10-Q 1 0001.txt --------------------------------------------------------------- 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 June 30, 2000 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 ------------------------------------- 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 59,609,920 shares of common stock ($0.50 par value per share) outstanding as of July 31, 2000. -------------------------------------------------------------------------------- RYDER SYSTEM, INC. TABLE OF CONTENTS Page ---- PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Condensed Statements of Earnings - Three and six months ended June 30, 2000 and 1999 (unaudited) 3 Consolidated Condensed Balance Sheets - June 30, 2000 (unaudited) and December 31, 1999 4 Consolidated Condensed Statements of Cash Flows - Six months ended June 30, 2000 and 1999 (unaudited) 5 Notes to Consolidated Condensed Financial Statements (unaudited) 6 Independent Accountants' Review Report 10 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 11 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 (unaudited)
----------------------------------------------------------------------------------------------------------------------------------- Periods ended June 30, 2000 and 1999 Three Months Six Months ---------------------------- ----------------------------- (In thousands, except per share amounts) 2000 1999 2000 1999 ----------------------------------------------------------------------------------------------------------------------------------- Revenue $1,332,190 1,214,832 $2,640,798 2,368,854 ------------- ------------- ------------- ------------- Operating expense 996,153 876,403 1,989,515 1,709,390 Freight under management expense 111,362 107,633 209,369 206,752 Depreciation expense, net of gains 135,184 141,124 278,189 281,965 Interest expense 38,698 48,427 80,650 94,073 Miscellaneous expense, net 3,746 80 4,561 3,169 Unusual items: Restructuring and other charges, net --- 827 --- 1,658 Year 2000 expense --- 7,108 --- 20,971 ------------- ------------- ------------- ------------- 1,285,143 1,181,602 2,562,284 2,317,978 ------------- ------------- ------------- ------------- Earnings from continuing operations before income taxes 47,047 33,230 78,514 50,876 Provision for income taxes 17,407 12,651 29,050 19,409 ------------- ------------- ------------- ------------- Earnings from continuing operations 29,640 20,579 49,464 31,467 Earnings from discontinued operations, less income taxes --- 9,571 --- 20,823 ------------- ------------- ------------- ------------- Net earnings $ 29,640 30,150 $ 49,464 52,290 ============= ============= ============= ============= Earnings per common share - Basic and Diluted: Continuing operations $ 0.50 0.29 $ 0.83 0.44 Discontinued operations --- 0.14 --- 0.30 ------------- ------------- ------------- ------------- Net earnings $ 0.50 0.43 $ 0.83 0.74 ============= ============= ============= ============= Cash dividends per common share $ 0.15 0.15 $ 0.30 0.30 ============= ============= ============= =============
See accompanying notes to consolidated condensed financial statements. 3 ITEM 1. Financial Statements (continued) Ryder System, Inc. and Subsidiaries CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited) --------------------------------------------------------------------------------------------------------------------------------- June 30, December 31, (In thousands, except share amounts) 2000 1999 --------------------------------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 66,156 112,993 Receivables, net of allowance for doubtful accounts of $11,589 and $10,254, respectively 418,839 725,815 Inventories 71,794 69,845 Tires in service 166,055 162,877 Prepaid expenses and other current assets 256,411 137,861 ----------------- ---------------- Total current assets 979,255 1,209,391 Revenue earning equipment, net of accumulated depreciation of $1,296,003 and $1,483,084, respectively 3,152,446 3,095,451 Operating property and equipment, net of accumulated depreciation of $605,890 and $574,784, respectively 580,949 581,105 Direct financing leases and other assets 696,047 652,270 Intangible assets and deferred charges 221,421 232,233 ----------------- ---------------- $ 5,630,118 5,770,450 ================= ================ Liabilities and Shareholders' Equity Current liabilities: Current portion of long-term debt $ 639,219 574,253 Accounts payable 381,112 334,103 Accrued expenses 459,491 541,156 ----------------- ---------------- Total current liabilities 1,479,822 1,449,512 Long-term debt 1,667,291 1,819,136 Other non-current liabilities 323,712 285,802 Deferred income taxes 929,665 1,011,095 ----------------- ---------------- Total liabilities 4,400,490 4,565,545 ----------------- ---------------- Shareholders' equity: Common stock of $0.50 par value per share (shares outstanding at June 30, 2000 - 59,583,795; December 31, 1999 - 59,395,050) 517,183 513,083 Retained earnings 746,173 714,544 Accumulated other comprehensive income (33,728) (22,722) ----------------- ---------------- Total shareholders' equity 1,229,628 1,204,905 ----------------- ---------------- $ 5,630,118 5,770,450 ================= ================
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 (unaudited)
