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PACR > SEC Filings for PACR > Form 10-Q on 25-Apr-2013All Recent SEC Filings

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Form 10-Q for PACER INTERNATIONAL INC


25-Apr-2013

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 2012 Annual Report filed with the SEC on February 8, 2013. 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, cash flows, debt levels, business and growth strategies, 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 cost reduction 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 on Form 10-Q and in our press releases and investor conference calls (including any forward looking statements regarding our projected revenues and/or earnings per share in 2013 or future periods) are discussed under "Item 1A. Risk Factors" and elsewhere in the 2012 Annual 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, the deterioration in our
             relationships with our rail carriers, or adverse changes to the
             railroads' operating rules;


            our reliance on Union Pacific 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 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 US-Mexico or other business to offset
             declines in revenue and margins for equipment and services provided
             under our new Union Pacific cross-border agreement;

the impact of competitive pressures in the marketplace;

            our success in passing through rate increases from rail and other
             transportation providers to our customers;


            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;

the loss of one or more of our major customers;

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


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changes in international and domestic shipping patterns;

            foreign currency fluctuations and exchange controls and changes in
             international tariffs, trade restrictions, trade agreements and
             taxations;


            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 2012 Annual Report. 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 intermodal operating results improved year over year as a result of several initiatives that we put in place in 2012 and continued during the first quarter of 2013. New processes were implemented to more effectively manage empty truck miles, limit our equipment dwell time, and optimize network efficiencies. The realignment of our intermodal operations has enhanced our customer service and streamlined our operations. As we continue to focus on volume growth, we announced the appointment of a new Executive Vice President of Sales & Marketing in April of 2013. We believe her experience in the automotive industry and with our major rail suppliers will be very valuable as we continue to execute our company-wide growth strategy.
During the quarter we successfully operationalized our cross-border agreement with Union Pacific. As expected, our intermodal revenues and cost of purchased transportation declined significantly as we no longer collect and pass through rail transportation costs to automotive intermediaries servicing the US-Mexico business. Instead, we now receive a fee from Union Pacific for acting as their network manager for the US-Mexico business. Also as expected, our margin contribution in 2013 from this intermodal automotive business remained consistent with its historical contribution level. This expected margin contribution going forward is primarily dependent on (1) the volume of US-Mexico automotive parts shipments via the network that we manage under the new agreement; (2) the volume of Pacer equipment used via the network that we manage versus rail or other equipment; and (3) the amount of selling, general and administrative costs incurred to run this business. Over the remaining term of the agreement, our revenue and margin for the services and equipment provided under the agreement decline absent growth in our retail direct US-Mexico business and will also continue to be dependent on the previously mentioned factors.
Our logistics segment, while not yet profitable, also saw improved operating results year over year. We plan to continue to build the operational and sales leadership of the logistics segment businesses. The new business licenses we obtained in the fourth quarter of 2012 will allow us to sell our services direct to customers in China and expand our international logistics network. We have begun the implementation of our new operating systems to support the international freight forwarding business and will continue to implement these systems over the next several months. We expect these investments in personnel and systems will allow the logistics segment to return to profitability within the next year and will build a stronger foundation for selling our integrated portfolio of services to customers.
We continue to prudently manage selling, general and administrative expenses which decreased $2.1 million in the first three months of 2013 compared to the 2012 period.


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We were debt free at March 31, 2013, and ended the quarter with $63.1 million of borrowing capacity. 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 generally accepted accounting principles ("GAAP").
These measures include adjusted results for 2012 which exclude from revenues and costs of purchased transportation, the rail transportation costs in our wholesale intermodal auto business that we no longer collect and pass through to automotive intermediaries servicing the US-Mexico business.
Management uses these 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 measures excluding the impact of these items provides useful supplemental information that is essential to a proper understanding of the operating results of our core businesses and allows 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 March 31, 2013 Compared to Three Months Ended March 31, 2012
The following table sets forth our historical financial data by reportable
segment for the three months ended March 31, 2013 and 2012 (in millions).
Certain reclassifications have been made to the 2012 quarterly operating
expenses in order to conform to the 2013 presentation. The reclassifications had
no impact on previously reported income. For a summary of the effects of the
reclassifications, refer to the table at the end of this section.

