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PACR > SEC Filings for PACR > Form 10-K on 26-Feb-2014All Recent SEC Filings

Show all filings for PACER INTERNATIONAL INC

Form 10-K for PACER INTERNATIONAL INC


26-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking Statements
This Annual Report on Form 10-K 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, 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. In addition, forward-looking statements in this Annual Report on Form 10-K include information regarding our proposed acquisition by XPO, the potential effects of the pending acquisition on our business and operations prior to the consummation thereof, the effects on the Company if the acquisition is not consummated and information regarding the combined operations and business of XPO and Pacer following the acquisition if consummated. 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 Annual Report on Form 10-K and in our press releases and investor conference call comments (including any forward looking statements regarding our projected revenues and/or earnings per share in 2014 or future periods) are discussed under "Item 1A. Risk Factors" and elsewhere in this Annual Report on Form 10-K 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 under our
             cross-border agreement with Union Pacific;

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;


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a determination that our independent contractors are our employees (See Note 8 of the notes to our consolidated financial statements);

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;

terrorism and acts of war and

risks related to our proposed acquisition by XPO, including:

                  pending the merger, our business and results of operations may
                   be adversely affected, we may lose employees and our business
                   activities are subject to certain restrictions that may
                   prevent us from pursuing opportunities;

our stock price may be adversely affected if the merger is not consummated;

                  the per share stock consideration to be received by our
                   shareholders in the merger is not fixed and will be affected
                   by changes in the market price of XPO common stock;


                  the merger is subject to various closing conditions that may
                   not be satisfied or that could delay shareholder receipt of
                   the merger consideration;


                  some of our executive officers and directors have interests in
                   the merger that may differ from the interests of our other
                   shareholders;


                  inability or delay in successfully combining the businesses of
                   Pacer and XPO following consummation of the merger could
                   adversely affect the future results of operations of the
                   combined company and adversely affect the market price of the
                   XPO commons stock to be received by our shareholders in the
                   merger;


                  XPO has incurred substantial operating losses in 2012 and the
                   first nine months of 2013;


                  different factors and conditions affect XPO and the market
                   price of its common stock than affect Pacer and its common
                   stock as a separate entity;


                  there is pending litigation seeking to enjoin the merger or
                   which may require the payment of substantial damages;


                  if the merger is not consummated, under certain circumstances
                   we may be required to pay XPO a substantial termination fee or
                   reimburse XPO for its out-of-pocket expenses; and


                  if the merger is consummated, the combined business may not be
                   able to realize the benefits and synergies currently
                   anticipated.


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Our actual consolidated results of operations and the execution of our business strategy as a stand-alone company, and, if the merger with XPO is consummated, the results of operations and business strategies of the combined companies, could differ materially from those expressed in, or implied by, the forward-looking statements contained in this Annual Report on Form 10-K 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 as a stand-alone company or the results of operations, financial condition or cash flows of the combined companies if the merger is consummated. In evaluating our forward-looking statements, you should specifically consider the risks and uncertainties discussed under "Item 1A. Risk Factors" in this Annual Report on Form 10-K. 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 Annual Report on Form 10-K. 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 Annual Report on Form 10-K. For additional information regarding the business of XPO and the proposed merger, see also (i) the Pacer Proxy Statement, and (ii) the XPO Annual Report on Form 10-K for the year ended December 31, 2012 filed by XPO with the SEC and the XPO Annual Report on Form 10-K for the year ended December 31, 2013 to be filed by XPO with the SEC, including the risks set forth under the caption "Item 1A. Risk Factors" in each such Annual Report.
Overview
We are a leading asset-light transportation and global logistics services provider. Our strategy is to focus on making our customer's world run smoother, offering a broad array of services to facilitate the movement of freight from origin to destination. We operate in two segments, the intermodal segment and the logistics segment. See the notes to our consolidated financial statements included in this report for segment information. As a leading provider of intermodal transportation services in North America, our intermodal segment represents approximately 77% of our total revenues. As a complement to our intermodal network, we also provide logistics solutions including global freight forwarding, non-vessel-operating common carrier ("NVOCC"), highway brokerage, warehousing and distribution and supply chain management services. Executive Summary
Our 2013 results reflect many of the improvements we made throughout the last year as well as many of the challenges that we still face. We focused on improving profitability in 2013. We 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. We also undertook initiatives to reduce our equipment maintenance and repair and lease costs. These improvements were a primary reason for our increases in gross margin and income from operations during the year. Increasing revenues remains a challenge in both our intermodal and logistics segments as we work to strike a proper balance between adding volume and maintaining profitability in increasingly competitive marketplaces.
Our intermodal segment showed improved profitability throughout the year due to the measures discussed above. Intermodal volumes overall improved slightly in 2013 but our revenues decreased because of the mix of services we were providing. We successfully implemented our cross-border agreement with Union Pacific in 2013. As expected under this agreement, our intermodal revenues and cost of purchased transportation declined significantly but our margin contribution in 2013 from this intermodal automotive business remained materially consistent with its historical contribution level. To enhance our capabilities in the U.S./Mexico cross-border automotive shipments market going forward, we continue to expand our sales team and add individuals with extensive cross-border automotive and freight-all-kinds experience. Also during 2013, we received our first major award of automotive business converting from wholesale to retail. This was an important first step as we look to grow our U.S./Mexico retail cross-border business going forward to offset expected declines in our wholesale automotive cross-border business.
In our logistics segment, revenues and gross margin decreased from the prior year while our loss from operations improved from the prior year. We implemented many initiatives over the last year to build a foundation to grow the logistics segment, improve profitability and transition primarily from a wholesale NVOCC provider to a retail freight forwarder. We expanded our operations in Asia by opening new offices in China, obtained a new business license in Hong Kong, entered into agreements with other entities in China and Germany to expand our sales network, and recently completed the implementation of new operating systems to support the international freight forwarding business. While we saw many positive signs from these changes, we did not see the 2013 revenue and profitability improvements we were expecting as we continued to operate in a highly competitive environment. In addition, ocean carrier excess capacity and other competitive pressures resulted in our NVOCC business continuing to experience declining margins and reduced volumes. We expect that our 2013 initiatives will build a stronger foundation for selling our integrated portfolio of services to customers and complete our transition to a retail freight forwarder while also maintaining our wholesale NVOCC business.