--------------------------------------------------------------------------------------------------------------------------------- Six months ended June 30, 2000 and 1999 (In thousands) 2000 1999 --------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Earnings from continuing operations $ 49,464 31,467 Depreciation expense, net of gains 278,189 281,965 Amortization expense and other non-cash charges, net 7,884 7,540 Deferred income tax expense 42,201 34,430 Changes in operating assets and liabilities: Increase in aggregate balance of trade receivables sold 275,000 25,000 Receivables 34,968 (17,789) Inventories (1,918) (5,915) Prepaid expenses and other assets (71,147) (37,574) Accounts payable 54,356 127,293 Accrued expenses and other liabilities (93,282) (70,707) ----------------- ---------------- 575,715 375,710 ----------------- ---------------- Cash flows from financing activities: Net change in commercial paper borrowings 107,245 365,955 Debt proceeds 42,280 185,503 Debt repaid, including capital lease obligations (314,950) (152,339) Common stock repurchased --- (43,034) Common stock issued 3,952 5,065 Dividends on common stock (17,835) (21,235) ----------------- ---------------- (179,308) 339,915 ----------------- ---------------- Cash flows from investing activities: Purchases of operating property and revenue earning equipment (841,716) (1,093,576) Sales of operating property and revenue earning equipment 130,517 189,562 Sale and leaseback of revenue earning equipment 222,978 78,852 Acquisitions, net of cash acquired (3,705) --- Other, net 48,682 5,009 ----------------- ---------------- (443,244) (820,153) ----------------- ---------------- Net cash flows from continuing operations (46,837) (104,528) Net cash flows from discontinued operations --- 31,770 ----------------- ---------------- Decrease in cash and cash equivalents (46,837) (72,758) Cash and cash equivalents at January 1 112,993 138,353 ----------------- ---------------- Cash and cash equivalents at June 30 $ 66,156 65,595 ================= ================
See accompanying notes to consolidated condensed financial statements. 5 ITEM 1. Financial Statements (continued) NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (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 1999 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 amounts have been reclassified to conform with current 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 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. A reconciliation of the number of shares used in computing basic and diluted earnings per share follows (in thousands):
Periods ended June 30, 2000 and 1999 Three Months Six Months (In thousands) 2000 1999 2000 1999 ----------------------------------------------------- ------- ------ ------ ----- Weighted average shares outstanding-Basic 59,465 70,524 59,453 70,856 Common equivalents: Shares issuable under outstanding dilutive options 1,149 2,538 1,280 2,638 Shares assumed repurchased based on the average market value for the period (1,078) (2,364) (1,195) (2,453) Dilutive effect of exercised options prior to being exercised 117 130 72 71 ------ ------ ------ ------- 188 304 157 256 ------ ------ ------ ------- Weighted average shares outstanding-Diluted 59,653 70,828 59,610 71,112 ====== ====== ====== ====== Anti-dilutive options not included above 6,144 4,671 6,014 4,571 ====== ===== ===== =====
6 ITEM 1. Financial Statements (continued) NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued) (C) SEGMENT INFORMATION During the fourth quarter of 1999, the Company implemented several restructuring initiatives designed to improve profitability and align the organizational structure with the strategic direction of the Company (see note "E"). As part of the restructuring, the Company changed how it manages and measures the business during the first quarter of 2000. The principal changes from prior management and measurement are (1) management of the business along product lines, without regard to geography and (2) discrete management and presentation of the Dedicated Contract Carriage business. The business segment information presented below reflects such changes. Prior year information has been restated to conform to the current year presentation. The Company operates in three business segments: (1) Leasing and Rental, which provides full service leasing, commercial rental and programmed maintenance of trucks, tractors and trailers to customers, principally in the U.S., Canada and the United Kingdom; (2) Logistics Solutions, which provides comprehensive supply chain consulting and lead logistics management solutions that support a client's entire supply chain, from inbound raw materials through distribution of finished goods throughout North America, in Latin America, Europe and Asia; and (3) Dedicated Contract Carriage (DCC), which provides vehicles and drivers as part of a dedicated transportation solution, principally in North America. Management evaluates segment financial performance based upon several factors, of which the primary measure is contribution margin. Contribution margin represents each business segment's revenue, less direct costs and direct overheads related to the segment's operations. Business segment contribution margin for all segments (net of eliminations), less Central Support Services expenses, is equal to earnings from continuing operations before income taxes. Central Support Services consist primarily of corporate overhead and other expenses not directly attributable to a single business segment, such as shared management information systems, finance, and sales and marketing. Central Support Services also include expenses of certain new business initiatives, Ryder Capital Services and e-commerce, which may be reported as business segments in the future once such operations begin. The Leasing and Rental segment leases revenue earning equipment, sells fuel and provides maintenance and other ancillary services to the Logistics Solutions and DCC segments. Intersegment revenues are accounted for at approximate fair value as if the transactions were made to third parties. Interest expense is allocated only to the Leasing and Rental business segment. The following table sets forth the revenue and contribution margin for each of the Company's business segments for the three and six months ended June 30, 2000 and 1999:
