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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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 No. 1-4364
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RYDER SYSTEM, INC.
(a Florida corporation)
3600 N. W. 82nd Avenue
Miami, Florida 33166
Telephone (305) 500-3726
I.R.S. Employer Identification No. 59-0739250
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Indicate by check mark 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
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Ryder System, Inc. had 71,675,254 shares of common stock ($0.50 par value per
share) outstanding as of October 30, 1998.
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RYDER SYSTEM, INC.
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Condensed Statements of Earnings -
Three and nine months ended September 30, 1998
and 1997 (unaudited) 3
Consolidated Condensed Balance Sheets -
September 30, 1998 (unaudited) and December 31, 1997 4
Consolidated Condensed Statements of Cash Flows -
Nine months ended September 30, 1998 and 1997 (unaudited) 5
Notes to Consolidated Condensed Financial Statements 6
Independent Accountants' Review Report 8
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 9
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 24
Signatures 25
Exhibit Index 26
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Ryder System, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
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Three Months Nine Months
Periods ended September 30, 1998 and 1997 ----------------------------- -------------------------------
(In thousands, except per share amounts) 1998 1997 1998 1997
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REVENUE $ 1,290,817 1,204,339 3,818,011 3,625,457
--------------- ------------ -------------- --------------
Operating expense 937,298 887,390 2,768,790 2,690,020
Freight under management expense 76,849 64,047 232,122 173,010
Year 2000 expense 11,003 1,508 25,848 1,508
Depreciation expense, net of gains (three months, 1998 - $12,966,
1997 - $13,418; nine months, 1998 - $40,632, 1997 - $42,446) 153,968 147,697 449,707 438,843
Interest expense 51,623 46,530 149,134 143,194
Miscellaneous expense (income), net 2,005 (270) (2,886) (6,777)
--------------- ------------ -------------- --------------
1,232,746 1,146,902 3,622,715 3,439,798
--------------- ------------ -------------- --------------
Earnings from continuing operations before income taxes 58,071 57,437 195,296 185,659
Provision for income taxes 21,023 22,159 75,707 74,602
--------------- ------------ -------------- --------------
Earnings from continuing operations 37,048 35,278 119,589 111,057
Earnings from discontinued operations - 7,525 - 15,447
--------------- ------------ -------------- --------------
NET EARNINGS $ 37,048 42,803 119,589 126,504
=============== ============ ============== ==============
Basic Earnings per Common Share:
Continuing operations $ 0.51 0.45 1.63 1.43
Discontinued operations - 0.10 - 0.20
--------------- ------------ -------------- --------------
$ 0.51 0.55 1.63 1.63
=============== ============ ============== ==============
Diluted Earnings per Common Share:
Continuing operations $ 0.51 0.45 1.61 1.41
Discontinued operations - 0.09 - 0.20
--------------- ------------ -------------- --------------
$ 0.51 0.54 1.61 1.61
=============== ============ ============== ==============
Cash dividends per common share $ 0.15 0.15 0.45 0.45
=============== ============ ============== ==============
See accompanying notes to consolidated condensed financial statements.
3
ITEM 1. Financial Statements (continued)
Ryder System, Inc. and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
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September 30, December 31,
(Dollars in thousands, except per share amounts) 1998 1997
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ASSETS
Current assets:
Cash and cash equivalents $ 54,565 78,370
Receivables 661,274 625,955
Inventories 67,224 66,006
Tires in service 175,869 163,771
Prepaid expenses and other current assets 203,168 157,883
------------ --------------
Total current assets 1,162,100 1,091,985
Revenue earning equipment 3,392,640 3,145,461
Operating property and equipment 595,874 581,705
Direct financing leases and other assets 460,021 414,932
Intangible assets and deferred charges 308,058 274,977
------------ --------------
$ 5,918,693 5,509,060
============ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 319,543 301,361
Accounts payable 375,470 305,337
Accrued expenses 499,654 482,811
------------ --------------
Total current liabilities 1,194,667 1,089,509
Long-term debt 2,466,213 2,267,554
Other non-current liabilities 348,082 365,264
Deferred income taxes 814,540 726,025
------------ --------------
Total liabilities 4,823,502 4,448,352
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Shareholders' equity:
Common stock of $0.50 par value per share (shares outstanding at
September 30, 1998 - 72,292,181; December 31, 1997 - 73,692,226) 281,435 328,117
Retained earnings 830,167 743,713
Accumulated other comprehensive income (16,411) (11,122)
------------ --------------
Total shareholders' equity 1,095,191 1,060,708
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$ 5,918,693 5,509,060
============ ==============
See accompanying notes to consolidated condensed financial statements.
