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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended September 30, 2016

Or

o            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from            to           

Commission file number 333-188177

TRAC Intermodal LLC

(Exact name of registrant as specified in the charter)

Indicate by check üwhether 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 requirement for the past 90 days.  Yes  x No  o

Indicate by check  ü whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such file).  Yes  x No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerate filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o                                                Accelerated filer o                                    Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o No  x

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TRAC Intermodal LLC and Subsidiaries

Form 10-Q

Index

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Forward-looking statements

This report contains forward-looking statements within the meaning of the U.S. federal securities laws. Forward-looking statements include, without limitation, statements concerning plans, objectives, goals, projections, strategies, future events or performance, and underlying assumptions and other statements, which are not statements of historical facts. Forward looking statements may be identified by the use of words like “expect,” “anticipate,” “intend,” “forecast,” “outlook,” “will,” “may,” “might,” “potential,” “likely,” “target,” “plan,” “contemplate,” “seek,” “attempt,” “should,” “could,” “would” or expressions of similar meaning. Forward-looking statements reflect management’s good faith evaluation of information currently available and are based on its current expectations and assumptions regarding its business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Specific factors that may impact performance or other predictions of future actions have, in many but not all cases, been identified in connection with specific forward-looking statements. TRAC Intermodal LLC’s (the “Company,” “we” or “TRAC”) actual results may differ materially from those contemplated by the forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. We caution you therefore against relying on any of these forward-looking statements.

Important factors that could cause actual results to differ materially from those in the forward-looking statements include economic, business, competitive, market and regulatory conditions and the following:

·                  the volume of world trade due to economic, political, or other factors;

·                  the demand for chassis;

·                  operating costs, including the cost of maintaining and repairing chassis, the cost of labor rates, the cost of parts and materials and the imposition of fees and other charges by the host locations at which the Company operates its chassis pools;

·                  increased regulatory costs;

·                  defaults by customers, which would decrease revenues and increase storage, collection, and recovery expenses and require payment to lenders sooner than anticipated;

·                  the inability of one or more customers to meet their obligations or decreased customer creditworthiness;

·                  the ability to mitigate any risk associated with efforts to enable shipping line customers to transition to the motor carrier model;

·                  the Company’s ability to be profitable;

·                  expansion of the Company’s business to provide logistics services and repair services through its service centers and mobile service units;

·                  the ability to mitigate any risk associated with the Company’s providing logistics services related to drayage;

·                  the decision by potential and existing customers to buy rather than lease chassis;

·                  the effect of the Company’s customers’ decision to shift to short-term leasing and transition to the motor carrier model on long-term leasing and direct finance leasing products;

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·                  the impact of consolidation within the container shipping industry;

·                  the Company’s ability to compete successfully in the chassis leasing industry;

·                  the impact on the Company’s business of losing exclusive rights to operate domestic chassis pools at certain railroad ramps;

·                  the impact of the credit markets on the worldwide demand for goods and, in turn, on the demand for chassis;

·                  the Company’s substantial amount of indebtedness;

·                  the Company’s ability to incur additional debt;

·                  the limitation on flexibility in operating the business arising from restrictions from debt agreements;

·                  the Company’s ability to service its debt or to obtain additional financing;

·                  the Company’s ability to re-lease chassis after their initial long-term lease;

·                  the impact of liens on equipment;

·                  changes in market price, availability, or transportation costs of equipment manufactured in China or Mexico;

·                  the Company’s ability to integrate acquisitions and to realize the anticipated benefits of any such potential future acquisitions;

·                  a decrease in the availability of storage space for chassis and a resulting increase in depot costs;

·                  the Company’s ability to maintain qualified personnel;

·                  strikes, work stoppages or slowdowns by draymen, truckers, longshoremen and railroad workers;

·                  the Company’s ability to maintain its relationship with employees, and thereby avoid unionization efforts, labor shortages, disruptions or stoppages;

·                  the Company’s ability or the ability of the Company’s lessees to maintain sufficient insurance to cover losses that may occur to chassis;

·                  the Company’s ability to estimate and maintain sufficient self-insurance for employee health care benefits;