Three Months Six Months --------------------- ----------------------- In millions 2000 1999 2000 1999 ----------- --------- ----------- ----------- Revenue: Leasing and rental: Full service lease and program maintenance $ 476.9 449.3 $ 949.5 891.3 Commercial rental 135.4 134.9 256.6 255.8 Fuel 182.8 139.5 373.8 266.0 Other 97.6 90.0 198.2 179.0 ----------- --------- ----------- ----------- Total leasing and rental 892.7 813.7 1,778.1 1,592.1 ----------- --------- ----------- ----------- Logistics solutions 402.9 355.8 790.4 686.4 Dedicated contract carriage 134.0 127.3 267.6 250.9 Eliminations (97.4) (82.0) (195.3) (160.5) ----------- --------- ----------- ----------- Total revenue $ 1,332.2 1,214.8 $ 2,640.8 2,368.9 =========== ========= =========== ===========
7 ITEM 1. Financial Statements (continued) NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued) (C) SEGMENT INFORMATION (continued)
In millions Three Months Six Months ------------------- ---------------------- Contribution margin: 2000 1999 2000 1999 --------- -------- ---------- --------- Leasing and rental $ 97.7 90.2 $ 178.5 176.1 Logistics solutions 19.4 13.7 35.3 20.8 Dedicated contract carriage 14.2 14.1 28.2 27.1 Eliminations (12.0) (10.3) (23.7) (19.8) --------- -------- ---------- --------- 119.3 107.7 218.3 204.2 Central support services (72.3) (66.6) (139.8) (130.6) --------- -------- ---------- --------- Earnings from continuing operations before unusual items and income taxes 47.0 41.1 78.5 73.6 Restructuring and other charges - (0.8) - (1.7) Year 2000 expense - (7.1) - (21.0) --------- -------- ---------- --------- Earnings before income taxes $ 47.0 33.2 $ 78.5 50.9 ========= ======== ========== =========
Management does not evaluate and the Company does not report total assets by operating segment. Such records are maintained on a legal entity basis, which differs from the Company's operating segments. As such, these amounts are not presented on an operating segment basis. (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 June 30, 2000 and 1999 was $20.9 million and $29.1 million, respectively. Total comprehensive income for the six months ended June 30, 2000 and 1999 was $38.5 million and $44.8 million, respectively. 8 ITEM 1. Financial Statements (continued) NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued) (E) RESTRUCTURING AND OTHER CHARGES During the fourth quarter of 1999, the Company implemented several restructuring initiatives designed to improve profitability and align the organizational structure with the strategic direction of the Company. The Company also identified certain assets that would be sold or for which development would be abandoned as a result of the restructuring. During 1999, the Company also restructured its leasing and rental operations in the United Kingdom in conjunction with the December 1998 decision to retain the business. As a result of these initiatives, the Company recorded pretax restructuring and other charges in 1999 of $52 million. Activity related to restructuring reserves for the six months ended June 30, 2000 was as follows:
Dec. 31, June 30, 1999 2000 In thousands Balance Additions Deductions Balance ---------------------------------------- ----------- ----------- ------------ ----------- Employee severance and benefits $ 13,017 6,718 6,299 - Facilities and related costs 7,182 - 4,012 3,170 ---------------------------------------- ----------- ----------- ------------ ----------- $ 20,199 - 10,730 9,469 ---------------------------------------- ----------- ----------- ------------ -----------
Deductions consist of payments and reversals of restructuring reserves related to the 1996 restructuring that were in excess of amounts required. Such reversals consisted of employee severance and benefits and facilities and related costs of $522,000 and $436,000, respectively. In the Consolidated Condensed Statement of Earnings for the six months ended June 30, 2000, such reversals of prior accruals were offset by expenses for other charges of $942,000 for consulting fees incurred during the period related to completion of the Company's profitability improvement study. 9 KPMG LLP CERTIFIED PUBLIC ACCOUNTANTS One Biscayne Tower Telephone 305-358-2300 2 South Biscayne Boulevard Fax 305-913-2692 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 June 30, 2000, and the related consolidated condensed statements of earnings for the three and six months ended June 30, 2000 and 1999 and the consolidated condensed statements of cash flows for the six months ended June 30, 2000 and 1999. 