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PACR > SEC Filings for PACR > Form 10-Q on 26-Oct-2012All Recent SEC Filings

Show all filings for PACER INTERNATIONAL INC

Form 10-Q for PACER INTERNATIONAL INC


26-Oct-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management's Discussion and Analysis ("MD&A") should be read in conjunction with the MD&A, including the discussion of our critical accounting policies, and the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (the "2011 Annual Report") filed with the Securities and Exchange Commission ("SEC") on February 10, 2012.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, the information concerning our possible future consolidated results of operations, business and growth strategies, the expected impact of our new cross-border agreement with Union Pacific Railroad ("UP"), our financing plans, our competitive position and the effects of competition, the projected growth of the industries in which we operate, and the benefits to be obtained from our strategic initiatives. Forward-looking statements include all statements that are not historical facts and can be identified by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "plan," "may," "should," "will," "would," "project" and similar expressions. These forward-looking statements are based on information currently available to us and are subject to a number of risks, uncertainties and other factors that could cause our actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. Important factors that could cause our actual results to differ materially from the results referred to in the forward-looking statements we make in this Quarterly Report are discussed under "Item 1A. Risk Factors" of the 2011 Annual Report and "Item 1A. Risk Factors" in Part II of this Quarterly Report and include:

general economic and business conditions, including the current U.S. and global economic environment and the timing and strength of economic recovery in the U.S. and internationally;

the effect of uncertainty surrounding the current economic environment on the transportation needs of our customers;

industry trends, including changes in the costs of services from rail, ocean, motor and air transportation providers and equipment and capacity shortages or surpluses;

network changes, lane closures, carrier consolidations and other reductions or inefficiencies in, or termination of, rail services;

the termination, extension or replacement of contracts and rate agreements with our underlying rail carriers, changes in the terms of such contracts or rate agreements, including those resulting from the new cross-border agreement with UP relating to our US-Mexico operations, the deterioration in our relationships with our rail carriers, or adverse changes to the railroads' operating rules;

our reliance on UP to provide us with, and to service and maintain, a substantial portion of the chassis and containers used in our business;

our reliance on shipments and the significant percentage of our revenues (39.7% during the nine month period ended September 30, 2012) and related operating profit from customers in or supplying the automotive industry and the effect that economic conditions can have on traffic from automotive industry customers;

our success at growing our direct US-Mexico or other business to offset declines in revenue and margins for equipment and services under our new UP cross-border agreement;

the impact of competitive pressures in the marketplace;

the frequency and severity of accidents, particularly involving our trucking operations;

our ability to attract and retain independent contractors and third party drayage capacity;

changes in our business strategy, development plans or cost savings plans, including those that may result from, or be necessitated by, changes in our business relationships with our underlying rail carriers as a consequence of new contracts or rate agreements entered into with these providers;

congestion, work stoppages, equipment and capacity shortages or surpluses, weather related issues and service disruptions affecting our rail, ocean, motor and air transportation providers;

the degree and timing of changes in fuel prices, including changes in the fuel costs and surcharges that we pay to our vendors and those that we are able to collect from our customers;


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the loss of one or more of our major customers;

changes in, or the failure to comply with, government regulations;

changes in international and domestic shipping patterns;

our ability to borrow amounts under our credit agreement due to borrowing base limitations and/or to comply with the covenants in our credit agreement;

increases in our leverage;

increases in interest rates;

difficulties in selecting, integrating, upgrading and replacing our information technology systems and protecting systems from disruptions and cyber-attacks;

a determination that our independent contractors are our employees; and

terrorism and acts of war.

