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R > SEC Filings for R > Form 10-K on 14-Feb-2014All Recent SEC Filings

Show all filings for RYDER SYSTEM INC

Form 10-K for RYDER SYSTEM INC


14-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with our consolidated financial statements and related notes contained in Item 8 of this report on Form 10-K. The following MD&A describes the principal factors affecting results of operations, financial resources, liquidity, contractual cash obligations, and critical accounting estimates. The information presented in the MD&A is for the years ended December 31, 2013, 2012 and 2011 unless otherwise noted.
OVERVIEW
Ryder System, Inc. (Ryder) is a global leader in transportation and supply chain management solutions. Our business operates 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, industrial, food and beverage service, consumer packaged goods, transportation and warehousing, hi-tech and electronics, retail, housing, business and personal services, and paper and publishing.
We operate in two 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.; and Supply Chain Solutions (SCS), which provides comprehensive supply chain consulting, including distribution and transportation services in North America and Asia. The SCS segment also provides dedicated services, which includes vehicles and drivers as part of a dedicated transportation solution in the U.S.
The FMS business segment is our largest segment. FMS revenue (net of intercompany eliminations) and assets in 2013 were $4.04 billion and $8.31 billion, respectively, representing 63% of our consolidated revenue and 91% of consolidated assets. SCS revenue in 2013 was $2.38 billion, representing 37% of our consolidated revenue.
In 2013, we delivered revenue and earnings growth in both business segments. Consolidated revenue grew 3% and earnings from continuing operations grew 21%. In FMS, we increased our full service lease fleet by over 2,600 vehicles during the second half of the year driven by significantly improved sales activity. Our commercial rental business also performed well with higher pricing and increased U.S. demand. Additionally, solid used vehicle sales activity drove inventories to the lowest levels in two years. In SCS, we had strong overall performance and continued growth in our dedicated services offering. We also improved the spread between our return on capital and cost of capital.
Total revenue was $6.42 billion, up 3% while operating revenue from continuing operations (total revenue less FMS fuel and subcontracted transportation) was $5.27 billion in 2013, up 4%. The increase in total and operating revenue was driven by growth in both the SCS and FMS business segments. Earnings from continuing operations before taxes (EBT) increased 22% in 2013 to $369 million. The improvement in EBT reflects better performance in the FMS and SCS business segments, lower restructuring and other charges and lower pension expense.


                ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)


EBT, earnings and EPS from continuing operations included certain items we do
not consider indicative of our ongoing operations and have been excluded from
our comparable earnings measure. The following discussion provides a summary of
the 2013 and 2012 items which are discussed in more detail throughout our MD&A
and within the Notes to Consolidated Financial Statements:
                                                              Continuing Operations
                                               Earnings Before                       Diluted Earnings
                                             Income Taxes (EBT)       Earnings       per Share (EPS)
                                                 (Dollars in thousands except per share amounts)
                                     2013
EBT/Earnings/EPS from Continuing
Operations                                               $368,895        $243,196                $4.63
  Non-operating pension costs (1)                      24,285            14,292               0.28
  Pension settlement charges (2)                        2,820             1,711               0.03
  Restructuring and other recoveries, net
(3)                                                      (470 )            (360 )            (0.01 )
  Superstorm Sandy recoveries (4)                        (600 )            (374 )            (0.01 )
  Foreign currency translation benefit
(4)                                                    (1,904 )          (1,904 )            (0.04 )
Comparable (5)                                           $393,026        $256,561                $4.88

                                     2012
EBT/Earnings/EPS from Continuing
Operations                                               $303,117        $200,899                $3.91
  Non-operating pension costs (1)                      31,423            19,370               0.37
Restructuring and other charges, net (3)                8,070             5,263               0.11
Superstorm Sandy vehicle-related losses
(4)                                                     8,230             5,117               0.10
 Acquisition-related transaction costs
(4)                                                       368               277                  -
Charge related to tax law change in the
U.K. (6)                                                    -               856               0.02
Tax benefit associated with resolution of
prior year tax item (6)                                     -            (4,967 )            (0.10 )
Comparable (5)                                           $351,208        $226,815                $4.41


