UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 21, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 333-85041
PACER INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Tennessee 62-0935669
----------------------------------- -----------
(State or other jurisdiction (I.R.S. employer
of organization) identification no.)
2300 Clayton Road, Suite 1200
Concord, CA 94520
Telephone Number (877) 917-2237
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
--
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding
Class at November 2, 2001
-------------------------------------- --------------------
Common stock, $.01 par value per share 11,544,747 shares
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q
FISCAL QUARTER ENDED SEPTEMBER 21, 2001
TABLE OF CONTENTS
Page
----------------
Part 1. Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets ................................ 3
Condensed Consolidated Statements of Operations ...................... 4
Condensed Consolidated Statements of Stockholders' Equity ............ 5
Condensed Consolidated Statements of Cash Flows ...................... 6
Notes to Condensed Consolidated Financial Statements ................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................ 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........... 24
Part 2. Other Information
Item 1. Legal Proceedings .................................................... 25
Item 6. Exhibits and Reports on Form 8-K ..................................... 25
Signatures .................................................................... 26
2
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 21, 2001 December 29, 2000
------------------ -----------------
(In millions)
ASSETS
Current assets
Cash and cash equivalents .................................................. $ - $ -
Accounts receivable, net of allowances of $7.6 million and $9.0
million, respectively ........................................ 230.4 215.7
Accounts receivable from APL ............................................... 6.1 6.0
Prepaid expenses and other ................................................. 10.0 10.3
Deferred income taxes ...................................................... 7.3 9.7
------------------ -----------------
Total current assets ................................................... 253.8 241.7
------------------ -----------------
Property and equipment
Property and equipment at cost ............................................. 83.5 74.3
Accumulated depreciation ................................................... (24.9) (17.8)
------------------ -----------------
Property and equipment, net ............................................ 58.6 56.5
------------------ -----------------
Other assets
Goodwill, net .............................................................. 284.6 289.8
Deferred income taxes ...................................................... 56.4 59.0
Other assets ............................................................... 9.9 11.4
------------------ -----------------
Total other assets .................................................... 350.9 360.2
------------------ -----------------
Total assets ................................................................... $ 663.3 $ 658.4
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt and capital leases ..................... $ 1.8 $ 1.9
Accounts payable and accrued liabilities .................................... 234.8 227.2
------------------ -----------------
Total current liabilities ............................................. 236.6 229.1
------------------ -----------------
Long-term liabilities
Long-term debt and capital leases .......................................... 399.5 403.5
Other ...................................................................... 3.2 3.7
------------------ -----------------
Total long-term liabilities ............................................ 402.7 407.2
------------------ -----------------
Total liabilities .............................................................. 639.3 636.3
------------------ -----------------
Minority interest - exchangeable preferred stock of a subsidiary................ 25.7 25.0
------------------ -----------------
Commitments and contingencies (Notes 6 and 9)
Stockholders' equity
Preferred stock: $0.01 par value, 1,000,000 shares
authorized, 44,997 issued and none outstanding ....................... - -
Common stock: $0.01 par value, 20,000,000 shares
authorized, 11,544,747 and 11,361,373 issued and
outstanding at September 21, 2001 and December 29, 2000
respectively ......................................................... 0.1 0.1
Additional paid-in-capital ................................................. 119.0 118.7
Unearned compensation ...................................................... (0.3) (0.3)
Treasury stock ............................................................. (0.4) (0.2)
Accumulated deficit ........................................................ (118.3) (121.3)
Accumulated other comprehensive income (loss) .............................. (1.8) 0.1
------------------ -----------------
Total stockholders' equity (deficit) .................................... (1.7) (2.9)
------------------ -----------------
Total liabilities and stockholders' equity ..................................... $ 663.3 $ 658.4
================== =================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
--------------------------------- --------------------------------
Sept. 21, 2001 Sept. 22, 2000 Sept. 21, 2001 Sept. 22, 2000
-------------- -------------- -------------- --------------
(in millions, except per share amounts)
Gross revenues ................................ $ 398.1 $ 307.2 $ 1,269.9 $ 915.4
Cost of purchased transportation and
services .................................. 317.8 240.9 1,027.9 717.7
-------------- -------------- -------------- --------------
Net revenues .......................... 80.3 66.3 242.0 197.7
-------------- -------------- -------------- --------------
Operating expenses:
Direct operating expenses ................. 22.1 20.4 71.1 60.0
Selling, general and administrative
expenses ............................. 37.3 24.4 115.4 73.1
Depreciation and amortization ............. 4.3 2.7 13.3 8.2
Merger and severance ...................... 1.2 - 1.2 -
Other ..................................... 4.0 - 4.0 -
-------------- -------------- -------------- --------------
Total operating expenses .............. 68.9 47.5 205.0 141.3
-------------- -------------- -------------- --------------
Income from operations ........................ 11.4 18.8 37.0 56.4
-------------- -------------- -------------- --------------
Interest expense, net ......................... 8.6 7.8 29.3 24.3
-------------- -------------- -------------- --------------
Income before income taxes and minority
interest .................................. 2.8 11.0 7.7 32.1
-------------- -------------- -------------- --------------
Income taxes .................................. 1.8 4.7 3.9 13.6
Minority interest ............................. - 0.3 0.8 1.2
-------------- -------------- -------------- --------------
Net income .................................... $ 1.0 $ 6.0 $ 3.0 $ 17.3
============== ============== ============== ==============
Earnings per share (Note 8):
Basic:
Earnings per share ............................ $ 0.09 $ 0.54 $ 0.26 $ 1.58
============== ============== ============== ==============
Weighted average shares outstanding ........... 11,544,747 11,043,397 11,481,028 10,927,235
============== ============== ============== ==============
Diluted:
Earnings per share ............................ $ 0.07 $ 0.46 $ 0.26 $ 1.35
============== ============== ============== ==============
Weighted average shares outstanding ........... 14,226,493 13,881,129 14,162,774 13,742,951
============== ============== ============== ==============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Nine Months Ended September 21, 2001
(Unaudited)
Preferred Stock Common Stock
------------------- ------------------------------ Additional Unearned
No. of No. of Paid-in- Accumulated Comp-
Shares Amount Shares Amount Capital Deficit Ensation
-------- -------- ------------- --------------- ---------- ----------- --------
(in millions, except share amounts)
Balance December 29, 2000.................. 17,499 $ -- 11,361,373 $ 0.1 $ 118.7 $ (121.3) $ (0.3)
======== ======== ============= =============== ========== =========== ========
Net Income................................. -- -- -- -- -- 3.0 --
Other Comprehensive Income (Loss)
(Note 1)...................................
