Exhibit 99.2

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Pacer International, Inc.:

We have audited the accompanying consolidated balance sheets of Pacer International, Inc. and subsidiaries (the Company) as of December 31, 2012 and 2011, and the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pacer International, Inc. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the years ended December 31, 2012 and 2011, in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP

Columbus, Ohio

February 8, 2013

 

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Report of Independent Registered Public Accounting Firm

To Board of Directors and Stockholders of Pacer International, Inc.:

In our opinion, the consolidated statements of income, shareholders’ equity and cash flows for the year ended December 31, 2010 present fairly, in all material respects, the results of Pacer International, Inc. and its subsidiaries operations and their cash flows for the year ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

/s/ PricewaterhouseCoopers LLP

Columbus, OH

February 23, 2011

 

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PACER INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

		December 31,
(in millions, except share and per share data)		2012				2011
ASSETS
Current assets
Cash and cash equivalents		$	20.2			$	24.0
Accounts receivable, net of allowances of $1.0 million and $1.4 million, respectively			132.7				133.5
Prepaid expenses and other			9.4				12.3
Deferred income taxes			2.4				4.0
Total current assets			164.7				173.8
Property and equipment
Property and equipment, cost			108.8				99.8
Accumulated depreciation			(62.0	)			(56.1	)
Property and equipment, net			46.8				43.7
Other assets
Deferred income taxes			12.6				14.1
Other assets			9.9				11.7
Total other assets			22.5				25.8
Total assets		$	234.0			$	243.3
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and other accrued liabilities			112.5				127.1
Long-term liabilities
Other			1.3				0.9
Total liabilities			113.8				128.0
Stockholders’ equity
Preferred stock, par value $0.01 per share; 50,000,000 shares authorized; none issued and outstanding			—				—
Common stock, par value $0.01 per share; 150,000,000 shares authorized; 35,085,577 and 34,979,273 issued and outstanding			0.4				0.4
Additional paid-in capital			305.7				304.7
Accumulated deficit			(185.9	)			(190.2	)
Accumulated other comprehensive income			—				0.4
Total stockholders’ equity			120.2				115.3
Total liabilities and stockholders’ equity		$	234.0			$	243.3

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

 

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PACER INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

		Year Ended
(in millions, except share and per share data)		December 31, 2012				December 31, 2011				December 31, 2010
Revenues		$	1,415.0			$	1,478.5			$	1,502.8
Operating expenses:
Cost of purchased transportation and services			1,181.5				1,218.7				1,251.7
Direct operating expenses			101.6				105.8				107.0
Selling, general and administrative expenses			123.4				131.8				138.5
Other income			(0.4	)			(4.8	)			(2.5	)
Total operating expenses			1,406.1				1,451.5				1,494.7
Income from operations			8.9				27.0				8.1
Interest expense			(1.4	)			(2.3	)			(6.6	)
Income before income taxes			7.5				24.7				1.5
Income tax expense			(3.2	)			(10.8	)			(0.6	)
Net income		$	4.3			$	13.9			$	0.9
Earnings per share:
Basic:
Earnings per share		$	0.12			$	0.40			$	0.03
Weighted average shares outstanding			35,069,099				34,959,819				34,921,594
Diluted:
Earnings per share		$	0.12			$	0.40			$	0.03
Weighted average shares outstanding			35,338,338				35,066,417				34,946,175
Other comprehensive income (loss):
Foreign currency translation adjustment		$	(0.4	)		$	0.7			$	(0.2	)
Comprehensive income		$	3.9			$	14.6			$	0.7

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

 

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PACER INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

(in millions, except share amounts)		Preferred Stock								Common Stock								Additional Paid-in								Accumulated Other				Total
		No. of Shares				Amount				No. of Shares				Amount				Accumulated Capital				Accumulated Deficit				Comprehensive Income (Loss)				Stockholders’ Equity
Balance December 31, 2009			—			$	—				34,904,051			$	0.4			$	301.5			$	(205.0	)		$	(0.1	)		$	96.8
Net income			—				—				—				—				—				0.9				—				0.9
Foreign currency translation adjustment			—				—				—				—				—				—				(0.2	)			(0.2	)
Stock based compensation			—				—				—				—				1.3				—				—				1.3
Tax impact of stock based compensation			—				—				—				—				(0.1	)			—				—				(0.1	)
Issuance of restricted stock, net of forfeitures			—				—				33,875				—				—				—				—				—
Repurchase and retirement of Pacer common stock			—				—				(26,252	)			—				(0.2	)			—				—				(0.2	)
Balance December 31, 2010			—			$	—				34,911,674			$	0.4			$	302.5			$	(204.1	)		$	(0.3	)		$	98.5
Net income			—				—				—				—				—				13.9				—				13.9
Foreign currency translation adjustment			—				—				—				—				—				—				0.7				0.7
Stock based compensation			—				—				—				—				2.4				—				—				2.4
Tax impact of stock based compensation			—				—				—				—				(0.1	)			—				—				(0.1	)
Issuance of common stock for vesting of restricted stock units			—				—				19,820				—				—				—				—				—
Issuance of restricted stock, net of forfeitures			—				—				57,895				—				—				—				—				—
Repurchase and retirement of Pacer common stock			—				—				(10,116	)			—				(0.1	)			—				—				(0.1	)
Balance December 31, 2011			—			$	—				34,979,273			$	0.4			$	304.7			$	(190.2	)		$	0.4			$	115.3
Net income			—				—				—				—				—				4.3				—				4.3
Foreign currency translation adjustment			—				—				—				—				—				—				(0.4	)			(0.4	)
Stock based compensation			—				—				—				—				1.8				—				—				1.8
Tax impact of stock based compensation			—				—				—				—				(0.7	)			—				—				(0.7	)
Issuance of common stock for vesting of restricted and performance stock units			—				—				55,330				—				—				—				—				—
Issuance of restricted stock, net of forfeitures			—				—				58,446				—				—				—				—				—
Repurchase and retirement of Pacer common stock			—				—				(7,472	)			—				(0.1	)			—				—				(0.1	)
Balance December 31, 2012			—			$	—				35,085,577			$	0.4			$	305.7			$	(185.9	)		$	—			$	120.2

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

 

