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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 March 31, 1999
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
-------------------------------------
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
--- ---
Ryder System, Inc. had 70,807,341 shares of common stock ($0.50 par value per
share) outstanding as of April 30, 1999.
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RYDER SYSTEM, INC.
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Condensed Statements of Earnings -
Three months ended March 31, 1999 and 1998 (unaudited) 3
Consolidated Condensed Balance Sheets -
March 31, 1999 (unaudited) and December 31, 1998 4
Consolidated Condensed Statements of Cash Flows -
Three months ended March 31, 1999 and 1998 (unaudited) 5
Notes to Consolidated Condensed Financial Statements 6
Independent Accountants' Review Report 9
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk 23
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
- ---------------------------------------------------------------------------------------------------------------------
Three months ended March 31, 1999 and 1998
(In thousands, except per share amounts) 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Revenue $ 1,320,648 1,245,617
--------------- --------------
Operating expense 969,539 909,943
Freight under management expense 99,119 77,913
Year 2000 expense 14,383 5,088
Depreciation expense, net of gains (1999 - $14,003; 1998 - $14,311) 149,829 146,758
Interest expense 48,652 48,408
Miscellaneous expense (income), net 2,961 (4,415)
--------------- --------------
1,284,483 1,183,695
--------------- --------------
Earnings before income taxes 36,165 61,922
Provision for income taxes 14,025 24,648
--------------- --------------
Net earnings $ 22,140 37,274
=============== ==============
Earnings per common share - Basic and Diluted $ 0.31 0.50
=============== ==============
Cash dividends per common share $ 0.15 0.15
=============== ==============
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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March 31, December 31,
(Dollars in thousands, except per share amounts) 1999 1998
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Assets
Current assets:
Cash and cash equivalents $ 55,244 138,353
Receivables 605,756 559,141
Inventories 69,959 67,605
Tires in service 177,450 166,578
Prepaid expenses and other current assets 156,253 111,170
--------------- --------------
Total current assets 1,064,662 1,042,847
Revenue earning equipment 3,416,434 3,211,969
Operating property and equipment 591,943 597,951
Direct financing leases and other assets 566,475 543,242
Intangible assets and deferred charges 311,332 312,592
--------------- --------------
$ 5,950,846 5,708,601
=============== ==============
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 607,529 483,334
Accounts payable 529,552 399,495
Accrued expenses 458,313 479,835
--------------- --------------
Total current liabilities 1,595,394 1,362,664
Long-term debt 2,111,139 2,099,697
Deferred income taxes 820,379 807,623
Other non-current liabilities 330,906 343,003
--------------- --------------
Total liabilities 4,857,818 4,612,987
--------------- --------------
Shareholders' equity:
Common stock of $0.50 par value per share (shares outstanding at
March 31, 1999 - 71,013,529; December 31, 1998 - 71,280,247) 609,482 610,543
Retained earnings 509,047 504,105
Accumulated other comprehensive income (25,501) (19,034)
--------------- --------------
Total shareholders' equity 1,093,028 1,095,614
--------------- --------------
$ 5,950,846 5,708,601
=============== ==============
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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Three months ended March 31, 1999 and 1998
(In thousands) 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $ 22,140 37,274
Depreciation expense, net of gains 149,829 146,758
Amortization expense and other non-cash charges, net 4,394 (533)
Deferred income tax expense 13,928 14,247
Changes in operating assets and liabilities, net of acquisitions:
Decrease in aggregate balance of trade receivables sold (75,000) -
Receivables 28,063 14,741
Inventories (2,354) 2,255
Prepaid expenses and other assets (50,064) (68,745)
Accounts payable 130,058 38,657
Accrued expenses and other non-current liabilities (34,369) (27,217)
--------------- --------------
186,625 157,437
--------------- --------------
Cash flows from financing activities:
Net change in commercial paper borrowings 138,571 135,410
Debt proceeds 79,013 9,107
Debt repaid, including capital lease obligations (71,042) (140,151)
Common stock repurchased (9,626) -
Common stock issued 2,017 14,564
Dividends on common stock (10,664) (11,130)
--------------- --------------
128,269 7,800
--------------- --------------
Cash flows from investing activities:
Purchases of property and revenue earning equipment (566,166) (270,566)
Sales of property and revenue earning equipment 86,166 87,979
Sale and leaseback of revenue earning equipment 78,852 -
Acquisitions, net of cash acquired - (4,933)
Other, net 3,145 335
--------------- --------------
(398,003) (187,185)
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Decrease in cash and cash equivalents (83,109) (21,948)
Cash and cash equivalents at January 1 138,353 78,370
--------------- --------------
Cash and cash equivalents at March 31 $ 55,244 56,422
=============== ==============
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 1998 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 1998 amounts have been reclassified
to conform with current year presentation.