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 auditing standards generally accepted in the United States of America, 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 in order for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Ryder System, Inc. and subsidiaries as of December 31, 1999, and the related consolidated statements of earnings, shareholders' equity and cash flows for the year then ended (not presented herein); and in our report dated February 2, 2000, 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, 1999, 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 July 20, 2000 10 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition -- Six months ended June 30, 2000 and 1999 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. Unless otherwise noted, discussion and analysis for the six months ended June 30, 2000 is consistent with that for the three month period ended June 30, 2000. On September 13, 1999, the Company completed the sale of its Public Transportation Services ("RPTS") business to FirstGroup plc for $940 million in cash and realized a $339 million after-tax gain. The Company used the proceeds from the sale for working capital needs, repurchase of common stock, and for debt reduction. The following discussion excludes the results of the Public Transportation Services business, which has been classified as discontinued operations. The Company operates in three business segments: (1) Leasing and Rental, which provides full service leasing, commercial rental and programmed maintenance of trucks, tractors and trailers to customers, principally in the U.S., Canada and the United Kingdom; (2) Logistics Solutions, which provides comprehensive supply chain consulting and lead logistics management solutions that support a client's entire supply chains, from inbound raw materials through distribution of finished goods throughout North America, in Latin America, Europe and Asia and (3) Dedicated Contract Carriage (DCC), which provides vehicles and drivers as part of a dedicated transportation solution, principally in North America. Revenue from continuing operations increased 10% to $1.33 billion for the three months ended June 30, 2000, as compared to $1.21 billion in the comparable period last year. All operating segments experienced revenue growth over the same period in 1999. The increase in revenue was primarily due to revenue growth in the Leasing and Rental and Logistics Solutions operating segments and higher fuel revenue. The increase in fuel revenue was driven by higher fuel costs, which increased by a dollar amount comparable to fuel revenue. Revenue from continuing operations increased 11% to $2.64 billion for the six months ended June 30, 2000, as compared to $2.37 billion in the comparable period last year. 11 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition (continued)-- Six months ended June 30, 2000 and 1999 OVERVIEW (continued) Operating expense increased $119.7 million, or 13.7%, to $996.2 million in the second quarter of 2000 compared to the same period in 1999. Operating expense increased $280.1 million, or 16.4%, to $1.99 billion in the first half of 2000 compared to the same period in 1999. The growth in operating expense was primarily attributable to growth in equipment rental expense, discussed in conjunction with depreciation expense below, that is a result of sale-leaseback transactions completed in the fourth quarter of 1999 and the first quarter of 2000; an increase in the cost of fuel due to higher market prices; and an increase in salaries and payroll due primarily to headcount growth related to growth in the Company's Logistics Solutions business. Such increases in salaries and payroll were partially offset by reduced employee benefit costs associated with income recognized from the Company's pension plan. Such trends--growth in salaries and payroll, partially offset by pension plan income--are expected to continue for the remainder of 2000. Pension income is generally recognized ratably through the year. The Company anticipates that pension income recognized for full year 2000 will be approximately $25 million to $35 million greater than that recognized for full year 1999. Pension income in 2000 and 1999 principally benefited the Leasing and Rental segment, as the obligation for pension benefits relates principally to vested employees in Leasing and Rental. Pension income is allocated to each operating segment as well as Central Support Services. Freight under management expense increased 3.5% to $111.4 million in the second quarter of 2000 compared to the same period in 1999. For the first half of 2000, freight under management expense increased 1.3% to $209.4 million compared to the same period in 1999. The increase in freight under management expense was less than the increase in revenue because revenue growth is generally associated with operations which do not outsource freight to third-party providers. Depreciation expense, net of gains, in the second quarter of 2000 decreased by $5.9 million, or 4.2%, compared to the second quarter of 1999. In the first half of 2000, net depreciation expense decreased by $3.8 million, or 1.3%, compared to the same period in 1999. Depreciation expense, excluding gains on vehicle sales, decreased by $16.1 million and $18.5 million in the second quarter and first half of 2000, respectively, as compared with 1999. The decreases resulted principally from sale-leaseback and other leasing transactions which increased the number of leased (as opposed to owned) vehicles in the Company's fleet as of June 30, 2000 as compared with June 30, 1999. Equipment rent expense increased by $40.5 million and $69.3 million in the second quarter and first half of 