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PACER INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Year Ended
(in millions)		December 31, 2012				December 31, 2011				December 31, 2010
Cash flows from operating activities
Net income		$	4.3			$	13.9			$	0.9
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			7.9				7.2				6.5
Gain on sale of property and equipment			—				(0.1	)			(2.5	)
Gain on sale of railcar assets			—				(4.7	)			—
Amortization of deferred gain on sale lease-back transactions			(0.8	)			(0.7	)			(0.8	)
Deferred taxes			2.5				12.4				5.2
Stock based compensation expense			1.8				2.4				1.3
Change in operating assets and liabilities
Accounts receivable, net			0.8				19.0				(0.2	)
Prepaid expenses and other			2.9				3.1				11.1
Accounts payable and other accrued liabilities			(14.4	)			(20.7	)			(1.2	)
Other assets			2.0				1.8				0.4
Other liabilities			(0.9	)			(0.2	)			(4.6	)
Net cash provided by operating activities			6.1				33.4				16.1
Cash flows used in investing activities
Capital expenditures			(11.4	)			(8.0	)			(8.2	)
Purchase of railcar assets			(28.4	)			(22.1	)			—
Net proceeds from sale of railcar assets			—				28.9				—
Net proceeds from sale lease-back transaction			30.2				—				2.4
Proceeds from sales of property and equipment			0.1				1.1				2.8
Net cash used in investing activities			(9.5	)			(0.1	)			(3.0	)
Cash flows used in financing activities
Net repayments under revolving line of credit agreement			—				(13.4	)			(9.6	)
Debt issuance costs paid to third parties			(0.2	)			—				(1.6	)
Repurchase and retirement of Pacer common stock			(0.1	)			(0.1	)			(0.2	)
Withholding tax paid upon vesting of restricted and performance stock units			(0.1	)			—				—
Capital lease obligation payment			—				—				(0.3	)
Net cash used in financing activities			(0.4	)			(13.5	)			(11.7	)
Net increase (decrease) in cash and cash equivalents			(3.8	)			19.8				1.4
Cash and cash equivalents at beginning of year			24.0				4.2				2.8
Cash and cash equivalents at end of year		$	20.2			$	24.0			$	4.2
Supplemental disclosures for cash paid for:
Interest		$	1.1			$	1.6			$	3.8
Income taxes (refunds)		$	(0.1	)		$	(7.7	)		$	(7.7	)

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

 

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PACER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Pacer International, Inc. and subsidiaries (referred to in these notes to consolidated financial statements as “Pacer”, “the Company”, “we”, “us” or “our”) are a leading asset-light transportation and global logistics service provider that facilitates the movement of freight from origin to destination through our intermodal and logistics segments.

The Company has operated as an independent, stand-alone company since its recapitalization in May 1999. From 1984 until the recapitalization, portions of the intermodal segment’s business were conducted by various entities owned directly or indirectly by APL Limited.

As part of the recapitalization, the assets and liabilities of the Company remained at their historical basis for financial reporting purposes; for income tax purposes, the transaction has been treated as a taxable transaction such that the consolidated financial statements reflect a “step-up” in tax basis resulting in the establishment of a deferred tax asset.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and all entities that the Company controls. All significant intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management of the Company to make estimates and assumptions related to the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant estimates include recognition of revenue, costs of purchased transportation and services, allowance for doubtful accounts, accounting for income taxes and valuation of deferred tax assets, the economic useful lives of our property and equipment and contingencies. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include highly liquid investments with an original maturity of three months or less.

Accounts Receivable

Accounts receivable are recorded at the invoice amount. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The allowance has been established through an analysis of accounts receivable aging categories, historical collection experience with our customers, current economic conditions, and credit policies. As we monitor our receivables, we regularly identify customers that may have payment problems, adjusting the allowance for doubtful accounts accordingly with an offset to selling, general and administrative expenses. Account balances are charged off against the allowance when recovery is considered remote. The Company does not have any off balance sheet credit exposure related to its customers. At December 31, 2012 and December 31, 2011, accounts receivable included unbilled amounts of $11.8 million and $10.1 million, respectively.

Property and Equipment

Property and equipment are recorded at cost. The Company capitalizes certain costs of internally developed software. Capitalized costs include purchased materials and services, and payroll and payroll related costs. Property and equipment under capital leases are recorded at the present value of minimum lease payments at the date of acquisition with a corresponding amount recorded as a capital lease obligation.

 

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Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the assets as follows:

 

Classification		Estimated Useful Life
Rail cars		25 to 30 Years
Containers and chassis		15 to 20 Years
Autos/trucks and revenue equipment		5 to 10 Years
Leasehold improvements		Shorter of term of lease or life of improvement
Other (including computer hardware and software and furniture and equipment)		3 to 7 Years

When assets are sold, the applicable costs and accumulated depreciation are removed from the accounts, and any gain or loss is included in income. Expenditures, including those on leased assets, which extend an asset’s useful life or increase its utility, are capitalized and amortized. Expenditures for maintenance and repairs are expensed as incurred.

Deferred Financing Costs

The deferred financing costs included in other assets relate to the cost incurred in the placement of the Company’s debt. The balance of $1.6 million and $1.8 million at December 31, 2012 and 2011 relate to those costs to be amortized over the remaining life of our 2010 Credit Agreement (see Note 2).

In 2012, $0.2 million of deferred financing costs were incurred related to an amendment to the Company’s 2010 Credit Agreement. In 2010, $1.6 million of deferred financing costs were charged to interest expense in the accompanying consolidated statements of comprehensive income as a result of entering into the 2010 Credit Agreement.

Revenue Recognition

We recognize revenue when all of the following conditions are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed and determinable, and collectability is reasonably assured. We maintain signed contracts with many of our customers and have bills of lading specifying shipment details, including the rates charged for our services. Revenues are presented net of sales and volume discounts.

Our transportation service revenue is recognized after the services have been completed, meaning delivery has occurred and the shipping terms of the contract have been satisfied. Our warehousing, distribution and supply chain services revenues are recognized as the storage or service is rendered.

Income Taxes

The Company accounts for income taxes according to the asset and liability method. Under this method, a deferred tax asset or liability is recorded based upon the tax effect of temporary differences between the tax basis of assets and liabilities and their carrying value for financial reporting purposes. Deferred tax assets and liabilities are measured pursuant to tax laws using rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized.

Tax liabilities are recorded when, in management’s judgment, a tax position does not meet the more likely than not threshold of being sustained under tax audits. For tax positions that are greater than 50% likely, a tax liability may be recorded depending on management’s assessment of how the tax position will ultimately be settled.

Accumulated Other Comprehensive Income (Loss)

Other comprehensive income (loss) includes foreign currency translation adjustments. The assets and liabilities of the Company’s foreign operations have been translated at rates of exchange at the balance sheet date, and related revenues and expenses have been translated at average rates of exchange in effect during the year.