-------- -------- ------------- --------------- ---------- ----------- --------
Total Comprehensive Income................. -- -- -- -- -- 3.0 --
Exercise of Preferred Stock Options........ 27,498 -- -- -- 0.2 -- --
Repurchase of Preferred Stock.............. -- -- -- -- -- -- --
Exercise of Common Stock Options........... -- -- 183,374 -- 0.1 -- --
-------- -------- ------------- --------------- ---------- ----------- --------
Balance September 21, 2001................. 44,997 $ -- 11,544,747 $ 0.1 $ 119.0 $ (118.3) $ (0.3)
======== ======== ============= =============== ========== =========== ========
Treasury Stock Accumulated
------------------- Other Total
No. of Comprehensive Stockholders'
Shares Amount Income(Loss) Equity(Deficit)
-------- -------- ------------- ---------------
Balance December 29, 2000.................. (17,499) $ (0.2) $ 0.1 $ (2.9)
======== ======== ============= ===============
Net Income................................. -- -- -- 3.0
Other Comprehensive Income (Loss)
(Note 1)................................... (1.9) (1.9)
-------- -------- ------------- ---------------
Total Comprehensive Income................. -- -- (1.9) 1.1
Exercise of Preferred Stock Options........ -- -- -- 0.2
Repurchase of Preferred Stock.............. (27,498) (0.2) -- (0.2)
Exercise of Common Stock Options........... -- -- -- 0.1
-------- -------- ------------- ---------------
Balance September 21, 2001................. (44,997) $ (0.4) $ (1.8) $ (1.7)
======== ======== ============= ===============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
-------------------------------
Sept. 21, 2001 Sept. 22, 2000
-------------- --------------
(in millions)
CASH FLOW FROM OPERATING ACTIVITIES
Net income ................................................................... $ 3.0 $ 17.3
-------------- --------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ........................................... 13.3 8.2
Deferred income taxes ................................................... 5.0 7.9
Minority interest ....................................................... 0.8 1.2
Gain on sale of property and equipment .................................. (0.1) -
Merger and severance .................................................... 1.2 -
Other ................................................................... 4.0 -
Changes in current assets and liabilities excluding the effects of
acquisitions:
Trade and other receivables ......................................... (14.8) (20.9)
Prepaid expenses and other assets ................................... 1.8 (1.7)
Accounts payable and accrued liabilities ............................ 10.7 (0.5)
Other ............................................................... (0.5) 0.9
-------------- --------------
Net cash provided by operating activities ........................ 24.4 12.4
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash acquired ........................................... - (41.7)
Capital expenditures ......................................................... (10.7) (3.4)
Proceeds from sales of property and equipment ................................ 0.2 0.2
-------------- --------------
Net cash used in investing activities ............................. (10.5) (44.9)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Checks drawn in excess of cash balances ...................................... (9.9) 10.7
Proceeds of long-term debt, net of costs ..................................... - 25.0
Proceeds from issuance of common stock ....................................... 0.1 0.8
Proceeds from issuance of preferred stock .................................... 0.2 -
Repurchase of preferred stock ................................................ (0.2) -
Debt, revolving credit facility and capital lease obligation repayment ....... (4.1) (16.2)
-------------- --------------
Net cash provided by (used in) financing activities ............... ( 13.9) 20.3
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......................... - (12.2)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD .............................. - 12.2
-------------- --------------
CASH AND CASH EQUIVALENTS - END OF PERIOD .................................... $ - $ -
============== ==============
DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Issuance of Common Stock for acquisition ............................ $ - $ 6.0
Issuance of 8.0% subordinated note for acquisition .................. $ - $ 5.0
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited interim financial statements as of September 21, 2001 and
for the three and nine months ended September 21, 2001 and September 22, 2000
are condensed and do not contain all information required by generally accepted
accounting principles to be included in a full set of financial statements. In
the opinion of management, all adjustments, consisting of only normal recurring
adjustments, that are necessary for fair presentation have been included. The
results of operations for any interim period are not necessarily indicative of
the results of operations to be expected for any full fiscal year. These
unaudited interim financial statements and footnotes should be read in
conjunction with the audited financial statements for the fiscal year ended
December 29, 2000 included in the Company's Form 10-K as filed with the
Securities and Exchange Commission.
Principles of Consolidation
The condensed consolidated financial statements as of September 21,
2001 and for the three and nine months ended September 21, 2001 include the
accounts of the Company and all entities in which the Company has more than a
50% equity ownership. For the three and nine months ended September 21, 2001,
this includes Pacer Logistics, Inc., and its subsidiaries acquired May 28, 1999,
the assets of Conex Global Logistics Services ("Conex"), Inc. acquired January
13, 2000, GTS Transportation Services, Inc. ("GTS") acquired August 31, 2000,
RFI Group, Inc. acquired October 31, 2000 and Rail Van, Inc. acquired December
22, 2000. For the three and nine months ended September 22, 2000, this includes
Pacer Logistics, Inc., Conex and GTS since acquisition. All significant
intercompany transactions and balances have been eliminated in consolidation.
Industry Segments
The Company operates in two reportable industry segments, providing
intermodal rail stacktrain services (the "Wholesale" segment) and logistic
services (the "Retail" segment).
Reclassification
Certain reclassifications have been made to the 2000 balances to
conform to the 2001 presentation. These reclassifications had no effect on the
Company's financial position or net income.
New Accounting Standards
The Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations," in July, 2001 and SFAS No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets" in October,
2001. SFAS No. 143, which is effective for fiscal years beginning after June 15,
2002, addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS No. 144, which is effective for fiscal years beginning
after December 15, 2001, addresses financial accounting and reporting for the
impairment of long-lived assets, excluding goodwill and intangible assets, to be
held and used or disposed of. The Company has not yet completed their analysis
of the effects that these new standards will have on the results of operations;
although it does not expect the implementation of these standards to have a
significant effect on the results of operations or financial condition.
The Financial Accounting Standards Board also recently issued Statement
of Financial Accounting Standard No. 141 ("SFAS 141"), "Business Combinations"
and SFAS 142, "Goodwill and Other Intangible Assets." The statements are
expected to become effective for the Company on December 29, 2001. While the
Company is currently studying the impact of these statements, SFAS 142 is
expected to result in significant modifications relative to the Company's
accounting for goodwill. Specifically, the Company will cease goodwill
amortization beginning December 29, 2001. Additionally, the recorded goodwill
will be subjected to new impairment testing criteria. Other than cessation of
goodwill amortization, the Company has not completed an evaluation of the impact
of adoption on the Company's financial statements.
7
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Other Comprehensive Income
Other comprehensive income (loss) includes foreign currency translation
adjustments and derivative transactions, net of related tax. Other comprehensive
income (loss) consists of the following (in millions):
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
Sept. 21, Sept. 22, Sept. 21, Sept. 22,
2001 2000 2001 2000
------------ ------------ ------------ -------------
Foreign Currency Translation Adjustment.............. $ - $ - $ (0.1) $ -
Derivative Instrument Fair Value,
Net of Amortization .............................. (1.6) - (1.8) -
------------ ------------ ------------ -------------
Other Comprehensive Income (Loss) ................... $ (1.6) $ - $ (1.9) $ -
============ ============ ============ =============
NOTE 2. STATEMENTS OF OPERATIONS
During the quarter ended September 21, 2001, the Company recorded a total
of $6.9 million of charges as further described below.
Direct operating expenses included $1.4 million for the repair and return
of 2,700 containers and 1,300 chassis as part of a program to downsize the
container and chassis fleet. Selling, general and administrative expenses
included $0.3 million for legal fees related to a civil lawsuit filed by the
Company against the former owner of an acquired business. Other included $1.9
million for the write-off of agent balances due to an agent bankruptcy, $1.6
million for the write-off of IPO costs and $0.5 million for early termination of
the chassis and container maintenance agreement. For the 2000 periods there were
no significant amounts relating to these matters.