_________________


(1) Includes the amortization of actuarial loss, interest cost and expected return on plan assets components of pension and post-retirement costs, which are tied to financial market performance. 2013 also includes $4 million ($2 million after-tax) or $0.05 charge related to an understatement of pension obligations. We consider these costs to be outside the operational performance of the business.
(2) Refer to Note 24, "Employee Benefit Plans," for further discussion.
(3) Refer to Note 5, "Restructuring and Other (Recoveries) Charges," in the Notes to Consolidated Financial Statements for additional information.
(4) Refer to Note 26, "Other Items Impacting Comparability," in the Notes to Consolidated Financial Statements.
(5) Non-GAAP financial measure. We believe comparable EBT, comparable earnings and comparable earnings per diluted common share all from continuing operations measures provide useful information to investors because they exclude non-operating pension costs, which we consider to be those impacted by financial market performance and outside the operational performance of the business, and other significant items that are unrelated to our ongoing business operations.
(6) See Note 14, "Income Taxes," in the Notes to Consolidated Financial Statements for additional information.

Excluding the items listed above, comparable earnings from continuing operations increased 13% to $257 million in 2013 and increased 18% to $227 million in 2012. Comparable EPS from continuing operations increased 11% to $4.88 per diluted common share in 2013 and 19% to $4.41 per diluted common share in 2012. EBT growth exceeded the EPS growth during 2013 because the average number of shares outstanding has increased 3% over prior year reflecting the impact of stock issuances under employee stock option and stock purchase plans.
Net earnings (including discontinued operations) increased 13% in 2013 to $238 million or $4.53 per diluted common share.
Cash provided by operating activities from continuing operations increased to $1.22 billion in 2013 compared with $1.13 billion in 2012 reflecting reduced working capital needs and higher earnings. Free cash flow from continuing operations was negative $386 million in 2013 compared to negative $384 million in 2012. The slight decline in free cash flow was driven by a $130 million sale-lease back transaction in the prior year partially offset by higher cash from operating activities. We made pension contributions of approximately $96 million and increased our annual dividend by 10% to $1.36 per share of common stock.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)

Capital expenditures (accrual basis) increased 1% to $2.18 billion in 2013 reflecting higher investments to fulfill contractual sales made to customers growing and renewing their fleets offset by planned lower investments in the commercial rental fleet. Our debt balance increased 10% to $4.19 billion at December 31, 2013 due to negative free cash flow. Our debt to equity ratio decreased to 221% from 260% in 2012. Our total obligations (including off-balance sheet debt) to equity ratio also decreased to 226% from 270% in 2012.

2014 Outlook
Looking ahead to 2014, we expect to build on our strong 2013 performance with accelerating revenue growth and double-digit earnings improvement. We anticipate revenue growth in all product lines. Based on recent sales results and trends, we anticipate continued growth in our lease fleet with a higher number of vehicles under long-term contracts with customers. We are forecasting another year of record earnings per share, driven by improved performance in contractual full service lease and supply chain solutions, as well as commercial rental. We also expect increasing contributions from new products including our on-demand maintenance and natural gas vehicle offerings. In addition, we anticipate depreciation benefits associated with strong used vehicle pricing realized over the past few years. These earnings improvements will be partially offset by a higher tax rate due to increased earnings in higher tax rate jurisdictions. Our strong earnings growth will also allow us to make strategic investments in the business to drive future growth. Lastly, with our leverage ratio now at the low end of our target range, we will begin implementing our recently announced anti-dilutive share repurchase program to deliver additional value to our shareholders.
We forecast full-year 2014 comparable earnings from continuing operations to be in the range of $5.30 to $5.45 per diluted share, up 9% to 12% from $4.88 per diluted share in 2013. Full-year earnings comparisons exclude non-operating pension costs of $0.15 per diluted share in 2014 and $0.28 per diluted share in 2013. Total revenue for the full-year 2014 is forecast to be approximately $6.8 billion, up 5% from $6.4 billion in 2013. Operating revenue (revenue excluding FMS fuel and all subcontracted transportation) for the full-year 2014 is forecast to be approximately $5.6 billion, up 6% from $5.3 billion in 2013.