Our actual consolidated results of operations and the execution of our business strategy could differ materially from those expressed in, or implied by, the forward-looking statements contained in this Quarterly Report on Form 10-Q or in other forward-looking statements made by us. In addition, past financial or operating performance is not necessarily a reliable indicator of future performance and you should not use our historical performance to anticipate future results or future period trends. We can give no assurances that any of the events anticipated or implied by the forward-looking statements we make will occur or, if any of them do occur, what impact they will have on our consolidated results of operations, financial condition or cash flows. In evaluating our forward-looking statements, you should specifically consider the risks and uncertainties discussed under "Item 1A. Risk Factors" in the 2011 Annual Report, and in Part II - Items 1A. "Risk Factors" of this Quarterly Report on Form10-Q. Except as otherwise required by federal securities laws, we undertake no obligation to publicly revise our forward-looking statements to reflect events or circumstances that arise after the date of this Quarterly Report on Form 10-Q. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q and our other filings with the SEC.

Executive Summary

Our third quarter 2012 results in both our intermodal and logistics segments reflect many of the challenges that we continue to face in the current economic climate. Our intermodal segment performance during the quarter reflects continued cost pressure from the railroads coupled with a market that remains unsupportive of price increases. We were, however, successful in managing controllable costs such as the optimal routing of freight and accessorial charges, which helped improve gross margin percentage quarter over quarter and we expect this trend to continue into the fourth quarter. Our logistics segment results are due to soft global economic conditions, depressed levels of trans-Pacific trade and competitive pressures, as well as customer attrition and management turnover in our European ocean operation that occurred during the third quarter.

On October 19, 2012, we entered into a multi-year agreement with UP for the handling of automotive parts and other shipments in connection with existing cross-border US-Mexico business. The new agreement will change the nature of our participation in this business. Typically, we contract for rail transportation from multiple rail carriers and combine that with our equipment and network logistics management services to intermediaries. Under the new agreement, effective January 1, 2013, we will no longer pass through the rail transportation costs to automotive parts intermediaries, but will provide the same network logistics management services for UP and be compensated for such services and the use of our equipment. Accordingly, beginning January 1, 2013, for US-Mexico automotive parts shipments, our financial results will no longer include the revenue and costs associated with the purchased rail transportation. Additionally, as part of the new agreement, we will pursue these shipments as a retail provider of intermodal services. As a result of this agreement, in 2013, we expect a decline in revenues from this business, but we expect that the margin contribution from the US-Mexico automotive parts business will remain consistent with its historical contribution level. Over the remaining term of the agreement, our revenue and margin for the services and equipment provided under the new agreement decline absent forecasted growth in our retail direct US-Mexico business. See "Forward Looking Statements" and "Risk Factors" in Part II - Item 1A of this Quarterly Report on Form 10-Q, and in Part I - "Item 1A. Risk Factors" to the Company's 2011 Annual Report.


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During 2012, we have undertaken a number of strategic initiatives which we believe will positively impact our underlying cost structure and improve our margins in both the intermodal and logistics segments. As discussed above, we signed a multi-year agreement in October with UP that continues our handling of shipments in the US-Mexico automotive parts business and allows us to develop and grow our retail direct US-Mexico business. On October 24, 2012, we announced the appointment of a new Chief Operating Officer who brings deep industry knowledge and extensive experience to our executive management team and will oversee the operations of both our intermodal and logistics segments. Earlier in the year, we announced a new intermodal drayage alliance with CRST which will provide dedicated trucking capacity at lower cost. On the logistics side, we announced the appointment of a new management team for our international logistics business that brings a wealth of knowledge and experience and plan to continue to build the operational and sales leadership of this business. We also have completed our evaluation of operating systems to support the international freight forwarding business and have selected a solution we are currently implementing. We expect these investments in personnel and systems will allow the logistics segment to return to profitability by late 2013 or early 2014 and will build a stronger foundation for selling an integrated portfolio of services to our customers. We have also taken advantage of favorable market conditions and interest rates to enter into several new railcar leases in the first and second quarters to reduce our lease costs which will partially offset the rising costs of railcar maintenance. Finally, in the third quarter of 2012, we amended our revolving credit facility to, among other things, reduce applicable interest rate margins and fees, thereby reducing our overall borrowing costs.

