 adversely affect Buyer’s ability to perform hereunder; 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. Buyer’s execution, delivery and performance of this Agreement and all certificates, documents, instruments and agreements delivered by Buyer under or in connection with this Agreement, and Buyer’s compliance with the terms, 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 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 21 US-DOCS\118388455.1
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 Buyer, in each case so as to materially and adversely affect Buyer’s ability to perform or Seller’s enjoyment of its rights 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 of the following events shall constitute an event of default (“Event of Default”) hereunder by a Party: 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 a 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 Party’s property or assets, or (v) filing of any involuntary petition in bankruptcy against either Party (provided that any such filing is not withdrawn, vacated, removed, discharged, or stayed within sixty (60) days thereafter); 22 US-DOCS\118388455.1
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). The Parties agree that either Party’s initiation of the dispute resolution provisions described 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 and the delivery of an Intent to Terminate Notice as set forth in Section 5.4, 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 Party’s rights or obligations that accrued prior to the date of such termination, and 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. 23 US-DOCS\118388455.1
20. SUPPLY OF SPARE PARTS. For a period beginning on the date hereof and ending on the [***]of the date hereof, or, if Seller (or Seller’s successor) discontinues the manufacturing of railcars for Third Parties or discontinues the manufacturing of aftermarket railcar parts and Components before the expiration of such [***] period (“Discontinued Operations”), up to the date of Discontinued Operations, Seller (or such successor) shall make spare parts, fixtures and assemblies for the Railcars that are proprietary to Seller or Seller’s successors (“Spare Parts”) and shall be made available to Buyer for purchase at Seller’s then market price. In the event the date of Discontinued Operations is before the expiration of such [***] period, Seller (or Seller’s successor) shall give Buyer as much 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 cease to make any Spare Parts, Seller shall give Buyer written notice of such Supplier’s 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 executed all such further acts, deeds and assurances as Buyer or Buyer’s counsel may, at any time or from time to time, reasonably require to confirm Buyer’s right, 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 I attached hereto (collectively, “Records”). Prior to Delivery of any Railcar hereunder, Seller will file an application with the AAR for a certificate of construction (a “Certificate of Construction”) for each Railcar and shall provide Buyer with such Certificate of 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, and effective as of January 1, 2016, CID numbers must be reported for couplers, bolsters and side frames). 24 US-DOCS\118388455.1
21.3. Communication and Correspondence. Seller shall furnish to Buyer, promptly upon Seller’s receipt thereof, copies of 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 shall also furnish to Buyer, promptly upon 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. In the course of performance hereunder, each of Buyer and Seller (with respect to information disclosed by such Party, the “Disclosing Party”) will disclose to the other Party (the “Receiving Party”), whether in written, electronic, or oral form, information regarding the Disclosing Party’s business plans, strategies, and processes that the Disclosing Party reasonably regards as proprietary and confidential (“Confidential Information”). Confidential Information shall include, but not be limited to, (1) delivery schedules, (2) pricing, (3) margins, (4) Specification, (5) Orders, and the identities of, and the requirements and pricing and delivery schedules for Buyer’s customers, and (6) terms of this Agreement redacted by the Parties prior to public disclosure. 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 five (5) years from the date of disclosure. Subject to Section 21.4.4 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 employee’s business decisions that are unrelated to the Receiving Party’s performance of its obligations or exercise of its rights under this Agreement. Notwithstanding the foregoing, but subject to Section 21.4.1, the Receiving Party may disclose Confidential Information to any of its legal, financial or tax planning representatives (“Representatives”) who need to know such Confidential Information in order for the Receiving Party to carry out its obligations or enforce its rights hereunder and who have been informed of, and the Receiving Party shall cause such Representatives to abide by this Section 21.4; provided, that Buyer may also disclose Records that constitute Confidential Information to any Third Party for the sole purpose of permitting, and only to the extent necessary to enable, such Third Party to safely operate, repair, maintain or modify Railcars purchased under this Agreement (the “Permitted Purpose”) so long as prior to such disclosure, such Third Party enters into a confidentiality agreement with 25 US-DOCS\118388455.1