4
ITEM 1. Financial Statements (continued)
Ryder System, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
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Nine months ended September 30, 1998 and 1997
(In thousands) 1998 1997
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CONTINUING OPERATIONS
CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings from continuing operations $ 119,589 111,057
Depreciation expense, net of gains 449,707 438,843
Amortization expense and other non-cash charges, net 8,166 7,248
Deferred income tax expense 108,477 77,795
Changes in operating assets and liabilities, net of acquisitions:
Increase in aggregate balance of trade receivables sold 65,000 -
Receivables (74,905) (68,579)
Inventories (1,227) (7,562)
Prepaid expenses and other current assets (67,356) (16,634)
Other assets (353) (20,520)
Accounts payable 64,195 48,295
Accrued expenses and other non-current liabilities (20,435) (102,815)
------------ --------------
650,858 467,128
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in commercial paper borrowings 236,774 (27,537)
Debt proceeds 245,478 39,526
Debt repaid, including capital lease obligations (287,684) (137,095)
Common stock repurchased (80,619) (62,149)
Common stock issued 29,411 52,508
Dividends on common stock (33,135) (34,778)
------------ --------------
110,225 (169,525)
------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and revenue earning equipment (1,041,486) (762,223)
Sales of property and revenue earning equipment 229,382 279,167
Proceeds from sale of discontinued operations - 111,306
Proceeds from vehicle securitization 73,430 -
Acquisitions, net of cash acquired (67,807) (46,346)
Other, net 21,593 23,774
------------ --------------
(784,888) (394,322)
------------ --------------
NET CASH FLOWS FROM CONTINUING OPERATIONS (23,805) (96,719)
NET CASH FLOWS FROM DISCONTINUED OPERATIONS - 5,234
------------ --------------
DECREASE IN CASH AND CASH EQUIVALENTS (23,805) (91,485)
Cash and cash equivalents at January 1 78,370 191,384
------------ --------------
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30 $ 54,565 99,899
============ ==============
See accompanying notes to consolidated condensed financial statements.
5
ITEM 1. Financial Statements (continued)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(A) INTERIM FINANCIAL STATEMENTS
The accompanying unaudited consolidated condensed financial statements
include the accounts of Ryder System, Inc. and subsidiaries (the
"Company") and have been prepared by the Company in accordance with the
accounting policies described in the 1997 Annual Report and should be
read in conjunction with the consolidated financial statements and
notes which appear in that report. These statements do not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included and the disclosures herein are adequate to make the
information presented not misleading. Operating results for interim
periods are not necessarily indicative of the results that can be
expected for a full year. Certain 1997 amounts have been reclassified
to conform with the current year presentation.
(B) EARNINGS PER SHARE INFORMATION
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards (FAS) No. 128, "Earnings per Share." This
Statement requires the presentation of basic and diluted earnings per
share (EPS). Basic EPS is computed by dividing net earnings by the
weighted average number of common shares outstanding. Diluted EPS
reflects the dilutive effect of potential common shares from securities
such as stock options. The dilutive effect of stock options is computed
using the treasury stock method, which assumes the repurchase of common
shares by the Company at the average market price for the period. All
prior years EPS data has been restated to conform with the provisions
of the new Statement. A reconciliation of the number of shares used in
computing basic and diluted EPS follows (in thousands):
Three Months Nine Months
For the periods ended September 30, 1998 1997 1998 1997
------- ------ ------ ------
Weighted average shares outstanding-Basic 72,998 77,808 73,566 77,388
Common equivalents:
Shares issuable under outstanding dilutive options 2,874 6,372 4,252 6,330
Shares assumed repurchased based
on the average market value for the period (2,639) (5,090) (3,678) (5,321)
Dilutive effect of exercised options prior to
being exercised 18 156 136 325
------ ------ ------ ------
253 1,438 710 1,334
------ ------ ------ ------
Weighted average shares outstanding-Diluted 73,251 79,246 74,276 78,722
====== ====== ====== ======
Anti-dilutive options not included above 2,659 63 1,281 105
====== ====== ====== ======
6
ITEM 1. Financial Statements (continued)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
(C) COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted FAS No. 130, "Reporting
Comprehensive Income." Comprehensive income presents a measure of all
changes in shareholders' equity except for changes resulting from
transactions with shareholders in their capacity as shareholders. The
Company's total comprehensive income presently consists of net earnings
and currency translation adjustments associated with foreign operations
which use the local currency as their functional currency. Total
comprehensive income was $33.0 million and $41.6 million for the three
months ended September 30, 1998 and 1997, respectively; and $114.3
million and $120.1 million for the nine months ended September 30, 1998
and 1997, respectively. The Statement also requires the separate
presentation of the accumulated balance of comprehensive income other
than net earnings in the Consolidated Condensed Balance Sheets.
(D) ACQUISITIONS
During the nine months ended September 30, 1998 and 1997, the Company
completed a number of acquisitions in each of its business units, all
of which have been accounted for using the purchase method of
accounting. The consolidated condensed financial statements reflect the
results of operations of the acquired businesses from the acquisition
dates. The fair value of assets acquired and liabilities assumed in
connection with these acquisitions was as follows (in millions):
For the nine months ended September 30, 1998 1997
---- ----
Working capital $14.9 (3.8)
Goodwill 42.3 24.0
Other non-current assets 46.6 32.7
Non-current liablilities (36.0) (6.6)
----- -----
Net assets acquired $67.8 46.3
===== =====
(E) SALE OF AUTOMOTIVE CARRIER BUSINESS
On September 30, 1997, the Company completed the sale of its automotive
carrier business for $111 million in cash and realized a $3 million
after tax gain. Accordingly, the Company's automotive carrier business
has been reported as a discontinued operation for all periods presented
in the accompanying Consolidated Condensed Statements of Earnings and
Cash Flows. Summarized results of the automotive carrier business were
as follows (in millions):
Three Nine
For the periods ended September 30, 1997 Months Months
------ ------
Revenue $144.8 462.9
====== =====
Earnings before income taxes $ 5.1 18.2
Provision for income taxes 0.8 6.0
------ -----
Earnings from discontinued operations before
net gain on disposition 4.3 12.2
------ -----
Loss on disposition (5.3) (5.3)
Income tax benefit 8.5 8.5
------ -----
Net gain on dispostion 3.2 3.2
------ -----
Earnings from discontinued operations $ 7.5 15.4
====== =====
7
KPMG PEAT MARWICK LLP
CERTIFIED PUBLIC ACCOUNTANTS
One Biscayne Tower Telephone 305-358-2300
2 South Biscayne Boulevard Telecopier 305-577-0544
Suite 2900
Miami, Florida 33131
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Shareholders
Ryder System, Inc.:
We have reviewed the accompanying consolidated condensed balance sheet of Ryder
System, Inc. and subsidiaries as of September 30, 1998, and the related
consolidated condensed statements of earnings for the three and nine months
ended September 30, 1998 and 1997 and the consolidated statements of cash flows
for the nine months ended September 30, 1998 and 1997. These consolidated
condensed financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated condensed financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Ryder System, Inc. and subsidiaries
as of December 31, 1997, and the related consolidated statements of operations
and cash flows for the year then ended (not presented herein); and in our report
dated February 4, 1998, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated condensed balance sheet as of December 31, 1997,
is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
/s/ KPMG PEAT MARWICK LLP
Miami, Florida
October 21, 1998
8
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition --
Three and nine months ended September 30, 1998 and 1997
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 the Company's audited
consolidated financial statements and notes thereto and related Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's most recent Annual Report on Form 10-K.