In December 2000, the Company recorded a merger and severance charge of
$7.7 million relating to the consolidation of retail segment operations
resulting from the December 22, 2000 acquisition of Rail Van, Inc. During the
quarter ended September 21, 2001, merger and severance included $0.8 million for
the severance of employees and $0.4 million for the write-off of impaired
assets. The majority of severance charges are planned to be incurred in the last
half of 2001 and completed in 2002.
The table below details merger and severance activity (in millions).
Facilities and
Severance Other Total
------------- ------------------ -----------
Beginning balance December 29, 2000............... $ 5.0 $ 2.7 $ 7.7
Additions at Sept. 21, 2001 .................. 0.8 0.4 1.2
Charges through Sept. 21, 2001 ............... (2.5) (1.6) (4.1)
------------- ------------------ -----------
Balance at Sept. 21, 2001 ....................... $ 3.3 $ 1.5 $ 4.8
============= ================== ===========
8
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE 3. LONG-TERM DEBT
At September 21, 2001, the Company had $21.4 million available under the
$100.0 million revolving credit facility expiring in 2004. At September 21,
2001, the interest rate on the revolving credit facility was 6.1%. During the
first nine months of 2001, the Company repaid $3.0 million under the revolving
credit facility and repaid $0.9 million of term loans and $0.2 million of
capital lease obligations.
NOTE 4. RELATED PARTY TRANSACTIONS
The Company has signed long-term agreements with APL Limited (the Company's
former parent) for the domestic transportation on the stacktrain network of APL
Limited's international freight for an annual management fee of $6.6 million and
for administrative services such as billing and accounts receivable and payable
processing on a per transaction basis. In addition, the information technology
services of APL Limited are currently being provided to the Company. The annual
fee for these services is $10.0 million. In March 2001, the Company entered into
a contract with a software developer/service provider to begin the conversion
from APL Limited's computer systems to a stand-alone capability. At September
21, 2001, $5.1 million has been paid on the contract and capitalized in property
and equipment. The project is expected to be completed by mid-year 2002.
During the nine months ended September 22, 2000, the Company repaid
$371,891 in notes payable to certain members of senior management including
accrued interest. The notes were part of the purchase price for Pacer Logistics
acquired on May 28, 1999. During the nine months ended September 21, 2001, the
Company repaid the remaining $37,582 in notes payable to certain members of
senior management including accrued interest.
NOTE 5. PENSION PLANS AND STOCK OPTION PLANS
During the third quarter of 2001, no options were exercised, 140,000
options were granted to management personnel to purchase Pacer International,
Inc. common stock at $25.00 per share and 20,000 options were forfeited due to
employee resignations.
During the second quarter of 2001, certain members of senior management
exercised options to purchase 500 shares of Pacer International, Inc. common
stock at an average purchase price of $10.00 per share. The proceeds were used
for general corporate purposes. In addition, 17,000 options were forfeited due
to employee resignations and 59,000 options were granted to management personnel
to purchase Pacer International, Inc. common stock at $25.00 per share
During the first quarter of 2001, certain members of senior management
exercised options to purchase 182,874 shares of Pacer International, Inc. common
stock at an average purchase price of $0.22 per share. The proceeds were used to
repay the notes payable as discussed in Note 4 and for general corporate
purposes. The Company granted 80,000 options during the first quarter of 2001 to
management personnel to purchase Pacer International, Inc. common stock at
$25.00 per share. In addition, certain members of senior management exercised
27,498 Pacer International, Inc. preferred stock options with an exercise price
of $9.00 per share. The Company elected, at its discretion, to repurchase the
preferred stock that arose from the exercise of the options.
During the third quarter of 2000, certain members of senior management
exercised options to purchase 40,000 shares of Pacer International, Inc. common
stock at an average purchase price of $10.00 per share. In addition, 15,000
options were forfeited due to employee
9
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
resignations and 132,000 options were granted to management personnel to
purchase Pacer International, Inc. common stock at $25.00 per share.
During the second quarter of 2000, 181,004 options were forfeited due to
employee resignations and 167,000 options were granted to management personnel
to purchase Pacer International, Inc. common stock (45,000 shares at $20.00 per
share and 122,000 shares at $25.00 per share).
During the first quarter of 2000, certain members of senior management
exercised options to purchase 287,373 shares of Pacer International, Inc. common
stock at an average purchase price of $1.22 per share, exercised 10,000 options
at $10.00 per share and forfeited 90,000 options. The proceeds of these
transactions were used to repay the notes payable as discussed above in Note 4
and for general corporate purposes. In addition, the Company granted an
additional 36,500 options to management personnel to purchase Pacer
International, Inc. common stock at an exercise price of $20.00 per share.
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company is party to various legal proceedings, claims and assessments,
including environmental, arising in the normal course of its business
activities. However, management believes none of these items will have a
material adverse impact on the Company's consolidated financial position,
results of operations or liquidity.
Two subsidiaries of Pacer Logistics, Interstate Consolidation, Inc. and
Intermodal Container Service, Inc., were named defendants in a class action
filed in July 1997 in the State of California, Los Angeles Superior Court,
Central District, alleging, among other things, breach of fiduciary duty, unfair
business practices, conversion and money had and received in connection with
monies allegedly wrongfully deducted from truck drivers' earnings. The
defendants entered into a Judge Pro Tempore Submission Agreement dated as of
October 9, 1998, pursuant to which the plaintiffs and defendants have waived
their rights to a jury trial, stipulated to a certified class, and agreed to a
minimum judgement of $250,000 and a maximum judgement of $1.75 million. On
August 11, 2000, the Court issued its Statement of Decision, in which Interstate
Consolidation, Inc. and Intermodal Container Service, Inc. prevailed on all
issues except one. The only adverse ruling was a Court finding that Interstate
failed to issue certificates of insurance to the owner-operators and therefore
failed to disclose that in 1998, the Company's retention on its liability policy
was $250,000. The court has ordered that restitution of $488,978 be paid for
this omission. Plaintiff's counsel has indicated he intends to appeal the entire
ruling. Defendants will be appealing the restitution issue. Based upon
information presently available and in light of legal and other defenses and
insurance coverage, management does not expect these legal proceedings, claims
and assessments, individually or in the aggregate, to have a material adverse
impact on the Company's consolidated financial position, results of operations
or liquidity.
NOTE 7. SEGMENT INFORMATION
The Company has two reportable segments, the Wholesale segment and the
Retail segment, which have separate management teams and offer different but
related products and services. The Wholesale segment provides intermodal rail
service in North America by selling intermodal service to shippers pursuant to
agreements with major railroads. The Retail segment provides trucking services,
intermodal marketing, freight consolidation and handling, international freight
forwarding and supply chain management services.
International revenues generated by the Company's Retail segment for the
first nine months of 2001 were $83.8 million in Europe and $5.5 million in
Canada. The Company's
10
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Wholesale segment generated $34.6 million in revenues for the first nine months
of 2001 from Mexico. For the first nine months of 2000, no revenues were
generated in Europe and $9.6 million were generated in Canada for the Company's
Retail segment. The Wholesale segment generated $38.5 million in revenues from
Mexico during the first nine months of 2000.