                                         2013           2012          Change         % Change
Revenues
Intermodal                           $    180.4     $    284.9     $   (104.5 )        (36.7 )%
Logistics                                  52.6           61.1           (8.5 )        (13.9 )
Inter-segment elimination                  (0.3 )         (0.1 )         (0.2 )          N/M
Total                                     232.7          345.9         (113.2 )        (32.7 )
Cost of purchased transportation and
services and direct operating
expenses
Intermodal                                155.1          260.8         (105.7 )        (40.5 )
Logistics                                  46.0           53.3           (7.3 )        (13.7 )
Inter-segment elimination                  (0.3 )         (0.1 )         (0.2 )          N/M
Total                                     200.8          314.0         (113.2 )        (36.1 )
Gross margin
Intermodal                                 25.3           24.1            1.2            5.0
Logistics                                   6.6            7.8           (1.2 )        (15.4 )
Total                                $     31.9     $     31.9     $        -              -
Gross margin percentage
Intermodal                                 14.0 %          8.5 %          5.5  %
Logistics                                  12.5           12.8           (0.3 )
Total                                      13.7 %          9.2 %          4.5  %
Selling, general & administrative
expenses
Intermodal                           $     15.5     $     15.9     $     (0.4 )         (2.5 )
Logistics                                   9.7           11.0           (1.3 )        (11.8 )
Corporate                                   4.6            5.0           (0.4 )         (8.0 )
Total                                      29.8           31.9           (2.1 )         (6.6 )
Other income
Intermodal                                    -              -              -              -
Logistics                                  (0.3 )            -           (0.3 )          N/M
Total                                      (0.3 )            -           (0.3 )          N/M
Income (loss) from operations
Intermodal                                  9.8            8.2            1.6           19.5
Logistics                                  (2.8 )         (3.2 )          0.4           12.5
Corporate                                  (4.6 )         (5.0 )          0.4            8.0
Total                                       2.4              -            2.4            N/M
Interest expense                           (0.3 )         (0.5 )          0.2           40.0  %
Income tax benefit (expense)               (0.8 )          0.2           (1.0 )          N/M
Net income                           $      1.3     $     (0.3 )   $      1.6            N/M


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Revenues. Revenues decreased by $113.2 million, or 32.7%, for the three months ended March 31, 2013 compared to the three months ended March 31, 2012.

Total intermodal revenues decreased $104.5 million, or 36.7%, as expected, primarily due to the implementation of the new cross border agreement with Union Pacific where we no longer collect and pass through the rail transportation costs to automotive intermediaries servicing the US-Mexico business ("the pass-through rail transportation costs"). Excluding the pass-through rail transportation costs in 2012, adjusted intermodal revenues decreased $10.3 million or 5.4%. This decline was primarily due to an 11.1% reduction of total intermodal volumes. Domestic intermodal volumes decreased 2.0% while international intermodal volumes decreased 30.3% in the 2013 period compared to the 2012 period. The international intermodal volume decline is due to a continued softness in ocean carrier trans-Pacific volumes and the impact of a wholesale drayage customer changing its port of service to a port with on-dock rail service during the second quarter of 2012 resulting in a reduction in drayage needs.
Revenues in our logistics segment decreased $8.5 million, or 13.9%, in the 2013 period compared to the 2012 period. The decline is primarily due to a 24.6% decrease in volumes of our ocean and air shipments attributed to competitive pricing pressures, customer attrition and a continued softness in the global market.
Cost of Purchased Transportation and Services and Direct Operating Expenses. Cost of purchased transportation and services and direct operating expenses decreased $113.2 million, or 36.1%, in the 2013 period compared to the 2012 period.
Total intermodal cost of purchased transportation and services and direct operating expenses decreased $105.7 million, or 40.5%, as expected, primarily due to the implementation of the new cross border agreement with Union Pacific. Excluding the pass-through rail transportation costs in 2012, adjusted intermodal cost of purchased transportation and services and direct operating expenses decreased $9.4 million or 6.6%. This decrease was primarily driven by the 11.1% decline in total intermodal volumes as well as from decreases in other purchased transportation costs and intermodal equipment costs. Other purchased transportation costs decreased 8.3% in the 2013 period compared to the 2012 period as a result of an increased focus on reducing empty miles in drayage operations and intermodal equipment costs declined 11.0% in the 2013 period compared to the 2012 period as a result of an increased focus on reducing equipment dwell time and reducing equipment maintenance and repair costs. Cost of purchased transportation and services in our logistics segment decreased $7.3 million or 13.7%, in the 2013 period compared to the 2012 period. The decrease was due primarily to the 24.6% decrease in volumes.

Gross Margin. Overall gross margin remained flat year-over-year, and our gross margin percentage (revenues less the cost of purchased transportation and services and direct operating expense divided by revenues) increased from 9.2% in the 2012 period to 13.7% in the 2013 period.

Intermodal segment gross margin increased by $1.2 million, or 5.0%, and the gross margin percentage for our intermodal segment increased from 8.5% in the 2012 period to 14.0% in the 2013 period. Excluding the pass-through rail transportation costs from 2012 intermodal revenues, the adjusted gross margin percentage increased 1.4% in the 2013 period compared to the 2012 period. The increase in intermodal gross margin and gross margin percentage is driven by decreases in other purchased transportation costs and intermodal equipment costs. Other purchased transportation costs and intermodal equipment costs decreased 8.3% and 11.0%, respectively, in the 2013 period compared to the 2012 period for the reasons noted above.
Logistics segment gross margin decreased $1.2 million, or 15.4%, and the gross margin percentage for our logistics segment decreased from 12.8% in the 2012 period to 12.5% in the 2013 period. The decrease in the gross margin was primarily due to the 24.6% decrease in the volume of ocean and air shipments driven by competitive pressures and the continued softness of the international shipping market, while the gross margin percentage decrease was due to a less favorable product mix.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $2.1 million, or 6.6%, in the 2013 period compared to the 2012 period. The decrease was driven by a decrease in labor expenses of $2.1 million due to a reduction in Company headcount of approximately 8% from the 2012 period to the 2013 period partially offset by an increase in incentive compensation expense of $0.2 million in the 2013 period compared to the 2012 period.
Other Income. Other income increased $0.3 million in the 2013 period compared to the 2012 period. The increase is due to sublease income from a warehouse facility in the Pacific Northwest which began in the third quarter of 2012. Income (Loss) From Operations. Income from operations increased $2.4 million from break-even in the 2012 period to $2.4 million in the 2013 period.