(B) EARNINGS PER SHARE INFORMATION
Basic earnings per share is computed by dividing net earnings by the
weighted average number of common shares outstanding. Diluted earnings
per share reflects the dilutive effect of potential common share
issuances 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. A reconciliation of the number of shares
used in computing basic and diluted earnings per share for the three
months ended March 31, 1999 and 1998 follows (in thousands):
1999 1998
------ ------
Weighted average shares outstanding-Basic 71,188 73,971
Common equivalents:
Shares issuable under outstanding dilutive options 2,703 4,905
Shares assumed repurchased based
on the average market price for the period (2,508) (3,976)
Dilutive effect of exercised options prior to
being exercised 13 106
------ ------
208 1,035
------ ------
Weighted average shares outstanding-Diluted 71,396 75,006
====== ======
Anti-dilutive options not included above 4,330 1,228
====== ======
6
ITEM 1. Financial Statements (continued)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
(C) SEGMENT INFORMATION
The Company operates in four business segments: (1) Transportation
Services, which provides full service leasing, commercial rental and
programmed maintenance of trucks, tractors and trailers to customers
throughout the U.S. and Canada; (2) Integrated Logistics, which
provides support services for customers' entire supply chains, from
inbound raw materials supply through finished goods distribution,
including dedicated contract carriage, the management of carriers, and
inventory deployment throughout the U.S. and Canada; (3) Public
Transportation Services, which provides student transportation, transit
management, and fleet management and maintenance services to the U.S.
public sector; and (4) International, which provides full service
leasing, commercial rental, programmed maintenance and logistics
services in Europe, South America and Mexico.
The Company evaluates segment financial performance based upon several
factors, of which the primary measure is earnings before income taxes
and Year 2000 expense. Business segment earnings before income taxes
represent the total profit earned from each segment's customers across
all of the Company's segments and include allocations of certain
overhead costs. The Transportation Services segment leases revenue
earning equipment, sells fuel and provides maintenance and other
ancillary services to the Integrated Logistics segment. Likewise, the
Transportation Services segment sells fuel and provides maintenance
services to the Public Transporation Services segment. Intersegment
sales are accounted for at fair value as if the sales were made to
third parties. Interest expense, net is allocated to the various
business segments based upon targeted debt to equity ratios using an
interest factor, which reflects the Company's average total cost of
debt. The following table sets forth the revenue and pretax earnings
for each of the Company's business segments for the three months ended
March 31, 1999 and 1998 (in thousands):
1999 1998
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Revenue:
Transportation Services $ 710,379 698,041
Integrated Logistics 398,261 361,012
Public Transportation Services 166,626 153,099
International 139,140 122,994
Intersegment eliminations (93,758) (89,529)
---------- ---------
Total revenue $1,320,648 1,245,617
========== =========
Earnings before income taxes:
Transportation Services $ 49,976 48,060
Integrated Logistics 9,244 13,470
Public Transportation Services 17,650 19,505
International (6,404) (1,858)
Intersegment eliminations (13,135) (13,318)
---------- ---------
Total from reportable segments 57,331 65,859
Corporate administrative
expenses and other (6,783) 1,151
Year 2000 expense (14,383) (5,088)
---------- ---------
Total earnings before income taxes $ 36,165 61,922
========== =========
7
ITEM 1. Financial Statements (continued)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
(D) 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 for
the three months ended March 31, 1999 and 1998 was $15.7 million and
$38.5 million, respectively. The decrease in total comprehensive income
was due primarily to lower net earnings and increased currency
translation losses associated with the strengthening U.S. dollar
relative to local currencies in Brazil and the U.K.