·                  the extent of any payments under the Company’s indemnification agreements;

·                  the impact of accidents or incidents or mismanagement of its fleet on the Company’s reputation and financial results;

·                  the impact of recalls and other investigations;

·                  the impact of federal roadability rules and regulations for intermodal equipment providers (“IEP”);

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·                  the impact of environmental liability;

·                  the impact of litigation that is not covered by insurance;

·                  the failure or operational interruption of information technology systems required to conduct its business;

·                  the failure to adequately protect the Company’s intellectual property rights;

·                  the willingness and ability of manufacturers or remanufacturers of the Company’s equipment to honor warranties covering defects;

·                  the disclosure requirement exemptions we utilize based on the Company’s status as an “emerging growth company” under the JOBS Act

·                  the impact of inherent, potential, or perceived conflicts of interest created by relationships and transactions with members of management, members or shareholders and their respective affiliates;

·                  risks inherent in international operations, including uncertainty about the jurisdictions in which enforcement might be sought and the political, environmental, and economic stability of particular countries or regions;

·                  the impact on the Company’s earnings of increases in prevailing interest rates;

·                  counterparty risk arising in the Company’s hedging strategies;

·                  the impact of a new standard for lease accounting;

·                  adverse changes in U.S. tax rules;

·                  terrorist attacks, wars, uprisings or hostilities; and

·                  other risks described in the “Risk Factors” section of this report.

Please also refer to Item 1A. Risk Factors to Part II of this report.  All of the above factors are difficult to predict, contain uncertainties that may materially affect actual results and may be beyond the Company’s control. New factors emerge from time to time and it is not possible for management to predict all such factors or to assess the effect of each such new factor on its business. Except to fulfill the Company’s obligations under the U.S. securities laws, we undertake no obligation to update any such statement to reflect events or circumstances after the date on which it is made.

Although the Company believes that assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore any of these statements included herein may prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the results or conditions described in such statements or objectives and plans will be achieved.

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PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements

TRAC Intermodal LLC and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

(Dollars in Thousands)

See accompanying notes.

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TRAC Intermodal LLC and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

(Dollars in Thousands)

See accompanying notes.

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TRAC Intermodal LLC and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

(Dollars in Thousands)

See accompanying notes.

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TRAC Intermodal LLC and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in Thousands)

See accompanying notes

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TRAC Intermodal LLC and Subsidiaries

Notes to Consolidated Financial Statements — Unaudited (continued)

For the Three and Nine Months Ended September 30, 2016 and 2015

(Dollars in Thousands, Except for Share Amounts)

1.  Description of the Business and Basis of Presentation

The accompanying Consolidated Financial Statements of TRAC Intermodal LLC (the “Company,” “we,” “our” or “TRAC”) and its subsidiaries are unaudited and have been prepared pursuant to U.S. generally accepted accounting principles (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting and, in our opinion, reflect all adjustments, including normal recurring items, which are necessary to present fairly the results for interim periods.  Operating results for the periods presented are not necessarily indicative of the results that may be expected for the entire year.  Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the SEC; however, we believe that the disclosures are adequate to make the information presented not misleading.  These interim Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2015 and with the information contained in other publicly-available filings with the SEC.

TRAC is an intermodal chassis solutions provider for domestic and international transportation companies in North America.  Its principal business is providing marine and domestic chassis on both long and short-term leases or rental agreements to a diversified customer base including the world’s leading shipping lines, Class I railroads, major U.S. intermodal transportation companies and motor carriers. The Company and its subsidiaries conduct business principally in one industry, the leasing of intermodal transportation equipment. The Company has two reportable segments, the Marine Market segment and the Domestic Market segment. The Company purchases equipment directly from manufacturers and shipping lines as well as through lease agreements, some of which qualify as capital leases. Primarily all of the Company’s revenues and long-lived assets are attributable to the United States.