For the nine-month period ended September 21, 2001, the Company had no
customers that contributed more than 10% of the Company's total gross revenues.
For the 2000 period, one customer contributed more than 10% of the Company's
total gross revenues. Total gross revenues of $114.4 million were generated by
both reporting segments from Union Pacific for the nine months ended September
22, 2000.
11
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The following table presents reportable segment information for the
three and nine months ended September 21, 2001 and September 22, 2000 (in
millions).
Wholesale Retail Other Consolidated
----------- -------- ------- ------------
3 Months ended September 21, 2001
Gross revenues ...................... $ 191.5 $ 230.3 $ (23.7) $ 398.1
Net revenues ........................ 44.5 35.8 - 80.3
Income from operations .............. 9.9 3.1 (1.6) 11.4
Interest expense, net ............... 4.7 3.9 - 8.6
Tax expense ......................... 3.2 (0.4) (1.0) 1.8
Net income .......................... 2.0 (0.4) (0.6) 1.0
Depreciation and amortization ....... 1.3 3.0 - 4.3
Capital expenditures ................ 1.5 1.0 - 2.5
Total assets ........................ 451.0 277.9 (65.6) 663.3
3 Months ended September 22, 2000
Gross revenues ...................... $ 192.7 $ 124.5 $ (10.0) $ 307.2
Net revenues ........................ 44.0 22.3 - 66.3
Income from operations .............. 13.0 5.8 - 18.8
Interest expense, net ............... 5.0 2.8 - 7.8
Tax expense ......................... 3.4 1.3 - 4.7
Net income .......................... 4.6 1.7 (0.3) 6.0
Depreciation and amortization ....... 1.3 1.4 - 2.7
Capital expenditures ................ 0.4 1.1 - 1.5
Total assets ........................ 364.3 198.7 (78.1) 484.9
9 Months ended September 21, 2001
Gross revenues ...................... $ 591.5 $ 741.5 $ (63.1) $ 1,269.9
Net revenues ........................ 132.2 109.8 - 242.0
Income from operations .............. 24.8 13.8 (1.6) 37.0
Interest expense, net ............... 15.6 13.7 - 29.3
Tax expense ......................... 4.9 - (1.0) 3.9
Net income .......................... 4.3 0.1 (1.4) 3.0
Depreciation and amortization ....... 4.1 9.2 - 13.3
Capital expenditures ................ 5.8 4.9 - 10.7
Total assets ........................ 451.0 277.9 (65.6) 663.3
9 Months ended September 22, 2000
Gross revenues ...................... $ 593.6 $ 348.4 $ (26.6) $ 915.4
Net revenues ........................ 132.2 65.5 - 197.7
Income from operations .............. 40.2 16.2 - 56.4
Interest expense, net ............... 16.9 7.4 - 24.3
Tax expense ......................... 9.9 3.7 - 13.6
Net income .......................... 13.4 5.1 (1.2) 17.3
Depreciation and amortization ....... 4.0 4.2 - 8.2
Capital expenditures ................ 0.7 2.7 - 3.4
Total assets ........................ 364.3 198.7 (78.1) 484.9
Data in the "Other" column includes elimination of intercompany balances and
subsidiary investment as well as the write-off in September 2001 of $1.6 million
of IPO costs.
12
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE 8. EARNINGS PER SHARE
The following table sets forth the computation of earnings per
share-basic and diluted (in millions, except share and per share amounts):
Three Months Ended Nine Months Ended
---------------------------------- -----------------------------------
Sept. 21, 2001 Sept. 22, 2000 Sept. 21, 2001 Sept. 22, 2000
-------------- --------------- ---------------- ---------------
Numerator:
Net income - basic ............................... $ 1.0 $ 6.0 $ 3.0 $ 17.3
Minority interest .............................. - 0.3 0.8 1.2
-------------- --------------- ---------------- ----------------
Numerator for earnings per share-diluted ......... $ 1.0 $ 6.3 $ 3.8 $ 18.5
============== =============== ================ ================
Denominator:
Denominator for earnings per share-basic-
Common shares outstanding .................... 11,544,747 11,043,397 11,481,028 10,927,235
Effect of dilutive securities:
Stock options ................................ 446,901 602,887 446,901 580,870
Exchangeable preferred stock of subsidiary ... 2,234,845 2,234,845 2,234,845 2,234,845
-------------- --------------- ---------------- ----------------
Denominator for earnings per share-diluted ....... 14,226,493 13,881,129 14,162,774 13,742,950
-------------- --------------- ---------------- ----------------
Earnings per share-basic ......................... $ 0.09 $ 0.54 $ 0.26 $ 1.58
============== =============== ================ ================
Earnings per share-diluted ....................... $ 0.07 $ 0.46 $ 0.26 $ 1.35
============== =============== ================ ================
NOTE 9. HEDGING ACTIVITIES
On December 29, 2000, the Company adopted SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities" (as amended by SFAS 138
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment of SFAS 133."). SFAS 133 established accounting
and reporting standards for derivatives and hedging activities, which
requires that all derivative instruments be reported on the balance sheet
at fair value and establishes criteria for designation and effectiveness of
transactions entered into for hedging purposes. The adoption of SFAS 133
did not result in a cumulative effect adjustment being recorded to net
income for the change in accounting as the Company had no derivative
instruments outstanding.
The Company records the fair value of interest rate swap agreements
designated as hedging instruments as a derivative asset or liability.
Changes in the fair value of the interest rate swap agreements are reported
as unrealized gains or losses in stockholders' equity as a component of
accumulated other comprehensive income. If a derivative instrument is
designated as a hedge but the derivative instrument is not fully effective
in hedging the designated risk, the ineffective portion of the gain or loss
is reported in interest expense immediately.
The Company entered into two interest rate swap agreements on April
11, 2001 with a combined notional amount of $100.0 million which matures on
October 11, 2002, to manage fluctuations in cash flows resulting from
interest rate risk. These swap agreements effectively change the
variable-rate cash flows on the Company's debt obligations to fixed-rate
cash flows. Under the terms of the interest rate swap agreements, the
Company receives variable interest rate payments based on LIBOR and makes
fixed interest rate payments.
13
PACER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Interest expense for the three and nine months ended September 21, 2001
includes no net gains or losses representing cash flow hedge ineffectiveness,
since the critical terms of the Company's swap agreements and debt obligations
are matched. The Company recognizes additional interest expense resulting from
amortization of amounts deferred to Other Comprehensive Income.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
--------------------------
This quarterly report on Form 10-Q contains forward looking statements 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
results of operations, 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 and synergies to be obtained
from our completed and any future acquisitions. 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" and similar
expressions. These forward-looking statements are based on all 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 include:
. General economic and business conditions;
. Industry trends;
. Increases in our leverage;
. Changes in our business strategy, development plans or cost savings plans;
. Our ability to integrate acquired businesses;
. The loss of one or more of our major customers;
. Competition;
. Availability of qualified personnel;
. Changes in, or the failure to comply with, government regulation; and
. The other risk factors detailed from time to time in the documents filed by
the Company with the Securities and Exchange Commission.
You should not place undue reliance on any forward-looking statements.
Except as otherwise required by federal securities laws, we undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events, changed circumstances or any
other reason after the date of this quarterly report.