 

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Stock-Based Compensation

The Company has adopted ASC Topic 718 (“ASC 718”), “Compensation – Stock Compensation,” which establishes the accounting for employee stock-based awards. Through December 31, 2012, the Company’s incentive awards have been granted in the form of common stock options, restricted stock, restricted stock units and performance stock units. Under the provisions of ASC 718, stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite employee or director service period (generally the vesting period of the grant) and also for performance stock units as performance targets are met, or expected to be met. The Company estimates the expected forfeiture rate and only recognizes expense for the shares expected to vest. The forfeiture rate is estimated based on historical experience and expectations regarding future pre-vesting termination behavior of employees. To the extent the actual forfeiture rate is different from the estimate, stock-based compensation expense is adjusted accordingly.

The Company recognizes stock-based compensation for awards issued under the Company’s long-term incentive plans in selling, general and administrative expenses of the consolidated statement of comprehensive income.

Our stock-based compensation expense for stock options is estimated at the grant date based on the award’s fair value as calculated by the Black-Scholes option pricing model and is recognized as expense over the requisite service period. This model requires various assumptions including expected volatility and expected term. If any of the assumptions used in the model changes significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. The Company sells primarily on net 30-day terms, performs credit evaluation procedures on its customers and generally does not require collateral on its accounts receivable.

For the year ended December 31, 2012, two customers contributed more than 10% of total consolidated revenues (individually each contributed 18.6% and 17.3%). Two customers contributed more than 10% of total consolidated revenues, contributing 15.3% and 15.1% respectively for the year ended December 31, 2011. Three customers contributed more than 10% of total consolidated revenues, contributing 14.5%, 12.0%, and 10.1% respectively for the year ended December 31, 2010.

Approximately 40%, 33% and 26% of total consolidated revenues for the years ended December 31, 2012, 2011 and 2010 were related to the automotive industry, respectively.

Reclassification

Certain reclassifications have been made to the 2011 and 2010 consolidated financial statements in order to conform to the 2012 presentation, including the reclassification of certain expenses from selling, general and administrative expenses to costs of purchased transportation and services and direct operating expenses. The Company also reclassified depreciation and amortization to direct operating expenses and selling, general and administrative expenses. The reclassifications had no impact on previously reported income.

The following table summarizes the specific reclassifications discussed above:

 

		Year Ended December 31,
(in millions)		2011												2010
		Originally Reported				Reclassification Amount				As Reclassified				Originally Reported				Reclassification Amount				As Reclassified
Cost of purchased transportation and services		$	1,208.4			$	10.3			$	1,218.7			$	1,240.5			$	11.2			$	1,251.7
Direct operating expenses			94.7				11.1				105.8				94.5				12.5				107.0
Selling, general and administrative expenses			146.0				(14.2	)			131.8				155.7				(17.2	)			138.5
Depreciation and amortization		$	7.2			$	(7.2	)		$	—			$	6.5			$	(6.5	)		$	—

 

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NOTE 2. REVOLVING CREDIT FACILITY

Our revolving credit agreement dated December 30, 2010, as amended on July 6, 2012 (the “2010 Credit Agreement”), matures on July 6, 2017 and provides for a revolving credit facility of up to $125 million (including a $40 million letter of credit facility and a $12.5 million swing line loan facility), and an accordion feature providing for an increase in the facility of up to $50 million subject to certain conditions (for a total facility of $175 million if such conditions are met).

The amount available for borrowing under the facility is determined by reference to a borrowing base formula which is equal to the lesser of (1) the aggregate commitments of the lenders (currently $125 million), or (2) an amount equal to the sum of (a) 85% of the eligible accounts receivable, (b) 85% of eligible earned but unbilled accounts receivables up to $20 million, and (c) an amount equal to the lesser of (i) 85% of the net orderly liquidation value of eligible owned railcars and chassis as of December 30, 2010 and (ii) $25 million (such lesser amount, the “Closing Date Equipment Formula Amount”), provided that, commencing February 1, 2011, the Closing Date Equipment Formula Amount is reduced monthly based on a seven year straight line monthly amortization schedule), minus (d) the availability reserve (as defined in the 2010 Credit Agreement). As of December 31, 2012, $75 million was available under the 2010 Credit Agreement pursuant to the borrowing base formula described above, net of $11.5 million of outstanding letters of credit. There were no outstanding loans as of December 31, 2012.

Borrowings under the 2010 Credit Agreement bear interest at rates based on a Eurodollar rate plus an applicable margin or a base rate plus an applicable margin. Effective as of July 6, 2012, the margin ranges from 1.75% to 2.25% on Eurodollar rate loans and 0.75% to 1.25% on base rate loans, in each case based on the percentage that our average total outstanding borrowings under the facility bear to the aggregate commitments of the lenders under the facility (currently $125 million). Pursuant to the July 2012 amendment, the applicable margins are no longer subject to further reduction based on the Company’s fixed charge coverage ratio. The base rate is the highest of the prime lending rate of the Administrative Agent, the Eurodollar rate for a 30-day interest period plus 1.5%, or the federal funds rate plus 1/2 of 1%.

The 2010 Credit Agreement provides for letter of credit fees ranging from 1.75% to 2.25% per annum based on the average quarterly availability as a percentage of the borrowing base, a letter of credit “fronting fee” equal to 0.25% per annum, and a commitment fee payable on the unused portion of the facility, accruing at a rate per annum ranging from 0.250% to 0.375% based on the percentage that the average unused amount of the facility bears to the aggregate commitments of the lenders under the facility.

The 2010 Credit Agreement contains affirmative, negative and financial covenants customary for such asset-based financings that, among other things, limit the Company’s ability to make loans or investments (including acquisitions) and equity distributions (cash dividends or repurchases of stock); prepay, redeem or purchase debt; incur liens and engage in sale and leaseback transactions; incur additional indebtedness; engage in mergers, acquisitions and asset sales; enter into transactions with affiliates; and change our primary business. In addition, the 2010 Credit Agreement does not limit the dollar amount of investments (including acquisitions) and equity distributions (cash dividends or repurchases of stock) so long as the Company is not in default under the agreement and the availability under the facility on a proforma basis exceeds specified threshold amounts (and in certain cases subject to our having a proforma fixed charge coverage ratio of greater than or equal to 1.1 to 1.0). The 2010 Credit Agreement does not contain any limitations on our ability to make capital expenditures. The 2010 Credit Agreement also contains representations and warranties and events of default customary for agreements of this type.

If the amount of availability under the facility falls below certain specified threshold amounts, we are subject to a fixed charge coverage ratio financial covenant (as defined in the 2010 Credit Agreement) for the preceding 12 months period, which must not be less than 1.1 to 1.0. Additionally, the 2010 Credit Agreement also contains a lockbox feature that will require that all qualified daily cash receipts be promptly applied to the repayment of outstanding borrowings under the facility only during a period commencing on the date in which the Company’s availability under the facility falls below certain threshold amounts (or the date that an event of default occurs) and continuing until the availability has exceeded such threshold amounts for 90 days (and no event of default has existed). As of December 31, 2012, the Company is compliant with all applicable covenants contained within the 2010 Credit Agreement.