We continue to prudently manage selling, general and administrative expenses which decreased $7.3 million in the first nine months of 2012 as compared to the 2011 period. Direct operating expenses, which include the expenses associated with our container, chassis and railcar fleet, also declined $3.4 million year-to-date 2012 as compared to the 2011 period. Managing and leveraging our fixed costs remains a focus area for the Company for the remainder of 2012 and beyond.

We were debt free at September 30, 2012, and ended the quarter with $83.0 million of borrowing capacity, and we believe that our cash, cash flow from operations and borrowings available under the 2010 Credit Agreement will be sufficient to meet our cash needs for at least the next twelve months.

Use of Non-GAAP Financial Measures

From time to time in press releases regarding quarterly earnings, presentations and other communications, we may provide financial information determined by methods other than in accordance with GAAP. The non-GAAP measures include adjusted revenue, adjusted intermodal revenue, adjusted intermodal gross margin and adjusted intermodal operating income, each of which excludes from 2011 results the impact of the previously announced volume reduction of an ocean carrier customer that transitioned its western volumes directly to the railroad. Adjusted intermodal operating income also excludes from 2011 results the gain on the sale of railcar assets. Management uses the non-GAAP measures in its analysis of the Company's performance and regularly reports such information to our Board of Directors. Management believes that presentations of financial performance excluding the impact of these revenues and associated costs provides useful supplemental information that is essential to a proper understanding of the operating results of our core businesses and allow investors, management and our Board to more easily compare operating results from period to period. However, the use of any such non-GAAP financial information should not be considered in isolation or as a substitute for revenues, net income or loss, operating income or loss, cash flows from operations or other income or cash flow data prepared in accordance with GAAP or as a measure of our profitability or liquidity. These non-GAAP measures may not be comparable to those used by other companies.


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Results of Operations

Three Months Ended September 30, 2012 Compared to Three Months Ended
September 30, 2011

The following table sets forth our financial data by reportable segment for the
three months ended September 30, 2012 and 2011 (in millions).



                                               2012           2011          Change          % Change
Revenues
Intermodal                                    $ 291.0        $ 302.2        $ (11.2 )            (3.7 )%
Logistics                                        58.1           73.7          (15.6 )           (21.2 )
Inter-segment elimination                        (0.2 )         (0.1 )         (0.1 )             N/M

Total                                           348.9          375.8          (26.9 )            (7.2 )
Cost of purchased transportation and
services and direct operating expenses
Intermodal                                      263.7          269.0           (5.3 )            (2.0 )
Logistics                                        47.5           60.9          (13.4 )           (22.0 )
Inter-segment elimination                        (0.2 )         (0.1 )         (0.1 )             N/M

Total                                           311.0          329.8          (18.8 )            (5.7 )
Gross margin
Intermodal                                       27.3           33.2           (5.9 )           (17.8 )
Logistics                                        10.6           12.8           (2.2 )           (17.2 )

Total                                         $  37.9        $  46.0        $  (8.1 )           (17.6 )
Gross margin percentage
Intermodal                                        9.4 %         11.0 %         (1.6 )%
Logistics                                        18.2           17.4            0.8

Total                                            10.9 %         12.2 %         (1.3 )%
Selling, general & administrative
expenses
Intermodal                                    $  17.1        $  19.6        $  (2.5 )           (12.8 )
Logistics                                        12.5           13.1           (0.6 )            (4.6 )
Corporate                                         3.9            4.8           (0.9 )           (18.8 )

Total                                            33.5           37.5           (4.0 )           (10.7 )
Other income
Intermodal                                         -            (4.8 )          4.8            (100.0 )
Logistics                                          -              -              -
Corporate                                          -              -              -

Total                                              -            (4.8 )          4.8            (100.0 )
Depreciation and amortization
Intermodal                                        1.5            1.2            0.3              25.0
Logistics                                         0.4            0.5           (0.1 )           (20.0 )
Corporate                                         0.2            0.2             -                 -