Seller on customary terms to be negotiated and agreed upon by such Third Party and Seller, with Seller’s agreement not to be unreasonably withheld, conditioned or delayed. Notwithstanding the foregoing, Buyer may also disclose Records that constitute Confidential Information to any Third Party via electronic portal solely for the Permitted Purpose, so long as (1) prior to such disclosure, such Third Party enters into a confidentiality agreement with Buyer, which terms shall, in all material respects, be no less restrictive than the terms set forth in this Section 21.4 and (2) Seller is stipulated in such confidentiality agreement to be a third party beneficiary thereof and thereunder. 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. 21.4.1. From and after the Effective Date, the Margin Schedule may not be disclosed to any of Buyer’s directors, officers, employees or Representatives who are not members of Buyer’s Clean Team. For purposes of this Agreement, “Buyer’s Clean Team” shall mean those officers, directors or employees of Buyer identified by title or Buyer’s Representatives, in each case as reasonably agreed to by the Parties prior to the Effective Date, but at a minimum, Buyer’s Clean Team shall always consist of at least Buyer’s highest ranking legal, finance and compliance officers; provided, that (a) Buyer may remove individuals from Buyer’s Clean Team at any time and from time to time without advance notice to Seller, and (b) in the event Buyer desires to add any individuals to Buyer’s Clean Team subsequent to the date hereof, Buyer shall provide Seller with the name and title of such individuals, and such individuals will only be added to Buyer’s Clean Team with Seller’s written approval. Upon the request of one Party to the other Party, the Parties shall enter into a Confidentiality Agreement substantially in the form of the Parties’ Confidentiality Agreement, dated as of September 12, 2014 (the “Margin Schedule Review Confidentiality Agreement”) in order to facilitate the consideration, evaluation and negotiation of any adjustments to the Margin Schedule as contemplated in Section 5.4 of this Agreement (“Margin Schedule Review”). Notwithstanding the foregoing, provided that the Parties have first entered into the Margin Schedule Review Confidentiality Agreement, the provisions of this Section 21.4.1 related to the Buyer’s Clean Team shall not apply with respect to, and during the pendency of, the Margin Schedule Review. 21.4.2. Seller’s Standard Manufacturing Cost and Seller’s actual cost for Railcars, or any component thereof, shall only be disclosed to Buyer’s Third Party Reviewer as set forth in Exhibit G. 21.4.3. 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 26 US-DOCS\118388455.1
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 of the Securities and Exchange Commission (the “SEC”) or of any stock exchange on which the Receiving Party’s stock is listed, or (b) pursuant to the 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. 21.4.4. Upon the request of the Disclosing Party following the expiration or termination of this Agreement, the Receiving Party will return or destroy all of the Disclosing Party’s Confidential Information, except that the Receiving Party may retain Confidential Information of the Disclosing Party that is (i) necessary in connection with the enforcement of the Receiving Party’s rights under this Agreement, (ii) required to be maintained by the Receiving Party’s internal document retention policies or (iii) contained in an archived computer system backup in accordance with the Receiving Party’s security or disaster 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, a Receiving Party’s 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 21.4.4. 21.4.5. 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 which a Party’s stock is listed, no Party will make public the existence or content of this Agreement or the negotiations leading to or 27 US-DOCS\118388455.1
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. Broker’s Commission. 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 reasonable attorneys’ fees) and costs relating to such claims or otherwise relating to such Party’s retention of any broker, finder or other Person relating to a sale of the Railcars. 