During 2012, borrowings under the 2010 Credit Agreement bore a weighted average interest rate of 4.0% per annum.

The 2010 Credit Agreement continues to be guaranteed by all of the Company’s domestic subsidiaries and is collateralized by substantially all of the tangible and intangible assets, intercompany debts, stock or other equity interests owned by the Company and its domestic subsidiaries and a majority of the stock or other equity interests of certain of its foreign subsidiaries.

 

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NOTE 3. RAILCAR ASSET SALE

During 2011, the Company purchased 245 railcars pursuant to purchase options under various lease agreements. These leases were previously accounted for as operating leases. The railcar purchases were financed through borrowings under the 2010 Credit Agreement. On July 22, 2011, we sold the railcar assets for net proceeds of $28.9 million. The Company recorded a gain as a result of the transaction net of related transaction costs and other carrying costs of approximately $4.7 million which is included in other income on the consolidated statement of comprehensive income. Proceeds from the sale of the railcars were used to repay outstanding borrowings under the 2010 Credit Agreement.

NOTE 4. ARRANGEMENTS WITH UNION PACIFIC

On November 3, 2009, the Company entered into (i) an amendment (the “Amendment”) to the Amended and Restated Rail Transportation Agreement dated as of May 15, 2002, among Union Pacific, the Company, and American President Lines, Ltd., and APL Co. PTE Ltd. (collectively, “APL”) (the “2002 Agreement”) and (ii) a new commercial rail transportation agreement (the “2009 Commercial Agreement”) and other agreements with Union Pacific (collectively, the “November 2009 Arrangements”). The Amendment provides that the rates and other terms and conditions of the 2002 Agreement will no longer apply to domestic shipments in 48- and 53-foot containers (also referred to as “domestic big box shipments”) tendered by Pacer for transportation by Union Pacific, which shipments will be subject to the terms and conditions of the 2009 Commercial Agreement.

In connection with the November 2009 Arrangements, Union Pacific and Pacer agreed to settle all outstanding claims and counterclaims between them relating to Pacer’s domestic big box shipments under the 2002 Agreement, including Union Pacific’s claim for retroactive rate adjustments of approximately $140 million for the period from January 1, 2005, through June 30, 2009 (the latest available date) and Pacer’s claims alleging Union Pacific’s breach of the 2002 Agreement.

Under the 2009 Commercial Agreement, the Company agreed that rates and fuel surcharges for domestic big box shipments payable by the Company to Union Pacific for transportation on the Union Pacific network would adjust gradually over a two-year period to “market” levels and full fuel surcharge and would continue on competitive terms after October 11, 2011, the expiration date of the 2002 Agreement.

As part of the November 2009 Arrangements, the Company and Union Pacific also entered into a fleet sharing arrangement that allows Union Pacific customers access to the Company’s equipment fleet and grants the Company expanded access to Union Pacific’s equipment fleet. These equipment arrangements also contain mechanisms that allow the Company to adjust the size of its fleet up or down to address estimated changes in its equipment needs.

The 2002 Agreement remained in effect through its October 11, 2011 expiration date with respect to shipments (other than the domestic big box shipments) and other matters not expressly governed by the November 2009 Arrangements, including the rates, terms and conditions applicable to (1) international shipments generally in 20, 40, and 45-ft. containers owned or leased by APL; (2) domestic shipments in containers owned or leased by APL or other third party ocean carriers (known as domestic and international reload services or avoided repositioning cost (“ARC”) moves); and (3) international shipments in containers owned or leased by other third party ocean carriers. The 2002 Agreement also established certain conditions applicable to automotive shipments (which primarily move between the United States and Mexico) in containers owned or leased by Pacer. The 2009 Commercial Agreement established terms and conditions to provide the Company with a continued exclusive position on the Union Pacific network with regard to offering services to meet ocean carrier customers’ needs in conjunction with and in addition to the Union Pacific rail transportation service. Prior to and in connection with the October 2011 expiration of the 2002 Agreement, the Company entered into rate agreements with Union Pacific covering automotive shipments, ARC moves and all but one of its third party ocean carrier customers.

The 2009 Commercial Agreement has a multi-year term and thereafter will automatically renew for one-year periods subject to certain conditions, including a minimum volume requirement, and subject to cancellation by either party with specified notice. In connection with the agreements and arrangements described above, including the amendment of the 2002 Agreement, Union Pacific paid Pacer $30 million. The payment was used to pay down outstanding borrowings under the Company’s prior credit facility on November 4, 2009. In 2009, the Company recognized other income of $17.5 million related to the Amendment (net of $1.2 million of accelerated chassis delivery costs), and $11.3 million of deferred gain was amortized to costs of purchased transportation and services through October 11, 2011, the expiration date of the 2002 Agreement. There was no amortization for the year ended December 31, 2012. The total amount of amortization for the years ended December 31, 2011 and 2010 was $4.7 million, and $5.7 million respectively.

During 2010, the Company assigned and Union Pacific assumed all of the Company’s future lease obligations for the majority of 53-foot, 110-inch containers leased from third party equipment lessors. At the same time, the Company entered into an equipment lease agreement with Union Pacific pursuant to which it leases 53-ft, 110-inch Pacer-branded intermodal containers from Union Pacific to support Pacer’s domestic intermodal traffic. Under these arrangements, Union Pacific

 

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assumed direct maintenance and repair responsibility for the containers, including those leased from Union Pacific. As a result of the equipment lease and the November 2009 Arrangements, Union Pacific has become the primary supplier and servicer of the containers used in the Company’s business. In connection with the November 2009 Arrangements, Union Pacific assumed responsibility for maintaining all of the Company’s 53-ft. chassis used on the Union Pacific network. During 2011, the Company assigned and Union Pacific assumed the Company’s future lease obligations for the majority of the 53-foot chassis leased from third party equipment lessors used on the Union Pacific network.

On October 19, 2012, the Company entered into a multi-year agreement with Union Pacific to arrange, manage and provide wholesale intermodal transportation services for automotive parts shipments between the United States and Mexico. The new agreement changes the nature of the Company’s participation in this business. Typically, the Company contracts for rail transportation from multiple rail carriers and combines that with the Company’s equipment and network logistics management services to intermediaries. Under the new agreement, effective January 1, 2013, the Company will no longer collect and pass through the rail transportation costs to automotive parts intermediaries servicing this US-Mexico business, but will act as Union Pacific’s manager for cross-border shipments and provide rail container and chassis management services for Union Pacific in Mexico. The Company is compensated on a fee basis for such services and the use of the Company’s equipment. Accordingly, beginning January 1, 2013, for US-Mexico automotive parts shipments, the Company’s financial results will no longer include the revenue and costs associated with the purchased rail transportation except to the extent that we are servicing customers as a direct retail provider.