Total                                             2.1            1.9            0.2              10.5
Income (loss) from operations
Intermodal                                        8.7           17.2           (8.5 )           (49.4 )
Logistics                                        (2.3 )         (0.8 )         (1.5 )             N/M
Corporate                                        (4.1 )         (5.0 )          0.9             (18.0 )

Total                                             2.3           11.4           (9.1 )           (79.8 )
Interest expense                                 (0.3 )         (0.5 )          0.2             (40.0 )
Income tax expense                               (0.9 )         (4.3 )          3.4             (79.1 )

Net income                                    $   1.1        $   6.6        $  (5.5 )           (83.3 )%


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Revenues. Revenues decreased $26.9 million, or 7.2%, for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. Excluding the revenue impact of the previously announced volume reduction from an ocean carrier customer that transitioned its western U.S. intermodal business directly to the railroad ($24.1 million in the third quarter of 2011), revenues decreased $2.8 million or 0.8%.

The following table sets forth the change in revenue by reportable segment in the 2012 period compared to the 2011 period (in millions).

                                                                  As Adjusted 1/
                                                   %                           %
                                   Change       Change         Change       Change
       Revenues:
       Intermodal                  $ (11.2 )       (3.7 ) %    $  12.9         4.6  %
       Logistics                     (15.6 )      (21.2 )        (15.6 )      (21.2 )
       Inter-segment elimination      (0.1 )        N/M           (0.1 )        N/M

       Total                       $ (26.9 )       (7.2 ) %    $  (2.8 )       (0.8 ) %

1/ Adjustment to reflect previously announced reduction in volume from an ocean carrier customer that transitioned its western U.S. intermodal business directly to the railroad.

Total intermodal revenue decreased $11.2 million, or 3.7%, from the 2011 period to $291.0 million. Excluding the revenue impact of the previously announced reduced volumes from an ocean carrier customer that transitioned its business directly to the railroad, intermodal revenues increased $12.9 million or 4.6%. Within intermodal, domestic revenues rose 8.9% from higher volume of 6.6%, improved pricing of 1.3% and improved mix of 1.0%. For the period, revenues associated with automotive customers across all intermodal lines of business represented 46.4% of intermodal revenues, compared to 40.1% in the 2011 period. Our big box equipment turns stayed consistent at 1.7x in the 2012 and 2011 periods. International and drayage revenues, excluding the ocean carrier customer reduction discussed above, decreased a combined 14.0% due primarily to a 24.6% decline in volumes attributed to competitive pressures and the continued softening of the global shipping market.

Revenues in our logistics segment decreased $15.6 million, or 21.2%, in the 2012 period compared to the 2011 period. The decline is primarily due to a 25.5% decrease in volumes of our ocean shipping operations attributed to competitive pricing pressures, loss of customers and continued softness in the global market, as well as customer attrition and management turnover in our European ocean operation that occurred during the third quarter.

Cost of Purchased Transportation and Services and Direct Operating Expenses. Cost of purchased transportation and services and direct operating expenses decreased $18.8 million, or 5.7%, in the 2012 period compared to the 2011 period. Direct operating costs are only incurred in our intermodal segment.

The intermodal segment's cost of purchased transportation and services and direct operating expense decreased $5.3 million, or 2.0%, in the 2012 period compared to the 2011 period. The decrease was primarily driven by the previously mentioned reduction in volume from an ocean carrier customer.

Cost of purchased transportation and services in our logistics segment decreased $13.4 million, or 22.0%, in the 2012 period compared to the 2011 period. The decrease was due primarily to decreased volumes.

Gross Margin. Overall gross margin decreased $8.1 million, or 17.6%, and our gross margin percentage (revenues less the cost of purchased transportation and services and direct operating expense divided by revenues) decreased from 12.2% to 10.9%.


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Intermodal segment gross margin decreased by $5.9 million and the gross margin percentage decreased to 9.4%, primarily due to increased costs from our rail providers over and above what we were able to pass onto our customers. Excluding the impact of the reduction in volumes from an ocean carrier customer from the 2011 results, intermodal gross margin decreased $3.2 million in the 2012 period.