21.6. Successors and Permitted Assigns. Neither Party may assign, transfer, sell, or convey this Agreement to a Third Party without the prior written consent of the other Party, which consent will not be unreasonably withheld or delayed. In the event of a merger, consolidation or change in Control of a Party whereby this Agreement transfers by operation of law (a “Transaction”) to such Party’s successor in interest (the “Transferee”), then: 21.6.1. In the case of a Transaction involving Seller, the Invoice Price for any Exhibit A Railcar that is charged by Transferee to Buyer shall not increase as a result of the Transaction or be greater than what Seller’s Invoice Price for any such Exhibit A Railcar would have been absent the Transaction and in the ordinary course of Seller’s operation of its business (in either case, an “impermissible increase”). For purposes of determining impermissible increases, upon reasonable request from Buyer, Transferee shall permit Buyer or Buyer’s agent access to Transferee’s relevant books and records as to an Exhibit A Railcar on commercially reasonable and confidential terms and conditions (excluding direct access by Buyer to Transferee’s manufacturing cost information, which access and review shall be handled in a manner similar to that described under Exhibit G hereto but without limitation as to the number of reviews). Buyer may terminate this Agreement with [***] advance written notice in the [***] 21.6.2. In the case of a Transaction involving Buyer, Seller may terminate this Agreement with sixty (60) days advance written notice in the event (i) a Transaction occurs prior to Buyer’s first acceptance of Railcars hereunder, 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 28 US-DOCS\118388455.1
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. 21.9. Dispute Resolution. Each dispute, claim or controversy arising out of or in any manner related to this Agreement or the breach thereof (a “Dispute”) between 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 written notice of such Dispute to the other Party (a “Dispute Notice”) and in such event, representatives at the vice president level of each Party shall meet in person to attempt to resolve such Dispute (a “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 Association (the “AAA”) under its commercial 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 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”) initiate a binding arbitration, to take place in Delaware, administered by the AAA (the “Arbitration”) under the AAA Commercial Arbitration Rules and Procedures (“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 (3) arbitrators (each an “Arbitrator”). Within ten (10) business days after 29 US-DOCS\118388455.1
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 attorney, have experience in manufacturing and be listed on the AAA’s 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 G, in which 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 with a Party’s application to a court of competent jurisdiction for interim or 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 Arbitrators’ award, all of the foregoing which shall be decided by a court 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 arbitrators’ award in any court of competent jurisdiction. 21.9.4. In any Arbitration initiated pursuant to this Section 21.9, the Parties shall be permitted to take the following discovery 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 the Arbitration shall be that each Party may obtain discovery regarding any non-privileged matter that is relevant to any Party’s claim or defense. 30 US-DOCS\118388455.1
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 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 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 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 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 J, 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 Arbitrator reduce the number of depositions provided for above. The Arbitrator may compel a Party to comply with discovery or its obligations under the Confidentiality Agreement and Agreed Protective Order, including by awarding attorneys’ fees, assessing monetary sanctions, and limiting a Party’s use of evidence 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, 31 US-DOCS\118388455.1
however, that any other Party shall have to right to obtain transcripts from the transcriber at such other Party’s own cost; 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, monetary sanctions, and attorneys’ fees and costs; 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 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 treated as Confidential Information. The Arbitrators’ decision shall be final and binding upon both Parties. Each Party shall be responsible for its own attorneys’ fees and costs, including filing fee and final fee of the AAA, in connection with any such mediation or Arbitration, subject to any award of attorneys’ fees 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 court of competent jurisdiction for confirmation. The court’s confirmation of the award shall be governed by Section 9 of the Federal Arbitration Act (the “Act”), and the grounds for the court 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 32 US-DOCS\118388455.1
addresses, facsimile numbers and email addresses for notice, unless changed by notice, are as follows: If to Seller: Trinity Rail Group, LLC 2525 Stemmons Freeway Dallas, TX 75207 Attn: Dale Hill Fax: 214-589-8819 Email: Dale.Hill@trin.net If to Buyer: GATX Corporation 222 West Adams Street Chicago, IL 60661 Attn: VP Fleet Management Fax: (312) 499-7536 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 Parties’ 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. 2525 Stemmons Freeway Dallas, TX 75207 Attn: Heather Randall Fax: 214-589-8824 Email: Heather.Randall@trin.net If to Buyer: GATX Corporation 222 West Adams Street Chicago, IL 60661 Attn: General Counsel Fax: (312) 621-6648 Email: Deborah.Golden@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 33 US-DOCS\118388455.1
