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| R > SEC Filings for R > Form 10-Q on 23-Apr-2008 | All Recent SEC Filings |
23-Apr-2008
Quarterly Report
OVERVIEW
The following discussion should be read in conjunction with the unaudited Consolidated Condensed Financial Statements and notes thereto included under Item 1. In addition, reference should be made to our audited Consolidated Financial Statements and notes thereto and related Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2007 Annual Report on Form 10-K.
Ryder System, Inc. (Ryder) is a global leader in transportation and supply chain management solutions. Our business is divided into three business segments: Fleet Management Solutions (FMS), which provides full service leasing, contract maintenance, contract-related maintenance and commercial rental of trucks, tractors and trailers to customers principally in the U.S., Canada and the U.K.; Supply Chain Solutions (SCS), which provides comprehensive supply chain consulting including distribution and transportation services throughout North America and in Latin America, Europe and Asia; and Dedicated Contract Carriage (DCC), which provides vehicles and drivers as part of a dedicated transportation solution in the U.S. We operate in highly competitive markets. Our customers select us based on numerous factors including service quality, price, and technology and service offerings. As an alternative to using our services, customers may choose to provide these services for themselves, or may choose to obtain similar or alternative services from other third-party vendors. Our customer base includes enterprises operating in a variety of industries including automotive, electronics, high-tech, telecommunications, industrial, consumer goods, paper and paper products, office equipment, food and beverage, general retail industries and governments.
ITEMS AFFECTING COMPARABILITY BETWEEN PERIODS
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, "Fair Value Measurements." This statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are to be applied prospectively, except for certain financial instruments, which should be recognized as a cumulative effect adjustment to the opening balance of retained earnings for the fiscal year in which this statement is initially applied. The provisions of SFAS No. 157, as amended by FASB Staff Position FAS 157-1, exclude provisions of SFAS No. 13, "Accounting for Leases," and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under SFAS No. 13. We adopted SFAS No. 157 on January 1, 2008 for all financial assets and liabilities and for all nonfinancial assets and liabilities recognized or disclosed at fair value in our Consolidated Condensed Financial Statements on a recurring basis (at least annually). The adoption of SFAS No. 157 on January 1, 2008 did not have a material impact on our Consolidated Condensed Financial Statements. For all other nonfinancial assets and liabilities, SFAS No. 157 is effective for us on January 1, 2009. We are in the process of evaluating the impact of SFAS No. 157 on the valuation of all other nonfinancial assets and liabilities, including our vehicles held for sale, and we do not expect there to be a material impact upon adoption on January 1, 2009 on our Consolidated Condensed Financial Statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." This statement permits companies to choose to measure many financial instruments and certain other items at fair value in order to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Effective January 1, 2008, we adopted SFAS No. 159; however, we have not elected to measure any financial instruments and other items at fair value under the provisions of this standard. Consequently, SFAS No. 159 had no impact on our Consolidated Condensed Financial Statements.
In transportation management arrangements where we act as principal, revenue is reported on a gross basis for subcontracted transportation services billed to our customers. We realize minimal changes in profitability as a result of fluctuations in subcontracted transportation. Determining whether revenue should be reported as gross (within total revenue) or net (deducted from total revenue) is based on an assessment of whether we are acting as the principal or the agent in the transaction and involves judgment based on the terms and conditions of the arrangement. Effective January 1, 2008, our contractual relationship with a significant customer for certain transportation management services changed, and we determined, after a formal review of the terms and conditions of the services, that we are acting as an agent based on the revised terms of the arrangement. This contract modification required a change in revenue recognition from a gross basis to a net basis for subcontracted transportation beginning on January 1, 2008. This contract represented $175 million of total revenue for the three months ended March 31, 2007.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
On January 11, 2008, we completed an asset purchase agreement with Lily Transportation Corporation ("Lily"), under which we acquired Lily's fleet of approximately 1,600 vehicles and over 200 contractual customers. The combined network operates under the Ryder name, complementing Ryder's market coverage and service network in the Northeast United States. On October 5, 2007, we also completed an asset purchase agreement with Pollock NationaLease ("Pollock"), under which we acquired Pollock's fleet of approximately 2,000 vehicles and nearly 200 contractual customers. The combined network operates under the Ryder name, complementing our market coverage and service network in Canada. The results of these acquisitions have been included in our consolidated results since the dates of acquisitions.