2000, respectively, as compared with 1999. Gains on vehicle sales decreased from $14.3 million in the second quarter of 1999 to $4.1 million in the second quarter of 2000 and from $28.0 million in the first half of 1999 to $13.3 million in the first half of 2000. During the second quarter of 2000, average sales proceeds per unit decreased for certain classes of tractors and were stable for other types of trucks compared with average proceeds per unit during the second 12 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition (continued)-- Six months ended June 30, 2000 and 1999 OVERVIEW (continued) quarter of 1999. However, the average book value per unit of units sold in 2000 was generally greater than that of units sold in 1999. Interest expense decreased $9.7 million or 20.1% to $38.7 million during the second quarter of 2000 and decreased $13.4 million or 14.3% to $80.6 million during the first half of 2000 compared with the same periods in 1999. The decrease in interest expense principally reflects the paydown of debt from the proceeds from the aforementioned sale-leaseback transactions, the sale of receivables, and the sale of RPTS, partially offset by increased borrowings to support capital expenditures. The Company's effective income tax rate on earnings from continuing operations for the second quarter and first half of 2000 was 37.0% compared to 38.1% and 38.2% for the same periods in 1999, respectively. Earnings from continuing operations were $29.6 million for the three months ended June 30, 2000, as compared to $20.6 million (which includes the net of tax impact of $4.9 million for unusual items) for the same period in 1999. Earnings from continuing operations were $49.5 million for the first half of 2000, as compared to $31.5 million (which includes the net of tax impact of $14.0 million for unusual items) for the same period in 1999. Earnings from discontinued operations of $9.6 million and $20.8 million in the second quarter and first half of 1999, respectively, represent the results of operations of the Public Transportation business that was divested in September, 1999. Net income for the second quarter of 2000 totaled $29.6 million, or $0.50 per diluted share, compared with $30.1 million, including discontinued operations, or $0.43 per diluted share during the second quarter of 1999. In the first half of 2000, net income totaled $49.5 million, or $0.83 per diluted share, compared with $52.3 million, including discontinued operations, or $0.74 per diluted share. 13 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition (continued)-- Six months ended June 30, 2000 and 1999 OPERATING RESULTS BY BUSINESS SEGMENT
Three Months Six Months ---------------------- ---------------------- In millions 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Revenue: Leasing and rental: Full service lease and program maintenance $ 476.9 449.3 $ 949.5 891.3 Commercial rental 135.4 134.9 256.6 255.8 Fuel 182.8 139.5 373.8 266.0 Other 97.6 90.0 198.2 179.0 ---------- ---------- ---------- ---------- Total leasing and rental 892.7 813.7 1,778.1 1,592.1 ---------- ---------- ---------- ---------- Logistics solutions 402.9 355.8 790.4 686.4 Dedicated contract carriage 134.0 127.3 267.6 250.9 Eliminations (97.4) (82.0) (195.3) (160.5) ---------- ---------- ---------- ---------- Total revenue $1,332.2 1,214.8 $2,640.8 2,368.9 ========== ========== ========== ========== Contribution margin: Leasing and rental $ 97.7 90.2 $ 178.5 176.1 Logistics solutions 19.4 13.7 35.3 20.8 Dedicated contract carriage 14.2 14.1 28.2 27.1 Eliminations (12.0) (10.3) (23.7) (19.8) ---------- ---------- ---------- ---------- 119.3 107.7 218.3 204.2 Central support services (72.3) (66.6) (139.8) (130.6) ---------- ---------- ---------- ---------- Earnings from continuing operations before unusual items and income taxes 47.0 41.1 78.5 73.6 Restructuring and other charges - (0.8) - (1.7) Year 2000 expense - (7.1) - (21.0) ---------- ---------- ---------- ---------- Earnings from continuing operations before income taxes $ 47.0 33.2 $ 78.5 50.9 ========== ========== ========== ==========
14 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition (continued)-- Six months ended June 30, 2000 and 1999 OPERATING RESULTS BY BUSINESS SEGMENT (continued)
Three Months Six Months --------------------------- ---------------------------- In millions 2000 1999 2000 1999 ------------ ------------ ------------- ------------ Leasing and Rental Total revenue $ 892.7 813.7 $ 1,778.1 1,592.1 Fuel revenue (182.8) (139.5) (373.8) (266.0) ------------ ------------ ------------- ------------ Dry revenue $ 709.9 674.2 $ 1,404.3 1,326.1 ============ ============ ============= ============ Contribution margin $ 97.7 90.2 $ 178.5 176.1 ============ ============ ============= ============ Contribution margin as % of total revenue 10.9% 11.1% 10.0% 11.1% ============ ============ ============= ============ Contribution margin as % of dry revenue 13.8% 13.4% 12.7% 13.3% ============ ============ ============= ============ Logistics Solutions Total revenue $ 402.9 355.8 $ 790.4 686.4 Freight Under Management (FUM) expense (110.0) (106.5) (207.2) (204.5) ------------ ------------ ------------- ------------ Operating revenue $ 292.9 249.3 $ 583.2 481.9 ============ ============ ============= ============ Contribution margin $ 19.4 13.7 $ 35.3 20.8 ============ ============ ============= ============ Contribution margin as % of total revenue 4.8% 3.9% 4.5% 3.0% ============ ============ ============= ============ Contribution margin as % of operating revenue 6.6% 5.5% 6.1% 4.3% ============ ============ ============= ============ Dedicated Contract Carriage Total revenue $ 134.0 127.3 $ 267.6 250.9 Freight Under Management (FUM) expense (1.3) (1.1) (2.2) (2.2) ------------ ------------ ------------- ------------ Operating revenue $ 132.7 126.2 $ 265.4 248.7 ============ ============ ============= ============ Contribution margin $ 14.2 14.1 $ 28.2 27.1 ============ ============ ============= ============ Contribution margin as % of total revenue 10.6% 11.1% 10.5% 10.8% ============ ============ ============= ============ Contribution margin as % of operating revenue 10.7% 11.2% 10.6% 10.9% ============ ============ ============= ============