agreements, understandings, and representations, whether oral or written, related to the subject matter hereof, including that certain Confidentiality Agreement, dated September 12, 2014, 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 September 12, 2014 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 performance, including, but not limited to, Sections 5.1.3, 5.2.4, 5.2.5, 5.4, 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 with such Party’s obligations arising pursuant to this Agreement. 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. 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 meaning. The word “including” (and its variants, e.g. “includes”, “include”) will mean “including without limitation” unless otherwise stated. Unless the context requires otherwise, the words “hereof,” “herein,” “hereunder,” “hereby,” or words of similar import refer to this Agreement as a whole and not to any particular Section, subparagraph, clause or other subdivision hereof. The word “or” will be disjunctive but not exclusive. Each reference to a Section 34 US-DOCS\118388455.1
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] 35 US-DOCS\118388455.1
IN WITNESS WHEREOF, Seller and Buyer have executed this Agreement as of the Effective Date. GATX CORPORATION By: Name: Title: TRINITY RAIL GROUP, LLC By: Name: Title: [Signature page to Supply Agreement] US-DOCS\118388455.1
Exhibit A [***] US-DOCS\118388455.1
Exhibit B [***] US-DOCS\118388455.1
Exhibit C [***] US-DOCS\118388455.1
Exhibit D [***] US-DOCS\118388455.1
Exhibit E 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: Terms and Conditions: This Order Form is subject to the terms and conditions of the Supply Agreement dated November 3, 2014. Executed by: GATX Corporation By: Name: ________________________________ Title: _________________________________ Signature: _____________________________ US-DOCS\118388455.1
Exhibit F Form of Certificate of Acceptance CERTIFICATE OF ACCEPTANCE GATX PO SELLER’S JOB NUMBER NUMBER RAILCAR DESCRIPTION In accordance with the Supply Agreement (“Agreement”) between GATX Corporation ("Buyer") and Trinity Rail Group, LLC ("Seller"), dated November 3, 2014, the undersigned hereby certifies that on the date of this Certificate the following Railcars were accepted by the Buyer in accordance with the Agreement. The execution of this Certificate of Acceptance shall not relieve the Seller of any of its obligations under the Agreement nor shall it constitute a waiver by the Buyer with respect to any of its rights and remedies under the Agreement. DATE AVAILABLE LIGHT FOR DATE CAR NUMBER GALLONS BO# WEIGHT INSPECTION ACCEPTED OR RE- INSPECTION Accepted Cumulative Accepted by Today: BO#: US-DOCS\118388455.1
Exhibit G Third Party Review 1. General. (a) Pursuant to Section 7 of the Agreement between Buyer and Seller dated November 3, 2014, 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 G. (b) Buyer may initiate a Third Party Review after the first Order Year of this Agreement. Thereafter, Buyer may request [***]. 2. Selection of Third Party Reviewer. Within 30 days after Buyer’s notice to undertake a Third Party Review, Buyer will appoint a reputable accounting firm to conduct the Third Party Review, subject to Seller’s consent, such consent not to be unreasonably withheld or delayed (the “Reviewer”), to the extent that such Reviewer does not have ethical conflicts given their then- 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 G (the “Reviewer Confidentiality Agreement”). Buyer acknowledges that all information the Reviewer receives from Seller will be considered “Evaluation Material” as set forth in the Reviewer Confidentiality Agreement and, except to the extent otherwise provided under this Exhibit G 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 Person (other than to Reviewer’s employees 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 they disclose Seller’s 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 this 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 [***]. (b) Seller will provide the Reviewer with access to the Seller Records and Seller’s 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 G). The Third Party Review will take place at Seller’s place of US-DOCS\118388455.1
business in Dallas, Texas and the Reviewer will not be permitted to (i) remove any of the books, records, and information provided by Seller to the Reviewer from Seller’s place of business or (ii) 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. All Third Party Reviews will be performed during Seller’s normal business hours and in a manner so as not to unreasonably interfere with Seller’s operations and personnel. Reviewer and Seller will cooperate with each other as necessary for Reviewer to perform the Third Party Review in an expeditious and efficient manner. Reviewer’s onsite access to Seller’s place of business will be limited to a maximum of [***]per Third Party Review performed hereunder; provided, that Seller promptly responds to Reviewer’s reasonable requests 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 Seller’s Records to determine whether there were any discrepancies between (i) the [***]. (b) In addition to its obligations set forth in Section 4 of this Exhibit G, 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) A “Price Calculation List” for each Order of a Railcar listed on Exhibit A to the Agreement for which Buyer received an invoice. The Price Calculation List shall consist of [***]. (ii) [***]. (iii) [***]. (c) [***]. 7. Report. (a) The Reviewer shall prepare a written report (the “Report”) [***]. (b) [***] (c) [***] US-DOCS\118388455.1