8
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 March 31, 1999, and the related consolidated
condensed statements of earnings and cash flows for the three months ended March
31, 1999 and 1998. 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, 1998, and the related consolidated statements of operations,
shareholders' equity and cash flows for the year then ended (not presented
herein); and in our report dated February 4, 1999, 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, 1998, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
/s/ KPMG LLP
Miami, Florida
April 21, 1999
9
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations --
Three months ended March 31, 1999 and 1998
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 operates in four business segments: (1) Transportation Services,
which provides full service leasing, commercial rental and programmed
maintenance of trucks, tractors and trailers to customers throughout the U.S.
and Canada; (2) Integrated Logistics, which provides support services for
customers' entire supply chains, from inbound raw materials supply through
finished goods distribution, including dedicated contract carriage, the
management of carriers, and inventory deployment throughout the U.S. and Canada;
(3) Public Transportation Services, which provides student transportation,
transit management, and fleet management and maintenance services to the U.S.
public sector; and (4) International, which provides full service leasing,
commercial rental, programmed maintenance and logistics services in Europe,
South America and Mexico.
The Company reported earnings prior to Year 2000 expense of $30.9 million, or
$0.43 a diluted share, in the first quarter of 1999, compared with $40.3
million, or $0.54 a diluted share, in the same 1998 period. Including Year 2000
expense, net earnings in the first quarter of 1999 were $22.1 million, or $0.31
a diluted share, compared with $37.3 million, or $0.50 a diluted share, in the
first quarter of 1998. The decline in net earnings was due primarily to
increased Year 2000 costs, reduced profitability in the Integrated Logistics and
International segments and the absence of certain non-recurring gains realized
in the first quarter of 1998.
Revenue in the first quarter of 1999 increased 6%, to $1.32 billion, compared
with $1.25 billion in the first quarter of 1998. Integrated Logistics,
International and Public Transportation Services led the revenue growth.
Transportation Services also posted slightly higher revenue in the first quarter
of 1999 reflecting an improvement in full service leasing and commercial rental
revenue offset by decreased fuel revenue associated with declining fuel prices
and volumes.
Operating expense increased 7% in the first quarter of 1999 compared with the
first quarter of 1998. The increase was primarily a result of higher business
volumes and was reflected in higher compensation and employee benefits expenses,
outside driver costs, vehicle liability and technology costs. These increases
were partially offset by lower fuel costs. Operating expense as a percentage of
revenue was 73% in both periods.
10
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)--
Three months ended March 31, 1999 and 1998
Freight under management expense, which represents subcontracted freight costs
on logistics contracts where the Company purchases transportation, increased $21
million, or 27%, in the first quarter of 1999 compared with the same 1998
period. Freight under management expense as a percentage of revenue also
increased from 6% in the first quarter of 1998 to 8% in the first quarter of
1999. The increases reflect the growth in these integrated logistics contracts
experienced since the latter half of 1997.
Incremental Year 2000 expense totaled $14.4 million ($8.8 million after tax, or
$0.12 a diluted share) in the first quarter of 1999, compared with $5.1 million
($3.0 million after tax, or $0.04 a diluted share) in the same period last year.
See "Year 2000 Preparation" for a further discussion of this matter.
Depreciation expense (before gains on vehicle sales) increased 2% in the first
quarter of 1999 compared with the first quarter of 1998 reflecting growth in the
average size of the full service lease and commercial rental fleets. Gains on
vehicle sales remained relatively the same in both periods as an increase in the
number of vehicles sold in the first quarter of 1999 was offset by a lower
average gain per vehicle sold during the same period. As a percentage of
revenue, depreciation expense, net of gains, declined from 12% in the first
quarter of 1998 to 11% in the first quarter of 1999.
Interest expense of $49 million in the first quarter of 1999 was relatively
unchanged from the same period last year as average debt levels and interest
rates were comparable for each of the periods. The 1999 increase in debt of $136
million occurred late in the first quarter of 1999 and resulted primarily from
increased levels of capital spending.
Miscellaneous expense (income), net totaled $3 million in the first quarter of
1999 compared with $(4) million in the same period last year. The decrease was
due primarily to the absence of gains on the sale of facilities and properties
in the first quarter of 1999 and increased costs associated with selling, with
limited recourse, more trade receivables during the 1999 period.
The Company's effective tax rate in the first quarter of 1999 was 38.8% compared
with 39.8% in the same 1998 period.