TRAC is a Delaware limited liability company that was formed on July 12, 2012 to facilitate the issuance of $300,000 aggregate principal amount of 11% Senior Secured Notes (the “Notes”).  The Company conducts its business through its 100% owned subsidiary, Interpool, Inc. (“Interpool”) and its consolidated subsidiaries.   TRAC is ultimately owned by Seacastle Inc. (“Seacastle”). Seacastle is owned by private equity funds that are managed by an affiliate of Fortress Investment Group LLC (“Fortress”) and by employees of affiliates of Seacastle. Interpool was founded in 1968 as an operating lessor servicing the intermodal transportation equipment industry. Interpool was listed on The New York Stock Exchange as a public company in 1993 and was acquired and taken private by Seacastle in July 2007.

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TRAC Intermodal LLC and Subsidiaries

Notes to Consolidated Financial Statements — Unaudited (continued)

For the Three and Nine Months Ended September 30, 2016 and 2015

(Dollars in Thousands, Except for Share Amounts)

1.  Description of the Business and Basis of Presentation (continued)

Interstar Acquisition

On February 29, 2016, TRAC Interstar LLC (“TRAC Interstar”), a newly formed, indirect wholly owned subsidiary of the Company, acquired certain assets and assumed certain liabilities of the emergency road service business of Interstar Mobile, LLC and Interstar North America, Inc. (collectively “Interstar”) for a purchase price of $5,943 which includes a $1,000 earn-out provision based on future operating performance.  The Company recorded $4,908 of goodwill related to the acquisition.  The allocation of the purchase price accounting is preliminary as the Company has not yet completed its analysis of estimating the fair value of the assets and liabilities acquired.  Interstar, located in Kentucky, is a leading provider of road service repair solutions for both the intermodal and commercial trucking industries.  The new entity, TRAC Interstar, combines a dispatch center and one of the country’s largest managed vendor networks and will provide roadside repair services covering chassis, truck and trailer breakdowns 24 hours a day, 7 days a week, 365 days a year.

New Accounting Standards

Pending Adoption

In May 2014, the FASB issued authoritative guidance on accounting for Revenue from Contracts with Customers (Topic 606): (“ASU 2014-09”). This update supersedes most of the current revenue recognition requirements.  The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. This guidance was effective for fiscal years and interim periods beginning after December 15, 2016 and early application was not permitted. However on July 9, 2015, the FASB decided to delay the effective date by one year. The deferral results in the new revenue standard being effective for fiscal years and interim periods beginning after December 15, 2017.  The FASB also decided to allow early adoption but no earlier than the original effective date of December 15, 2016.  Entities must adopt the new guidance using one of two retrospective application methods. The Company is currently evaluating the standard to determine the impact of its adoption on the Consolidated Financial Statements.

On February 25, 2016, the FASB issued authoritative guidance on accounting for Leases (Topic 842): (“ASU 2016-02”).  The FASB is issuing this update to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.  This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  Entities are required to adopt this guidance using a modified retrospective approach.  The Company is currently evaluating the standard to determine the impact of its adoption on the Consolidated Financial Statements.

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TRAC Intermodal LLC and Subsidiaries

Notes to Consolidated Financial Statements — Unaudited (continued)

For the Three and Nine Months Ended September 30, 2016 and 2015

(Dollars in Thousands, Except for Share Amounts)

1.  Description of the Business and Basis of Presentation (continued)

In March 2016, the FASB issued authoritative guidance on accounting for Compensation—Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting: (“ASU 2016-09”).  The amendments in this Update affect all entities that issue share-based payment awards to their employees. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows. The standard also allows entities to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on the cash flow statement, and provides an accounting policy election to account for forfeitures as they occur.   The amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating the standard to determine the impact of its adoption on the Consolidated Financial Statements.

In August 2016, the FASB issued authoritative guidance on accounting for Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments: (“ASU 2016-15”). The standard provides guidance on eight specific cash flow items and their classifications in the statement of cash flows thereby reducing the current and potential future diversity in practice. The amendments in this Update are effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The Company is currently evaluating the standard to determine the impact of its adoption on the Consolidated Financial Statements.

No other new accounting pronouncements issued or effective during 2016 had or are expected to have a material impact on the Company’s Consolidated Financial Statements.

