More Door-to-Door Intermodal Says Pacer

Pacer International, Inc., an asset-light North American freight transportation and logistics services provider, announced that it has entered into new arrangements with Union Pacific Railroad (UP) that will further accelerate Pacer’s transformation into a fully integrated, door-to-door intermodal service provider.

The Pacer announcement coincided with the company's release of earnings data and other industry news that Warren Buffett's Berkshire Hathaway group was buying the Burlington Northern Santa Fe Railroad.

Third-quarter revenues at Pacer declined by $139.1 million to $418.7 million. Income from operations fell $28.6 million to $700,000 compared with an income of $29.3 million for the 2008 quarter.

Revenues for the nine months ended September 30, 2009 decreased $423.2 million to $1,154.0 million compared with $1,577.2 million for the nine months ended September 19, 2008. Income from operations, (which includes a $200.4 million pre-tax, non-cash goodwill impairment charge), was a loss of $234.2 million compared to income of $75.3 million in the 2008 period. Excluding the first quarter impairment charge, income from operations was a loss of $33.8 million. Included in income from operations in the 2009 period is $4.3 million for severance expense.

The multi-year arrangements Pacer announced with the UP provide continued access to the entire UP intermodal rail network and establishe a new rate structure, said Pacer. As a result, Pacer is increasing its focus on door-to-door integrated intermodal services with seamless coordination and control of equipment, technology, and service delivery.

“We are delighted to announce that Pacer and UP have entered into new multi-year arrangements that provide Pacer with continued access to the entire UP network,” said Michael E. Uremovich, chairman and CEO of Pacer. “This is a significant positive development for Pacer and our customers. The direct beneficiaries of the arrangements are companies seeking door-to-door intermodal services who demand a higher degree of service delivery integration and greater efficiency,” he continued

Financial analyst firm Stifel Nicolaus noted, following the new agreements, Pacer will reduce its wholesale marketing of UP's intermodal capacity (i.e., ramp-to-ramp or marketing UP's intermodal capacity to other transportation companies), and instead, its intermodal business model will become more focused on providing door-to-door intermodal services. “In our view, Hub Group has the most similar business model to the business model that Pacer is targeting given Hub Group's presence on UP, its large domestic container fleet, and asset-light drayage operation,” said John Larkin. “Pacer will utilize the $30 million cash payment associated with the new agreements (payment to compensate Pacer for the relinquished value of the old contract) to reduce its debt balance, which stood at $60.9 million at the end of 3Q09,” he added.

“We view [this] announcement as a positive for Pacer,” said Larkin. “While the transition away from the old contract will significantly reduce revenue associated with marketing UP's wholesale intermodal capacity, we believe the new agreements demonstrate a willingness on the part of UP to work with Pacer on its transition toward becoming a sustainable door-to-door intermodal operation.”

Pacer explained, the new arrangements provide it with continued access to the entire UP intermodal network, featuring a multi-year line-haul services extension that replaces the parties’ current terms for domestic big-box shipments that were to expire in 2011. In addition, it resolves outstanding claims between Pacer and UP relating to domestic container transportation; facilitates a more efficient equipment model through a fleet-sharing arrangement that provides customers access to equipment of both companies; and allows Pacer to strategically focus on its direct-to-customer intermodal service offering. “The multi-faceted arrangements form a firm foundation for intermodal service growth by both organizations,” said Pacer.

Commening on the financial results, Brian C. Kane, CFO for Pacer, said, “We are very pleased with our progress and return to profitability in the third-quarter given that the transportation markets and overall economic conditions remained extremely challenging.”

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