CONSOLIDATED RESULTS
Three months ended March 31, Change
2008 2007 2008/2007
(In thousands, except per share amounts)
Earnings before income taxes $ 92,087 84,838 9 %
Provision for income taxes 36,005 33,579 7
Net earnings $ 56,082 51,259 9 %
Per diluted common share (EPS) $ 0.96 0.84 14
Weighted-average shares outstanding - Diluted 58,177 61,165 (5 )%
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Earnings before income taxes in the first three months of 2008 increased $7 million to $92 million compared to the same period in the prior year. The growth in operating results in the first quarter was driven primarily by better operating performance in our FMS business segment. Earnings in the first quarter of 2008 also benefited from a slightly lower income tax rate compared to 2007. EPS growth in 2008 exceeded the net earnings growth reflecting the impact of share repurchase programs.
See "Operating Results by Business Segment" for a further discussion of operating results.
Three months ended March 31, Change
2008 2007 2008/2007
(In thousands)
Revenue:
Fleet Management Solutions $ 1,105,611 988,090 12 %
Supply Chain Solutions 414,177 566,406 (27 )
Dedicated Contract Carriage 137,178 138,499 (1 )
Eliminations (113,384 ) (98,893 ) (15 )
Total $ 1,543,582 1,594,102 (3 )%
Operating revenue (1) $ 1,172,302 1,119,207 5 %
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(1) We use operating revenue, a non-GAAP financial measure, to evaluate the operating performance of our businesses and as a measure of sales activity. FMS fuel services revenue net of related intersegment billings, which is directly impacted by fluctuations in market fuel prices, is excluded from the operating revenue computation as fuel is largely a pass-through to our customers for which we realize minimal changes in profitability during periods of steady market fuel prices. However, profitability may be positively or negatively impacted by increases or decreases in market fuel prices during a short period of time as customer pricing for fuel services is established based on market fuel costs. Subcontracted transportation is deducted from total revenue to arrive at operating revenue as subcontracted transportation is typically a pass-through to our customers. We realize minimal changes in profitability as a result of fluctuations in subcontracted transportation. Operating revenue is also a primary internal operating metric used to measure segment performance. Refer to the section titled "Non-GAAP Financial Measures" for a reconciliation of total revenue to operating revenue.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Total revenue decreased 3% to $1.54 billion in the first quarter of 2008 compared with the same period in 2007. The decrease in total revenue was primarily due to a change, effective January 1, 2008, in our contractual relationship with a significant customer where we now act as an agent rather than a principal in the purchase of subcontracted transportation services. This contract modification required a change in revenue recognition from a gross basis to a net basis for subcontracted transportation and did not impact operating revenue or earnings. In the first quarter of 2007, we recorded revenue of $175 million related to this contractual relationship. Operating revenue increased 5% in the first quarter of 2008, compared with the same period in 2007, due primarily to growth in our FMS and SCS business segments. Total revenue and operating revenue in the first quarter of 2008 included a favorable foreign exchange impact of 1.7% and 1.8%, respectively, due primarily to the strengthening of the Canadian dollar.
Three months ended March 31, Change
2008 2007 2008/2007
(Dollars in thousands)
Operating expense (exclusive of items shown
separately) $763,767 667,208 14%
Percentage of revenue 49% 42%
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Operating expense and operating expense as a percentage of revenue increased in 2008 compared with the same period in 2007 primarily as a result of higher average fuel costs in 2008.
We retain a portion of the accident risk under vehicle liability and workers' compensation insurance programs. Our self-insurance accruals are based on actuarially estimated, undiscounted cost of claims, which includes claims incurred but not reported. While we believe that our estimation processes are well designed, every estimation process is inherently subject to limitations. Fluctuations in the frequency or severity of accidents make it difficult to precisely predict the ultimate cost of claims. In recent years, our development has been favorable compared to historical selected loss development factors because of improved safety performance, payment patterns and settlement patterns; however, there is no assurance we will continue to enjoy similar favorable development in the future. During each of the three months ended March 31, 2008 and 2007, we recorded a benefit of $5 million from favorable development in estimated prior years self-insured loss reserves for the reasons noted above.