2. Leasing Activity

Equipment Leasing Revenue

The Company has non-cancelable operating leases for certain of its leasing equipment. At September 30, 2016, future minimum lease revenue under these agreements is estimated as follows:

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TRAC Intermodal LLC and Subsidiaries

Notes to Consolidated Financial Statements — Unaudited (continued)

For the Three and Nine Months Ended September 30, 2016 and 2015

(Dollars in Thousands, Except for Share Amounts)

2. Leasing Activity (continued)

Finance Revenue

At September 30, 2016, receivables under direct finance leases are collectible through 2022 as follows:

As of December 31, 2015, the Company had total lease receivables, unearned lease income and net lease receivables of $14,330, $1,533 and $12,797, respectively.  As of September 30, 2016 and December 31, 2015, the Company had guaranteed and unguaranteed residual values for leasing equipment on direct finance leases of $8,656 and $8,673, respectively.  The unguaranteed residual values are reflected in “Total Lease Receivables” above.

Historically, the Company has not experienced losses related to direct finance leases and does not project future uncollectible amounts related to the principal balances receivable. If customers were to default, the Company would seek to recover the equipment securing the lease, often at fair market values in excess of the remaining receivable.

3. Leasing Equipment

The following is a summary of leasing equipment recorded on the Consolidated Balance Sheets:

Leasing equipment includes assets recorded under capital leases of $82,195 and $121,817 with accumulated depreciation of $31,730 and $46,304 at September 30, 2016 and December 31, 2015, respectively.

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TRAC Intermodal LLC and Subsidiaries

Notes to Consolidated Financial Statements — Unaudited (continued)

For the Three and Nine Months Ended September 30, 2016 and 2015

(Dollars in Thousands, Except for Share Amounts)

3. Leasing Equipment (continued)

Impairment of Leasing Equipment

Impairment of leasing equipment amounted to $2,007 and $9,980 for the three and nine months ended September 30, 2016, respectively.  This compares to $1,693 and $5,695 for the three and nine months ended September 30, 2015, respectively.  The increase in impairment charges reflected during 2016 was primarily due to a greater number of end-of-life chassis impaired in 2016 versus 2015 and an increase in write-downs associated with axle sets determined to be unsuitable for the remanufacturing program.  The above impairment charges are recorded in Impairment of leasing equipment in the Consolidated Statements of Operations.

4. Capitalized Software Development Costs

In 2014, the Company’s Investment Committee approved the proposal to replace its principal operating and financial reporting systems, named “Project Helix” to provide more functional capabilities necessitated by new business requirements emerging from the industry shift to the motor carrier model.  In accordance with ASC 350-40, Internal-Use Software, the Company is capitalizing costs during the application development stage of the project.  At September 30, 2016 and December 31, 2015, capitalized software development costs totaled $20,461 and $9,675, respectively.  These costs are included in Other assets in the Consolidated Balance Sheet.  Once the software is substantially complete and ready for its intended use, capitalization will cease.  Capitalized software costs will be amortized on a straight-line basis over seven years, the estimated useful life of the software.

5. Borrowings

The following is a summary of the Company’s borrowings:

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TRAC Intermodal LLC and Subsidiaries

Notes to Consolidated Financial Statements — Unaudited (continued)

For the Three and Nine Months Ended September 30, 2016 and 2015

(Dollars in Thousands, Except for Share Amounts)

5. Borrowings (continued)

The Company’s debt consisted of notes, loans and capital lease obligations payable in varying amounts through 2021.  On a consolidated basis, the weighted-average interest rate was 5.37% for the year ended December 31, 2015.  For the nine months ended September 30, 2016 and 2015, the weighted-average interest rate was 4.20% and 5.58%, respectively.  The weighted-average interest rates disclosed are calculated as “all-in” rates which include cash interest expense and amortization of agents’ fees and deferred financing fees.

On January 14, 2016, the Company borrowed $51,000 (the “Repurchase Amount”) under the revolving credit facility of the ABL Facility to finance the repurchase and retirement of 62 shares, par value $0.01 per share, of the common stock of Interpool held by the Company, the sole stockholder of Interpool  Through a successive chain of dividends, the Repurchase Amount was received pro rata by the Company’s indirect shareholders of record, including certain private equity funds that are managed by an affiliate of Fortress Investment Group LLC, employees of affiliates of Seacastle Inc. (the Company’s indirect parent) and members of the Company’s management.