14
Results of Operations
---------------------
Amounts for the Retail segment for the first nine months of 2001 include
the results of our year 2000 acquisitions. Two of these acquisitions occurred
subsequent to the first nine months of 2000 (the "post-nine month 2000
acquisitions") and are therefore not included in the first nine months 2000
results. GTS Transportation Services, Inc. ("GTS") was acquired on August 31,
2000 and is included in 2000 results since acquisition. RFI Group, Inc. ("RFI")
was acquired on October 31, 2000 and Rail Van, Inc. ("Rail Van") on December 22,
2000 both of which are excluded from 2000 results. The acquisition of Conex
occurred on January 13, 2000 and is included in both periods.
Three Months Ended September 21, 2001 Compared to Three Months Ended September
------------------------------------------------------------------------------
22, 2000
--------
The following table sets forth our historical financial data for the three
months ended September 21, 2001 and September 22, 2000 (in millions). An
asterisk indicates that Retail segment data is not comparable because the 2000
amounts do not include comparable results for GTS, RFI and Rail Van all acquired
during or subsequent to the third quarter of 2000.
15
Financial Data Comparison by Reportable Segment
Three Months Ended September 21, 2001 and September 22, 2000
2001 2000 Change % Change
---------- ---------- ---------- -----------
Gross revenues
Wholesale ...................................... $ 191.5 $ 192.7 $ (1.2) -0.6%
Retail ........................................ 230.3 124.5 105.8 *
Inter-segment elimination ..................... (23.7) (10.0) (13.7) *
---------- ---------- ---------- -----------
Total ...................................... 398.1 307.2 90.9 29.6
Cost of purchased transportation and services
Wholesale ...................................... 147.0 148.7 (1.7) -1.1
Retail ........................................ 194.5 102.2 92.3 *
Inter-segment elimination ..................... (23.7) (10.0) (13.7) *
---------- ---------- ---------- -----------
Total ...................................... 317.8 240.9 76.9 31.9
Net revenues
Wholesale ...................................... 44.5 44.0 0.5 1.1
Retail ........................................ 35.8 22.3 13.5 *
---------- ---------- ---------- -----------
Total ...................................... 80.3 66.3 14.0 21.1
Direct operating expenses
Wholesale ...................................... 22.1 20.4 1.7 8.3
Retail ........................................ - - - -
---------- ---------- ---------- -----------
Total ...................................... 22.1 20.4 1.7 8.3
Selling, general & administrative expenses
Wholesale ...................................... 9.9 9.3 0.6 6.5
Retail ........................................ 27.4 15.1 12.3 *
---------- ---------- ---------- -----------
Total ...................................... 37.3 24.4 12.9 52.9
Depreciation and amortization
Wholesale ...................................... 1.3 1.3 - -
Retail ........................................ 3.0 1.4 1.6 *
---------- ---------- ---------- -----------
Total ...................................... 4.3 2.7 1.6 59.3
Merger and severance
Wholesale ...................................... 0.8 - 0.8 *
Retail ........................................ 0.4 - 0.4 *
---------- ---------- ---------- -----------
Total ...................................... 1.2 - 1.2 *
Other
Wholesale ...................................... 0.5 - 0.5 *
Retail ........................................ 1.9 - 1.9 *
Write-off of IPO costs ........................ 1.6 - 1.6 *
---------- ---------- ---------- -----------
Total ...................................... 4.0 - 4.0 *
Income from operations
Wholesale ...................................... 9.9 13.0 (3.1) -23.8
Retail ........................................ 3.1 5.8 (2.7) *
Write-off of IPO costs ........................ (1.6) - (1.6) *
---------- ---------- ---------- -----------
Total ...................................... 11.4 18.8 (7.4) -39.4
Interest expense, net ............................. 8.6 7.8 0.8 10.3
Income tax expense ................................ 1.8 4.7 (2.9) -61.7
Minority interest ................................. - 0.3 (0.3) -100.0
Net income ........................................ $ 1.0 $ 6.0 $ (5.0) -83.3
--------------------------------------------------
* Not comparable
Gross Revenues. Gross revenues increased $90.9 million, or 29.6%, for
the three months ended September 21, 2001 compared to the three months ended
September 22, 2000. The post-nine month 2000 acquisitions accounted for
approximately $115.1 million of the increase. Excluding the post-nine month 2000
acquisitions, gross revenues for the Retail
16
segment decreased by approximately $9.3 million, reflecting a $12.6 million
reduction in intermodal marketing, truck brokerage and freight handling
operations partially offset by a $3.3 million increase in revenues in local and
specialized trucking operations. The Wholesale segment decrease of $1.2 million
was due primarily to a $6.7 million decrease in freight revenues partially
offset by a $4.9 million increase in railcar rental revenue associated with the
increase in railcars for the 2001 period and a $0.6 million increase in
repositioning revenues. The freight revenue decrease was due to a decline in
container volumes and the average freight revenue per container. The overall
container volume decrease of 2.1% for the period was due primarily to a 24.7%
reduction in automotive traffic. The 1.7% reduction in average freight revenue
per container was due to volume reductions in the higher rated automotive
business coupled with domestic traffic rate reductions. Inter-segment revenues
increased by $13.7 million primarily as the result of the acquisition of Rail
Van.
The Company's results for the third quarter of 2001 have been negatively
impacted by the continuation of the general economic downturn experienced during
the first and second quarters of 2001. The downturn has produced overcapacity in
selected markets which increases competitive pressures to reduce transportation
rates. The Company's intermodal marketing, truck brokerage and freight handling
operations have experienced reduced shipments from major retailers and other
customers, while the Wholesale operations have been affected by reduced
automotive shipments. The economic downturn has continued into the fourth
quarter of 2001 and continues to negatively impact our operations.
Net Revenues. Net revenues increased $14.0 million, or 21.1%, for the 2001
period compared to the 2000 period. The post-nine month 2000 acquisitions
accounted for $15.6 million of the increase while the remaining Retail
operations decreased by $2.1 million due to the economic downturn discussed
above. Wholesale segment net revenues increased $0.5 million for the third
quarter of 2001 compared to the third quarter of 2000. The Wholesale segment
gross margin increased to 23.2% in the 2001 period from 22.8% in the 2000 period
due primarily to the increase in railcar rental income discussed above partially
offset by reduced margins on freight transportation associated with competitive
market pressures related to excess capacity. The Retail segment gross margin
decreased to 15.5% in the 2001 period from 17.9% in the 2000 period due
primarily to the lower margins associated with business of the post-nine month
2000 acquisitions.
Direct Operating Expenses. Direct operating expenses, which are only
incurred by the Wholesale segment, increased $1.7 million, or 8.3%, in the 2001
period compared to the 2000 period due to increased equipment lease and
maintenance expenses as a result of the expansion of the fleet of railcars,
partially offset by reduced container and chassis lease expenses. During the
2001 period, $1.4 million was charged for container and chassis return costs
required in order to return 2,700 containers and 1,300 chassis as part of a
program to downsize the container and chassis fleet.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $12.9 million, or 52.9%, in the 2001 period
compared to the 2000 period. The post-nine month 2000 acquisitions accounted for
$12.0 million of the Retail segment increase and legal fees of $0.3 million
related to a lawsuit filed by the Company accounted for the remaining Retail
segment increase. The Wholesale segment accounted for $0.6 million of the
increase due primarily to an increase in headcount since the 2000 period
associated with completing the organizational changeover from APL Limited to
Pacer since May 1999.