The Company's primary business units consist of integrated logistics,
transportation services (which primarily provides full service leasing and
commercial rental in the United States and Canada), International (which
provides full service leasing and integrated logistics in Europe, South America
and Mexico) and public transportation services. On September 30, 1997, the
Company completed the sale of its automotive carrier business. In the
accompanying consolidated condensed statements of earnings and cash flows, the
automotive carrier business has been reported as a discontinued operation (see
"Notes to Consolidated Condensed Financial Statements").
The Company reported earnings from continuing operations before income taxes of
$58 million in the third quarter of 1998, compared with $57 million in last
year's third quarter. Results for the third quarter of 1998 and 1997 included
incremental pretax expenses of $11 million and $2 million, respectively,
associated with the Company's initiative to modify computer information systems
to be Year 2000 compliant. Excluding Year 2000 expense, earnings from continuing
operations before income taxes were 17% higher in the third quarter of 1998
compared with the same period last year. Earnings from continuing operations
before income taxes in the first nine months of 1998 were $195 million, compared
with $186 million in the first nine months of 1997. Results for the first nine
months of 1998 and 1997 included incremental pretax Year 2000 expenses of $26
million and $2 million, respectively. Excluding Year 2000 expense, earnings from
continuing operations before income taxes were 18% higher in the first nine
months of 1998 compared with the same period last year.
9
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued) --
Three and nine months ended September 30, 1998 and 1997
Earnings from continuing operations in the third quarter of 1998 were $37
million, or $0.51 per diluted common share, compared with $35 million, or $0.45
per diluted common share, in the third quarter of 1997. Excluding Year 2000
expense, earnings from continuing operations increased to $44 million, or $0.60
per diluted common share in 1998 from $36 million, or $0.46 per diluted common
share in 1997, a per-share increase of 30%. In the first nine months of 1998,
earnings from continuing operations were $120 million, or $1.61 per diluted
common share, compared with $111 million, or $1.41 per diluted common share, in
the first nine months of 1997. Excluding Year 2000 expense, earnings from
continuing operations increased to $135 million, or $1.82 per diluted common
share in the first nine months of 1998 from $112 million, or $1.42 per diluted
common share in the same 1997 period, a per-share increase of 28%. The earnings
per share growth rate exceeds the earnings growth rate because the average
number of diluted shares outstanding during the third quarter and first nine
months of 1998 decreased by almost 8% and 6%, respectively, compared with the
same 1997 periods. The decrease in shares was due to the Company's stock
repurchase programs.
Total revenue increased 7% to $1.29 billion in the third quarter of 1998 from
$1.20 billion in the third quarter of 1997. For the first nine months of 1998,
revenue totaled $3.82 billion, compared with $3.63 billion in the first nine
months of 1997, an increase of 5%. The revenue growth in the third quarter and
first nine months of 1998 was led by International, integrated logistics and
public transportation. Transportation services also posted slightly higher
revenue in the third quarter of 1998 reflecting an improvement in full service
leasing and commercial rental revenue offset by decreased fuel revenue
associated with declining fuel prices and volume. For the year, transportation
services revenue was slightly lower due to decreased fuel revenue.
Operating expense increased 6% in the third quarter and 3% in the first nine
months of 1998 compared with the same periods of 1997. The increases are
attributable to higher compensation and benefits, including driver rental costs,
maintenance, technology and workers' compensation costs primarily as a result of
higher business volumes. These increases were partially offset by lower fuel
costs. Higher employee benefit costs in the third quarter, primarily due to the
recognition in the prior year of pension and postretirement curtailment gains
related to headcount reductions, were only partially offset by a $3.4 million
reduction in estimated facility closure costs, which were originally established
in connection with several of the Company's 1996 restructuring initiatives. The
1996 restructuring charge totaled $78 million for employee separation and
facility closure costs, of which $6 million remains accrued at September 30,
1998. Based on the review conducted in the third quarter, management believes
that the remaining restructuring liabilities are adequate to complete its plans.
10
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued) --
Three and nine months ended September 30, 1998 and 1997
Operating expense as a percentage of revenue was 73% in the third quarter and
first nine months of 1998 compared with 74% for the same 1997 periods. The
decrease was attributable primarily to lower fuel costs.
Freight under management expense, which represents subcontracted freight costs
on logistics contracts where the Company purchases transportation, increased $13
million, or 20%, in the third quarter of 1998 and $59 million, or 34%, in the
first nine months of 1998 compared with the same periods in 1997. Freight under
management expense as a percentage of revenue also increased to 6% in the third
quarter and first nine months of 1998 from 5% for the comparable 1997 periods.