 

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NOTE 5. INCOME TAXES

The provision for income taxes is as follows (in millions):

 

		Year Ended
		December 31, 2012				December 31, 2011				December 31, 2010
Current:
Federal		$	—			$	(2.6	)		$	(4.9	)
State			0.4				0.7				0.2
Foreign			0.3				0.3				0.1
Total current			0.7				(1.6	)			(4.6	)
Deferred:
Federal			2.8				9.5				5.1
State			—				2.9				0.1
Foreign			(0.3	)			—				—
Total deferred			2.5				12.4				5.2
Total provision		$	3.2			$	10.8			$	0.6

Income (loss) before taxes includes the following components (in millions):

 

		Year Ended
		December 31, 2012				December 31, 2011				December 31, 2010
United States		$	7.8			$	22.6			$	0.9
Outside U.S.			(0.3	)			2.1				0.6
		$	7.5			$	24.7			$	1.5

The reconciliation of the net effective income tax rate to the U.S. federal statutory income tax rate is as follows:

 

		Year Ended
		December 31, 2012				December 31, 2011				December 31, 2010
U.S. federal statutory rate			35.0	%			35.0	%			35.0	%
State tax, net of federal benefit			5.0				3.3				14.3
State NOL valuation allowance, net of federal benefit			0.1				0.3				—
Non-deductible business meals			1.5				0.4				8.3
Tax penalties			0.3				0.1				2.2
Impact of change in state apportionment on deferred taxes			(1.1	)			4.3				—
Prior tax year adjustments			0.3				2.2				(8.1	)
Tax credits			(0.1	)			(0.2	)			(3.7	)
Tax settlements			0.1				(0.5	)			(17.4	)
Foreign taxes in excess of federal rate			1.1				0.5				8.5
Non-taxed foreign income			—				(1.8	)			—
Other			0.5				0.1				1.1
Net effective tax rate			42.7	%			43.7	%			40.2	%

The following table shows the tax effects of the Company’s cumulative temporary differences included in the consolidated balance sheets at December 31, 2012 and December 31, 2011 (in millions):

 

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		December 31, 2012				December 31, 2011
Tax basis in excess of book—Goodwill		$	14.1			$	22.5
Property and equipment			(9.6	)			(10.2	)
Accrued liabilities			1.8				3.5
Prepaids			(2.0	)			(2.2	)
Stock compensation			1.7				2.1
Net operating loss and other carryforwards			8.3				1.6
Other			0.8				1.0
Total net deferred tax asset before valuation allowance			15.1				18.3
State NOL valuation allowance			(0.1	)			(0.2	)
Total net deferred tax asset		$	15.0			$	18.1
Current deferred tax asset		$	4.2			$	5.5
Non-current deferred tax asset			22.3				24.4
Current deferred tax liability			(1.8	)			(1.5	)
Non-current deferred tax liability			(9.7	)			(10.3	)
Total net deferred tax asset		$	15.0			$	18.1

At December 31, 2012, the Company has recorded a net deferred tax asset of $15.0 million which includes a valuation allowance of $0.1 million. The Company believes it is more likely than not that future earnings will be sufficient to fully utilize the net assets. The minimum amount of future taxable income required to realize this asset is approximately $40.5 million over the next twenty years. Should the Company not be able to generate sufficient future income in 2013 and beyond, it may be required to record valuation allowances against the deferred tax assets resulting in additional income tax expense in the consolidated statement of comprehensive income.

At December 31, 2012, the Company had federal net operating loss carryforwards of $5.5 million primarily expiring through 2032. At December 31, 2012 and 2011, the Company had state net operating loss carryforwards (tax affected before federal benefit) of $2.8 million and $1.8 million, respectively, expiring through 2032. The Company has a valuation allowance against the state operating loss carryforwards (tax affected before federal benefit) of $0.2 million and $0.3 million at December 31, 2012 and 2011, respectively. The valuation allowance for state net operating loss carryforward decreased $0.1 million mainly as a result of the write off of loss carryforwards due to the closure of operations in certain jurisdictions for some legal entities.

Undistributed earnings of the Company’s non-U.S. subsidiaries amounted to approximately $2.5 million at December 31, 2012. Those earnings are considered to be indefinitely reinvested and, accordingly, no U.S. federal or state deferred income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to U.S. income taxes and withholding taxes payable in various non-U.S. jurisdictions, which could potentially be offset by foreign tax credits. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation.

Accounting for uncertainty in income taxes requires a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company recognizes in the financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The Company had no reserves relating to uncertain tax positions as of December 31, 2012, 2011 and 2010.

Pacer International, Inc. and its U.S. subsidiaries file a consolidated federal income tax return. We file unitary or separate state returns based on state filing requirements. All federal income tax returns for the Company are closed through 2003 and filed through 2011. All state and local income tax returns for the Company are closed through 2007 and filed through 2011.

 

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NOTE 6. 401(K) PLAN AND LONG-TERM INCENTIVE PLANS

401(k) Plan

Under the Pacer International, Inc. 401(k) plan, the Company matches 50% of the first 6% of base salary contributed by the employee. Matching contributions were $1.0 million and $1.1 million for 2012 and 2011, respectively. There were no matching contributions in 2010.

Long-Term Incentive Plans

The Company recognized stock based compensation expense under our long-term incentive plans of $1.8 million, $2.4 million and $1.3 million for 2012, 2011 and 2010, respectively. The tax benefit for all share-based compensation plan expense included in the provision for income taxes totaled $0.3 million, $0.1 million and $0.2 million for 2012, 2011 and 2010, respectively. The Company did not realize any excess tax benefit for tax deductions from any of the share-based compensation plans in 2012, 2011 and 2010.

On April 25, 2012, the shareholders of the Company approved the 2012 Omnibus Incentive Plan (the “2012 Plan”) which had been adopted by the Board of Directors in February 2012 subject to shareholder approval. The 2012 Plan provides for grants or awards of cash incentives, stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, performance shares, dividend equivalent rights and other equity-based awards (collectively, “Awards”) to directors, certain key employees and executive officers.