15 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition (continued)-- Six months ended June 30, 2000 and 1999 Management evaluates segment financial performance based upon several factors, of which the primary measure is Contribution Margin. Contribution Margin represents each business segment's revenue, less direct costs and direct overheads related to the segment's operations. Business segment contribution margin for all segments (net of eliminations), less Central Support Services expenses, is equal to consolidated pre-tax earnings. Expenses recorded in Central Support Services consist primarily of corporate overhead and other expenses not directly attributable to a single business segment, such as expenses related to shared management information systems, finance and sales and marketing. Central Support Services also includes expenses of certain new business initiatives, Ryder Capital Services and e-commerce, which may be reported as business segments in the future once such operations begin. The Leasing and Rental segment leases revenue earning equipment, sells fuel and provides maintenance and other ancillary services to the Logistics Solutions and Dedicated Contract Carriage (DCC) segments. Intersegment revenues are accounted for at approximate fair value as if the transactions were with third parties. Leasing and Rental In the Leasing and Rental business segment, dry revenue (revenue excluding fuel) in the second quarter of 2000 totaled $709.9 million, an increase of 5.3%, and in the first half of 2000 totaled $1.40 billion, an increase of 5.9%, from the same periods in 1999, respectively. Full service lease revenue increased 6.1% in the second quarter of 2000 and 6.5% in the first half of 2000 as a result of a significant number of vehicles being placed in service, while rental revenue was essentially flat compared with the second quarter and first half of 1999. Rental growth slowed due to the arrival of new full service lease vehicles, which replaced rental vehicles that had been used by customers awaiting new full service lease deliveries. Fuel revenue increased 31.0% in the second quarter of 2000 and 40.5% in the first half of 2000 over the same periods in 1999 due to increased prices charged to customers. However, the impact of such selling price increase was offset by the increase in cost paid by the Company for fuel. 16 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition (continued)-- Six months ended June 30, 2000 and 1999 The contribution margin as a percentage of dry revenue was 13.8% in the second quarter of 2000 compared with 13.4% in 1999. Improved contribution margins for the second quarter of 2000 compared to the same period in 1999 are due to improvements in full service lease margins in the United States, improved margins for leasing and rental for the United Kingdom as a whole, and pension income attributable to Leasing and Rental employees, net of reduced gains on vehicle sales and increased fixed costs on non-revenue earning equipment. The contribution margin as a percentage of dry revenue was 12.7% in the first half of 2000 compared with 13.3% in 1999. Contribution margins for the six months ended June 30, 2000 have decreased compared to the same period in 1999 due to higher fixed costs on non-revenue earning equipment and lower gains on the sale of equipment, net of pension income recognized. At June 30, 2000 there were approximately 11,000 non-revenue earning units as compared to 11,500 non-revenue earning units at June 30, 1999. However, the composition of non-revenue earning units has changed significantly. At June 30, 1999, non-revenue earning units consisted of approximately 6,500 (generally new) units not yet delivered to lease customers and approximately 5,000 (generally used) units that were no longer earning revenue and were available for sale or re-lease. At June 30, 2000, such units consisted of approximately 3,200 units awaiting delivery to lease customers and approximately 7,800 units no longer earning revenue that were available for sale or re-lease. Logistics Solutions In the Logistics Solutions business segment, second quarter 2000 gross revenue totaled $402.9 million, an increase of 13.2% from the comparable period in 1999. Second quarter 2000 operating revenue was $292.9 million, an increase of 17.5% from the comparable period a year ago. In the first half of 2000, gross revenue totaled $790.4 million, an increase of 15.2% from the first half of 1999, and operating revenue was $583.2 million, an increase of 21.0% over 1999. Revenue growth was principally due to increased business with existing accounts, in particular, automotive industry clients, and revenue from clients in the electronics and high technology