ACQUISITIONS
We completed the following acquisitions from 2011 to 2012 (there were no
acquisitions in 2013), under which we acquired a company's fleet and contractual
customers. The acquisitions 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.
See Note 3, "Acquisitions," for further discussion.

                                                                     Contractual
Company Acquired                          Date           Vehicles     Customers     Segment       Market
Euroway Ltd.                         August 1, 2012       1,360          60           FMS          U.K.
Hill Hire plc                         June 8, 2011        13,700         400          FMS          U.K.
B.I.T. Leasing                       April 1, 2011         490           130          FMS       California
The Scully Companies                January 28, 2011      2,100          200        FMS/SCS    Western U.S.
Carmenita Leasing, Inc.             January 10, 2011       190           60           FMS       California


                ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)


FULL YEAR CONSOLIDATED RESULTS

                                                                                                             Change
                                                 2013                       2012          2011       2013/2012    2012/2011
                                         (Dollars in thousands, except per share amounts)
Total revenue                    $        6,419,285                      6,256,967     6,050,534         3%           3%
Operating revenue (1)                     5,270,494                      5,066,322     4,814,557         4            5
Pre-tax earnings from
continuing operations            $          368,895                        303,117       279,387         22           8
Earnings from continuing
operations                                  243,196                        200,899       171,368         21           17
Net earnings                                237,792                        209,979       169,777         13           24
Earnings per common share -
Diluted
Continuing operations            $             4.63                           3.91          3.31        18%          18%
Net earnings                                   4.53                           4.09          3.28        11%          25%


_________________


(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, 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. Refer to the section titled "Non-GAAP Financial Measures" for a reconciliation of total revenue to operating revenue.

Revenue and cost of revenue by source
Total revenue increased 3% in 2013 to $6.42 billion and increased 3% in 2012 to $6.26 billion. Operating revenue (revenue excluding FMS fuel and all subcontracted transportation) increased 4% in 2013 to $5.27 billion and increased 5% in 2012 to $5.07 billion. The following table summarizes the components of the change in revenue on a percentage basis versus the prior year:

                                           2013                2012
                                     Total   Operating   Total   Operating
Organic including price and volume    3%        4%        2%        3%
Acquisitions                           -         -         1         2
Total increase                        3%        4%        3%        5%

See "Full Year Operating Results by Business Segment" for a further discussion of the revenue impact from organic growth and acquisitions.

Lease and Rental
                                                                            Change
                                2013          2012         2011      2013/2012   2012/2011
                                    (Dollars in thousands)
Lease and rental revenues   $ 2,770,026    2,695,376    2,553,877       3%          6%
Cost of lease and rental      1,915,736    1,890,659    1,746,057       1%          8%
Gross margin                    854,290      804,717      807,820       6%          -%
Gross margin %              31%            30%          32%

Lease and rental revenues represent full service lease and commercial rental product offerings within our FMS business segment. Revenues increased 3% in 2013 to $2.77 billion and increased 6% in 2012 to $2.70 billion. In 2013, the increase was primarily driven by higher prices on full service lease vehicles and, to a lesser extent, higher commercial rental revenue. Commercial rental revenue increased due to an improvement in rental pricing (up 3% in 2013) partially offset by lower demand in the U.K. In 2012, the increase was primarily driven by higher prices on lease and commercial rental vehicles, organic full service lease fleet growth and the impact of the Hill Hire acquisition partially offset by lower commercial rental demand.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)