Logistics segment gross margin decreased $2.2 million, or 17.2%, and the gross margin percentage for our logistics segment increased from 17.4% in the 2011 period to 18.2% in the 2012 period. The decrease in the gross margin was primarily due to a 25.5% decrease in ocean shipments attributed to competitive pressures and the continued softness of the international shipping market, as well as customer attrition and management turnover in our European ocean operation, while the gross margin percentage increase was due to a more favorable product mix.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $4.0 million, or 10.7%, in the 2012 period compared to the 2011 period. The decrease was due primarily to the impact of cost reduction efforts taken in 2011 and continuing in 2012, as well as lower incentive compensation accruals in the 2012 period compared to the 2011 period. Company headcount is down 12.3% year over year.

Depreciation and Amortization. Depreciation and amortization expenses increased $0.2 million, or 10.5%, in the 2012 period compared to the 2011 period reflecting additional depreciation of investments in improvements to our transportation information systems.

Income (Loss) From Operations. Income from operations decreased $9.1 million in the 2012 period compared to the 2011 period.

Intermodal segment income from operations decreased $8.5 million, or 49.4%, from $17.2 million in the 2011 period to $8.7 million in the 2012 period. As outlined above, the decrease was due to a combination of lower volumes and increased costs from our rail providers over and above what we were able to pass onto our customers, as well as $1.4 million of amortized gains in the third quarter 2011 related to the 2009 UP payment that is not included in the 2012 results. Excluding the impact of the reduction in volume from the transitioned ocean carrier customer and the gain on sale of railcar assets of $4.8 million in the third quarter of the 2011, the 2012 period income from operations decreased $1.0 million, or 10.3%, compared to adjusted 2011 intermodal operating income.

Logistics segment loss from operations increased $1.5 million from $0.8 million in the 2011 period to $2.3 million in the 2012 period. The increased loss was primarily due to a decline in ocean shipments attributed to competitive pricing pressures, loss of customers and continued softness in the global market, as well as customer attrition and management turnover in our European ocean operation that occurred during the third quarter.

Corporate expenses decreased $0.9 million from $5.0 million in the 2011 period to $4.1 million in the 2012 period. The decrease is primarily due to lower incentive compensation accruals in the 2012 period compared to the 2011 period.

Interest Expense. Interest expense decreased $0.2 million in the 2012 period compared to the 2011 period primarily due to lower average borrowings in the period. Interest expense is composed of interest paid on our debt and the amortization of deferred financing costs. The weighted average interest rate during the 2012 period was approximately 4.0% compared to 4.1% in the 2011 period.

Income Tax Expense. We recorded income tax expense of $0.9 million in the 2012 period compared to an income tax expense of $4.3 million in the 2011 period. The effective tax rate was 45.0% in the 2012 period and 39.4% in the 2011 period. The change in the estimated annual effective tax rate is primarily due to the change in the mix of income among the jurisdictions in which we do business.

Net income. As a result of the foregoing, net income decreased by $5.5 million from net income of $6.6 million in the 2011 period to $1.1 million in the 2012 period.


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               Reconciliation of GAAP Results to Adjusted Results

      For the Three Months Ended September 30, 2012 and September 30, 2011

                                 (in millions)



                                           Three Months
                                               Ended
                                           September 30,                                                                        Adjusted           % Adjusted
                                               2012                      Three Months Ended September 30, 2011                  Variance            Variance
                                                                    GAAP                                      Adjusted          2012 vs             2012 vs
                                           GAAP Results            Results           Adjustments              Results             2011                2011
Revenues
Intermodal                                $         291.0        $     302.2         $      (24.1 )1/        $    278.1        $     12.9                 4.6  %
Cost of purchased transportation and
services and direct operating expense
Intermodal                                          263.7              269.0                (21.4 )1/        $    247.6              16.1                  6.5
Gross margin
Intermodal                                           27.3               33.2                 (2.7 )                30.5              (3.2 )              (10.5 )
. . .
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