Three months ended March 31, Change
2008 2007 2008/2007
(Dollars in thousands)
Salaries and employee-related costs $358,370 354,164 1%
Percentage of revenue 23% 22%
Percentage of operating revenue 31% 32%
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Salaries and employee-related costs increased in the first quarter of 2008 compared with the same period in 2007 primarily due to the impact of foreign exchange rate changes and higher medical costs partially offset by a decrease in commissions. Headcount as of March 31, 2008 was flat compared to the same period in 2007.
Pension expense decreased $6 million in the first quarter of 2008 compared to the same period in the prior year primarily as a result of the freeze of the U.S. pension plans. In connection with the freeze of the U.S. pension plans on January 1, 2008, we provided an enhanced 401(k) savings plan to employees. Refer to Note (O), "Employee Benefit Plans" in the Notes to Consolidated Condensed Financial Statements for additional information. Total savings plan costs increased $6 million in the first quarter of 2008 compared to 2007, primarily as a result of the enhanced 401(k) plan.
Three months ended March 31, Change
2008 2007 2008/2007
(Dollars in thousands)
Subcontracted transportation $75,331 247,229 (70)%
Percentage of revenue 5% 16%
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Subcontracted transportation expense represents freight management costs on logistics contracts for which we purchase transportation from third parties. Subcontracted transportation expense is directly impacted by whether we are acting as an agent or principal in our transportation management contracts. To the extent that we are acting as a principal, revenue is reported on a gross basis and carriage costs to third parties are recorded as subcontracted transportation expense. The impact to net earnings is the same whether we are acting as an agent or principal in the arrangement. Effective January 1, 2008, our contractual relationship with a significant customer changed, and we determined, after a formal review of the terms and conditions of the services, we are acting as an agent based on the revised terms of the arrangement. As a result, the amount of total revenue and subcontracted transportation
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
expense decreased by $175 million in the first three months of 2008 compared to
the same period in the prior year due to the reporting of revenue net of
subcontracted transportation expense for this particular customer contract.
Three months ended March 31, Change
2008 2007 2008/2007
(In thousands)
Depreciation expense $ 205,960 196,183 5%
Gains on vehicle sales, net (12,426 ) (15,032 ) (17 )
Equipment rental 21,526 20,522 5
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Depreciation expense relates primarily to FMS revenue earning equipment. Depreciation expense increased in the first quarter of 2008 compared with the same period in 2007, reflecting foreign exchange rate changes and the impact of the lease replacement cycle. The increase was partially offset by lower adjustments in the carrying value of vehicles held for sale of $2 million during the first quarter of 2008 compared to the same period in the prior year.
Gains on vehicle sales, net decreased in the first three months of 2008 compared with the same period in 2007 due to a decline in the number of vehicles sold in the first three months of 2008 compared with the same period in 2007.
Equipment rental consists primarily of rent expense for FMS revenue earning equipment under lease. The increase in equipment rental in the first quarter of 2008 compared to the same period in 2007 primarily reflects higher rental costs associated with investments made in material handling equipment to support our SCS operations.
Three months ended March 31, Change
2008 2007 2008/ 2007
(Dollars in thousands)
Interest expense $ 37,428 39,370 (5)%
Effective interest rate 5.4% 5.5%
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Interest expense decreased in the first three months of 2008 compared with the same period in 2007, reflecting lower average cost of debt and lower average debt balances. The lower effective interest rate in 2008 compared to 2007 resulted from lower interest rate commercial paper borrowings.
Three months ended March 31,
2008 2007
Miscellaneous expense (income), net $ 1,617 (916)
Miscellaneous expense (income), net consists of investment losses
(income) on securities used to fund certain benefit plans, interest income,
losses (gains) from sales of property, foreign currency transaction losses
(gains), and other non-operating items. Miscellaneous expense (income), net
increased in the first quarter of 2008 compared with the same period in 2007
primarily due to declining market performance of investments classified as
trading securities and higher foreign currency transaction losses.
Three months ended March 31,
2008 2007
Restructuring and other (recoveries) charges, net $ (78 ) 536
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Restructuring and other recoveries, net in the first three months of 2008 primarily related to employee severance charges recorded in prior restructurings that were reversed due to subsequent refinements in estimates. Restructuring and other charges, net in the first three months of 2007 related primarily to information technology transition costs and employee severance and benefit costs incurred in connection with global cost savings initiatives announced in the fourth quarter of 2006.
