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PACR > SEC Filings for PACR > Form 10-Q on 26-Jul-2013All Recent SEC Filings

Show all filings for PACER INTERNATIONAL INC

Form 10-Q for PACER INTERNATIONAL INC


26-Jul-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;

            a determination that our independent contractors are our employees
             (see Note 4 of the notes to our unaudited condensed consolidated
             financial statements);


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

changes in international and domestic shipping patterns;

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


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


            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; 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 half of 2013. We took efforts to manage our mix of freight and we implemented new processes to more effectively manage empty truck miles, limit our equipment excess dwell time, and optimize our network shipment flows. In addition, our realignment of our intermodal operations has enhanced our customer service and streamlined our operations.
During the first half of 2013, 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, which has not yet returned to profitability, should benefit from new agreements we entered into recently with CTS International Logistics Corporation, Ltd. and Menzell Frankfurt. These agreements will expand our networks in mainland China and Germany. We plan to continue to build the operational and sales leadership of the logistics segment businesses and to continue the implementation of our new operating systems to support the international freight forwarding business. 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 six months of 2013 compared to the 2012 period.
We were debt free at June 30, 2013, and ended the quarter with $26.8 million of cash and cash equivalents and $65.0 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.


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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 June 30, 2013 Compared to Three Months Ended June 30, 2012
The following table sets forth our historical financial data by reportable
segment for the three months ended June 30, 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                           $    184.3     $    306.8     $   (122.5 )       (39.9 )%
Logistics                                  54.0           61.8           (7.8 )       (12.6 )
Inter-segment elimination                  (0.3 )         (0.3 )            -           N/M
Total                                     238.0          368.3         (130.3 )       (35.4 )
Cost of purchased transportation and
services
Intermodal                                134.2          256.5         (122.3 )       (47.7 )
Logistics                                  47.3           54.3           (7.0 )       (12.9 )
Inter-segment elimination                  (0.3 )         (0.3 )            -           N/M
Total                                     181.2          310.5         (129.3 )       (41.6 )
Direct operating expenses
Intermodal                                 24.1           25.4           (1.3 )        (5.1 )
Total                                      24.1           25.4           (1.3 )        (5.1 )
Gross margin
Intermodal                                 26.0           24.9            1.1           4.4
Logistics                                   6.7            7.5           (0.8 )       (10.7 )
Total                                $     32.7     $     32.4     $      0.3           0.9
Gross margin percentage
Intermodal                                 14.1 %          8.1 %          6.0 %
Logistics                                  12.4           12.1            0.3
Total                                      13.7 %          8.8 %          4.9 %
Selling, general & administrative
expenses
Intermodal                           $     15.2     $     15.5     $     (0.3 )        (1.9 )
Logistics                                   9.7           10.0           (0.3 )        (3.0 )
Corporate                                   5.0            4.4            0.6          13.6
Total                                      29.9           29.9              -           N/M
Other income
Logistics                                  (0.2 )            -           (0.2 )         N/M
Total                                      (0.2 )            -           (0.2 )         N/M
Income (loss) from operations
Intermodal                                 10.8            9.4            1.4          14.9
Logistics                                  (2.8 )         (2.5 )         (0.3 )       (12.0 )
Corporate                                  (5.0 )         (4.4 )         (0.6 )       (13.6 )
Total                                       3.0            2.5            0.5          20.0
Interest expense                           (0.2 )         (0.3 )          0.1          33.3
Income tax benefit (expense)               (0.9 )         (0.9 )            -           N/M
Net income                           $      1.9     $      1.3     $      0.6          46.2  %

Revenues. Revenues decreased by $130.3 million, or 35.4%, for the three months ended June 30, 2013 compared to the three months ended June 30, 2012.


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Total intermodal revenues decreased $122.5 million, or 39.9% in the 2013 period compared to the 2012 period. As expected, the majority of the decrease was 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, intermodal revenues decreased $24.7 million or 11.8%. This decline was primarily due to an 8.2% reduction of total intermodal volumes in the 2013 period compared to the 2012 period. Domestic intermodal volumes decreased 3.2% mainly due to our efforts to pare low-margin freight volumes that we had won in the second quarter of 2012 but later became less profitable due to unexpected rail cost increases. International intermodal volumes decreased 20.2% 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 $7.8 million, or 12.6%, in the 2013 period compared to the 2012 period. The decline is primarily due to a 22.3% decrease in the volume 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. Cost of purchased transportation and services decreased $129.3 million, or 41.6%, in the 2013 period compared to the 2012 period.
Total intermodal cost of purchased transportation and services decreased $122.3 million, or 47.7%, in the 2013 period compared to the 2012 period. As expected, the majority of the decrease was due to the implementation of the new cross border agreement with Union Pacific. Excluding the pass-through rail transportation costs in 2012, intermodal cost of purchased transportation and services decreased $24.5 million or 15.4%. This decrease was primarily driven by the 8.2% decline in total intermodal volumes, an increased focus on reducing dwell time when utilizing rail-controlled equipment, and a 3.1% decrease in other purchased transportation costs in the 2013 period compared to the 2012 period, reflecting our increased focus on reducing empty miles in drayage operations.
Cost of purchased transportation and services in our logistics segment decreased $7.0 million, or 12.9%, in the 2013 period compared to the 2012 period. The decrease was primarily due to the 22.3% decrease in volumes for the reasons mentioned above.
Direct Operating Expenses. Direct operating expenses decreased $1.3 million, or 5.1%, in the 2013 period compared to the 2012 period, reflecting a decrease in intermodal equipment costs of 10.0% in the 2013 period compared to the 2012 period as a result of an increased focus on lowering equipment maintenance and repair costs and a reduction in equipment lease costs. This decrease was offset by a $0.8 million dispute settlement related to assessments of property taxes on our intermodal equipment.

