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

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Form 10-Q for PACER INTERNATIONAL INC


25-Oct-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 third quarter 2013 results reflect many of the improvements we have made over the last year. We have put considerable effort into optimizing our mix of freight and in reducing our network costs through better management of our empty miles, network flows, and equipment utilization. These improvements were a primary reason for our increases in gross margin and income from operations during the quarter. Our intermodal volumes improved in the third quarter year over year but our revenue decreased slightly (after adjusting for the effects of the new cross border agreement with Union Pacific), which was primarily driven by our mix of services provided. We expect to see the increase in intermodal volumes continue for the remainder of 2013.
As expected under our cross-border agreement with Union Pacific, 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, yielded an improved gross margin and a reduced loss from operations during the third quarter of 2013 year over year. Logistics revenues decreased slightly during the period but the improved profitability was driven by a more favorable service mix and the effects of initiatives we have undertaken to expand our global footprint and to grow our operations in Asia and in Europe. We also continued the implementation of our new operating system to support the international freight forwarding business with several more locations coming online in the third quarter. We expect these investments will build a stronger foundation for selling our integrated portfolio of services to customers and allow the logistics segment to return to profitability.
We continue to prudently manage selling, general and administrative expenses which decreased $1.8 million in the first nine months of 2013 compared to the 2012 period.


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We were debt free at September 30, 2013, and ended the quarter with $39.7 million of cash and cash equivalents and $63.8 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 September 30, 2013 Compared to Three Months Ended
September 30, 2012
The following table sets forth our historical financial data by reportable
segment for the three months ended September 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                                    $ 193.3     $ 291.0     $ (97.7 )      (33.6 )%
Logistics                                        57.0        58.1        (1.1 )       (1.9 )
Inter-segment elimination                        (0.3 )      (0.2 )      (0.1 )        N/M
Total                                           250.0       348.9       (98.9 )      (28.3 )
Cost of purchased transportation and services
Intermodal                                      142.8       240.4       (97.6 )      (40.6 )
Logistics                                        49.7        51.0        (1.3 )       (2.5 )
Inter-segment elimination                        (0.3 )      (0.2 )      (0.1 )        N/M
Total                                           192.2       291.2       (99.0 )      (34.0 )
Direct operating expenses
Intermodal                                       23.2        26.0        (2.8 )      (10.8 )
Total                                            23.2        26.0        (2.8 )      (10.8 )
Gross margin
Intermodal                                       27.3        24.6         2.7         11.0
Logistics                                         7.3         7.1         0.2          2.8
Total                                         $  34.6     $  31.7     $   2.9          9.1
Gross margin percentage
Intermodal                                       14.1 %       8.5 %       5.6 %
Logistics                                        12.8        12.2         0.6
Total                                            13.8 %       9.1 %       4.7 %
Selling, general & administrative expenses
Intermodal                                    $  16.0     $  15.9     $   0.1          0.6
Logistics                                         9.3         9.6        (0.3 )       (3.1 )
Corporate                                         4.6         4.1         0.5         12.2
Total                                            29.9        29.6         0.3          1.0
Other income
Logistics                                        (0.3 )      (0.2 )      (0.1 )       50.0
Total                                            (0.3 )      (0.2 )      (0.1 )       50.0
Income (loss) from operations
Intermodal                                       11.3         8.7         2.6         29.9
Logistics                                        (1.7 )      (2.3 )       0.6         26.1
Corporate                                        (4.6 )      (4.1 )      (0.5 )      (12.2 )
Total                                             5.0         2.3         2.7          N/M
Interest expense                                 (0.4 )      (0.3 )      (0.1 )      (33.3 )%
Income tax expense                               (1.8 )      (0.9 )      (0.9 )        N/M
Net income                                    $   2.8     $   1.1     $   1.7          N/M


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Revenues. Revenues decreased by $98.9 million, or 28.3%, for the three months ended September 30, 2013 compared to the three months ended September 30, 2012.

Total intermodal revenues decreased $97.7 million, or 33.6%, in the 2013 period compared to the 2012 period. As expected, the majority of the decrease was due to 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 $1.8 million or 0.9%. Domestic intermodal revenues decreased 0.7% primarily due to a change in the mix of services provided. International intermodal revenues decreased 1.6% driven by a 7.3% decrease in volumes due to constrained capacity of ISO boxes inland due to strong export demand and transloading.
Revenues in our logistics segment decreased $1.1 million, or 1.9%, in the 2013 period compared to the 2012 period. The decline is primarily due to the change in the mix of services provided.
Cost of Purchased Transportation and Services. Cost of purchased transportation and services decreased $99.0 million, or 34.0%, in the 2013 period compared to the 2012 period.
Total intermodal cost of purchased transportation and services decreased $97.6 million, or 40.6%, in the 2013 period compared to the 2012 period. As expected, the majority of the decrease was due to 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 $1.7 million or 1.2%. The decrease was driven by the previously mentioned change in domestic service mix and the 7.3% decrease in international intermodal volumes. Cost of purchased transportation and services in our logistics segment decreased $1.3 million, or 2.5%, in the 2013 period compared to the 2012 period. The decrease was primarily due to the previously mentioned change in service mix. Direct Operating Expenses. Direct operating expenses decreased $2.8 million, or 10.8%, in the 2013 period compared to the 2012 period, reflecting a decrease in intermodal equipment costs of 14.9% in the 2013 period compared to the 2012 period as a result of lowering equipment maintenance and repair costs and a reduction in equipment lease costs.