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We continue to prudently manage selling, general and administrative expenses which decreased 2.6% from the prior year. Managing and leveraging our fixed costs remains a focus area in the coming year.
We were able to take advantage of lower rates and refinanced some of our railcar and chassis leases in the second, third and fourth quarters of 2013 and saw a reduction in our 2013 intermodal direct operating expenses as a result and will continue to see the reductions in 2014. We will also continue to refinance equipment leases as favorable refinancing opportunities arise.
We were debt free as of December 31, 2013 and for nearly all of 2013 and we ended the year with $46.3 million of cash. 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 filings and press releases regarding 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:
(1) adjusted revenues, adjusted intermodal revenues, adjusted intermodal gross margin and adjusted intermodal operating income for 2011, each of which excludes from 2011 results the impact of the previously announced volume reduction of the ocean carrier customer that transitioned its western business directly to the railroad; adjusted intermodal operating income for 2011 also excludes the impact of the gain on sale of railcar assets which occurred in the third quarter of 2011;
(2) adjusted income tax expense and adjusted earnings per share, each of which excludes from 2011 results the deferred tax asset adjustment in 2011;
(3) 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; and
(4) adjusted income from operations, adjusted net income and adjusted basic and diluted earnings per share, each of which excludes from 2013 results the impact of a settlement of a property tax dispute related to our intermodal equipment and transaction costs related to our pending merger with XPO. Intermodal income from operations and corporate income from operations in 2013 are adjusted for the property tax dispute and transaction costs, respectively. 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. Background
The following section describes some of our revenue and expense categories and is provided to facilitate investors' understanding of the discussion of our historical financial results, including these revenue and expense items, discussed under the caption "Results of Operations." Revenues
Intermodal segment revenues are generated from the movement of freight in containers and trailers utilizing truck and rail transportation. Revenues are generated by the rates, fuel surcharges and other fees we charge customers for the transportation of freight and are impacted by changes in volume, product mix, length of haul and route changes. Also included in intermodal segment revenues are the network management fees under our cross-border agreement with Union Pacific, container and chassis per diem charges, railcar rental income and incentives paid by certain shipping companies for the repositioning of empty containers with domestic westbound (backhaul) loads.