The increases reflect the growth in these integrated logistics contracts
experienced, especially during the latter half of 1997.
Incremental Year 2000 expense totaled $11 million in the third quarter of 1998
($7 million after tax, or $0.09 per diluted common share) and $26 million in the
first nine months of 1998 ($16 million after tax, or $0.21 per diluted common
share) compared with $2 million ($1 million after tax, or $0.01 per diluted
common share) in the third quarter and first nine months of 1997. See "Year 2000
Issue" for a further discussion of this matter.
Depreciation expense (before gains on vehicle sales) increased 4% in the third
quarter and 2% in the first nine months of 1998 compared with the same periods
in 1997. The growth in depreciation expense was primarily in revenue earning
equipment. Gains on vehicle sales decreased 3% in the third quarter and 4% in
the first nine months of 1998, compared with the same periods last year, due to
a decrease in the average gain per vehicle sold in 1998 which was partially
offset by an increase in the number of vehicles sold. As a percentage of
revenue, depreciation expense, net of gains on vehicle sales, remained at 12% in
the third quarter and first nine months of 1998, as in 1997.
Interest expense increased $5 million, or 11%, and $6 million, or 4%, in the
third quarter and first nine months of 1998, respectively, compared with the
same periods in 1997, as higher average outstanding debt levels, especially
during the third quarter of 1998, were only partially offset by lower average
interest rates. The higher outstanding debt levels resulted primarily from
increased levels of capital spending.
11
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued) --
Three and nine months ended September 30, 1998 and 1997
Miscellaneous expense (income), net was $2.0 million and $(2.9) million in the
third quarter and first nine months of 1998, respectively, compared with $(0.3)
million and $(6.8) million for the comparable 1997 periods. The decrease in
miscellaneous income is primarily due to increased costs associated with
selling, with limited recourse, more trade receivables, especially during the
third quarter and lower earnings from equity investments due to the
International acquisition, in May 1998, of an entity previously reported on the
equity method of accounting. On a year-to-date basis, these reductions were
partially offset by increased gains from the sale of surplus non-operating
properties.
The Company's effective tax rates for continuing operations in the third quarter
and first nine months of 1998 were 36.2% and 38.8%, respectively, compared with
38.6% and 40.2%, respectively, in the same 1997 periods. The lower 1998
effective rates resulted primarily from lower state income taxes and lower net
non-deductible items.
BUSINESS UNIT PERFORMANCE
Revenue from integrated logistics increased 7% and 9% in the third quarter and
first nine months of 1998, respectively, compared with the same 1997 periods,
primarily due to expansion of revenue with existing customers and start-up of
business sold in the previous year. The largest component of growth in 1998 has
come from logistics contracts where the Company manages the transportation of
freight and subcontracts the delivery of products to third parties. Operating
revenue (which excludes subcontracted freight costs) increased 4% in both the
third quarter and first nine months of 1998, compared with the same 1997
periods. Revenue growth from integrated logistics was impacted by a strike at
General Motors as well as the termination of two large accounts in the last
year. Adjusting for these matters, revenue would have increased 15% and 17% in
the third quarter and first nine months of 1998, respectively, compared with the
same 1997 periods and operating revenue would have increased by 10% in both the
third quarter and first nine months of 1998.
In light of the current level of new business sales as well as lost business,
revenue growth for this product line in the near term will be lower than growth
rates experienced in 1997. However, new business sales in the third quarter of
1998 increased 50% compared to the third quarter of 1997. Management believes
that improved sales force capabilities, industry segmentation, the ability to
leverage rapidly emerging logistics technologies and alliances to enhance
service offerings should result in continued new sales growth, followed by
higher revenue growth rates in 1999.
12
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued) --
Three and nine months ended September 30, 1998 and 1997
Revenue from transportation services increased 1% in the third quarter and
decreased 1% in the first nine months of 1998 compared with the same periods in
1997. The results were impacted primarily by decreased fuel revenue. Full
service leasing revenue increased 3% and 1% in the third quarter and first nine
months of 1998, respectively, primarily as a result of strong lease sales
partially offset by extended manufacturer's delivery times for new vehicle
purchases which delays the period for lease revenue recognition and offsets the
impact of new lease sales. However, the impact of delays in delivery lessened
during the third quarter of 1998. New lease sales for the first nine months of
1998 continued at record levels and were significantly ahead of new lease sales
in the same period of 1997. An acquisition completed in July 1998 also
contributed to the third quarter revenue increase. Overall, the revenue increase
in the third quarter of 1998 represented the largest quarterly growth rate in
the last eighteen months. In light of the level of new lease sales and the
recently completed acquisition, management expects continued revenue growth in
the fourth quarter of 1998 and in 1999.
Commercial rental revenue in the third quarter and first nine months of 1998
increased 11%, compared with the same periods in 1997, due to continued strong
utilization of a larger fleet. Utilization levels reflect, in part, increased
demand from full service lease customers requiring additional vehicles during
peak periods and while awaiting delivery of new full service lease vehicles.
Such "awaiting new lease" rental revenue increased $7 million, or 108%, in the
third quarter and $15 million, or 84%, in the first nine months of 1998,
compared with the same periods in 1997. Fuel revenue decreased 13% and 17% in
the third quarter and first nine months of 1998, respectively, compared with the
same periods in 1997 as a result of both lower fuel prices and volume. Other
transportation services revenue, consisting of third-party maintenance, trailer
rentals and other ancillary revenue to support product lines, increased 4% and
5% in the third quarter and first nine months of 1998, respectively, compared
with the same periods in 1997.