The maximum number of shares of common stock that may be subject to equity awards under the 2012 Plan is 2,775,000 shares plus such number of shares relating to outstanding awards under predecessor plans that expire, are canceled, are not earned or terminate for any reason without issuance or delivery of the shares. Subject to any required action by the Company’s shareholders, the number of shares reserved for issuance under the 2012 Plan, the maximum award limitations set forth in the 2012 Plan, the number of shares underlying an outstanding award, as well as the price per share (or exercise, base or purchase price) of the underlying shares, will be proportionately adjusted for any increase or decrease in the number of issued shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the shares, or any other similar transaction (but not the issuance or conversion of convertible securities). Subject to any required action by the Company’s shareholders, the 2012 Plan administrator (presently the Compensation Committee of the Board of Directors), in its sole discretion, may make similar adjustments to reflect a change in the capitalization of the Company, including a recapitalization, repurchase, rights offering, reorganization, merger, consolidation, combination, exchange of shares, spin-off, spin-out or other distribution of assets to shareholders or other similar corporate transaction or event.

Prior to April 25, 2012, the Company had three long-term incentive plans, the 2006 Long-Term Incentive Plan (the “2006 Plan”), the 2002 Stock Option Plan (the “2002 Plan”) and the 1999 Stock Option Plan (the “1999 Plan”). Upon adoption of the 2002 Plan, no further awards were able to be made under the 1999 Plan, although outstanding awards under the 1999 plan were not affected. Upon adoption of the 2006 Plan, no further awards were able to be made under the 2002 Plan, although outstanding awards under the 2002 Plan were not affected. As of April 25, 2012, with the adoption of the 2012 Plan, no further awards may be made under the 2006 Plan, although outstanding awards under the 2006 Plan were not affected.

The 2012 Plan will continue in effect until February 6, 2022, unless terminated earlier by the Board. As of December 31, 2012, there were 2.8 million shares available for issuance under the 2012 Plan.

 

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Stock Options

During the year ended December 31, 2012, the Company granted stock options under the 2006 Plan to certain key employees and officers. The Company did not grant any stock options in 2011 or 2010. The options vest three years after grant date, have a seven year life, and an exercise price equal to the Company’s stock price on the grant date. The fair value of options granted in 2012 was estimated using the Black-Scholes valuation model and the assumptions noted in the following table.

 

		2012
Black-Scholes option-pricing model assumptions:
Weighted average risk-free interest rate			0.9	%
Weighted average volatility			47.3	%
Weighted average dividend yield			N/A
Weighted average expected option term			5 years
Weighted average fair value per share of options granted		$	2.25

The expected term of the stock options is based on the expected life of the option, using the simplified method. The expected volatility is based on a combination of the changes in weekly prices of the Company’s and selected competitors’ stock over a historical period preceding each grant date. The risk free interest rate is based on the implied yield on U.S. Treasury issues with a term equal to the expected term of the option.

The following table summarizes the stock option activity under the 2002 Plan, 2006 Plan and 2012 Plan as of December 31, 2012:

 

		Options				Weighted Average Exercise Price
Balance at December 31, 2009			464,900			$	17.38
Granted			—				—
Canceled or expired			(96,100	)			17.87
Exercised			—				—
Balance at December 31, 2010			368,800				17.26
Granted			—				—
Canceled or expired			(154,300	)			15.15
Exercised			—				—
Balance at December 31, 2011			214,500				18.77
Granted			662,326				5.43
Canceled or expired			(40,884	)			5.42
Exercised			—				—
Balance at December 31, 2012			835,942				8.85
Options exercisable, end of year			208,500			$	19.23

There was no intrinsic value of stock options exercisable as of December 31, 2012. As of December 31, 2012, there was $0.9 million of unrecognized compensation costs related to stock options assuming no new grants or forfeitures. These costs are expected to be recognized over a weighted-average period of approximately 2.2 years.

 

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The following table summarizes information about stock options outstanding at December 31, 2012:

 

				Options Outstanding												Options Exercisable
Range of Exercise Prices				Number Outstanding				Weighted Average Remaining Life (Years)				Weighted Average Exercise Price				Number Exercisable				Weighted Average Exercise Price
Common Stock
$	2.41 - 9.99				645,442				6.2			$	5.33				18,000			$	2.75
$	10.00 - 14.99				8,000				0.1				13.74				8,000				13.74
$	15.00 - 19.99				128,700				1.5				18.69				128,700				18.69
$	20.00 - 24.99				10,800				1.3				20.31				10,800				20.31
$	25.00 - 29.99				33,000				3.0				26.48				33,000				26.48
$	30.00 - 35.17				10,000				3.3				35.17				10,000				35.17
	Total				835,942				5.2			$	8.85				208,500			$	19.23

Restricted Stock

The Company has issued time-based restricted stock under the 2006 Plan to certain employees and non-employee directors. Restricted stock is subject to restrictions and cannot be sold, transferred or disposed of during the restriction period. The holders of restricted stock generally have the same rights as a stockholder of the Company with respect to such shares, including the right to vote and receive dividends with respect to the shares. Restricted stock awards vest either in 25% increments, on June 1 of each year over a four year period or, in the case of directors, on the first anniversary of the grant date. A summary of restricted stock activity for the three years ended December 31, 2012 is presented below:

 

		Shares				Weighted Average Grant-Date Fair Value
Nonvested at December 31, 2009			116,750			$	22.27
Granted			50,000				6.53
Vested			(77,375	)			21.38
Forfeited			(16,125	)			19.34
Nonvested at December 31, 2010			73,250				13.12
Granted			67,844				5.41
Vested			(33,299	)			14.66
Forfeited			(9,949	)			8.23
Nonvested at December 31, 2011			97,846				7.75
Granted			58,446				5.42
Vested			(84,596	)			7.96
Forfeited			—				—
Nonvested at December 31, 2012			71,696			$	5.59

The fair value of time-based restricted stock vested was $0.7 million, $0.5 million and $1.7 million for 2012, 2011 and 2010, respectively, based on the market price at the grant date. As of December 31, 2012, there was $0.1 million of total unrecognized compensation cost related to restricted stock, which is expected to be recognized over a weighted-average period of approximately 0.2 years.

Performance Stock Units and Restricted Stock Units

The Company granted performance stock units (“PSUs”) in March 2012 under the 2006 Plan that vest based on (i) the percentage of the Company’s achievement of operating income and operating margin targets established by the Compensation Committee of the Board of Directors for the performance periods ending December 31, 2012, 2013 and 2014 and (ii) the continued employment of the grantee through March 5, 2015. The Company granted restricted stock units (“RSUs”) in

 

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November 2012 under the 2012 Plan that vest in equal one-fourth increments on November 12, 2013, 2014, 2015 and 2016, subject to the grantee’s continued employment by the Company on such vesting dates.