11
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)--
Three months ended March 31, 1999 and 1998
OPERATING RESULTS BY BUSINESS SEGMENT
For the three
months ended
March 31,
(In thousands) 1999 1998
- -----------------------------------------------------------------------
Revenue:
Transportation Services:
Full service lease and
programmed maintenance $ 405,256 393,594
Commercial rental 112,867 101,199
Fuel 125,603 138,288
Other 66,653 64,960
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710,379 698,041
Integrated Logistics 398,261 361,012
Public Transportation Services 166,626 153,099
International 139,140 122,994
Intersegment eliminations (93,758) (89,529)
---------- ---------
Total revenue $1,320,648 1,245,617
========== =========
Earnings before income taxes:
Transportation Services $ 49,976 48,060
Integrated Logistics 9,244 13,470
Public Transportation Services 17,650 19,505
International (6,404) (1,858)
Intersegment eliminations (13,135) (13,318)
---------- ---------
Total from reportable segments 57,331 65,859
Corporate administrative
expenses and other (6,783) 1,151
Year 2000 expense (14,383) (5,088)
---------- ---------
Total earnings before income taxes $ 36,165 61,922
========== =========
Vehicle Fleet Size (owned and leased):
March 31, December 31, March 31,
1999 1998 1998
- --------------------------------------------------------------------------------
Transportation Services:
Full service lease 111,720 109,124 104,664
Commercial rental 38,404 37,517 33,923
Service vehicles 2,114 2,127 2,068
------- ------- -------
152,238 148,768 140,655
Public Transportation Services 10,526 10,439 10,067
International 13,658 13,802 13,286
Integrated Logistics 103 107 109
------- ------- -------
176,525 173,116 164,117
======= ======= =======
12
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)--
Three months ended March 31, 1999 and 1998
The Company evaluates financial performance based upon several factors, of which
the primary measure is business segment earnings before income taxes and
one-time items such as Year 2000 expense. Business segment earnings before
income taxes represent the total profit earned from each segment's customers
across all of the Company's segments and include allocations of certain overhead
costs.
INTEGRATED LOGISTICS
Total revenue from Integrated Logistics increased 10% in the first quarter of
1999 compared with the same period last year due primarily to expansion of
revenue with existing customers and start-up of new business sold in the
previous year, which offset lost business in the dedicated contract carriage
sector. The largest component of growth in 1999 continued to 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 6% in the first quarter of 1999
compared with the same 1998 period. New business sales remained strong for the
first quarter of 1999. Management continues to believe that improved sales force
capabilities, industry segmentation, and the ability to leverage rapidly
emerging logistics technologies and alliances to enhance service offerings
should result in continued new sales growth and increasing revenue growth rates
for the remainder of 1999.
Integrated Logistics pretax earnings in the first quarter of 1999 were $9
million compared with $13 million in the same period last year. Pretax earnings
as a percentage of operating revenue decreased to 3.1% in the first quarter of
1999 from 4.8% in the comparable 1998 period. Pretax earnings in the first
quarter of 1999 were impacted by lower volumes in a segment of the carrier
management business, reduced margins as a result of lost dedicated contract
carriage business, increased start-up costs for new business, increased vehicle
liability costs and higher overhead costs to support product development and
marketing initiatives. Management expects these factors to continue over the
near term.
TRANSPORTATION SERVICES
Total revenue in the Transportation Services segment increased 2% in the first
quarter of 1999 compared with the same 1998 period. Total revenue continues to
be impacted by lower fuel revenue, which is due to a decline in both price and
volume. Dry revenue (revenue excluding fuel) increased 4% in the first quarter
of 1999 compared with the same period last year, due primarily to growth in
commercial rental revenue. Full service leasing and programmed maintenance
revenue for the first quarter of 1999 was $405 million, an increase of 3% from
the first quarter of 1998. Despite continued strong new sales of truck leases in
the first quarter of 1999, the revenue growth rate for this product offering was
impacted by delays in deliveries of new vehicles from manufacturers, in-service
processing efforts and non-renewals. As the year progresses, management expects
to see improvement in the timing of vehicle deliveries from equipment
manufacturers and of in-service processing efforts which, when combined with
continued strong sales efforts, should result in higher lease revenue growth in
1999.