International revenue increased 43% in the third quarter of 1998 and 30% in the
first nine months of 1998, compared with the same periods in 1997. The third
quarter revenue growth resulted primarily from the May 1998 acquisition of a
Brazilian logistics company; however, revenue improvements were made in every
country. The 1998 year-to-date revenue growth also reflected the impact of a
ground equipment maintenance contract with British Airways that commenced in the
United Kingdom during the second quarter of 1997.
13
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued) --
Three and nine months ended September 30, 1998 and 1997
Revenue from public transportation services increased 11% in the third quarter
and 10% in the first nine months of 1998, compared with the same periods in
1997. The revenue growth was primarily achieved through contributions from new
contracts as well as the impact of four acquisitions completed in the past
year.
Operating margin (revenue less direct operating expenses, depreciation and
interest expense) and operating margin as a percentage of revenue from
integrated logistics increased in the third quarter and first nine months of
1998, compared with the same 1997 periods, due to operating efficiencies
achieved since the second quarter, contract minimum volume billings and, to a
lesser extent, the overall growth in revenue. Full service leasing operating
margin and operating margin as a percentage of revenue were about the same in
the third quarter and first nine months of 1998, as compared with the same 1997
periods, as revenue growth on a larger fleet was offset by higher vehicle
maintenance costs, principally on older units. Commercial rental operating
margin in the third quarter of 1998 was significantly higher than the comparable
1997 period primarily due to continued strong utilization of a larger rental
fleet. Commercial rental operating margin as a percentage of revenue was
slightly higher reflecting strong utilization in both periods. On a year-to-date
basis, commercial rental operating margin and operating margin as a percentage
of revenue were significantly higher, compared with the same 1997 period,
primarily due to higher vehicle utilization on a larger rental fleet.
International operating margin was higher in the third quarter and first nine
months of 1998, compared with the same periods in 1997, as a result of revenue
growth. Operating margin as a percentage of revenue was lower for both 1998
periods due to increased costs associated with start-up logistics contracts in
the United Kingdom and, to a lesser extent, the change in mix resulting from an
acquisition in Brazil. In public transportation services, in spite of revenue
growth, operating margin and operating margin as a percentage of revenue were
lower in the third quarter of 1998, compared with the same period in 1997, in
part from increased vehicle liability expense in student transportation services
as well as the impact of acquisitions and internal growth which magnified the
seasonal performance of the unit. Ryder/ATE also produced lower operating margin
and operating margin as a percentage of revenue in the third quarter primarily
due to increased maintenance, safety and termination costs associated with
several transit and fleet maintenance contracts. On a year-to-date basis,
operating margin was higher in 1998 compared with the same period in 1997,
primarily as a result of revenue growth. Operating margin as a percentage of
revenue was the same in the first nine months of 1998 as fleet efficiencies in
student transportation services were offset by the increased maintenance, safety
and termination costs associated with several transit and fleet maintenance
contracts at Ryder/ATE.
14
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued) --
Three and nine months ended September 30, 1998 and 1997
CORPORATE ADMINISTRATIVE EXPENSES AND OTHER
Corporate administrative expenses and other totaled $5 million and $8 million in
the third quarter and first nine months of 1998, respectively, compared with $6
million and $16 million in the third quarter and first nine months of 1997,
respectively. The third quarter decrease in corporate administrative expenses
and other reflects lower compensation and benefit costs. The year-to-date
variance in corporate administrative expenses and other is primarily due to
gains in the first quarter of 1998 from the sale of surplus non-operating
properties and the re-insurance of certain vehicle-related liabilities.
LIQUIDITY AND CAPITAL RESOURCES
Total capital expenditures, excluding acquisitions, related to continuing
operations in the first nine months of 1998 were $1.04 billion, compared with
$762 million in the first nine months of 1997. Expenditures for full service
lease were significantly higher in the first nine months of 1998, as compared
with the same period of 1997, reflecting the growth in new lease sales and
higher fleet replacement. Commercial rental expenditures were also higher
primarily due to planned fleet repositioning and replacement. Expenditures
for International in the first nine months of 1998 increased over the first nine
months of 1997, reflecting higher expenditures for rental vehicles and operating
equipment. Expenditures for public transportation decreased primarily due to
timing of fleet replacement. Total capital expenditures, excluding acquisitions,
for all of 1998 are expected to be approximately $1.3 billion.
During the first nine months of 1998, the Company completed acquisitions in all
business units. The aggregate annualized revenue associated with these
acquisitions is estimated to be $177 million. Cash paid for acquisitions totaled
$68 million in the first nine months of 1998 compared with $46 million in the
same 1997 period. The Company will continue to evaluate strategic acquisition
opportunities as a means of strengthening its core contractual businesses.
15
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued) --
Three and nine months ended September 30, 1998 and 1997
Cash flow from continuing operating activities in the first nine months of 1998
was $651 million, compared with $467 million in the same period last year. The
increase resulted from lower working capital needs and higher earnings before
non-cash charges such as depreciation and deferred income taxes. The lower
working capital needs relate primarily to an increase in the aggregate balance
of trade receivables sold and lower requirements for accrued expenses as 1997
activity reflected payments associated with restructuring activities initiated
in 1996, all of which more than offset increased prepaid expenses and other
current assets primarily due to the timing of funding for employee benefit
costs. Cash flow from continuing operating activities (excluding increase in
aggregate balance of trade receivables sold) plus asset sales as a percentage of
capital expenditures (excluding acquisitions) was 78% in the first nine months
of 1998, compared with 98% in the same period last year, primarily as a result
of increased capital expenditures which offset improved cash flow from operating
activities.