Gross Margin. Overall gross margin improved by $0.3 million or 0.9%, and our gross margin percentage (revenues less the cost of purchased transportation and services and direct operating expenses divided by revenues) increased from 8.8% in the 2012 period to 13.7% in the 2013 period.

Intermodal segment gross margin increased by $1.1 million, or 4.4%, and the gross margin percentage for our intermodal segment increased from 8.1% in the 2012 period to 14.1% in the 2013 period. Excluding the pass-through rail transportation costs from 2012 results, the gross margin percentage increased 220 basis points. The increase in intermodal gross margin and gross margin percentage was driven by our efforts to pare low margin freight volumes and the decreases in other purchased transportation costs and intermodal equipment costs mentioned above.
Logistics segment gross margin decreased $0.8 million, or 10.7%, and the gross margin percentage for our logistics segment increased from 12.1% in the 2012 period to 12.4% in the 2013 period. The decrease in the gross margin was primarily due to the 22.3% 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 increase was primarily due to a more favorable service mix in the 2013 period compared to the 2012 period. Selling, General and Administrative Expenses. Selling, general and administrative expenses on a consolidated basis remained unchanged in the 2013 period compared to the 2012 period. Selling, general and administrative expenses decreased $0.3 million in both the intermodal and logistics segments. These decreases were offset by a $0.6 million increase in the corporate segment driven by a $1.1 million increase in incentive compensation, a non-cash charge. Other Income. Other income increased $0.2 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.


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Income (Loss) From Operations. Income from operations increased $0.5 million, or 20.0%, in the 2013 period compared to the 2012 period.
Intermodal segment income from operations increased $1.4 million, or 14.9%, in the 2013 period compared to the 2012 period. The increase was due to the increase in the intermodal gross margin of $1.1 million driven by our efforts to pare low margin freight volumes and the decreases in other purchased transportation costs and intermodal equipment costs mentioned above, and a $0.3 million decrease in segment selling, general and administrative expenses. The logistics segment incurred a loss from operations of $2.8 million in the 2013 period compared to a loss from operations of $2.5 million in the 2012 period. The increase in the loss was driven by the $0.8 million decrease in the logistics gross margin resulting from the decreased volumes mentioned above, partially offset by an increase in other income of $0.2 million due to new sublease income, and a decrease of $0.3 million in segment selling, general and administrative expenses.
Corporate loss from operations increased $0.6 million from $4.4 million in the 2012 period to $5.0 million in the 2013 period. The increase is driven by an increase in incentive compensation costs of $1.1 million in the 2013 period compared to the 2012 period, offset by decreases in various other expenses driven by initiatives to reduce corporate general administrative expenses in the 2013 period.
Interest Expense. Interest expense decreased by $0.1 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 $1.3 million for the three months ended June 30, 2012 to less than $0.1 million for the three months ended June 30, 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 $0.9 million in the 2013 and 2012 periods. The effective tax rate was 32.1% in the 2013 period and 40.9% in the 2012 period. The change in the estimated annual effective tax rate is due to the change in the mix of income among the jurisdictions in which we do business and a favorable tax adjustment during the period related to one of our foreign subsidiaries. The Company expects its effective tax rate for the year ended 2013 to approximate 37%.
Net Income and Earnings Per Share. As a result of the foregoing, net income increased $0.6 million from $1.3 million in the 2012 period to $1.9 million in the 2013 period. Earnings per share basic and diluted increased from $0.04 per share in the 2012 period to $0.05 per share in the 2013 period.


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  Reclassifications of 2012 Quarterly Results to Conform to 2013 Presentation
                    For the Three Months Ended June 30, 2012
                                 (in millions)
(in millions)                                                           Three Months Ended June 30, 2012
                                                    Originally Reported       Reclassification Amount 1/      As Reclassified
Cost of purchased transportation and services      $            307.1       $                   3.4          $         310.5
Direct operating expenses                                        22.6                           2.8                     25.4
Selling, general and administrative expenses                     34.2                          (4.3 )                   29.9
Depreciation and amortization                      $              1.9       $                  (1.9 )        $             -

                                                                        Three Months Ended June 30, 2012
                                                    Originally Reported       Reclassification Amount 1/      As Reclassified
Gross margin
Intermodal                                         $             27.7       $                  (2.8 )        $          24.9
Logistics                                                        10.9                          (3.4 )                    7.5
Total                                              $             38.6       $                  (6.2 )        $          32.4
Gross margin percentage
Intermodal                                                        9.0 %                                                  8.1 %
Logistics                                                        17.6                                                   12.1
Total                                                            10.5 %                                                  8.8 %

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 June 30, 2013 and 2012
                                 (in millions)
                       Three Months Ended
                         June 30, 2013               Three Months Ended June 30, 2012               Adjusted         % Adjusted
                              GAAP               GAAP                                Adjusted       Variance          Variance
. . .
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