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| R > SEC Filings for R > Form 10-Q on 23-Jul-2008 | All Recent SEC Filings |
23-Jul-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, 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 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 $179 million and $354 million of total revenue for the three and six months ended June 30, 2007, respectively.
See Note (B), "Accounting Changes" for a discussion of the impact of changes in accounting standards.
ACQUISITIONS
We have completed various asset purchase agreements in the past year, under
which we acquired a company's fleet and contractual customers. The combined
networks operate under Ryder's name and complement our existing market coverage
and service network. The results of these acquisitions have been included in our
consolidated results since the dates of acquisition. The acquisitions were as
follows:
Business Contractual
Company Acquired Segment Date Vehicles Customers Market
Gator Leasing, Inc. FMS May 12, 2008 2,300 300 Florida
Lily Transportation Corp. FMS January 11, 2008 1,600 200 Northeast U.S.
Pollock NationaLease FMS/SCS October 5, 2007 2,000 200 Canada
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
CONSOLIDATED RESULTS
Three months ended June 30, Six months ended June 30, Change 2008/2007
Three Six
2008 2007 2008 2007 Months Months
(In thousands, except per share amounts)
Earnings before income taxes $ 112,675 104,336 $ 204,762 189,174 8 % 8
Provision for income taxes 49,729 39,213 85,735 72,792 27 18
Net earnings $ 62,946 65,123 $ 119,027 116,382 (3 )% 2
Per diluted common share (EPS) $ 1.10 1.07 $ 2.06 1.90 3 % 8
Weighted-average shares
outstanding - Diluted 57,260 61,090 57,719 61,128 (6 )% (6 )
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Earnings before income taxes in the second quarter of 2008 increased $8 million to $113 million and increased $16 million to $205 million in the first six months of 2008, compared to the same periods in the prior year. The growth in operating results in the second quarter and first half of 2008 was driven primarily by better operating performance in our FMS business segment. The growth in operating results was partially offset by declined profitability in our SCS segment including a second quarter pre-tax charge of $6 million ($7 million after-tax) for prior years' adjustments associated with our Brazilian SCS operation discussed more fully in Note (A), "Interim Financial Statements."
Net earnings decreased $2 million in the second quarter of 2008 compared to the same period in 2007 as our better operating performance was more than offset by the impact of non-deductible foreign losses. Net earnings increased $3 million in the first six months of 2008 compared to the same period in 2007 as a result of better operating performance which was partially offset by the impact of non-deductible foreign losses in the second quarter of 2008.
EPS growth in the first half of 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 June 30, Six months ended June 30, Change 2008/2007
Three Six
2008 2007 2008 2007 Months Months
(In thousands)
Revenue:
Fleet Management Solutions $ 1,201,342 1,037,322 $ 2,306,953 2,025,412 16 % 14
Supply Chain Solutions 440,903 583,994 855,081 1,150,400 (25 ) (26 )
Dedicated Contract Carriage 143,732 141,067 280,910 279,566 2 -
Eliminations (125,735 ) (104,414 ) (239,120 ) (203,307 ) (20 ) (18 )
Total $ 1,660,242 1,657,969 $ 3,203,824 3,252,071 - % (1 )
Operating revenue (1) $ 1,215,940 1,157,067 $ 2,388,243 2,276,274 5 % 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 rapid changes 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 was flat in the second quarter of 2008 at $1.66 billion and decreased 1% to $3.20 billion in the first half of 2008, compared with the same periods in 2007. Total revenue in 2008 was impacted by a change, effective January 1, 2008, in our contractual relationship with a significant customer that required a change in revenue recognition from a gross basis to a net basis for subcontracted transportation. This change did not impact operating revenue or earnings. In the second quarter and first half of 2007, we recorded revenue of $179 million and $354 million, respectively, related to this contractual relationship. Excluding this item, total revenue increased in the second quarter and first half of 2008 as a result of higher FMS revenue driven by fuel services and contractual revenue. Operating revenue increased 5% in the second quarter and first half of 2008, compared with the same periods in 2007, primarily due to acquisitions and contractual revenue growth. Total revenue and operating revenue in the second quarter and first half of 2008 included a favorable foreign exchange impact of 1% due primarily to the strengthening of the Canadian dollar.