Cost of lease and rental represents the direct costs related to lease and rental revenues. These costs are comprised of depreciation of revenue earning equipment, maintenance costs (primarily repair parts and labor), and other fixed costs such as licenses, insurance and operating taxes. Cost of lease and rental excludes interest costs from vehicle financing. Cost of lease and rental increased 1% in 2013 to $1.92 billion and increased 8% in 2012 to $1.89 billion. In 2013, the change was due to increased maintenance costs and depreciation from higher lease vehicle investments, partially offset by lower depreciation of $30 million from changes in the residual value policy and a smaller average rental fleet (down 6% in 2013). The increased costs in 2012 were due to the growth in the lease fleet and refreshment of the lease and rental fleets partially offset by lower depreciation of $18 million from changes in the residual value policy. Gross margin increased to $854 million and gross margin as a percentage of revenue increased to 31% in 2013. The increase was due to higher per-vehicle pricing, benefits from improved vehicle residual values and increased utilization on a smaller average rental fleet. Gross margin declined slightly to $805 million and gross margin as a percentage of revenue declined to 30% in 2012. The slight decline in 2012 was a result of lower commercial rental performance from lower fleet utilization partially offset by the impact of the Hill Hire acquisition and improved full service lease performance.

Services
                                                                   Change
                       2013          2012         2011      2013/2012   2012/2011
                           (Dollars in thousands)
Services revenue   $ 2,819,673    2,707,013    2,609,174       4%          4%
Cost of services     2,366,820    2,274,118    2,186,353       4%          4%
Gross margin           452,853      432,895      422,821       5%          2%
Gross margin %     16%            16%          16%

Services revenue represents all the revenues associated with our SCS business segment as well as contract maintenance, contract-related maintenance and other services associated with our FMS business segment. Services revenue increased 4% in 2013 to $2.82 billion and increased 4% in 2012 to $2.71 billion. In 2013, the revenue increase was primarily due to new business and higher volumes in our SCS business segment, especially around dedicated services, and higher contract-related maintenance revenue in our FMS business segment. In 2012, the revenue increase was primarily driven by increased volumes and new business in our SCS automotive sector and higher fuel costs passed through to our SCS segment customers.
Cost of services represents the direct costs related to services revenue and is primarily comprised of salaries and employee-related costs, SCS subcontracted transportation (purchased transportation from third parties) and maintenance costs. Cost of services increased 4% in 2013 to $2.37 billion and increased 4% in 2012 to $2.27 billion. In 2013 and 2012, the cost increase was due to an increase in revenue. The increase in 2012 also reflects higher medical benefit costs as well as $8 million of vehicle-related losses from Superstorm Sandy. Services gross margin increased 5% to $453 million in 2013 and increased 2% to $433 million in 2012 primarily due to higher revenue. Services gross margin as a percentage of revenue remained at 16% in 2013 and 2012.

Fuel
                                                                  Change
                           2013        2012       2011     2013/2012   2012/2011
                             (Dollars in thousands)
Fuel services revenue   $ 829,586    854,578    887,483      (3)%        (4)%
Cost of fuel services     814,058    838,673    873,466      (3)%        (4)%
Gross margin               15,528     15,905     14,017      (2)%         13%
Gross margin %              2%          2%         2%

Fuel services revenue decreased 3% in 2013 to $830 million and decreased 4% in 2012 to $855 million. In 2013, the revenue decrease was due to lower fuel prices passed through to customers. In 2012, the decrease in revenue was due to fewer gallons sold partially offset by higher fuel prices passed through to customers.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)

Cost of fuel services includes the direct costs associated with providing our customers with fuel. These costs include fuel, salaries and employee-related costs of fuel island attendants and depreciation of our fueling facilities and equipment. Cost of fuel decreased 3% in 2013 to $814 million and decreased 4% in 2012 to $839 million. In 2013, the cost decrease was due to lower fuel prices. In 2012, the cost decrease was due to fewer gallons sold.
Fuel services gross margin decreased 2% in 2013 and increased 13% to $16 million in 2012. Fuel is largely a pass-through to customers for which we realize minimal changes in margin during periods of steady market fuel prices. However, fuel services margin is impacted by sudden increases or decreases in market fuel prices during a short period of time as customer pricing for fuel is established based on market fuel costs. Fuel services gross margin as a percentage of revenue remained at 2% in 2013 and 2012.