The Company granted PSUs in March 2011 that vest based on (i) the percentage of the Company’s achievement of operating income and operating margin targets established by the Compensation Committee of the Board of Directors for the performance periods ending December 31, 2011, 2012 and 2013 and (ii) the continued employment of the grantee through March 5, 2014. The Company granted RSUs in March 2011 that vest in equal one-third increments on March 5, 2012, 2013, and 2014, subject to the grantee’s continued employment by the Company on such vesting dates.

The Company granted PSUs in June 2010 that vest based on (i) the percentage of the Company’s achievement of operating income targets established by the Compensation Committee of the Board of Directors for the performance periods ending December 31, 2010, 2011 and 2012 and (ii) the continued employment of the grantee through March 5, 2013. The Company granted RSUs in June 2010 that vest in equal one-third increments on March 5, 2011, 2012, and 2013, subject to the grantee’s continued employment by the Company on such vesting dates.

The PSUs and RSUs (collectively the “Units”) may vest before the applicable vesting date if the grantee’s employment is terminated by the Company without cause. Upon vesting, the Units with respect to each of the 2010, 2011 and 2012 awards, result in the issuance of shares of Pacer common stock after required minimum tax withholdings. The holders of the Units do not have the rights of a shareholder and do not have voting rights but are entitled to receive dividend equivalents payable in the form of additional shares upon vesting of the Units.

The Units are valued at the date of grant, based on the closing market price of the Company’s common stock, and expensed using the straight-line method over the requisite service period. The actual number of PSUs earned with respect to each of the 2010, 2011 and 2012 awards will be based on the Company’s performance for the periods ending December 31, 2010, 2011, 2012, 2013 and 2014, as applicable. Vested PSUs in the table below include PSUs that vested under the terms of the applicable award agreement upon the grantee’s resignation or voluntary termination. A summary of RSU and PSU award activity for the years ended December 31, 2012, 2011 and 2010 is presented below:

 

		Performance Stock Units				Restricted Stock Units				Total				Weighted Average Grant-Date Fair Value
Balance at December 31, 2009			—				—				—			$	—
Granted			278,487				92,830				371,317				6.97
Vested			—				—				—				—
Forfeited/canceled			(92,830	)			—				(92,830	)			6.97
Balance at December 31, 2010			185,657				92,830				278,487				6.97
Granted			587,784				127,804				715,588				5.64
Vested			(6,060	)			(28,963	)			(35,023	)			6.74
Forfeited/canceled			(35,000	)			(17,995	)			(52,995	)			5.98
Balance at December 31, 2011			732,381				173,676				906,057				5.98
Granted			278,333				250,000				528,333				4.49
Vested			(11,499	)			(66,899	)			(78,398	)			6.08
Forfeited/canceled			(379,823	)			(13,409	)			(393,232	)			5.89
Balance at December 31, 2012			619,392				343,368				962,760			$	5.18

RSUs are expensed based on their respective time-based vesting periods, which are equal annual increments over the vesting period.

PSUs are expensed ratably over the vesting periods based on the actual and expected financial results of the individual performance periods. For the 2010, 2011 and 2012 performance periods, PSUs are expensed based on the actual financial results compared to the set performance targets for those periods. No expense related to PSUs was recorded for the 2010 and 2012 performance periods as the Company did not meet the operating income or operating margin targets for those periods. For the 2011 performance period, PSUs are expensed based on the actual achievement of the maximum (125%) operating income and operating margin targets which resulted in grantees earning 200% of the potential PSUs for the period subject to vesting on March 5, 2013 with respect to the 2010 awards, and March 5, 2014 with respect to the 2011 awards. For the 2013 and 2014 performance periods, PSUs are expensed based on forecasted achievement of the set targets. The future PSU expense related to

 

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the 2013 and 2014 performance periods may be higher or lower based on the actual results of those periods. The number of PSUs earned for those periods will be based on the actual operating income and operating margin in each of those periods, ranging from 0% (if threshold performance of 75% of the operating income or operating margin targets are not met in any of the those periods) to 200% (if the maximum performance of 125% of the operating income or operating margin target is met or exceeded in each of those periods).

As of December 31, 2012, there was $2.3 million of total unrecognized compensation cost related to RSUs and PSUs, which is expected to be recognized over a weighted-average period of approximately 1.2 years.

NOTE 7. COMMITMENTS AND CONTINGENCIES

The Company is subject to routine litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on the Company’s business, consolidated results of operations, financial condition or cash flows. Most of the lawsuits to which the Company is a party are covered by insurance and are being defended in cooperation with insurance carriers.

NOTE 8. SEGMENT INFORMATION

The intermodal segment provides intermodal rail transportation, intermodal marketing and local trucking services. The logistics segment provides highway brokerage, warehousing and distribution, international ocean shipping and freight forwarding, and supply chain management services.

For segment reporting purposes by geographic region, international ocean shipping and ocean freight forwarding revenues for the import and export of goods are generally attributed to the country of destination. For United States import movements from ocean shipping and ocean freight forwarding, the revenue is attributed to the country of origin. Revenues for all other services are attributed to the sales location. Substantially all intermodal revenues are generated in the United States. The following table presents revenues generated by geographical area for the years ended December 31, 2012, December 31, 2011 and December 31, 2010 (in millions):

 

		Year Ended
		December 31, 2012				December 31, 2011				December 31, 2010
United States		$	1,265.2			$	1,266.6			$	1,185.1
Asia			76.0				101.9				224.3
Europe			37.1				66.4				47.8
North America (excluding United States)			23.4				21.9				21.4
Australia/Oceania			4.0				8.3				10.5
South America			5.6				8.2				9.2
Africa			3.7				5.2				4.5
Total		$	1,415.0			$	1,478.5			$	1,502.8

All of the foreign revenues are generated by the logistics segment with the exception of revenues earned in North America (excluding United States), which are primarily generated by the Company’s intermodal segment. Foreign revenues totaled $149.8 million, $211.9 million and $317.7 million for the years ended December 31, 2012, December 31, 2011 and December 31, 2010, respectively. All material assets are located in the United States of America.