8. Settlement Procedures. (a) If the Report discloses any discrepancies (whether related to Seller’s [***], or otherwise), Buyer may, at its option, request in writing a refund or credit for such discrepancies, which shall include a description of the basis for Buyer’s request founded upon the Report. (b) Seller shall have thirty (30) days from its receipt of Buyer’s request to respond. If Seller does not respond by the end of such thirty (30) day period or if Seller concurs with any or all of the Reviewer’s findings, it shall issue a refund or credit to Buyer within ten (10) business days in the full amount of Buyer’s request, unless Seller disputes a portion of the Reviewer’s findings, in which case it shall issue a refund or credit to Buyer in the amount that is not disputed by Seller. (c) If Seller disputes any or all of the Reviewer’s findings, the Parties shall promptly discuss the Reviewer’s findings under dispute and attempt to reach a settlement. If the 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 of Buyer’s request for a refund or credit, Buyer may pursue such dispute under the dispute resolution provisions set forth in Section 21.9 of the Agreement. 9. Buyer’s Access to the Report. 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. US-DOCS\118388455.1
Schedule 1 to Exhibit G Reviewer Confidentiality Agreement CONFIDENTIALITY AGREEMENT This Confidentiality Agreement (this “Agreement”) is between Trinity Rail Group, LLC, 2525 Stemmons Freeway, Dallas, TX 75207 (“TRail”), and PricewaterhouseCoopers LLP, 300 Madison Avenue, New York, NY 10017 (“Reviewer”). Reviewer and TRail are sometimes referred to herein individually as a “Party” and collectively as the “Parties”. WHEREAS, Reviewer has been engaged by GATX Corporation (“GATX”) to perform certain “Third Party Review” services (the “Services”) as provided for in that certain Supply Agreement, by and between GATX and TRail, dated November 3, 2014 (the “Supply Agreement”); and WHEREAS, TRail is agreeable to Reviewer’s performance of the Services subject to the 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” shall consist of any and all disclosures by TRail to Reviewer with respect to Reviewer’s performance of the Services. 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. is acquired by Reviewer from a third party that is not, to Reviewer’s knowledge, 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. US-DOCS\118388455.1
2. Disclosure to GATX. Reviewer agrees not to disclose Evaluation Material to GATX or GATX’s other representatives without TRail’s prior written consent. TRail agrees that: Reviewer may (i) disclose to GATX the report containing the information described in Section 7(a) of Exhibit G to the Supply Agreement (“Exhibit G”) (the “Report”), and (ii) may conduct general discussions with GATX and GATX’s representatives regarding the 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. Subject to TRail’s execution of a release 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 G, Reviewer will redact the Reports in accordance with TRail’s 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 breach of this Agreement by its personnel and Reviewer’s agents and any employee of Reviewer’s agents. 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. Reviewer shall, upon TRail’s written request, return to TRail or 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 US-DOCS\118388455.1
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. Other than as expressed in Section 6 above, Reviewer’s confidentiality obligations 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 _________________, 201__. TRINITY RAIL GROUP, LLC PRICEWATERHOUSECOOPERS LLP By:____________________________ By:_______________________________ Name:__________________________ Name:_____________________________ Title:___________________________ Title:______________________________ US-DOCS\118388455.1
Exhibit H Form of Bill of Sale THIS BILL OF SALE is made and effective this _____ day of ________________, 20___ by TRINITY RAIL GROUP, LLC (“Seller”) to GATX CORPORATION (“Buyer”). 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, sells, conveys, and transfer to Buyer all of Seller’s right, title and interest in and to those railcars listed on Schedule A attached hereto (the “Cars”), to have and to hold the same, together with 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 November 3, 2014 (the “Agreement”). EXCEPT AS OTHERWISE PROVIDED IN THE AGREEMENT, 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:_________________________________________ US-DOCS\118388455.1