Change
2013 2012 2011 2013/2012 2012/2011
(In thousands)

Other operating expenses $ 137,916 135,904 129,180 1% 5%

Other operating expenses includes costs related to our owned and leased facilities within the FMS business segment such as depreciation, rent, insurance, utilities and taxes. These facilities are utilized to provide maintenance to our lease, rental, contract maintenance and fleet support services customers. Other operating expenses also include the costs associated with used vehicle sales such as writedowns of used vehicles to fair market value and facilities costs. Other operating expenses increased 1% to $138 million in 2013 due to higher maintenance costs on FMS facilities and higher insurance costs partially offset by lower operating property depreciation. Other operating expenses increased 5% to $136 million in 2012 due to higher writedowns on vehicles held for sale of $10 million.

                                                                                    Change
                                          2013         2012        2011      2013/2012   2012/2011
                                             (Dollars in thousands)
Selling, general and administrative
expenses (SG&A)                        $ 790,681     766,704     771,244        3%         (1)%
Percentage of total revenue                12%          12%         13%
Percentage of operating revenue            15%          15%         16%

SG&A expenses increased 3% to $791 million in 2013 and decreased 1% to $767 million in 2012. SG&A expenses as a percent of total revenue remained at 12% in 2013 and decreased to 12% in 2012. The increase in SG&A expenses in 2013 reflect planned investments in information technology and higher compensation-related expenses. The decrease in SG&A expenses in 2012 reflect lower incentive-based compensation of $31 million partially offset by higher pension expense and commissions from new sales activity as well as an increase in salaries and employee-related costs from organic growth and acquisitions. Pension expense, which primarily impacts SG&A expenses, decreased $1 million in 2013 and increased $15 million in 2012. The decrease in pension expense in 2013 primarily reflects higher than expected pension asset returns in 2012 as well as contributions, partially offset by a lower discount rate at December 31, 2012 and 2013 and pension settlement charges of $3 million. In addition, in the fourth quarter of 2013, we determined certain census data used to actuarially determine the value of our pension benefit obligations for the years 1998 to 2012 was inaccurate. We recorded a one-time, non-cash charge of $4 million to adjust our pension benefit obligation. The impact of revising our pension benefit obligation was not material to our consolidated financial statements in any individual prior period, and the cumulative amount is not material to 2013 results. The increase in pension expense in 2012 primarily reflects lower than expected pension asset returns in 2011 and lower assumed returns in 2012.

Change 2013 2012 2011 2013/2012 2012/2011

(In thousands)

Gains on vehicle sales, net $ 96,175 89,108 62,879 8% 42%

Gains on vehicle sales, net increased 8% to $96 million in 2013 due to higher sales volume and higher average proceeds per unit. Increased sales volume in 2013 (up 5%) reflects higher average used vehicle inventories and improved sales performance. Used vehicle sales inventory dropped 14% to 7,900 at December 31, 2013. Global average proceeds per unit increased 1% in 2013 reflecting an increase in average truck proceeds per unit partially offset by modestly lower average tractor proceeds per unit. Gains on vehicle sales, net increased 42% to $89 million in 2012 due to higher sales volume and improved pricing.


                ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)


                                                                  Change
                            2013       2012       2011     2013/2012   2012/2011
                              (Dollars in thousands)
Interest expense          137,196    140,557    133,164      (2)%         6%
Effective interest rate     3.5%       3.8%       4.3%

. . .

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