Three months ended June 30, Six months ended June 30, Change 2008/2007
Three Six
2008 2007 2008 2007 Months Months
(Dollars in thousands)
Operating expense (exclusive
of items shown separately) $ 843,107 701,351 $ 1,606,874 1,368,559 20% 17
Percentage of revenue 51% 42% 50% 42%
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Operating expense and operating expense as a percentage of revenue increased in 2008 compared with the same periods 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 have similar favorable development in the future. During the three months ended June 30, 2008 and 2007, we recorded a benefit of $6 million and $5 million, respectively, from favorable development in estimated prior years' self-insured loss reserves for the reasons noted above. During the six months ended June 30, 2008 and 2007, we recorded a benefit of $10 million and $9 million, respectively, from favorable development in estimated prior years' self-insured loss reserves for the reasons noted above.
Three months ended June 30, Six months ended June 30, Change 2008/2007
Three Six
2008 2007 2008 2007 Months Months
(Dollars in thousands)
Salaries and employee-related costs $ 354,043 344,702 $ 712,413 698,866 3% 2
Percentage of revenue 21% 21% 22% 21%
Percentage of operating revenue 29% 30% 30% 31%
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Salaries and employee-related costs increased in the second quarter and first half of 2008 compared with the same periods in 2007 primarily due to the impact of foreign exchange rate changes and higher incentive-based compensation. Headcount as of June 30, 2008 was slightly lower compared to the prior year.
Pension expense decreased $6 million in the second quarter of 2008 and $12 million in the first half of 2008, compared to the same periods 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 $5 million and $11 million in the second quarter and first half of 2008, respectively, compared to 2007, primarily as a result of the enhanced 401(k) plan.
Three months ended June 30, Six months ended June 30, Change 2008/2007
Three Six
2008 2007 2008 2007 Months Months
(Dollars in thousands)
Subcontracted transportation $ 93,699 256,986 $ 169,030 504,215 (64)% (66)
Percentage of revenue 6% 16% 5% 16%
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
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 expense decreased by $179 million in the second quarter and $354 million in the first half of 2008, compared to the same periods in the prior year due to the reporting of revenue net of subcontracted transportation expense for this particular customer contract. The decrease in subcontracted transportation expense as a result of net revenue reporting in the second quarter and first half of 2008 compared to the same periods in the prior year was slightly offset by increased volumes of freight management activity from new and expanded business.
Three months ended June 30, Six months ended June 30, Change 2008/2007
Three Six
2008 2007 2008 2007 Months Months
(In thousands)
Depreciation expense $ 209,250 202,270 $ 415,210 398,454 3 % 4
Gains on vehicle sales, net (10,164 ) (13,533 ) (22,590 ) (28,566 ) (25 ) (21 )
Equipment rental 20,295 22,319 41,821 42,841 (9 ) (2 )
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Depreciation expense relates primarily to FMS revenue earning equipment. Depreciation expense increased in the second quarter and first half of 2008, compared with the same periods in 2007, reflecting the impact of recent acquisitions and foreign exchange rate changes. The increases were partially offset by lower adjustments in the carrying value of vehicles held for sale of $2 million and $4 million during the second quarter and first half of 2008, respectively, compared to the same periods in the prior year.
Gains on vehicle sales, net decreased in the second quarter and first half of 2008 compared with the same periods in 2007 primarily due to a decline in the number of vehicles sold and a decline in the average price of vehicles sold, primarily in our used truck class.
Equipment rental consists primarily of rent expense for FMS revenue earning equipment under lease. The decrease in equipment rental in the second quarter and first half of 2008 compared to the same periods in 2007 reflects a reduction in the average number of leased vehicles.
Three months ended June 30, Six months ended June 30, Change 2008/2007
Three Six
2008 2007 2008 2007 Months Months
(Dollars in thousands)
Interest expense $ 37,588 40,841 $ 75,016 80,211 (8 )% (6 )
Effective interest rate 5.2% 5.7% 5.3% 5.6%
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Interest expense decreased in the second quarter of 2008 compared with the same period in 2007 due to a lower average cost of debt. Interest expense decreased in the first half of 2008 compared with the same period in 2007 due to a lower average cost of debt and lower average debt balances. The lower effective interest rate in 2008 compared to 2007 primarily resulted from lower commercial paper borrowing rates.