13
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)--
Three months ended March 31, 1999 and 1998
Commercial rental revenue increased 12% to $113 million in the first quarter of
1999, compared with $101 million in the first quarter of 1998. The increase in
revenue reflects continued strong utilization of a larger average commercial
rental fleet, especially from full service lease customers awaiting delivery of
new lease equipment. Such "awaiting new lease" rental revenue increased $8
million, or 90%, in the first quarter of 1999 compared with the same period last
year. Fuel revenue decreased 9% in the first quarter of 1999, compared with the
first quarter of 1998, as a result of lower fuel prices and slightly lower
volumes. Other transportation services revenue, consisting of third-party
maintenance, trailer rentals and other ancillary revenue to support product
lines, increased 3% in the first quarter of 1999 compared with the same period
last year.
Transportation Services pretax earnings increased 4% to $50 million in the first
quarter of 1999 compared with the first quarter of 1998. The improvement in
segment pretax earnings resulted primarily from higher revenue, which offset a
decrease in real estate gains in the first quarter of 1999 compared with the
same period last year. As a percentage of dry revenue, earnings before income
taxes remained about the same at 8.5%. Operating margin (revenue less direct
operating expenses, depreciation and interest expense) and operating margin as a
percentage of revenue from full service leasing increased in the first quarter
of 1999 compared with the same period last year, reflecting revenue growth from
new sales and improved pricing. Commercial rental operating margin and operating
margin as a percentage of revenue also increased in the first quarter of 1999,
compared with the same 1998 period, reflecting continued strong utilization of a
larger average fleet and improved operating efficiencies.
PUBLIC TRANSPORTATION SERVICES
Public Transportation Services revenue increased 9% in the first quarter of 1999
compared with the same 1998 period. The revenue growth resulted from new student
transportation and transit management business, as well as several acquisitions
completed in student transportation services in 1998. Pretax earnings in Public
Transportation Services declined 10% in the first quarter of 1999 compared with
the first quarter of 1998 and pretax earnings as a percentage of revenue
declined to 10.6% in the first three months of 1999 compared with 12.7% in the
same period of 1998. These results reflect reduced profitability in the student
transportation business, which suffered from bad weather and higher driver
compensation costs in several regions. While driver compensation costs are
expected to remain higher on a comparable basis in the second quarter,
management expects to obtain rate increases during the second quarter which
should favorably impact results for the latter half of 1999.
14
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)--
Three months ended March 31, 1999 and 1998
INTERNATIONAL
International segment revenue increased 13% to $139 million in the first quarter
of 1999 compared with $123 million in the first quarter of 1998. The revenue
growth resulted primarily from the May 1998 acquisition of the remaining
interest in Companhia Transportadora e Comercial Translor, S.A., a Brazilian
logistics company. The International segment recorded a pretax loss of $6
million in the first quarter of 1999 compared with a pretax loss of $2 million
in the same 1998 period. Results were negatively impacted by reduced
profitability in the U.K. operations, related primarily to a softer U.K.
economy, as well as higher costs due in part to the reorganization of the U.K.
truck leasing and rental business, previously held for sale. International
results also suffered from the impact of economic difficulties experienced in
Brazil and Argentina, as well as higher costs in the European logistics
operations reflecting infrastructure spending and marketing costs associated
with a large proposal.
CORPORATE ADMINISTRATIVE EXPENSES AND OTHER
Corporate administrative expenses and other totaled $7 million in the first
quarter of 1999, compared with income of $1 million in the first quarter of
1998. The 1998 results included gains of $7 million from the sale of properties
and the reinsurance of certain vehicle-related liabilities.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
The following is a summary of the Company's cash flows from operating, financing
and investing activities for the three months ended March 31, 1999 and 1998 (in
thousands):
1999 1998
-------- --------
Net cash provided by (used in):
Operating activities $186,625 157,437
Financing activities 128,269 7,800
Investing activities (398,003) (187,185)
-------- --------
Net cash flows $(83,109) (21,948)
======== ========
The increase in cash flow from operating activities in the first quarter of
1999, compared with the same period last year, was attributable to lower working
capital needs. The lower working capital needs related primarily to increased
accounts payable for vehicle purchases due to the timing of deliveries which
offset a reduction in the aggregate balance of trade receivables sold. A summary
of the individual items contributing to the cash flow changes is included in the
Consolidated Condensed Statements of Cash Flows. Cash flow from operating
activities (excluding sales of receivables) plus asset sales as a percentage of
capital expenditures (net of proceeds from the sale and leaseback of revenue
earning equipment) was 71% in the first quarter of 1999, compared with 91% in
the same period last year. The decrease was due to a significant increase in
capital expenditures to support new lease business and fleet replacement
requirements which offset improved cash flow from operations.