industries that have been added in the last 12 months. The Logistics Solutions business segment contribution margin increased 41.6% in the second quarter of 2000 compared with the second quarter of 1999. The contribution margin as a percentage of operating revenue was 6.6% in the second quarter of 2000, compared with 5.5% in the same quarter of 1999. In the first half of 2000, contribution margin increased 69.7% over the same period in 1999. The contribution margin as a percentage of operating revenue was 6.1% in the first half of 2000, compared with 4.3% in the first half of 1999. Improvements in contribution margin were due to improved performance on start-up accounts, as well as increased efficiency and expansion with existing clients. Second quarter 2000 revenue and contribution margin were positively impacted by resolution of contract issues with a significant account (noted in the prior quarterly report) for which certain revenue was contingent based upon production volume. Such resolution 17 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition (continued)-- Six months ended June 30, 2000 and 1999 included an agreement to pay the Company $2.9 million retroactive to the beginning of 2000, which had not previously been recorded as revenue due to the uncertainty related to the contract issues. Dedicated Contract Carriage In the Dedicated Contract Carriage business segment, second quarter gross revenue totaled $134.0 million, an increase of 5.3% from the second quarter of 1999. Second quarter operating revenue was $132.7 million, an increase of 5.2% from the comparable period a year ago. Contribution margin increased .7% in the second quarter of 2000 compared with the second quarter of 1999. The contribution margin as a percentage of operating revenue was 10.7%, compared with 11.2% in the second quarter of 1999. In the first half of 2000, gross revenue totaled $267.6 million, an increase of 6.7% from the first half of 1999. First half operating revenue was $265.4 million, an increase of 6.7% from the comparable period a year ago. Contribution margin increased 4.1% in the first half of 2000 compared with the first half of 1999. The contribution margin as a percentage of operating revenue was 10.6%, compared with 10.9% in the first half of 1999. The improvements in revenue were largely influenced by the successful efforts to minimize lost business in the segment. Decreases in contribution margin as a percent of operating revenue are due to increased fuel and driver costs, partially offset by favorable comparisons year-over-year, particularly in the first quarter, for the termination of certain unprofitable contracts. Central Support Services Central Support Services are those costs incurred to support all operating segments, including sales and marketing, human resources, finance, shared management information systems, customer solutions, health and safety, legal, and communications. In the second quarter of 2000, Central Support Services expenses were $72.3 million, compared with $66.6 million in the second quarter of 1999. In the first half of 2000, Central Support Services expenses were $139.8 million, compared with $130.6 million in the first half of 1999. The increase was due primarily to additional spending on management information systems, training costs and incremental spending for customer solutions, Ryder Capital Services, and e-commerce. Such increases were partially offset by a reduction in interest expense attributed to Central Support Services. 18 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition (continued)-- Six months ended June 30, 2000 and 1999 LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS The following is a summary of the Company's cash flows from continuing operating, financing and investing activities for the six months ended June 30, (in thousands): 2000 1999 ---- ---- Net cash provided by (used in): Operating activities $ 575,715 375,710 Financing activities (179,308) 339,915 Investing activities (443,244) (820,153) ---------- --------- Net cash flows from continuing operations $ (46,837) (104,528) ========== ========= A summary of the individual items contributing to the cash flow changes is included in the Consolidated Condensed Statements of Cash Flows. The improvement in cash flow from operating activities in the first half of 2000, compared with the same period last year, was primarily attributable to increases in the aggregate balance of trade receivables sold. The decrease in cash provided by financing activities in the first half of 2000, compared to the same period last year, was due primarily to repayment of debt using a portion of the cash received from the sale of trade receivables and sale-leaseback transactions. The decrease in cash used for investing activities in the first half of 2000 compared with the same period last year was attributable to increased proceeds from the sale and leaseback of revenue earning equipment. A summary of capital expenditures for continuing operations for the six months ended June 30 follows (in thousands): 2000 1999 ---- ---- Revenue earning equipment $795,068 1,036,137 Operating property and equipment 46,648 57,439 ---------- ----------- $841,716 1,093,576 ========== =========== 19 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition (continued)-- Six months ended June 30, 2000 and 1999 The decrease in capital expenditures for revenue earning equipment was due principally to improved controls over capital expenditures and a reduction in the volume of early terminations of full service leases compared to the second quarter and first half of 1999. Such decrease was partially offset by purchases of revenue earning equipment during the six months ended June 30, 2000 that had been postponed from the fourth quarter of 1999. Management expects capital expenditures for 2000 will be less than 1999 levels. The Company expects to fund its 2000 capital expenditures with both internally generated funds and additional financing. 