Total debt at September 30, 1998 was $2.8 billion, an increase of $217 million,
or 8%, from the balance at December 31, 1997. During the first nine months of
1998, the Company made scheduled unsecured note payments of $251 million and
issued $222 million of unsecured debentures and medium-term notes with the
proceeds used to pay down commercial paper. U.S. commercial paper outstanding at
September 30, 1998 increased to $578 million, compared with $340 million at
December 31, 1997, primarily to fund capital expenditures. The Company's foreign
debt increased slightly from December 31, 1997 to $395 million, primarily due to
debt assumed as part of the May 1998 acquisition of a Brazilian logistics
company. The Company's debt to equity ratio at September 30, 1998, increased to
254% from 242% at December 31, 1997. The ratio of debt to tangible equity at
September 30, 1998 was 344% compared with 318% at December 31, 1997. The
Company's percentage of variable-rate financing obligations was 32% at September
30, 1998, which is above the Company's targeted level of 25%-30% and higher than
27% at December 31, 1997. The Company expects this percentage to trend downward
over the next several quarters in conjunction with planned financings.
The Company had contractual lines of credit totaling $726 million at September
30, 1998, of which $91 million was available. The Company also had $46 million
of debt securities available at September 30, 1998 under a shelf registration
statement filed in 1995. In September, the Company filed an $800 million shelf
registration statement with the Securities and Exchange Commission. Proceeds
from debt issues under the shelf registration are expected to be used for
capital expenditures, debt refinancing and general corporate purposes. The
Company also participates in an agreement to sell, with limited recourse, up to
$350 million ($50 million of which is uncommitted) of trade receivables on a
revolving basis through July 2002. At September 30, 1998, the outstanding
balance of receivables sold pursuant to this agreement was $140 million.
16
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued) --
Three and nine months ended September 30, 1998 and 1997
In June 1998, the Company completed a vehicle securitization whereby it sold a
beneficial interest in certain long-term vehicle leases and related lease
vehicle residuals to a separately-rated and unconsolidated vehicle lease trust
(the "Trust") for $77.8 million, which approximated the carrying value of the
vehicles. The Company received $73.4 million in cash and a $4.4 million
subordinated note from the Trust. The Trust funded the cash requirement with the
issuance of triple-A rated senior notes and single-A rated asset-backed
certificates collateralized by the beneficial interest in the long-term vehicle
leases and the residual value of the vehicles. The senior notes and asset-backed
certificates are not insured or guaranteed by the Company; however, the Company
has provided credit enhancement in the form of a cash reserve fund of
approximately $2.7 million and a pledge of its subordinated note as additional
security for the Trust to the extent that delinquencies and losses on vehicle
leases and related vehicle sales are incurred. The Company used the proceeds
from the securitization to pay down commercial paper. The completion of the
vehicle securitization provides the Company with further liquidity and access to
new capital markets.
On April 29, 1998, Moody's Investors Service lowered its senior unsecured debt
rating on the Company to Baa1 from A3 and assigned a Baa1 rating to the
Company's $720 million Global Revolving Credit Agreement. Moody's Investors
Service affirmed the Company's P2 rating for commercial paper. As of September
30, 1998, Standard and Poor's Ratings Group and Duff and Phelps continued to
maintain ratings of BBB+ and A, respectively, for the Company's unsecured debt
and A2 and D1, respectively, for commercial paper.
During April 1998, the Company completed a six-million-share buyback program,
announced in July 1997, through the repurchase of 800,000 shares of common stock
at an average price of approximately $36.60 per common share. A new
three-million-share buyback program was initiated in May 1998. As of September
30, 1998, a total of approximately 1.8 million shares of common stock were
repurchased at an average price of approximately $28.00 per common share. The
Company utilized cash flow from operating activities and commercial paper
borrowings to fund these purchases.
17
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued) --
Three and nine months ended September 30, 1998 and 1997
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer systems, software products and
embedded technology using two digits rather than four to indicate the applicable
year. If not addressed, such computer systems, software products and embedded
technology may be unable to properly interpret dates beyond the year 1999, which
could cause system failures or miscalculations and lead to disruptions in the
Company's activities and operations.
During 1997, after consideration of the potential impact to operations,
including customer and supplier relationships, an enterprise-wide program was
initiated to modify computer information systems to be Year 2000 compliant or to
replace non-compliant systems. The Company has established a Year 2000 Steering
Committee comprised of senior executives to address compliance issues and
strategic alternatives. The Company also established a program office dedicated
to implementing the Year 2000 compliance plan, and has engaged external
consultants to provide day-to-day management oversight and contractors to
remediate and test non-compliant source code. Accordingly, the majority of the
Company's Year 2000 costs are incremental to operations. Management believes
that adequate resources have been allocated to the Year 2000 effort and expects
the Year 2000 compliance program to be completed on a timely basis.
The Company has identified three major areas determined to be critical for
successful Year 2000 compliance: (1) information systems, such as mainframes,
PCs, networks and similar type systems maintained at customer sites, and legacy
applications relating to operations such as financial reporting, human
resources, purchasing, treasury, marketing and sales; (2) third-party
relationships, including customers, suppliers, vendors and government agencies;
and (3) facilities and equipment which may contain microprocessors with embedded
technology.