15
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)--
Three months ended March 31, 1999 and 1998
During the first quarter of 1999, cash of $128 million was provided by financing
activities, primarily from additional net borrowings $147 million partially
offset by cash expended to pay dividends of $11 million and repurchase common
stock of $10 million. During the first quarter of 1999, the Company repurchased
360,000 shares of common stock, at an average price of $26.74 per common
share, under a three-million-share stock repurchase program announced in
December 1998. The current program is the fourth since 1996 resulting in the
cumulative repurchase of 15.4 million shares by the Company. The increase in
cash provided by financing activities in the first quarter of 1999 compared to
the same period last year is due primarily to the timing of debt maturities and
increased financing requirements for capital spending.
Cash used for investing activities in the first quarter of 1999 increased
compared with the same period last year, reflecting higher capital expenditures
which was partially offset by the sale and operating leaseback of revenue
earning equipment in 1999. A summary of capital expenditures for the three
months ended March 31, 1999 and 1998 follows (in thousands):
1999 1998
-------- -------
Revenue earning equipment:
Transportation Services $506,132 226,063
Public Transportation Services 11,171 674
International 23,303 15,501
-------- -------
540,606 242,238
Operating property and equipment 25,560 28,328
-------- -------
$566,166 270,566
======== =======
The growth in capital expenditures for Transportation Services' revenue earning
equipment was due principally to an acceleration in the delivery of new lease
vehicles from manufacturers in the latter half of the quarter and the timing of
rental purchases relative to the same period last year. The increase in
expenditures for Public Transportation Services was due to the timing of fleet
replacements while the increase in International reflects fleet replacement
activity in the U.K. which was deferred in 1998. Management expects capital
expenditures for 1999 will exceed 1998 levels by 20% to 25%, primarily as a
result of anticipated growth and higher fleet replacement levels in full service
truck leasing. The Company expects to fund its 1999 capital expenditures with
both internally generated funds and additional financing.
16
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)--
Three months ended March 31, 1999 and 1998
FINANCING
Ryder utilizes external capital to support growth in its asset-based product
lines. The Company has a variety of financing alternatives available to fund its
capital needs. These alternatives include long- and medium-term public and
private debt, as well as variable-rate financing available through bank credit
facilities and commercial paper. The Company also periodically enters into sale
and leaseback agreements for revenue earning equipment, the majority of which
are accounted for as operating leases.
On April 27, 1999, Duff & Phelps lowered its ratings of the Company's commercial
paper and unsecured notes to D2 and A- from D1 and A, respectively. The
Company's debt ratings as of April 27, 1999 were as follows:
Commercial Unsecured
Paper Notes
---------- ---------
Moody's Investors Service P2 Baa1
Standard & Poor's Ratings Group A2 BBB+
Duff & Phelps D2 A-
Debt totaled $2.7 billion at March 31, 1999, or an increase of $136 million from
December 31, 1998. During the first quarter of 1999, the Company made $32
million of scheduled unsecured note payments and issued $63 million of
medium-term notes. U.S. commercial paper outstanding at March 31, 1999 increased
to $315 million, compared with $198 million at December 31, 1998, primarily to
fund capital expenditures. The Company's foreign debt decreased approximately
$11 million from December 31, 1998 to $379 million at March 31, 1999. The
Company's percentage of variable-rate financing obligations was 28% at March 31,
1999 which was within the Company's targeted level of 25%-30% and only slightly
higher than the 27% percentage at December 31, 1998. The Company's debt to
equity ratio at March 31, 1999, increased to 249% from 236% at December 31,
1998.
As of March 31, 1999, $352 million was available under the Company's $720
million global revolving credit facility, which expires in 2002. Foreign
borrowings of $53 million were outstanding under the facility as of March 31,
1999. In September 1998, 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. As of March 31, 1999, the
Company had $598 million of debt securities available for issuance under this
shelf registration statement. 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
March 31, 1999, the outstanding balance of receivables sold pursuant to this
agreement decreased to $125 million from $200 million at December 31, 1998.