Three months ended March 31, Change
2008 2007 2008/2007
(Dollars in thousands)
Provision for income taxes $ 36,005 33,579 7%
Effective tax rate 39.1% 39.6%
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Our effective income tax rate for the first quarter of 2008 as compared with 2007 decreased primarily due to increased earnings in lower tax rate jurisdictions and settlement of certain tax audits partially offset by an increase of non-deductible expenses.
OPERATING RESULTS BY BUSINESS SEGMENT
Three months ended March 31, Change
2008 2007 2008/2007
(In thousands)
Revenue:
Fleet Management Solutions $ 1,105,611 988,090 12 %
Supply Chain Solutions 414,177 566,406 (27 )
Dedicated Contract Carriage 137,178 138,499 (1 )
Eliminations (113,384 ) (98,893 ) (15 )
Total $ 1,543,582 1,594,102 (3 )%
Operating Revenue:
Fleet Management Solutions $ 747,582 713,907 5
Supply Chain Solutions 341,999 322,082 6
Dedicated Contract Carriage 134,025 135,594 (1 )
Eliminations (51,304 ) (52,376 ) 2
Total $ 1,172,302 1,119,207 5 %
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NBT:
Fleet Management Solutions $ 91,438 80,780 13 %
Supply Chain Solutions 8,313 11,448 (27 )
Dedicated Contract Carriage 11,316 10,352 9
Eliminations (7,518 ) (8,919 ) 16
103,549 93,661 11
Unallocated Central Support Services (11,540 ) (8,287 ) (39 )
Restructuring and other recoveries (charges), net 78 (536 ) NA
Earnings before income taxes $ 92,087 84,838 9 %
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As part of management's evaluation of segment operating performance, we define the primary measurement of our segment financial performance as "Net Before Taxes" (NBT), which includes an allocation of CSS and excludes restructuring and other recoveries (charges), net. CSS represents those costs incurred to support all business segments, including human resources, finance, corporate services and public affairs, information technology, health and safety, legal and corporate communications. The objective of the NBT measurement is to provide clarity on the profitability of each business segment and, ultimately, to hold leadership of each business segment and each operating segment within each business segment accountable for their allocated share of CSS costs. Segment results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented. Certain costs are considered to be overhead not attributable to any segment and remain unallocated in CSS. Included within the unallocated overhead remaining within CSS are the costs for investor relations, public affairs and certain executive compensation. See Note (P), "Segment Reporting," in the Notes to Consolidated Condensed Financial Statements for a description of how the remainder of CSS costs is allocated to the business segments.
Our FMS segment leases revenue earning equipment and provides fuel, maintenance and other ancillary services to our SCS and DCC segments. Inter-segment revenue and NBT are accounted for at rates similar to those executed with third parties. NBT related to inter-segment equipment and services billed to customers (equipment contribution) are included in both FMS and the business segment which served the customer and then eliminated (presented as "Eliminations").
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The following table sets forth equipment contribution included in NBT for
our SCS and DCC business segments:
Three months ended March 31, Change
2008 2007 2008/2007
(In thousands)
Equipment contribution:
Supply Chain Solutions $ 4,135 4,740 (13 )%
Dedicated Contract Carriage 3,383 4,179 (19 )
Total $ 7,518 8,919 (16 )%
Fleet Management Solutions
Three months ended March 31, Change
2008 2007 2008/2007
(Dollars in thousands)
Full service lease $ 504,161 475,904 6 %
Contract maintenance 40,637 37,201 9
Contractual revenue 544,798 513,105 6
Contract-related maintenance 51,710 52,145 (1 )
Commercial rental 132,738 131,021 1
Other 18,336 17,636 4
Operating revenue (1) 747,582 713,907 5
Fuel services revenue 358,029 274,183 31
Total revenue $ 1,105,611 988,090 12 %
Segment NBT $ 91,438 80,780 13 %
Segment NBT as a % of total revenue 8.3 % 8.2 % 10 bps
Segment NBT as a % of operating revenue (1) 12.2 % 11.3 % 90 bps
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