The Company's Year 2000 compliance program for each major area can be segregated
into three broad phases. Phase I of the program is the assessment of information
systems, facilities and equipment, and services and products provided by third
parties in order to identify exposures to Year 2000 issues and to develop a
master plan of action including remediation, retirement or replacement of
non-compliant systems. Phase II of the program is the implementation of action
plans. Phase III of the program is the final testing of each major area of
exposure to ensure compliance, the placement of remediated items into production
and contingency planning to assess reasonably likely worst case scenarios.
18
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued) --
Three and nine months ended September 30, 1998 and 1997
The Company has completed the assessment of the majority of legacy application
and system software. The Company's remediation plan for this area is segregated
into 15 major partitions worldwide. Currently, the Company's remediation
projects are at different phases of completion; overall, approximately 50% of
the remediation effort has been performed. Remediation and testing activities
are underway on most of the Company's core business applications. Final testing
of remediated code is scheduled to be completed by mid-1999 which is consistent
with the Company's previous statement on the Year 2000 issue in the 1997 Annual
Report on Form 10-K. In addition, due to the uncertainties inherent in this
undertaking, the Company has initiated contingency planning to evaluate a course
of action to minimize the impact of any unforeseen disruption resulting from
non-compliance.
The Company is also assessing the compliance of its major customers, suppliers
and vendors. The Company relies on suppliers, vendors and government agencies to
timely provide a wide range of goods and services, including equipment,
supplies, licensing, telecommunications, utilities, transportation services and
banking services. Management believes that third-party relationships represent
the greatest risk with respect to the Year 2000 issue because of the Company's
limited ability to influence actions of third parties and to estimate the impact
of non-compliance of third parties throughout the Company's operations. The
Company continues to survey and communicate with customers, suppliers and
vendors with whom it has important financial and operational relationships to
assess their Year 2000 exposures as well as the status of their Year 2000
compliance program. Some of the Company's significant suppliers and vendors have
not responded to inquiries, have declined to respond because of liability
concerns or have not responded with sufficient detail for the Company to ensure
(a) timely Year 2000 compliance, or (b) the impact to the Company in the event
of non-compliance. The Company is continuing to pursue adequate responses from
mission critical business partners under the new "Year 2000 Readiness
Disclosure" legislation. However, the Company can provide no assurance that Year
2000 compliance plans will be successfully completed by third parties in a
timely manner.
19
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued) --
Three and nine months ended September 30, 1998 and 1997
In the facilities and equipment area, the Company's exposure relates to embedded
technology in, among other things, vehicles, vehicle-related devices, and fuel
storage and other facilities operated by the Company. Based upon preliminary
testing and discussions with major truck manufacturers, it appears that the
microprocessors installed by the truck manufacturers are Year 2000 compliant.
Remediation of leak detection devices on the Company's underground fuel storage
tanks is 85% complete and is expected to be completed by the end of 1998. The
Company is continuing to assess its exposure and to develop action and
contingency plans for other critical facilities and equipment, including
on-board vehicle computers acquired from other than major truck manufacturers.
The Company has initiated a Year 2000 contingency plan development process to
mitigate potential disruptions in the Company's activities and operations that
may be created by failures of critical business partners, facilities and
equipment, and internal systems. Such contingency plans are expected to be
developed by the third quarter of 1999. However, the Company can provide no
assurance that it will correctly anticipate the level, impact or duration of
non-compliance by critical business partners, facilities and equipment or
internal systems, or that contingency plans will be sufficient to mitigate the
impact of non-compliance.
Based upon current information, the Company estimates that the impact on after
tax earnings for incremental Year 2000 costs range from $34 to $38 million, an
increase of approximately $12 million from the estimate provided in the 1997
Annual Report on Form 10-K. The increase in estimated costs reflects primarily
the discovery of additional lines of software code subject to remediation.
Through September 30, 1998, the Company has incurred $18 million on the Year
2000 project. The majority of costs incurred to date relate to remediation
activities. These costs have been and will continue to be funded through
operating cash flows and expensed as incurred. Future costs are difficult to
estimate and actual results could differ significantly from the Company's
expectations due to changes in software remediation or replacement plans,
unanticipated technological difficulties, project vendor delays or overruns,
impact of third-party non-compliance and the cost and availability of resources.
20
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued) --
Three and nine months ended September 30, 1998 and 1997
EURO CONVERSION
On January 1, 1999, the participating countries of the European Union are
scheduled to adopt the euro as their common legal currency. The participating
countries' existing national currencies will continue as legal tender until at
least January 1, 2002. During this transition period, parties may pay for goods
and services using either the euro or the participating country's legacy
currency. The Company is presently assessing the business implications of
conversion to the euro, principally the need to adapt internal systems to
accommodate euro-denominated transactions. Due to the nature of current
international operations, conversion to the euro is not expected to have a
material impact on the Company's results of operations or financial position.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued FAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." This
Statement establishes standards for reporting information about a company's
operating segments and related disclosures about its products, services,
geographic areas of operations and major customers. This Statement will be
adopted by the Company in 1998 year-end financial statements and will not impact
the Company's results of operations or financial position.
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which is effective for fiscal
years beginning after December 15, 1998. The Statement outlines the accounting
treatment for certain costs related to the development or purchase of software
to be used internally and requires that costs incurred during the preliminary
project and post-implementation/operation stages be expensed, and costs incurred
during the application development stage be capitalized and amortized over the
estimated useful life of the software. Costs incurred prior to initial
application of the Statement cannot be adjusted to the amounts that would have
been capitalized had the Statement been in effect when those costs were
incurred. Adoption of this Statement is not expected to have a material impact
on the Company's results of operations or financial position.