17
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)--
Three months ended March 31, 1999 and 1998
YEAR 2000 PREPARATION
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 Financial Condition
and Results of Operations (continued)--
Three months ended March 31, 1999 and 1998
The Company has completed the assessment of the legacy application and system
software. The Company's remediation plan for this area is segregated into 15
major partitions worldwide. The Company's remediation projects are at different
phases of completion; overall, approximately 75% of the Company's effort in this
area has been performed as of April 30, 1999. Remediation and testing activities
are underway on all of the Company's core business applications. Final testing
of remediated code is scheduled to be substantially completed in the third
quarter of 1999. 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 relies on suppliers, vendors and government agencies to timely
provide a wide range of goods and services, including equipment, supplies,
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 is making
concerted efforts to understand the Year 2000 status of third parties whose Year
2000 non-compliance could either have a material adverse effect on the Company's
business, financial condition or results of operations or involve a safety risk
to employees or customers. 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 compliance program and to
develop a joint contingency plan.
The Company's vendor compliance program includes the following: assessing vendor
compliance status; tracking vendor compliance progress; developing contingency
plans, including identifying alternate vendors, as needed; addressing contract
language; replacing, remediating or upgrading equipment; requesting
certification from vendors or making on-site assessments, as required; and
sending questionnaires and conducting phone interviews. 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
"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 Financial Condition
and Results of Operations (continued)--
Three months ended March 31, 1999 and 1998
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 or replacement of leak detection devices on the Company's
underground fuel storage tanks will be completed by mid-1999. 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 manufacturers other than major truck manufacturers.
The Company has developed 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. Management currently believes that the most
likely worst case scenario will consist of some localized disruptions of systems
that may affect individual business processes, facilities or suppliers for a
short time rather than systemic or long-term problems affecting business
operations as a whole. Through visits to key operating sites, departments,
customers, and vendors, potential disruption scenarios are being identified and
contingency plans are being developed. These plans address preparation,
assessment of failure, and resumption of critical business functions. Detailed
contingency plans for each business unit and for critical business processses
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 cumulative impact
on after tax earnings for incremental Year 2000 costs range from $40 to $44
million, an increase of approximately $6 million from the estimate provided in
the 1998 Annual Report on Form 10-K. The increase in estimated costs reflects
primarily the impact of changing the remediation action plan for a non-compliant
application as well as the discovery of additional lines of software code
subject to remediation. Through March 31, 1999, the Company has incurred $35
million after tax 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 Financial Condition
and Results of Operations (continued)--
Three months ended March 31, 1999 and 1998
EURO CONVERSION
On January 1, 1999, the participating countries of the European Union adopted
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. 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 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 was effective for the
Company on January 1, 1999. 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. Adoption of this statement did not 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 was effective for the Company on January
1, 1999, requires that all costs of start-up activities, including organization
costs, be expensed as incurred. The Company's existing accounting policies
conformed with the requirements of SOP 98-5; therefore adoption of this
statement did not impact the Company's results of operations or financial
position.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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.
21
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)--
Three months ended March 31, 1999 and 1998
FORWARD-LOOKING STATEMENTS
This management's discussion and analysis of financial condition and results of
operations 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
PART 1. FINANCIAL INFORMATION (continued)
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
In the normal course of business, the Company is exposed to fluctuations in
interest rates, fuel prices and foreign exchange rates. The Company manages such
exposures in several ways including the use of a variety of derivative financial
instruments when deemed prudent. The Company does not enter into leveraged
derivative financial transactions or use derivative financial instruments for
trading purposes.
The Company's quantitative and qualitative disclosures about market risk for
changes in interest rates and foreign exchange rates have not materially changed
since December 31, 1998. The Company's disclosures about market risk are
contained in Item 7A of the Annual Report on Form 10-K for the year ended
December 31, 1998. The exposure to market risk for fluctuations in fuel prices
relates to fixed-price fuel sales commitments with customers. The Company
mitigates this exposure by entering into forward purchases for delivery at
fueling facilities. Fixed-price fuel arrangements are primarily within Public
Transportation Services and represent approximately 5% of total fuel purchases.
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 information
(27.1) 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: May 6, 1999 /s/ EDWIN A. HUSTON
-------------------
Edwin A. Huston
Senior Executive Vice President-Finance
and Chief Financial Officer
(Principal Financial Officer)
Date: May 6, 1999 /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 information
27.1 Financial Data Schedule (for SEC use only)
26