SCHEDULE A TO BILL OF SALE I. Invoice No. II. Car Type: III. Quantity of Cars: IV. Car Marks: V. Running Numbers: US-DOCS\118388455.1
Exhibit I Records DOCUMENT TYPE FORMAT REQUIRED Required for New Built Railcar Certificate of Construction Adobe PDF Yes Car Specification Sheet - to include Microsoft Word or Excel or Adobe PDF Yes Builder file number (BO#) Drawings- including but not limited to: One drawing per file in (*.dwg or *.dxf All upper level drawing files) Adobe PDF files. Electronic arrangement and drawing files names to include drawing assembly drawings number, sheet and revision. used to build the Railcar, in 1. Arrangement electronic format. 2. Assembly Seller will provide 3. Part Buyer with 4. Calculation reasonable access to, but not copies of, parts drawings. Drawing List HTML, Adobe PDF, Microsoft Excel or yes Plain Text (*.txt) file with entries that include the drawing number, sheet, revision and drawing title. Bill of Materials - to include Builder file HTML, Microsoft Word or Excel or Adobe yes number PDF file of the entire BOM. Specialty List of additional vendor HTML, Adobe PDF, Microsoft Excel or yes components used to build the car. To Plain Text (*.txt) file of the entire Specialty include lot and model number for: list to include vendor name, component name, component model number, 1. Trucks component lot number. 2. Couplers Any drawings to follow drawing 3. Brakes requirements above. 4. Running Gear Photograph - To include one full side and Digital high resolution color photograph or yes A & B end views. 8x10 color print. TCID Adobe PDF yes Qualification Acceptance Criteria 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 US-DOCS\118388455.1
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 change from time to time in accordance with Buyer’s Fleet Maintenance Instruction (ETSD-15.0) and Seller’s acceptance of those changes. US-DOCS\118388455.1
Exhibit J Confidentiality Agreement __________________, § § § Claimant, § AMERICAN ARBITRATION § ASSOCIATION CASE NO. v. § § _______________ __________________, § § § Respondent. § CONFIDENTIALITY AGREEMENT AND AGREED PROTECTIVE ORDER The parties to this arbitration (the “Parties”), Claimant ______________ (“Claimant” or “Party”) and Respondent _____________________ (“Respondent” or “Party”) enter into this Confidentiality Agreement and Agreed Protective Order (“Agreement”) as follows: 1. The term “Discovery Material” shall mean all information, tangible items, electronic material and documents produced by any Party or non-party in response to discovery in the arbitration proceeding, _______________________, AAA Case No. ________________ (the “Arbitration”). For purposes of this Agreement, “Discovery Material” shall also include any affidavit, motion, memorandum, pleading, image, or other material presented to the arbitration panel that discloses Discovery Material designated “Confidential” and retaining its confidential designation. This Agreement shall govern the handling of all such Discovery Material. 2. The term “Confidential Discovery Material” shall refer to all Discovery Material which has been designated by the producing Party (the “Producing Party”) as “Confidential” because such Discovery Material contains Confidential Information. “Confidential Discovery Material” shall also include Discovery Material designated by the Producing Party as “Confidential – Attorney Eyes Only.” In designating information as “Confidential – Attorney Eyes Only,” the Producing Party will make such a designation only as to that information that it US-DOCS\118388455.1
believes contains highly sensitive business or technical information of the producing or designation Party. The “Confidential – Attorney Eyes Only” category is more fully explained in paragraph 15 below, but is identified here as being part of “Confidential Discovery Material.” For purposes of this Agreement, “Party” shall include each Party’s respective affiliates defined as any person or entity (or sub-unit of any entity) that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with a Party. “Confidential Information” is information 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 any other information that is “Confidential Information” under Section 21.4 of the Supply Agreement dated November 3, 2014 between Claimant and Respondent (the “Supply Agreement”). 3. No Discovery Material designated as “Confidential” or “Confidential – Attorney Eyes Only” hereunder or any copy, 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 US-DOCS\118388455.1
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. Unless otherwise provided herein, the “Confidential” designation set forth in this Agreement must be made at or prior to the time of production of documents by, to the extent possible, stamping the word “Confidential” on the first page of the Discovery Materials to be deemed Confidential. Information provided in electronic format, to the extent possible, should be designated as “Confidential” by correspondence between counsel. Discovery Material produced prior to entry of this Agreement may be designated as “Confidential” by referencing the Bates- 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 the form of testimony in deposition or otherwise may be designated as “Confidential” by counsel 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. US-DOCS\118388455.1