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Logistics segment revenues are generated through rates and other fees charged for our portfolio of freight transportation services, including highway brokerage, warehousing and distribution, international NVOCC, freight forwarding and supply chain management services. Through our international ocean and air shipping and freight forwarding services, we arrange transportation and other services necessary to move our customers' freight to and from a foreign country. Revenues for international ocean and air shipping and freight forwarding are driven by changes in international trade volumes, rate changes, product mix and route changes. Revenues from highway brokerage are driven primarily by volumes, rates and the level of outsourcing by companies of their transportation and logistics needs. Revenues for warehousing and distribution, which include the handling, consolidation/deconsolidation and storage of freight on behalf of the shipper, are driven by outsourcing and import volumes and by steamship lines' use of third-party containers, rather than their own containers, on the West Coast to move freight inland. Through our supply chain management services, we manage all aspects of the supply chain from inbound sourcing and delivery logistics through outbound shipment, handling, consolidation, deconsolidation, distribution and just-in-time delivery of end products to our customers. Revenues for supply chain management services are recognized on a net basis and are driven by changes in transactional volumes and rates for services charged on a per transaction basis and by increases in services and costs for services rendered on a cost plus basis.
Cost of Purchased Transportation and Services The intermodal segment's cost of purchased transportation and related services consists primarily of the amounts charged to us by railroads, local trucking companies and owner operators under our agreements with these transportation providers. Third-party rail costs are charged through agreements with the railroads and are dependent upon the competitive environment, capacity constraints, fuel surcharges, product mix and traffic lanes. In addition, terminal and cargo handling services represent the variable expenses directly associated with handling freight at a terminal location. The cost of these services is variable in nature and is based on the volume of freight shipped and rates charged.
The logistics segment's cost of purchased transportation and related services consists of amounts paid to third parties under our agreements with them to provide such services, such as independent contractor truck drivers, ocean carriers and freight terminal operators and dock workers; labor and facilities costs directly related to our warehousing and distribution services; and labor and third-party professional fees related to our consulting and supply chain management services. Sub-contracted or independent operators are paid on a percentage of revenues, mileage or a fixed fee from point-to-point or between zones.
Direct Operating Expenses
Direct operating expenses are both fixed and variable expenses directly relating to our intermodal operations and consist of equipment lease expense, equipment depreciation expense, equipment maintenance and repair costs, equipment property taxes, fixed terminal and cargo handling expenses and operating costs of our local drayage facilities. Our fleet of leased equipment is accessed through a variety of short- and long-term leases. Changes to the size of our equipment fleet will primarily be through adjustment to leased equipment as the volume of our business dictates. Equipment maintenance and repair costs consist of the costs related to the upkeep of the equipment fleet, which can be considered semi-variable in nature, as a certain amount relates to the annual preventative maintenance costs in addition to amounts driven by fleet usage. Fixed terminal and cargo handling costs primarily relate to the fixed rent and storage expense charged to us by terminal operators and is expected to remain relatively fixed. Operating costs of our local drayage facilities consist mainly of labor, rent, maintenance, utilities and other facility related costs. Selling, General and Administrative Expenses The selling, general and administrative expenses of both the intermodal and logistics segments consist of costs relating to customer acquisition, billing, customer service, salaries and related expenses of the executive and administrative staff, office expenses, technology services, professional fees relating to the aforementioned functions and depreciation expense (excluding railcar, container and chassis depreciation).
Corporate selling, general and administrative expenses relate to the costs of executive, administrative, internal audit, marketing, finance, legal and human resources functions.


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Results of Operations
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012 The following table sets forth our historical financial data by reportable segment for the fiscal years ended December 31, 2013 and 2012 (in millions).

                                         2013           2012          Change         % Change
Revenues
Intermodal                           $    759.1     $  1,179.6     $   (420.5 )        (35.6 )%
Logistics                                 222.7          238.3          (15.6 )         (6.5 )
Inter-segment elimination                  (1.2 )         (2.9 )          1.7            N/M
Total                                     980.6        1,415.0         (434.4 )        (30.7 )
Cost of purchased transportation and
services
Intermodal                                559.5          975.6         (416.1 )        (42.7 )
Logistics                                 195.6          208.8          (13.2 )         (6.3 )
Inter-segment elimination                  (1.2 )         (2.9 )          1.7            N/M
Total                                     753.9        1,181.5         (427.6 )        (36.2 )
Direct operating expenses
Intermodal                                 93.0          101.6           (8.6 )         (8.5 )
Total                                      93.0          101.6           (8.6 )         (8.5 )
Gross margin
Intermodal                                106.6          102.4            4.2            4.1
Logistics                                  27.1           29.5           (2.4 )         (8.1 )
Total                                $    133.7     $    131.9     $      1.8            1.4
Gross margin percentage
Intermodal                                 14.0 %          8.7 %          5.3  %
Logistics                                  12.2           12.4           (0.2 )
Total                                      13.6 %          9.3 %          4.3  %
Selling, general & administrative
expenses
Intermodal                           $     62.4     $     64.0     $     (1.6 )         (2.5 )
Logistics                                  38.0           40.3           (2.3 )         (5.7 )
Corporate                                  19.8           19.1            0.7            3.7
Total                                     120.2          123.4           (3.2 )         (2.6 )
Other income
Logistics                                  (1.0 )         (0.4 )         (0.6 )        150.0
Total                                      (1.0 )         (0.4 )         (0.6 )        150.0
Income (loss) from operations
Intermodal                                 44.2           38.4            5.8           15.1
Logistics                                  (9.9 )        (10.4 )          0.5            4.8
Corporate                                 (19.8 )        (19.1 )         (0.7 )         (3.7 )
Total                                      14.5            8.9            5.6           62.9
Interest expense                           (1.1 )         (1.4 )          0.3           21.4
Income tax                                 (5.4 )         (3.2 )         (2.2 )         68.8
Net income                           $      8.0     $      4.3     $      3.7           86.0  %
. . .
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