Depreciation and Amortization. Depreciation and amortization expenses
increased $1.6 million, or 59.3%, for the 2001 period compared to the 2000
period. The Retail segment including the post-nine month acquisitions accounted
for all of the increase. Depreciation expense was $2.6 million and $1.6 million
and amortization expense was $1.7 million and $1.1 million for the 2001 period
and 2000 period, respectively.
Merger and Severance. In September 2001, the Company recorded an additional
$1.2 million pre-tax charge including $0.8 million for the severance of
employees in the Wholesale
17
segment and $0.4 million for the write-off of Retail segment assets that are no
longer feasible and have been abandoned.
Other. Other expenses included $1.9 million for the write-off of agent
balances due to an agent bankruptcy, $1.6 million for the write-off of IPO costs
relating to the Company's planned IPO and $0.5 million for early termination
costs associated with the termination of a chassis and container maintenance
agreement.
Income From Operations. Income from operations decreased $7.4 million, or
39.4%, from $18.8 million in the 2000 period to $11.4 million in the 2001
period. The Wholesale segment accounted for $3.1 million of the decrease due
primarily to the 25% reduction in automotive shipments, the $1.4 million charge
for container and chassis return costs required to downsize the container and
chassis fleet, the increase in equipment costs associated with the expansion of
the railcar fleet and the merger and severance charge. Retail segment income
from operations decreased $2.7 million for the 2001 period. Income from
operations for the post-nine month 2000 acquisitions was $2.2 million while the
remaining Retail operations decreased $4.9 million reflecting the economic
downturn discussed above, the write-off of agent balances and the merger and
severance charge. The write-off of IPO costs accounted for $1.6 million of the
decline in income from operations.
Income from operations, before the $6.9 million of charges discussed below,
decreased $0.5 million from $18.8 million in the 2000 period to $18.3 million in
the 2001 period reflecting the continuation of the economic downturn. The $6.9
million of charges included $1.2 million discussed in Merger and Severance
above, $4.0 million discussed in Other above, $1.4 million for the container and
chassis return program included in Direct Operating Expenses and $0.3 million
for legal fees included in Selling, General and Administrative expenses.
Interest Expense. Interest expense increased by $0.8 million, or 10.3%, for
the 2001 period compared to the 2000 period due to the higher level of
outstanding debt in the 2001 period partially offset by lower interest rates in
2001. The Company borrowed $68.2 million from the revolving credit facility and
issued $40.0 million in new term loans to fund the acquisitions of GTS, RFI and
Rail Van.
Income Tax Expense. Income tax expense decreased $2.9 million in the 2001
period compared to the 2000 period due to lower pre-tax income in the 2001
period.
Net Income. Net income decreased $5.0 million from $6.0 million in the 2000
period to $1.0 million in the 2001 period. The Wholesale segment accounted for a
decrease of $2.6 million due primarily to decreased income from operations. The
Retail segment accounted for $2.1 million of the decrease due primarily to
increased interest expense and corporate costs accounted for a decrease of $0.3
million.
Nine Months Ended September 21, 2001 Compared to Nine Months Ended September 22,
--------------------------------------------------------------------------------
2000
----
The following table sets forth our historical financial data for the nine
months ended September 21, 2001 and September 22, 2000 (in millions). An
asterisk indicates that Retail segment data is not comparable because the 2000
amounts do not include comparable results for GTS, RFI and Rail Van all acquired
during or subsequent to the third quarter of 2000.
18
Financial Data Comparison by Reportable Segment
Nine Months Ended September 21, 2001 and September 22, 2000
2001 2000 Change % Change
----------- ----------- ---------- ------------
Gross revenues
Wholesale ..................................... $ 591.5 $ 593.6 $ (2.1) -0.4%
Retail ....................................... 741.5 348.4 393.1 *
Inter-segment elimination .................... (63.1) (26.6) (36.5) *
----------- ----------- ---------- ------------
Total ..................................... 1,269.9 915.4 354.5 38.7
Cost of purchased transportation and services
Wholesale ..................................... 459.3 461.4 (2.1) -0.5
Retail ....................................... 631.7 282.9 348.8 *
Inter-segment elimination .................... (63.1) (26.6) (36.5) *
----------- ----------- ---------- ------------
Total ..................................... 1,027.9 717.7 310.2 43.2
Net revenues
Wholesale ..................................... 132.2 132.2 - -
Retail ....................................... 109.8 65.5 44.3 *
----------- ----------- ---------- ------------
Total ..................................... 242.0 197.7 44.3 22.4
Direct operating expenses
Wholesale ..................................... 71.1 60.0 11.1 18.5
Retail ....................................... - - - -
----------- ----------- ---------- ------------
Total ..................................... 71.1 60.0 11.1 18.5
Selling, general & administrative expenses
Wholesale ..................................... 30.9 28.0 2.9 10.4
Retail ....................................... 84.5 45.1 39.4 *
----------- ----------- ---------- ------------
Total ..................................... 115.4 73.1 42.3 57.9
Depreciation and amortization
Wholesale ..................................... 4.1 4.0 0.1 2.5
Retail ....................................... 9.2 4.2 5.0 *
----------- ----------- ---------- ------------
Total ..................................... 13.3 8.2 5.1 62.2
Merger and severance
Wholesale ..................................... 0.8 - 0.8 *
Retail ....................................... 0.4 - 0.4 *
----------- ----------- ---------- ------------
Total ..................................... 1.2 - 1.2 *
Other
Wholesale ..................................... 0.5 - 0.5 *
Retail ....................................... 1.9 - 1.9 *
Write-off of IPO costs ....................... 1.6 - 1.6 *
----------- ----------- ---------- ------------
Total ..................................... 4.0 - 4.0 *
Income from operations
Wholesale ..................................... 24.8 40.2 (15.4) -38.3
Retail ....................................... 13.8 16.2 (2.4) *
Write-off of IPO costs ....................... (1.6) - (1.6) *
----------- ----------- ---------- ------------
Total ..................................... 37.0 56.4 (19.4) -34.4
Interest expense, net ........................... 29.3 24.3 5.0 20.6
Income tax expense ............................... 3.9 13.6 (9.7) -71.3
Minority interest ................................ 0.8 1.2 (0.4) -33.3
Net income ....................................... $ 3.0 $ 17.3 $ (14.3) -82.7
--------------------------------------------------
* Not comparable
Gross Revenues. Gross revenues increased $354.5 million, or 38.7%, for the
nine months ended September 21, 2001 compared to the nine months ended September
22, 2000. The post-nine month 2000 acquisitions accounted for approximately
$422.4 million of the
19
increase. Excluding the post-nine month 2000 acquisitions, gross revenues for
the Retail segment decreased by approximately $29.3 million, reflecting a $40.4
million reduction in intermodal marketing, truck brokerage and freight handling
operations partially offset by a $11.1 million increase in revenues in local and
specialized trucking operations. The Wholesale segment decrease of $2.1 million
was due primarily to a $19.3 million, or 3.5%, decrease in freight revenues
partially offset by a $14.2 million increase in railcar rental revenue
associated with the increase in railcars for the 2001 period and a $3.0 million
increase in repositioning revenues. The freight revenue decrease was due to a
decline in the average freight revenue per container and to a decline in
container volumes. The 2.5% reduction in the average freight revenue per
container resulted from volume reductions in the higher rated automotive
business and volume increases in the lower rated domestic traffic. Container
volumes decreased by 5,031 containers, or 1.0%, due primarily to a 19.3%
reduction in automotive traffic. Inter-segment revenues increased by $36.5
million primarily as the result of the acquisition of Rail Van.