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’s claim of confidentiality, 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’s effort to retrieve any document or information promptly from such person and to limit any further disclosure pursuant to this Agreement. 7. A Party who has received Discovery Material (the “Receiving Party”) that is designated as “Confidential” and who objects to the designation of any Discovery Material as 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 US-DOCS\118388455.1
Discovery Material. The burden of proof in any proceeding regarding whether the designation of any document as “Confidential” is appropriate is at all times on the Party designating the document as “Confidential.” 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. Any other person upon order of the arbitration panel or upon all Parties’ 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 J-1 shall evidence such notification and agreement. US-DOCS\118388455.1
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. Nothing in this Agreement will be construed as limiting the Parties’ right to object 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 US-DOCS\118388455.1
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 governmental agency which is within the scope of such agency’s request and after providing at least five (5) business days’ notice to the Producing Party and after providing the Producing Party a reasonable opportunity to object to such production, provided that the production of any Confidential Discovery Material shall be at the Producing Party’s cost and expense. 15. The Receiving Party may not disclose, summarize, describe, characterize, or otherwise communicate documents or information designated as “Confidential – Attorney Eyes Only” to any persons other than those identified in 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) and filing “Confidential Materials” under seal (paragraph 9), shall apply to documents designated “Confidential – Attorneys Eyes Only.” Likewise, the duties and responsibilities the Parties have to agree to permit retroactive designation (paragraph 6), to US-DOCS\118388455.1
notify the other Party of a subpoena or order (paragraph 14) and to return or destroy documents (paragraph 11) shall apply to documents designated as “Confidential – Attorney Eyes Only.” 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: ________________________________ US-DOCS\118388455.1
EXHIBIT J-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 “Confidential Discovery Materials” will be used by me only in connection with the 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:___________________ US-DOCS\118388455.1
Exhibit K – 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 shall Order on Buyer’s behalf the number of Railcars necessary to fulfill such Monthly Order 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 of such Order Year, Seller shall Order on Buyer’s behalf the number of Railcars necessary to fulfill the Unscheduled Car requirement for such Order Year. All of such Railcars shall be the following Railcar Type: Railcar Type – [***] Seller Specification No. – [***] Gross Rail Load – [***] Typical Commodity – [***] Car Class – [***] US-DOCS\118388455.1
Exhibit L Form of Seller’s Order Confirmation [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: $ Seller’s Order Confirmation Price: $ The Seller’s Order Confirmation Price is subject to adjustment in accordance with the terms and conditions of the Supply Agreement dated November 3, 2014. Delivery: Commencing ______________ US-DOCS\118388455.1
Exhibit M Form of Invoice TRINITY RAIL GROUP, LLC 2525 Stemmons Freeway - Box 568887 - Dallas, Texas 75356-8887 214-631-4420 - Fax 214-589-8939 FREIGHT CAR/TANK CAR Sold To: Invoice Date: Invoice No: Cust No: Cust PO No: Our Order No: Bill of Lading: Ship To: Date Shipped: Shipped Via: Plant #___________ Salesman: Terms: Shipped Description Unit Price Amount 2 3311 PD CAR, 5660 CF RUNNING #'S: GACX 9413 9414 2 $0.00 Remarks: Remit To: Trinity Industries, Inc. P. O. Box 951716 Dallas, Texas 75395-1716 Wire Transfer To: Wachovia Bank Atlanta, Georgia ABA Routing #061-000-227 Trinity Industries, Inc. Account #2000143245898 ** The total amount set out above is payable at the office of Trinity Industries, Inc. at Dallas, Dallas County, Texas. Past due accounts will bear interest. Invoice - DHL ORIGINAL - CUSTOMER US-DOCS\118388455.1
Exhibit 31A
Certification of Principal Executive Officer
I, Brian A. Kenney, 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/ Brian A. Kenney | ||
| Brian A. Kenney | ||
| Chairman, President and Chief Executive Officer | ||
October 30, 2020
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 30, 2020
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, 2020, 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/ Brian A. Kenney | /s/ Thomas A. Ellman | |||||||
| Brian A. Kenney | Thomas A. Ellman | |||||||
| Chairman, President and Chief Executive Officer | Executive Vice President and Chief Financial Officer | |||||||
October 30, 2020
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.