Gross Margin. Overall gross margin improved by $2.9 million, or 9.1%, and our gross margin percentage (revenues less the cost of purchased transportation and services and direct operating expenses divided by revenues) increased from 9.1% in the 2012 period to 13.8% in the 2013 period.

Intermodal segment gross margin increased by $2.7 million, or 11.0%, and the gross margin percentage for our intermodal segment increased from 8.5% 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 150 basis points from 12.6% in the 2012 period to 14.1% in the 2013 period. The increase in intermodal gross margin and gross margin percentage was driven by our efforts to pare lower margin freight volumes, better management of our empty miles, an improvement in our big box equipment turns, and the decrease in intermodal equipment costs mentioned above.
Logistics segment gross margin increased $0.2 million, or 2.8%, and the gross margin percentage for our logistics segment increased from 12.2% in the 2012 period to 12.8% in the 2013 period. The increase in the gross margin and gross margin percentage was due to changes in the mix of services provided during the periods.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $0.3 million, or 1.0%, in the 2013 period compared to the 2012 period. The increase was driven by an increase in labor expense of $0.2 million due to an increase in Company headcount of 4.5%, an increase in incentive compensation of $0.1 million, and a $0.4 million increase in insurance costs driven primarily by a policy audit refund received in the third quarter of 2012, offset by a $0.3 million decrease in legal costs and a $0.3 million decrease in severance expense.
Other Income. Other income increased $0.1 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 $2.7 million to $5.0 million in the 2013 period compared to the 2012 period.
Intermodal segment income from operations increased $2.6 million, or 29.9%, in the 2013 period compared to the 2012 period. The increase was due to the increase in the intermodal gross margin of $2.7 million driven by our efforts to pare low margin freight volumes, better management of our empty miles and equipment utilization and the decrease in intermodal equipment costs mentioned above, offset by a $0.1 million increase in segment selling, general and administrative expenses.


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The logistics segment incurred a loss from operations of $1.7 million in the 2013 period compared to a loss from operations of $2.3 million in the 2012 period. The decrease in the loss was driven by the $0.2 million increase in the logistics gross margin, an increase in other income of $0.1 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 $0.5 million from $4.1 million in the 2012 period to $4.6 million in the 2013 period. The increase is driven by the factors described above in selling, general and administrative expenses. 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, fees charged on the unused portion of our line of credit and outstanding letters of credit, and the amortization of deferred financing costs. Interest expense decreased because we had no outstanding debt during the three months ended September 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 $1.8 million in the 2013 period compared to $0.9 million in the 2012 period. The effective tax rate was 39.1% in the 2013 period and 45.0% in the 2012 period. The change in the effective tax rate is due to the change in the mix of income among the jurisdictions in which we do business. 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 $1.7 million from $1.1 million in the 2012 period to $2.8 million in the 2013 period. Earnings per share basic and diluted increased from $0.03 per share in the 2012 period to $0.08 per share in the 2013 period.

  Reclassifications of 2012 Quarterly Results to Conform to 2013 Presentation
                 For the Three Months Ended September 30, 2012
                                 (in millions)
(in millions)                                                   Three Months Ended September 30, 2012
                                                     Originally       Reclassification Amount
                                                      Reported                  1/                As Reclassified
Cost of purchased transportation and services      $      287.7       $             3.5          $          291.2
Direct operating expenses                                  23.3                     2.7                      26.0
Selling, general and administrative expenses               33.5                    (3.9 )                    29.6
Depreciation and amortization                               2.1                    (2.1 )                       -
Other income                                       $          -       $            (0.2 )        $           (0.2 )

                                                                Three Months Ended September 30, 2012
                                                     Originally       Reclassification Amount
                                                      Reported                  1/                As Reclassified
Gross margin
Intermodal                                         $       27.3       $            (2.7 )        $           24.6
Logistics                                                  10.6                    (3.5 )                     7.1
Total                                              $       37.9       $            (6.2 )        $           31.7
Gross margin percentage
Intermodal                                                  9.4 %                                             8.5 %
Logistics                                                  18.2                                              12.2
Total                                                      10.9 %                                             9.1 %

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 September 30, 2013 and 2012
                                 (in millions)
                        Three Months Ended
                        September 30, 2013            Three Months Ended September 30, 2012             Adjusted        % Adjusted
                               GAAP                GAAP                                  Adjusted       Variance         Variance
                             Results              Results         Adjustments            Results      2013 vs 2012     2013 vs  2012
Total revenues        $         250.0          $    348.9        $     (95.9 )     2/   $  253.0     $       (3.0 )         (1.2 )%
Total cost of
purchased
transportation and
services                        192.2               291.2    1/        (95.9 )     2/      195.3             (3.1 )         (1.6 )
Total net revenue     $          57.8          $     57.7                  -            $   57.7     $        0.1            0.2
Total gross margin
percentage                       13.8 %               9.1 %  1/                             12.5 %            1.3 %

Intermodal revenues   $         193.3          $    291.0              (95.9 )     2/   $  195.1     $       (1.8 )         (0.9 )
Intermodal cost of
purchased
transportation and
services                        142.8               240.4    1/        (95.9 )     2/      144.5             (1.7 )         (1.2 )
Intermodal net
. . .
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