The Company's results for the first nine months of 2001 have been
negatively impacted by the continuation of the general economic downturn
experienced during the first and second quarters of 2001. The downturn has
produced overcapacity in selected markets which increases competitive pressures
to reduce transportation rates. The Company's intermodal marketing, truck
brokerage and freight handling operations have experienced reduced shipments
from major retailers and other customers, while the Wholesale operations have
been affected by reduced automotive shipments. The economic downturn has
continued into the fourth quarter of 2001 and continues to negatively impact our
operations.
Net Revenues. Net revenues increased $44.3 million, or 22.4%, for the 2001
period compared to the 2000 period. The post-nine month 2000 acquisitions
accounted for $50.1 million of the increase while the remaining Retail segment
operations decreased $5.8 million due to the economic downturn discussed above.
Wholesale segment net revenues were unchanged for the first nine months of 2001
compared to the first nine months of 2000. The Wholesale segment gross margin
increased slightly to 22.4% in the 2001 period from 22.3% in the 2000 period due
primarily to the increase in railcar rental income discussed above partially
offset by reduced margins on freight transportation associated with competitive
market pressures related to excess capacity. The Retail segment gross margin
decreased to 14.8% in the 2001 period from 18.8% in the 2000 period due
primarily to the lower margins associated with business of the post-nine month
2000 acquisitions.
Direct Operating Expenses. Direct operating expenses, which are only
incurred by the Wholesale segment, increased $11.1 million, or 18.5%, in the
2001 period compared to the 2000 period due to increased equipment lease and
maintenance expenses as a result of the expansion of the fleet of railcars.
During the 2001 period, $1.4 million was charged for container and chassis
return costs required in order to return 2,700 containers and 1,300 chassis as
part of a program to downsize the container and chassis fleet.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $42.3 million, or 57.9%, in the 2001 period
compared to the 2000 period. The post-nine month 2000 acquisitions accounted for
$39.1 million of the Retail segment increase and legal fees of $0.3 million
related to a lawsuit filed by the Company accounted for the remaining Retail
segment increase. The Wholesale segment accounted for $2.9 million of the
increase due primarily to an increase in headcount since the 2000 period
associated with completing the organizational changeover from APL Limited to
Pacer since May 1999. In March 2001, the Company terminated a container and
chassis maintenance management contract and brought that function in-house,
which while increasing administrative labor costs, is expected to reduce repair
and maintenance costs and provide for more control of the maintenance function
in the future. Also in March 2001, the Company entered into a contract with a
software developer/service provider to begin the conversion from APL Limited's
computer systems to a stand-alone capability. The conversion is continuing and
is expected to be completed by mid-year 2002.
20
Depreciation and Amortization. Depreciation and amortization expenses
increased $5.1 million, or 62.2%, for the 2001 period compared to the 2000
period. The Retail segment including the post-nine month 2000 acquisitions
accounted for $5.0 million of the increase and the Wholesale segment accounted
for the remaining $0.1 million. Depreciation expense was $7.9 million and $4.9
million and amortization expense was $5.4 million and $3.3 million for the 2001
period and 2000 period, respectively.
Merger and Severance. In September 2001, the Company recorded an
additional $1.2 million pre-tax charge including $0.8 million for the severance
of employees in the Wholesale segment and $0.4 million for the write-off of
Retail segment assets that are no longer feasible and have been abandoned.
Other. Other expenses included $1.9 million for the write-off of agent
balances due to an agent bankruptcy, $1.6 million for the write-off of IPO costs
relating to the Company's planned IPO and $0.5 million for early termination
costs associated with the termination of a chassis and container maintenance
agreement.
Income From Operations. Income from operations decreased $19.4 million, or
34.4%, from $56.4 million in the 2000 period to $37.0 million in the 2001
period. The Wholesale segment accounted for $15.4 million of the decrease due
primarily to the 19% reduction in automotive shipments, the $1.4 million charge
for container and chassis return costs required to downsize the container and
chassis fleet, the increase in equipment costs associated with the expansion of
the railcar fleet and the merger and severance charge. Retail segment income
from operations decreased by $2.4 million for the 2001 period compared to the
same period in 2000. Income from operations for the post-nine month 2000
acquisitions was approximately $6.4 million while the remaining Retail
operations decreased $8.8 million reflecting the economic downturn discussed
above, the write-off of agent balances and the merger and severance charge. The
write-off of IPO costs accounted for $1.6 million of the decline in income from
operations.
Income from operations, before the $6.9 million of charges discussed below,
decreased $12.5 million from $56.4 million in the 2000 period to $43.9 million
in the 2001 period reflecting the continuation of the economic downturn. The
$6.9 million of charges included $1.2 million discussed in Merger and Severance
above, $4.0 million discussed in Other above, $1.4 million for the container and
chassis return program included in Direct Operating Expenses and $0.3 million
for legal fees included in Selling, General and Administrative Expenses.
Interest Expense. Interest expense increased by $5.0 million, or 20.6%, for
the 2001 period compared to the 2000 period due to the higher level of
outstanding debt in the 2001 period partially offset by lower interest rates in
2001. The Company borrowed $68.2 million from the revolving credit facility and
issued $40.0 million in new term loans to fund the acquisitions of GTS, RFI and
Rail Van.
Income Tax Expense. Income tax expense decreased $9.7 million in the 2001
period compared to the 2000 period due to lower pre-tax income in the 2001
period.
Net Income. Net income decreased $14.3 million from $17.3 million in the
2000 period to $3.0 million in the 2001 period. The Wholesale segment accounted
for $9.1 million of the decrease due primarily to decreased income from
operations. The Retail segment accounted for $5.0 million of the decrease due
primarily to increased interest expense and corporate costs accounted for a
decrease of $0.2 million.
Liquidity and Capital Resources
-------------------------------
Cash provided by operating activities for the first nine months of 2001 was
$24.4 million compared to $12.4 million for the first nine months of 2000. The
increased source of cash for the 2001 period was due primarily to improved
working capital during the 2001 period. Partially offsetting the increased
source of cash were interest payments of $23.9 million during the first
21
nine months of 2001 compared to $19.4 million for the same period in 2000,
merger and severance cash payments of $3.0 million, acquisition fees and
expenses paid of $2.0 million primarily for the acquisitions of GTS, RFI and
Rail Van, as well as reduced income from operations during the 2001 period. Cash
generated from operating activities is typically used for working capital
purposes, to fund capital expenditures and for acquisitions. The Company had
working capital of $17.2 million at September 21, 2001 compared to a deficit of
$4.8 million at September 22, 2000. The increase in working capital is primarily
due to the acquisitions during 2000.
