GATX CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(In millions, except per share data)

New Accounting Pronouncements Adopted (Continued)

New Accounting Pronouncements Not Yet Adopted

NOTE 3 . Revenue

Adoption of ASC Topic 606, “Revenue from Contracts with Customers”

In the first quarter of 2018, we adopted Topic 606 using the modified retrospective method with respect to applicable contracts existing as of January 1, 2018. As provided in the guidance, we recognize marine operating revenue in the amount that corresponds directly to the value transferred to the customer. Contract assets and liabilities related to our customer performance obligations are not material to our financial statements. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period

amounts have not been adjusted and continue to be reported in accordance with appropriate accounting guidance. We recorded an immaterial cumulative adjustment to opening retained earnings, with the impact completely attributable to our marine operating 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 which continues to be within the scope of existing lease guidance. Therefore, the adoption of ASC 606 had no impact on our recognition or presentation of lease revenue.

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 executory costs, such as maintenance, insurance, and ad valorem taxes. We do not offer stand-alone maintenance service contracts and are unable to separate executory costs from full-service lease revenue. Operating lease revenue, including amounts related to executory costs, is recognized on a straight-line basis over the term of the underlying lease. As a result, we may not recognize lease revenue in the same period as maintenance and other executory costs, which we expense as incurred. Contingent rents are recognized when the contingency is resolved. Revenue is not recognized if collectability is not reasonably assured.

Finance Lease Revenue

In certain cases, we lease railcars and other operating assets that, at lease inception, are classified as finance leases. We recognize unearned income as lease revenue using the interest method, which produces a constant yield over the lease term. Initial unearned income is the amount that 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.

Marine Operating Revenue

We generate marine operating revenue through shipping services completed by our marine vessels. Upon adoption of ASC 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 our historical voyage data.

Other Revenue

Other revenue comprises customer liability repair revenue, utilization income, fee income, interest on loans, and other miscellaneous revenues. Select components of other revenue are within the scope of Topic 606 but based on our assessment, we determined that our current revenue elements and timing for purposes of income recognition are consistent with applicable provisions in the new standard. The remaining items are considered lease components that continue to be within the scope of existing lease guidance.

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.

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 nine instruments outstanding with an aggregate notional amount of $500.0 million as of June 30, 2018 with maturities ranging from 2019 to 2022 and ten instruments outstanding with an aggregate notional amount of $550.0 million as of December 31, 2017 with maturities ranging from 2018 to 2022.

Cash Flow Hedges

We use interest rate swaps to convert floating rate debt to fixed rate debt. 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 to hedge our exposure to fluctuations in the exchange rates of the foreign currencies in which we conduct business. We had 11 instruments outstanding with an aggregate notional amount of $296.6 million as of June 30, 2018 that mature from 2018 to 2022 and five instruments outstanding with an aggregate notional amount of $285.6 million as of December 31, 2017 with maturities ranging from 2019 to 2022. Within the next 12 months, we expect to reclassify $3.4 million ( $2.6 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.

Some of our derivative instruments contain credit risk provisions that could require us to make immediate payment on net liability positions in the event that we default on certain outstanding debt obligations. The aggregate fair value of our derivative instruments with credit risk related contingent features that are in a liability position as of June 30, 2018 was $35.7 million . We are not required to post any collateral on our derivative instruments and do not expect the credit risk provisions to be triggered.

In the event that a counterparty fails to meet the terms of an interest rate swap agreement or a foreign exchange contract, our exposure is limited to the fair value of the swap, if in our favor. We manage the credit risk of counterparties by transacting with institutions that we consider financially sound and by avoiding concentrations of risk with a single counterparty. We believe that the risk of non-performance by any of our counterparties is remote.

The following table shows the impacts of our derivative instruments on our statement of comprehensive income (in millions):

Other Financial Instruments

The carrying amounts of cash and cash equivalents, restricted cash, rent and other receivables, accounts payable, and commercial paper and bank credit facilities 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):

(1) Amounts reclassified from accumulated other comprehensive loss.

In 2018, we adopted ASU 2017-07 which modifies how an entity must present service costs and other components of net benefit cost. See "Note 2 . Basis of Presentation " for further details. In accordance with this new guidance, the service cost component of net periodic cost is recorded in the applicable operating expense line, including maintenance expense and selling, general and administrative expense in the Statements of Comprehensive Income; and the other components are recorded in other expense.

NOTE 6 . Share-Based Compensation

During the six months ended June 30, 2018 , we granted 320,100 non-qualified employee stock options, 45,250 restricted stock units, 58,440 performance shares, and 12,194 phantom stock units. For the three months and six months ended June 30, 2018, total share-based compensation expense was $4.7 million and $9.6 million and the related tax benefits were $1.2 million and $2.4 million . For the three months and six months ended June 30, 2017, total share-based compensation expense was $3.9 million and $7.2 million and the related tax benefits were $1.5 million and $2.7 million .

The estimated fair value of our 2018 non-qualified employee stock option awards and related underlying assumptions are shown in the table below.

NOTE 7 . Income Taxes

On December 22, 2017, the Tax Act was enacted, which made broad and complex changes to the U.S. tax laws. In particular, the U.S. corporation income tax rate was reduced to 21% from 35%, and a new territorial tax system was implemented that will affect the future U.S. taxation of earnings repatriated from our foreign subsidiaries and affiliates. Other provisions included an immediate deduction for qualified investments and limitations on the deductibility of interest expense and executive compensation. Due to our net operating loss position, these adjustments had no cash impact on our tax positions.

In 2017, we recorded a one-time non-cash net tax benefit of $315.9 million , which represented our provisional estimate of the impact of the Tax Act. This amount included a net benefit of $371.4 million associated with the re-measurement of our net deferred tax liability utilizing the lower U.S. tax rate. The Tax Act also imposed a one-time transitional repatriation tax of $57.2 million on certain undistributed earnings of our non-U.S. subsidiaries and affiliates.

We continue to evaluate the provisions of the Tax Act, and the ultimate impact may differ from this provisional estimate, due to, among other things, changes in interpretations and assumptions made by us, additional guidance that may be issued by the Internal Revenue Service and the U.S. Department of the Treasury, and actions that we may take. In addition, these estimates may change due to guidance provided by state taxing authorities and the completion of our 2017 U.S. and state income tax returns. No adjustments were made to our initial provisional estimate during the six months ended June 30, 2018.

Our effective tax rate was 25% for the six months ended June 30, 2018, compared to 30% for the six months ended June 30, 2017. The difference in the effective rates for the current year compared to the prior year is primarily attributable to the reduction in the U.S. corporation income tax rate from 35% to 21%, as part of the Tax Act. 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. Incremental tax benefits associated with share-based compensation were also recognized in each of the six-month periods ended June 30, 2018 and 2017.

NOTE 8 . Commercial Commitments

We have entered into various commercial commitments, such as guarantees, standby letters of credit, and performance bonds, 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):

(1) The carrying value of liabilities on the balance sheet for commercial commitments was $1.5 million at June 30, 2018 and $2.0 million at December 31, 2017 . The expirations of these commitments range from 2019 to 2023 . We are not aware of any event that would require us to satisfy any of our commitments.

Lease payment guarantees are commitments to financial institutions to make lease payments for a third party in the event they default. We reduce any liability that may result from these guarantees by the value of the underlying asset or group of assets.

We are also parties to standby letters of credit and performance bonds, which primarily relate to contractual obligations and general liability insurance coverages. No material claims have been made against these obligations, and no material losses are anticipated.

NOTE 9 . 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.