 

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The following table presents reportable segment information for the years ended December 31, 2012, December 31, 2011 and December 31, 2010 (in millions):

 

		Intermodal				Logistics				Corp/Other				Consolidated
Year ended December 31, 2012
Revenues		$	1,179.6			$	238.3			$	—			$	1,417.9
Inter-segment elimination			(2.9	)			—				—				(2.9	)
Subtotal			1,176.7				238.3				—				1,415.0
Depreciation and amortization			5.5				1.6				0.8				7.9
Income (loss) from operations			38.4				(10.4	)			(19.1	)			8.9
Capital expenditures			8.7				2.4				0.3				11.4
Year ended December 31, 2011
Revenues		$	1,175.3			$	303.5			$	—			$	1,478.8
Inter-segment elimination			(0.3	)			—				—				(0.3	)
Subtotal			1,175.0				303.5				—				1,478.5
Depreciation and amortization			4.8				1.9				0.5				7.2
Income (loss) from operations			48.6				(2.2	)			(19.4	)			27.0
Capital expenditures			4.7				2.7				0.6				8.0
Year ended December 31, 2010
Revenues		$	1,081.5			$	422.1			$	—			$	1,503.6
Inter-segment elimination			(0.8	)			—				—				(0.8	)
Subtotal			1,080.7				422.1				—				1,502.8
Depreciation and amortization			4.9				1.4				0.2				6.5
Income (loss) from operations			24.2				0.9				(17.0	)			8.1
Capital expenditures			4.5				3.7				—				8.2

The “Corp/Other” column includes corporate amounts (primarily compensation, tax and overhead costs unrelated to a specific segment). The Chief Operating Decision Maker does not review assets by segment for purposes of allocating resources and therefore assets by segment are not disclosed.

NOTE 9. PROPERTY AND EQUIPMENT

Property and equipment consist of the following at December 31, 2012 and December 31, 2011 (in millions):

 

		2012				2011
Railcars		$	25.5			$	25.6
Containers and chassis			4.9				5.1
Furniture and equipment			7.2				7.0
Computer hardware and software			60.9				52.1
Leasehold improvements and other			3.9				3.9
Software under development			6.4				6.1
Total			108.8				99.8
Less: accumulated depreciation			(62.0	)			(56.1	)
Property and equipment, net		$	46.8			$	43.7

Depreciation and amortization of property and equipment was $7.9 million, $7.2 million and $6.5 million for the years ended December 31, 2012, December 31, 2011 and December 31, 2010, respectively.

 

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NOTE 10. ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES

Accounts payable and other accrued liabilities at December 31, 2012 and December 31, 2011 were as follows (in millions):

 

		2012				2011
Accounts payable		$	86.0			$	93.9
Deferred revenue			2.6				3.1
Accrued equipment maintenance and lease			8.1				7.5
Accrued volume rebates			—				2.2
Accrued compensation and benefits			1.8				5.4
Accrued severance and restructuring charges			1.7				1.7
Accrued property taxes			1.4				1.1
Accrued claims			1.7				1.7
Other			9.2				10.5
		$	112.5			$	127.1

NOTE 11. LEASES

The Company leases double-stack railcars, containers, chassis, tractors, data processing equipment and real and other property. Minimal rental commitments under non-cancelable leases at December 31, 2012 are shown below (in millions):

 

		Operating Leases
2013		$	67.1
2014			59.7
2015			33.3
2016			15.2
2017			4.0
Thereafter			3.8
Total minimum payments		$	183.1

Operating leases for railcars contain provisions for automatic renewal for an additional five year period. The above table assumes the automatic five year renewal and includes the related minimum lease payments.

Rental expense was $77.6 million, $80.8 million and $88.5 million for the years ended December 31, 2012, December 31, 2011, and December 31, 2010, respectively.

The Company receives income from others for the use of its double-stack railcars and containers. These income amounts are included in revenues. Rental income was $37.9 million, $43.3 million and $47.8 million for the years ended December 31, 2012, December 31, 2011 and December 31, 2010, respectively.

During 2010, the Company completed a sale-leaseback transaction of 4,000 53-ft containers in our intermodal segment. The Company recognized net proceeds of $2.4 million which was recorded as a reduction of lease expense totaling $0.3 million and a deferred gain of $2.1 million in the first quarter of 2010. The deferred gain is being amortized over the lease term.

During 2012, the Company purchased a total of 262 railcars pursuant to purchase options under existing lease agreements. The Company subsequently sold and leased these railcars back under new agreements. As a result of these railcar asset transactions, the Company recorded a deferred gain of $1.8 million which will be amortized over the life of the respective leases. At December 31, 2012, $0.3 million is recorded in accounts payable and other accrued liabilities and $1.2 million is recorded in other long-term liabilities related to these transactions.

In 2012, 2011 and 2010, the Company recognized $0.8 million, $0.7 million and $0.8 million, respectively, of the deferred gains as reduction of direct operating expenses within the accompanying statements of comprehensive income.

 

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NOTE 12. EARNINGS PER SHARE

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

 

		Year Ended
		December 31, 2012				December 31, 2011				December 31, 2010
Numerator:
Net income (basic and diluted)		$	4.3			$	13.9			$	0.9
Denominator:
Denominator for earnings per share-basic:
Weighted average common shares outstanding			35,069,099				34,959,819				34,921,594
Effect of dilutive securities:
Stock options, restricted stock, and performance stock units			269,239				106,598				24,581
Denominator for earnings per share-diluted			35,338,338				35,066,417				34,946,175
Earnings per share-basic		$	0.12			$	0.40			$	0.03
Earnings per share-diluted		$	0.12			$	0.40			$	0.03

Anti-dilutive shares attributable to outstanding stock options were excluded from the calculation of diluted earnings per share. For the years ended December 31, 2012, December 31, 2011 and December 31, 2010, the weighted average common stock equivalents outstanding that were anti-dilutive were 707,900, 190,500 and 344,800, respectively.

NOTE 13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following table sets forth selected quarterly financial data for each of the quarters in 2012 and 2011 (in millions, except per share amounts):

 

		Quarters
		First				Second				Third				Fourth
Year ended December 31, 2012
Revenues		$	345.9			$	368.3			$	348.9			$	351.9
Gross margin 1/			31.9				32.4				31.7				35.9
Income from operations			—				2.5				2.3				4.1
Net income (loss)			(0.3	)			1.3				1.1				2.2
Basic earnings (loss) per share		$	(0.01	)		$	0.04			$	0.03			$	0.06
Diluted earnings (loss) per share		$	(0.01	)		$	0.04			$	0.03			$	0.06
Year ended December 31, 2011
Revenues		$	358.4			$	386.3			$	375.8			$	358.0
Gross margin 1/			36.8				41.1				40.4				35.7
Income from operations			3.9				7.5				11.4				4.2
Net income 2/			2.0				4.2				6.6				1.1
Basic earnings per share		$	0.06			$	0.12			$	0.19			$	0.03
Diluted earnings per share		$	0.06			$	0.12			$	0.19			$	0.03

 

1/	Gross margin is calculated as revenues less cost of purchased transportation and services and direct operating expenses.

2/	Net income in the fourth quarter includes a $1.2 million adjustment to deferred tax assets reflecting actions taken to lower our effective tax rate.

 

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