In February 2016, the Company executed three interest rate swap agreements to convert variable rate debt based on LIBOR into a fixed rate per annum.  See Note 6.

On March 7, 2016, the Company announced its proposed offering of $485,000 aggregate principal amount of senior secured notes due 2021. Subsequently on March 22, 2016, the Company decided that due to current market conditions, it would not proceed with its proposed offering.  As a result, during the nine months ended September 30, 2016, the Company expensed approximately $1,603 of accumulated costs related to the offering. These costs are included in Selling, general and administrative expenses in the Consolidated Statement of Operations.

Redemption of Senior Secured 11% Notes

On August 15, 2016, the Company borrowed $80,000 under its ABL Facility which carries an interest rate of one-month LIBOR + 2.00% and matures on December 10, 2020, which is the maturity date of the ABL Facility.  The funds were used to finance the redemption of $80,000 in aggregate principal amount of its outstanding Senior Secured 11% Notes at a redemption price equal to 105.500 percent of such aggregate principal amount.  Approximately $84,400 was paid to redeem the Notes, $80,000 aggregate principal amount and a premium of $4,400.  Additionally, $1,206 of deferred financing fees related to the Notes were expensed upon redemption.  As of September 30, 2016, $70,000 aggregate principal amount of the Notes remains outstanding.

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TRAC Intermodal LLC and Subsidiaries

Notes to Consolidated Financial Statements — Unaudited (continued)

For the Three and Nine Months Ended September 30, 2016 and 2015

(Dollars in Thousands, Except for Share Amounts)

6. Derivatives and Hedging Activities

In the normal course of business, the Company utilizes interest rate derivatives to manage its exposure to interest rate risks. Through the utilization of interest rate derivatives, the Company receives floating rate payments in exchange for fixed rate payments, effectively converting its floating rate debt to a fixed rate.  If certain conditions are met, an interest rate derivative may be specifically designated as a cash flow hedge. The Company’s interest rate derivatives qualify and have been designated as cash flow hedges.  For the effective portion of the derivative gain or loss, changes in fair value are recorded in Accumulated other comprehensive loss and subsequently reclassified into earnings when the interest payments on the debt are recorded in earnings.  The ineffective portion of the derivative gain or loss is recorded in Interest expense in the Consolidated Statements of Operations.

On January 10, 2013, the Company entered into an interest rate swap transaction with Deutsche Bank AG effectively converting $300,000 of variable rate debt based upon LIBOR into a fixed rate instrument.  The Company receives one-month LIBOR with interest payable at a rate of 0.756% on the notional amount.  At September 30, 2016, one-month LIBOR was 0.5311%.  The agreement terminates on August 9, 2017.

On February 4, 2016, the Company executed two interest rate swap agreements with Deutsche Bank.  One agreement effectively converts $50,000 of variable rate debt based upon LIBOR into a fixed rate of 1.063% per annum.  This agreement will terminate on December 10, 2020 at the same time the Company’s ABL Facility terminates.  Additionally, the Company executed a $300,000 forward interest rate swap agreement.  This agreement begins on August 9, 2017 when the Company’s existing $300,000 swap agreement ends.  At that time, the Company will effectively convert $300,000 of variable rate debt based upon LIBOR into a fixed rate of 1.2985%.

On February 5, 2016, the Company executed an interest rate swap with PNC Bank effectively converting $100,000 of variable rate debt based upon LIBOR into a fixed rate of 1.1175%.  The agreement will terminate December 10, 2020 at the same time the Company’s ABL Facility terminates.

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TRAC Intermodal LLC and Subsidiaries

Notes to Consolidated Financial Statements — Unaudited (continued)

For the Three and Nine Months Ended September 30, 2016 and 2015

(Dollars in Thousands, Except for Share Amounts)

6.  Derivative and Hedging Activities (continued)

The Company’s interest rate derivatives involve counterparty credit risk.  As of September 30, 2016, the Company does not anticipate its counterparties will fail to meet their obligations.  As of September 30, 2016, there were no credit risk related contingent features in the Company’s derivative agreements.   For additional disclosures related to derivative instruments see Notes 9 and 15.