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 were accounted for as operating leases. The Company's debt ratings as of June 30, 2000 were as follows: Commercial Unsecured Paper Notes ---------- --------- Moody's Investors Service P2 Baa1 Standard & Poor's Ratings Group A2 BBB Fitch D2 A- Debt totaled $2.31 billion at June 30, 2000, or a decrease of 3.6% from December 31, 1999. During the first half of 2000, the Company made $17.1 million of scheduled unsecured note payments, $11.0 million of payments in accordance with sinking fund requirements, and retired $215.0 million of medium-term notes. U.S. commercial paper outstanding at June 30, 2000 increased to $402.7 million, compared with $320.0 million at December 31, 1999, primarily to fund capital expenditures. The Company participates in an agreement to sell, with limited recourse, up to $375.0 million of trade receivables on a revolving basis through July 2002. At June 30, 2000 and December 31, 1999, the outstanding balance of receivables sold pursuant to this agreement was $350.0 and $75.0 million, respectively. The Company's foreign debt decreased approximately $15.2 million from December 31, 1999 to $384.8 million at June 30, 2000. The Company's percentage of variable-rate financing obligations was 25.1% at June 30, 2000 compared to 19.2% at December 31, 1999. The Company's debt-to-equity ratio at June 30, 2000 decreased to 188% from 199% at December 31, 1999. 20 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition (continued)-- Six months ended June 30, 2000 and 1999 As of June 30, 2000, $358.3 million was available under the Company's $720.0 million global revolving credit facility, which expires in 2002. Foreign borrowings of $62.2 million were outstanding under the facility as of June 30, 2000. In September 1998, the Company filed an $800.0 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 has $487.0 million of debt securities available for issuance under this shelf registration statement. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") 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, as amended by SFAS 138, is effective for fiscal years beginning after June 15, 2000, 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. In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation--an interpretation of APB Opinion No. 25" (FIN 44). This Interpretation provides guidance for issues that have arisen in applying APB Opinion No. 25, "Accounting for Stock Issued to Employees." FIN 44 applies prospectively to new stock awards, exchanges of stock awards in a business combination, modifications to outstanding stock awards, and changes in grantee status that occur on or after July 1, 2000, except for the provisions related to repricings of stock awards and the definition of an employee which apply to stock awards issued after December 15, 1998. The provisions related to modifications to fixed stock option awards to add a reload feature are effective for awards modified after January 12, 2000. Based upon the Company's existing stock-based compensation plans, the impact of FIN 44 is not anticipated to be material. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition" (SAB 101). SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. SAB 101, as amended by Staff Accounting Bulletin No. 101B issued in June 2000, will be adopted by the Company in the fourth quarter of 2000 as required and is not anticipated to have a material impact on the results of the Company operations. 21 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition (continued)-- Six months ended June 30, 2000 and 1999 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 logistics solutions from other logistics companies as well as from air cargo, shipping, railroads and motor carriers and competition in full service truck leasing and commercial rental from companies providing similar services as well as from 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 clients' business environments (or the loss of a significant client), or changes in government regulations. 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 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 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, 1999. The Company's disclosures about market risk are contained in the Annual Report on Form 10-K for the year ended December 31, 1999. 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. (27.1) 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: August 4, 2000 /S/ CORLISS J. NELSON --------------------- Corliss J. Nelson Senior Executive Vice President-Finance and Chief Financial Officer (Principal Financial Officer) Date: August 4, 2000 /S/ RICHARD G. RODICK --------------------- Richard G. Rodick Vice President and Controller (Principal Accounting Officer) 25 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION ----------- ----------- (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. (27.1) Financial data schedule (for SEC use only). 26