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Intermodal segment income from operations increased $1.6 million to $9.8 million in the 2013 period compared to income from operations of $8.2 million in the 2012 period. The increase was due to the increase in the intermodal gross margin of $1.2 million driven by decreases in other purchased transportation costs and intermodal equipment costs and a decrease in intermodal selling, general and administrative expenses of $0.4 million driven mainly by headcount reduction. The logistics segment incurred a loss from operations of $2.8 million in the 2013 period compared to a loss from operations of $3.2 million in the 2012 period. The decrease in the loss was due to a $1.3 million decrease in selling, general and administrative expenses driven mainly by headcount reduction and an increase in other income of $0.3 million due to new sublease income, offset by the decrease in the logistics gross margin of $1.2 million from lower volumes. Corporate loss from operations decreased $0.4 million from $5.0 million in the 2012 period to $4.6 million in the 2013 period. The decrease in the loss is primarily due to initiatives to reduce corporate general and administrative expenses.
Interest Expense. Interest expense decreased by $0.2 million in the 2013 period compared to the 2012 period primarily due to lower average borrowings in the 2013 period. Interest expense is composed of interest paid on our debt and the amortization of deferred financing costs. The decrease is due to the average outstanding debt balance decreasing from $9.5 million for the three months ended March 31, 2012 to less than $0.1 million for the three months ended March 31, 2013. The weighted average interest rate was approximately 4.0% in both the 2013 and 2012 periods.
Income Tax Expense. We recorded income tax expense of $0.8 million in the 2013 period compared to a benefit of $0.2 million in the 2012 period. The effective tax rate was 38.1% in the 2013 period and 41.7% in the 2012 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 increased $1.6 million from a loss of $0.3 million in the 2012 period to income of $1.3 million in the 2013 period. Earnings per share basic and diluted increased from a loss of $0.01 per share in the 2012 period to earnings of $0.04 per share in the 2013 period.

    Reclassifications of 2012 Quarterly Results to Conform to 2012 Year End
                                  Presentation
                   For the Three Months Ended March 31, 2012
                                 (in millions)
(in millions)                                                           Three Months Ended March 31, 2012
                                                    Originally Reported       Reclassification Amount 1/       As Reclassified
Cost of purchased transportation and services      $            285.8       $                   3.2           $         289.0
Direct operating expenses                                        22.3                           2.7                      25.0
Selling, general and administrative expenses                     36.0                          (4.1 )                    31.9
Depreciation and amortization                      $              1.8       $                  (1.8 )         $             -

                                                                        Three Months Ended March 31, 2012
                                                    Originally Reported       Reclassification Amount 1/       As Reclassified
Gross margin
Intermodal                                         $             26.8       $                  (2.7 )         $          24.1
Logistics                                                        11.0                          (3.2 )                     7.8
Total                                              $             37.8       $                  (5.9 )         $          31.9
Gross margin percentage
Intermodal                                                        9.4 %                                                   8.5 %
Logistics                                                        18.0                                                    12.8
Total                                                            10.9 %                                                   9.2 %

1/ Certain reclassifications have been made to the 2012 quarterly operating expenses in order to conform to the 2013 presentation. The reclassifications had no impact on previously reported income. Specifically, Pacer reclassified certain expenses from selling, general and administrative to costs of purchased transportation and services and direct operating expenses. Pacer also reclassified depreciation and amortization as direct operating expenses and selling, general and administrative expenses.


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               Reconciliation of GAAP Results to Adjusted Results
               For the Three Months Ended March 31, 2013 and 2012
                                 (in millions)
                        Quarter Ended
                        March 31, 2013             Quarter Ended March 31, 2012               Adjusted        % Adjusted
                             GAAP             GAAP                             Adjusted       Variance         Variance
                           Results          Results       Adjustments          Results      2013 vs 2012     2013 vs  2012
Total revenues        $       232.7        $  345.9      $     (94.2 )   2/   $  251.7     $      (19.0 )         (7.5 )%
Total cost of
purchased
transportation                177.9           289.0   1/       (94.2 )   2/      194.8            (16.9 )         (8.7 )
Total net revenue     $        54.8        $   56.9                -          $   56.9     $       (2.1 )         (3.7 )
Total gross margin
percentage                     13.7 %           9.2 % 1/                          12.7 %            1.0 %

Intermodal revenues   $       180.4        $  284.9            (94.2 )   2/   $  190.7     $      (10.3 )         (5.4 )
Intermodal cost of
. . .
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