The Company held the following interest rate derivative as of September 30, 2016:

(a)         These interest rate derivatives are recorded in Accrued expenses and other liabilities in the Consolidated Balance Sheets.

At the dates indicated, the Company had in place total interest rate derivatives to fix floating interest rates on a portion of the borrowings under its debt facilities as summarized below:

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TRAC Intermodal LLC and Subsidiaries

Notes to Consolidated Financial Statements — Unaudited (continued)

For the Three and Nine Months Ended September 30, 2016 and 2015

(Dollars in Thousands, Except for Share Amounts)

6.  Derivative and Hedging Activities (continued)

The following table sets forth the net of tax effect of the Company’s cash flow hedge derivative instruments on the Consolidated Financial Statements for the periods indicated:

(a)                                 This represents the change in the fair market value of the Company’s interest rate derivatives, net of tax, offset by the amount of actual cash paid related to the net settlements of the interest rate derivatives, net of tax.

(b)                                 This represents the amount of actual cash paid, net of tax, related to the net settlements of the interest rate derivatives plus any effective amortization of deferred losses on the Company’s terminated derivative, net of tax.

(c)                               Amount impacting income not related to AOCI reclassification.

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TRAC Intermodal LLC and Subsidiaries

Notes to Consolidated Financial Statements — Unaudited (continued)

For the Three and Nine Months Ended September 30, 2016 and 2015

(Dollars in Thousands, Except for Share Amounts)

6. Derivatives and Hedging Activities (continued)

The following table summarizes the deferred (gains) and losses for the terminated interest rate derivatives and the related amortization into interest expense for the three and nine months ended September 30, 2016 and 2015:

(a)            This hedged item is referred to as Chassis Funding II Floating Rate Asset-Backed Notes, Series 2007-1

(b)          This hedged item is referred to as Chassis Funding Floating Rate Asset-Backed Notes, Series 2007-1

(c)           This hedged item is referred to as Chassis Financing Program, Portfolio A

The amount of loss expected to be reclassified from AOCI into interest expense over the next 12 months consists of net interest settlements on active interest rate derivatives in the amount of $645 (which is net of tax of $417) and amortization of deferred losses on the Company’s terminated derivatives of $8,609 (which is net of tax of $5,565).

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TRAC Intermodal LLC and Subsidiaries

Notes to Consolidated Financial Statements — Unaudited (continued)

For the Three and Nine Months Ended September 30, 2016 and 2015

(Dollars in Thousands, Except for Share Amounts)

7. Commitments and Contingencies

Chassis Purchase Commitments

The Company’s chassis purchase commitments are related to commitments to refurbish chassis, remanufacture chassis and to exercise purchase options related to maturing capital leases.  At September 30, 2016, the Company had non-cancellable commitments totaling approximately $33,860 with commitments totaling $16,806, $8,565, $6,563 and $1,926 for 2016, 2017, 2018 and 2019, respectively.  During the third quarter of 2016, the Company entered into a purchase order for the refurbishment of chassis which allows either party to cancel with 90 days’ notice.  If the Company were to cancel, it would be required to fulfill refurbishments committed aggregating approximately $3,355 which is included in the 2016 commitment number above.

Tire Purchase Commitments

Contemporaneous with the Interstar acquisition, the Company committed to purchase from an affiliate of the acquired company 45,000 tires annually for a period of five years.  Initial prices for tire types were agreed upon but are subject to purchase price adjustments based on certain changes in the cost of raw materials used in the manufacturing process as well as the mix of tires to be purchased over the commitment period.  At September 30, 2016, the tire purchase commitments are estimated to be $24,292 with $1,783 committed for the remainder of 2016, $5,919 committed for 2017 and $5,530 committed for 2018, 2019 and 2020, respectively. See Note 12.

Lease Commitments

The Company is party to various operating leases relating to office facilities and certain other equipment with various expiration dates through 2026. All leasing arrangements contain normal leasing terms without unusual purchase options or escalation clauses.  As of September 30, 2016, the aggregate minimum rental commitment under operating leases having initial or remaining non-cancelable lease terms in excess of one year was $43,467.