In April 1998, the AICPA also issued SOP 98-5, "Reporting on the Costs of
Start-up Activities." SOP 98-5, which is effective for fiscal years beginning
after December 15, 1998, requires that all costs of start-up activities,
including organization costs, be expensed as incurred. The impact of adoption of
SOP 98-5 should be reported as the cumulative effect of a change in accounting
principle. Adoption of this Statement is not expected to have a material impact
on the Company's results of operations or financial position.
21
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued) --
Three and nine months ended September 30, 1998 and 1997
In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which requires all derivatives to be
recognized at fair value as either assets or liabilities on the balance sheet.
Any gain or loss resulting from changes in such fair value is required to be
recognized in earnings to the extent the derivatives are not effective as
hedges. This Statement is effective for fiscal years beginning after June 15,
1999, and is effective for interim periods in the initial year of adoption.
Adoption of this Statement is not expected to have a material impact on the
Company's results of operations or financial position.
FORWARD-LOOKING STATEMENTS
This management's discussion and analysis of results of operations and financial
condition contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are based on
the current plans and expectations of Ryder System, Inc. and involve risks and
uncertainties that may cause actual results to differ materially from the
forward-looking statements. Important factors that could cause such differences
include, among others, general economic conditions in the United States and
worldwide, the highly competitive environment applicable to the Company's
operations (including competition in integrated logistics from other logistics
companies as well as from air cargo, shipping, railroads and motor carriers and
competition in full service truck leasing and rental from companies providing
similar services as well as truck and trailer manufacturers who provide leasing,
extended warranty maintenance, rental and other transportation services),
greater than expected expenses associated with the Company's personnel needs or
activities (including increased cost of freight and transportation),
availability of equipment, changes in customers' business environments (or the
loss of a significant customer), changes in government regulations and
disruptions due to Year 2000 non-compliance by the Company, its suppliers or
customers.
The risks included here are not exhaustive. New risk factors emerge from time to
time and it is not possible for management to predict all such risk factors or
to assess the impact of such risk factors on the Company's business.
22
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued) --
Three and nine months ended September 30, 1998 and 1997
SELECTED FINANCIAL AND OPERATIONAL DATA
(Dollars in thousands)
Three Months Nine Months
---------------------------------- ---------------------------------
1998 1997* 1998 1997*
- ---------------------------------------------------------------------------------------------------------------------------------
BUSINESS UNITS
Revenue:
Transportation services:
Full service lease and programmed
maintenance $ 406,368 394,724 1,198,293 1,190,230
Commercial rental 126,166 114,164 342,969 308,211
Fuel 131,920 151,276 404,705 485,518
Other 64,794 62,535 196,139 185,960
-------------- --------------- --------------- ---------------
729,248 722,699 2,142,106 2,169,919
Integrated logistics 367,966 345,283 1,096,535 1,008,300
International 167,813 116,989 431,684 330,970
Public transportation 114,485 103,573 418,160 378,548
Eliminations and other (88,695) (84,205) (270,474) (262,280)
-------------- --------------- --------------- ---------------
Total 1,290,817 1,204,339 3,818,011 3,625,457
-------------- --------------- --------------- ---------------
Operating expense 933,011 882,683 2,755,926 2,673,223
Freight under management expense 76,849 64,047 232,122 173,010
Year 2000 expense 10,945 1,507 25,681 1,507
Depreciation expense 166,331 160,574 488,501 479,703
Gains on sale of revenue earning equipment (12,966) (13,418) (40,632) (42,446)
Interest expense 51,862 47,289 150,034 145,206
Miscellaneous expense (income), net 1,858 (1,412) 3,389 (6,149)
-------------- --------------- --------------- ---------------
Earnings before income taxes from business units 62,927 63,069 202,990 201,403
CORPORATE ADMINISTRATIVE EXPENSES AND OTHER 4,856 5,632 7,694 15,744
-------------- --------------- --------------- ---------------
EARNINGS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES $ 58,071 57,437 195,296 185,659
============== =============== =============== ===============
Fleet size (owned and leased including International):
Full service lease 117,484 112,050
Commercial rental 41,326 37,100
Buses operated or managed 15,743 14,290
Transportation services locations 1,039 966
- ---------------------------------------------------------------------------------------------------------------------------------
* Certain 1997 amounts have been reclassified to conform with the presentation
adopted January 1, 1998.
23
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K:
(a) EXHIBITS
(3.1) The Ryder System, Inc. Restated Articles of Incorporation,
dated November 8, 1985, as amended through May 18, 1990,
previously filed with the Commission as an exhibit to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1990, are incorporated by reference into this
report.
(3.2) The Ryder System, Inc. By-Laws, as amended through November
23, 1993, previously filed with the Commission as an exhibit
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1993, are incorporated by reference into this
report.
(15) Letter regarding unaudited interim financial statements.
(27) Financial data schedule (for SEC use only).
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed by the Registrant during the
period covered by this report.
24
SIGNATURES
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.
RYDER SYSTEM, INC.
(Registrant)
Date: November 6, 1998 /s/ EDWIN A. HUSTON
-------------------
Edwin A. Huston
Senior Executive Vice President-Finance
and Chief Financial Officer
(Principal Financial Officer)
Date: November 6, 1998 /s/ GEORGE P. SCANLON
---------------------
George P. Scanlon
Senior Vice President-Planning and Controller
(Principal Accounting Officer)
25
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
(15) Letter regarding unaudited interim financial statements.
(27) Financial data schedule (for SEC use only).
26