During the quarter ended September 21, 2001, the Company charged a total of
$6.9 million to operating expense as described below. The charges included $1.9
million for the write-off of agent balances due to agent bankruptcy; $1.6
million for the write-off of IPO costs relating to the Company's planned IPO;
$1.4 million for container and chassis return costs required as part of a
program to downsize the container and chassis fleet; $1.2 million for additional
merger and severance costs; $0.5 million for early container and chassis
maintenance agreement termination costs; and $0.3 million for legal fees related
to a civil lawsuit filed by the Company against the former owner of an acquired
business.
Cash flows used in investing activities were $10.5 million and $44.9
million for the 2001 period and 2000 period, respectively. The use of cash
during the first nine months of 2001 was for capital expenditures primarily for
computer and related equipment including amounts for the conversion of the
Wholesale computer systems from APL Limited to an in-house capability and the
expansion of the Rail Van computer system to handle the retail operations
requirements. During the first nine months of 2000, the Company acquired Conex
assets for $26.4 million in cash and issued common stock and a subordinated note
as described below and acquired GTS for $15.3 million in cash. Capital
expenditures of $3.4 million for the first nine months of 2000 were for computer
equipment and leasehold improvements to office space and warehouse facilities.
Cash flows provided by (used for) financing activities were $(13.9)
million for the first nine months of 2001 compared to $20.3 million for the
first nine months of 2000. The use of cash in the 2001 period was due to cash
management activities as well as debt repayment. During the first nine months of
2001, the Company repaid $3.0 million under the revolving credit facility and
repaid $0.9 million of term loans and $0.2 million of capital lease obligations.
During the first nine months of 2001, certain members of senior management
exercised options to purchase 183,374 shares of Pacer International, Inc. common
stock for total proceeds of $0.1 million. The proceeds were used to repay the
remaining portion of the notes payable to management that were part of the
purchase price for Pacer Logistics acquired on May 28, 1999 and for general
corporate purposes. In addition, certain members of senior management exercised
options to purchase 27,498 shares of Pacer International, Inc. preferred stock
for total proceeds of $0.2 million. The Company elected, at its discretion, to
repurchase the preferred stock that arose from the exercise of the options.
During the first nine months of 2000, certain members of senior management
exercised options to purchase 337,373 shares of Pacer International, Inc. common
stock for total proceeds of $0.8 million. The proceeds were used to make an
initial payment on notes payable to management which were part of the purchase
price for Pacer Logistics acquired on May 28, 1999 and for general corporate
purposes. In connection with the acquisition of GTS, the Company borrowed $10.0
million from the revolving credit facility to purchase the stock of GTS. In
connection with the acquisition of Conex assets, the Company borrowed $15.0
million from the revolving credit facility expiring in 2004, issued Conex
shareholders an 8.0% subordinated note in the aggregate principal amount of $5.0
million due 2003 and issued Conex shareholders 300,000 shares of Pacer
International, Inc. common stock valued at $6.0 million. During the first nine
of 2000, $15.0 million was repaid on the revolving credit facility, $0.7 million
was repaid on the term loan facility, $0.4 million was repaid on notes payable
to management and $0.1 million was repaid on capital lease obligations.
22
Effective April 11, 2001, the Company entered into two interest rate swap
agreements totaling a notional amount of $100.0 million to take advantage of
lower interest rates and hedge against the LIBOR component of the interest rate
increases on the Company's variable rate debt. The Company agreed to pay a fixed
rate of interest on the swap of 4.43% and receive a variable rate based on
LIBOR. The swap terminates on October 11, 2002.
The revolving and term loan credit facilities are generally guaranteed by
all of our existing and future direct and indirect wholly-owned subsidiaries and
are collateralized by liens on our and our subsidiaries properties and assets.
At September 21, 2001, the Company had $21.4 million available under the
revolving credit facility, subject to borrowing base requirements. The credit
agreement contains certain restrictions and financial covenants such as an
adjusted total leverage ratio and a consolidated interest coverage ratio. At
September 21, 2001 the Company was in compliance with these covenants.
The Wholesale segment took delivery of 851 containers and 76 chassis
financed through operating lease and returned or retired 2,159 primarily 48-ft
containers and 863 chassis during the first nine months of 2001. The Company
received an additional 799 of 1,100 new railcars ordered in 2000 under operating
lease during the first nine months of 2001 with the remaining 216 railcars on
order to be received by December 2001.
Based upon the current level of operations and the anticipated future
growth in both operating segments, management believes that operating cash flow
and availability under the revolving credit facility will be adequate to meet
our working capital, capital expenditure and other cash needs for at least the
next two years, although no assurance can be given in this regard.
In December 2000, the Company filed a registration statement with the SEC
with respect to an initial public offering of the Company's common stock.
Proceeds from the IPO were expected to be used to repay indebtedness under the
Company's credit facility. During the third quarter of 2001, the Company charged
to expense $1.6 million of costs associated with the IPO.
Other Matters
The Financial Accounting Standards Board issued SFAS No. 143, "Accounting
for Asset Retirement Obligations," in July, 2001 and SFAS No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets" in October, 2001. SFAS No.
143, which is effective for fiscal years beginning after June 15, 2002,
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS No. 144, which is effective for fiscal years beginning after
December 15, 2001, addresses financial accounting and reporting for the
impairment of long-lived assets, excluding goodwill and intangible assets, to be
held and used or disposed of. The Company has not yet completed their analysis
of the effects that these new standards will have on the results of operations;
although it does not expect the implementation of these standards to have a
significant effect on the results of operations or financial condition.
The Financial Accounting Standards Board also recently issued Statement of
Financial Accounting Standard No. 141 ("SFAS 141"), "Business Combinations" and
SFAS 142, "Goodwill and Other Intangible Assets." The statements are expected to
become effective for the Company on December 29, 2001. While the Company is
currently studying the impact of these statements, SFAS 142 is expected to
result in significant modifications relative to the Company's accounting for
goodwill. Specifically, the Company will cease goodwill amortization beginning
December 29, 2001. Additionally, the recorded goodwill will be subjected to new
impairment testing criteria. Other than cessation of goodwill amortization, the
Company has not completed an evaluation of the impact of adoption on the
Company's financial statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk is affected primarily by changes in interest
rates. Under the Company's policies, it may use hedging techniques and
derivative financial instruments to reduce the impact of adverse changes in
market prices. Effective April 11, 2001, the Company entered into two interest
rate swap agreements totaling a notional amount of $100.0 million to take
advantage of lower interest rates and hedge against interest rate increases on
the Company's variable rate debt. As of September 21, 2001, a liability of $1.8
million is included in Accounts Payable and Accrued Liabilities and offset in
Accumulated Other Comprehensive Income (Loss) which represents the fair market
value of the swaps. The swaps terminate on October 11, 2002. Based upon the
average variable interest rate debt outstanding during the first nine months of
2001, a 1% change in our variable interest rates would effect the Company's
pre-tax earnings by approximately $2.6 million on an annual basis including the
effects of the interest rate swaps entered into on April 11, 2001.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 6 to the Notes to Condensed Consolidated Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
----
(b) During the three months ended September 21, 2001, no reports on
Form 8-K were filed by the Company.
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SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PACER INTERNATIONAL, INC.
Date: November 2, 2001 By: /s/ L.C. Yarberry
------------------- -----------------
Vice President - Finance
(Principal Financial Officer)
26