Three months ended June 30, Six months ended June 30,
2008 2007 2008 2007
Miscellaneous (income) expense, net $ (296) (2,458 ) $ 1,321 (3,374 )
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Miscellaneous (income) expense, net consists of investment (income) losses
on securities used to fund certain benefit plans, interest income,
(gains) losses from sales of operating property, foreign currency transaction
(gains) losses, and other non-operating items. Miscellaneous (income) expense,
net decreased in the second quarter and first half of 2008 compared with the
same periods in 2007 primarily due to declining market performance of
investments classified as trading securities and lower gains on sales of
properties.
Three months ended June 30, Six months ended June 30, ,
2008 2007 2008 2007
(In thousands)
Restructuring and other charges
(recoveries), net $ 45 1,155 $ (33 ) 1,691
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Restructuring and other charges (recoveries), net in the second quarter and first half of 2008 related to facility and employee severance charges recorded in prior periods that were adjusted based on refinements in estimates. Restructuring and other charges, net in the second quarter and first half of 2007 primarily related to a charge of $1 million incurred to extinguish debentures that were originally set to mature in 2017. The charge included the premium paid on the early extinguishment of debt and the write-off of related debt discount and issuance costs. Restructuring and other charges, net in the six months ended June 30, 2007 also included costs for information technology transition and employee severance and benefits incurred in connection with global cost savings initiatives announced in the fourth quarter of 2006.
Three months ended June 30, Six months ended June 30, Change 2008/2007
Three Six
2008 2007 2008 2007 Months Months
(Dollars in thousands)
Provision for income taxes $ 49,729 39,213 $ 85,735 72,792 27% 18
Effective tax rate 44.1% 37.6% 41.9% 38.5%
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Our effective income tax rate for the second quarter and first half of 2008 increased as compared with the same periods in 2007 primarily due to the adverse impact of higher non-deductible foreign losses in the current year, mostly in our Brazil operations. During the second quarter of 2007, the State of New York enacted changes to its tax system which resulted in favorable adjustments to deferred income taxes of $1 million in the prior year.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
OPERATING RESULTS BY BUSINESS SEGMENT
Three months ended June 30, Six months ended June 30, Change 2008/2007
Three Six
2008 2007 2008 2007 Months Months
(In thousands)
Revenue:
Fleet Management Solutions $ 1,201,342 1,037,322 $ 2,306,953 2,025,412 16 % 14
Supply Chain Solutions 440,903 583,994 855,081 1,150,400 (25 ) (26 )
Dedicated Contract Carriage 143,732 141,067 280,910 279,566 2 -
Eliminations (125,735 ) (104,414 ) (239,120 ) (203,307 ) (20 ) (18 )
Total $ 1,660,242 1,657,969 $ 3,203,824 3,252,071 - % (1 )
Operating Revenue:
Fleet Management Solutions $ 776,337 742,223 $ 1,523,919 1,456,130 5 % 5
Supply Chain Solutions 349,655 329,966 691,655 652,048 6 6
Dedicated Contract Carriage 141,281 138,109 275,306 273,703 2 1
Eliminations (51,333 ) (53,231 ) (102,637 ) (105,607 ) 4 3
Total $ 1,215,940 1,157,067 $ 2,388,243 2,276,274 5 % 5
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NBT:
Fleet Management Solutions $ 115,792 97,484 $ 207,230 178,264 19 % 16
Supply Chain Solutions 6,794 15,456 15,107 26,904 (56 ) (44 )
Dedicated Contract Carriage 12,410 12,508 23,726 22,860 (1 ) 4
Eliminations (7,668 ) (7,904 ) (15,186 ) (16,823 ) 3 10
127,328 117,544 230,877 211,205 8 9
Unallocated Central Support Services (8,110 ) (12,053 ) (19,650 ) (20,340 ) 33 3
Restructuring and other charges, net and
Brazil charges(1) (6,543 ) (1,155 ) (6,465 ) (1,691 ) NA NA
. . .
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