Stock Buyback Program

On April 13, 2016, Interpool instituted a stock buyback program (the “Stock Buyback Program”) whereby employees who hold vested shares of SCT Chassis, Inc. (“SCT Chassis”), an indirect parent of the Company, pursuant to Management Shareholder Agreements executed prior to January 1, 2016, will be eligible to elect, on an annual basis, to sell up to 25% of such shares to Interpool.  Under the Stock Buyback Program, participants will elect annually whether to participate in the Stock Buyback Program and the number of eligible shares they wish to sell.  Elections will generally be made on or about April 30 of each year, and the Stock Buyback Program will expire in 2019 after all completed share repurchase elections are fulfilled for that year.  The fair market value price, at which SCT Chassis shares will be repurchased, will be determined each year by the Board of Directors of SCT Chassis.  At September 30, 2016, the estimated repurchase amount based on the current fair market value of $10.72 per share is $3,294.  See Note 10.

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TRAC Intermodal LLC and Subsidiaries

Notes to Consolidated Financial Statements — Unaudited (continued)

For the Three and Nine Months Ended September 30, 2016 and 2015

(Dollars in Thousands, Except for Share Amounts)

7. Commitments and Contingencies (continued)

ILWU Roadability Program — Inspection Fees

An  agreement reached in March 2015 between the Pacific Maritime Association (“PMA”) and the International Longshore and Warehouse Union (“ILWU”) provides for mandatory roadability inspections (subject to limited exceptions) of all chassis before they leave any of the West Coast terminals where the ILWU has jurisdiction (the “ILWU Roadability Program”).  In connection with this program, the Company has received invoices and payment demands from certain host locations. The Company is currently disputing such fees because, among other reasons, it believes there is no legal basis for them to be imposed and the ILWU Roadability Program provides for inspections beyond those required by applicable law.  Since the Company believes that any amounts it may be required to pay are not probable, it is not currently accruing such expenses in its financial statements.  As of September 30, 2016, the Company has received invoices aggregating approximately $5,000.

8.  Income Taxes

The consolidated income tax provisions for the three and nine months ended September, 30, 2016 and 2015 were determined based upon estimates of the Company’s consolidated forecasted effective income tax rates for the years ended December 31, 2016 and 2015, respectively.

For the three months ended September 30, 2016, the Company recorded a tax provision of $1,666, reflecting a 32.6% effective tax rate.  This compares to a tax provision of $737, on a net loss of $501, reflecting a 147% effective tax rate for the three months ended September 30, 2015.  In both periods, the effective tax rate was adversely impacted by Canadian and Mexican tax provisions.  In addition, the effective tax rate for the three months ended September 30, 2016 was favorably impacted by a lower state effective tax rate and the recognition of a Research and Development tax credit on the Project Helix costs.  The effective tax rate for the three months ended September 30, 2015 was adversely affected due to discreet items recorded pertaining to changes in certain states’ effective tax rates.

For the nine months ended September 30, 2016, the Company recorded a tax provision of $7,149, reflecting a 38.0% effective tax rate.  This compares to a tax provision of $13,171, reflecting a 41.4% effective tax rate for the nine months ended September 30, 2015. In both periods, the effective tax rate was adversely impacted by Canadian and Mexican tax provisions.  In addition, the effective tax rate for the nine months ended September 30, 2016 was favorably impacted by a lower state effective tax rate and the recognition of a Research and Development tax credit on the Project Helix costs.

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TRAC Intermodal LLC and Subsidiaries

Notes to Consolidated Financial Statements — Unaudited (continued)

For the Three and Nine Months Ended September 30, 2016 and 2015

(Dollars in Thousands, Except for Share Amounts)

9. Accumulated Other Comprehensive Loss

Accumulated Other Comprehensive Loss (“AOCI”) includes the changes in the fair value of derivative instruments, reclassification into earnings of amounts previously deferred relating to derivative instruments and foreign currency translation gains and losses primarily relating to the Company’s Canadian operation.

For the nine months ended September 30, 2016, the components of AOCI, net of tax, are as follows: