UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q
Commission File Number: 1-4364
RYDER SYSTEM, INC.
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 þ NO o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o YES þ NO
The number of shares of Ryder System, Inc. Common Stock ($0.50 par value per share) outstanding at March 31, 2008 was 57,497,673.
RYDER SYSTEM, INC.FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RYDER SYSTEM, INC. AND SUBSIDIARIESCONSOLIDATED CONDENSED STATEMENTS OF EARNINGS(unaudited)
See accompanying notes to consolidated condensed financial statements.
1
RYDER SYSTEM, INC. AND SUBSIDIARIESCONSOLIDATED CONDENSED BALANCE SHEETS
2
RYDER SYSTEM, INC. AND SUBSIDIARIESCONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS(unaudited)
3
RYDER SYSTEM, INC. AND SUBSIDIARIESCONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS’ EQUITY(unaudited)
4
RYDER SYSTEM, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(unaudited)
(A) INTERIM FINANCIAL STATEMENTS
The accompanying unaudited Consolidated Condensed Financial Statements include the accounts of Ryder System, Inc. (Ryder) and all entities in which Ryder System, Inc. has a controlling voting interest (“subsidiaries”), and variable interest entities (VIEs) required to be consolidated in accordance with U.S. generally accepted accounting principles (GAAP). The accompanying unaudited Consolidated Condensed Financial Statements have been prepared in accordance with the accounting policies described in the 2007 Annual Report on Form 10-K except for the accounting change described below relating to fair value measurements, and should be read in conjunction with the Consolidated Financial Statements and notes thereto. These financial statements do not include all of the information and footnotes required by GAAP in the United States of America 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. The operating results for interim periods are unaudited and are not necessarily indicative of the results that can be expected for a full year. Certain prior year amounts have been reclassified to conform to the current period presentation.
(B) ACCOUNTING CHANGES
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements.” This statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are to be applied prospectively, except for certain financial instruments, which should be recognized as a cumulative effect adjustment to the opening balance of retained earnings for the fiscal year in which this statement is initially applied. The provisions of SFAS No. 157, as amended by FASB Staff Position FAS 157-1, exclude provisions of SFAS No. 13, “Accounting for Leases,” and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under SFAS No. 13. We adopted SFAS No. 157 on January 1, 2008 for all financial assets and liabilities and for all nonfinancial assets and liabilities recognized or disclosed at fair value in our Consolidated Condensed Financial Statements on a recurring basis (at least annually). The adoption of SFAS No. 157 on January 1, 2008 did not have a material impact on our Consolidated Condensed Financial Statements. For all other nonfinancial assets and liabilities, SFAS No. 157 is effective for us on January 1, 2009. We are in the process of evaluating the impact of SFAS No. 157 on the valuation of all other nonfinancial assets and liabilities, including our vehicles held for sale, and we do not expect there to be a material impact upon adoption on January 1, 2009 on our Consolidated Condensed Financial Statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This statement permits companies to choose to measure many financial instruments and certain other items at fair value in order to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Effective January 1, 2008, we adopted SFAS No. 159; however, we have not elected to measure any financial instruments and other items at fair value under the provisions of this standard. Consequently, SFAS No. 159 had no impact on our Consolidated Condensed Financial Statements.
(C) ACQUISITIONS
Lily Acquisition — On January 11, 2008, we completed an asset purchase agreement with Lily Transportation Corporation (“Lily”), under which we acquired Lily’s fleet of approximately 1,600 vehicles and over 200 contractual customers for a purchase price of $96 million, of which $93 million has been paid as of March 31, 2008. The combined network will operate under the Ryder name, complementing Ryder’s market coverage and service network in the Northeast United States. The asset purchase was accounted for as a business combination. The initial recording of the transaction was based on preliminary valuation assessments and is subject to change. Goodwill and intangible assets related to the Lily acquisition were $29 million and $8 million, respectively.
Pollock Acquisition — On October 5, 2007, we completed an asset purchase agreement with Pollock NationaLease (“Pollock”), under which we acquired Pollock’s fleet of approximately 2,000 vehicles and nearly 200 contractual customers served by 6 locations for a purchase price of $78 million, of which $75 million had been paid as of March 31, 2008. The combined network operates under the Ryder name, complementing our market coverage and service network in Canada. The asset purchase was accounted for as a business combination. The initial recording of the transaction was based on preliminary valuation assessments and is subject to change. During the three months ended March 31, 2008, purchase price adjustments related to the Pollock acquisition were not significant. Pro forma information for the Lily and Pollock acquisitions is not disclosed because the effects of the acquisitions are not significant.
5
RYDER SYSTEM, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)(unaudited)
On April 11, 2008, we entered into an asset purchase agreement with Gator Leasing, Inc. (“Gator”), under which we agreed to acquire Gator’s fleet of approximately 2,300 vehicles and nearly 300 contractual customers. The acquisition is expected to be finalized in May 2008 and is subject to customary closing conditions. If consummated, the combined network will operate under the Ryder name, complementing Ryder’s Fleet Management Solutions market coverage and service network in Florida. The asset purchase will be accounted for as a business combination.
(D) SHARE-BASED COMPENSATION PLANS
Share-based incentive awards are provided to employees under the terms of various share-based compensation plans (collectively, the “Plans”). The Plans are administered by the Compensation Committee of the Board of Directors. Awards under the Plans principally include at-the-money stock options, nonvested stock (time-vested restricted stock rights, market-based restricted stock rights and restricted stock units) and cash awards. Share-based compensation expense is generally recorded in “Salaries and employee-related costs” in the Consolidated Condensed Statements of Earnings.
The following table provides information on share-based compensation expense and income tax benefits recognized during the periods:
Total unrecognized pre-tax compensation expense related to share-based compensation arrangements at March 31, 2008 was $37 million and is expected to be recognized over a weighted-average period of approximately 2.4 years.
During the three months ended March 31, 2008 and 2007, 0.6 million and 0.9 million stock options, respectively, were granted under the Plans. These awards, which vest one-third each year, are fully vested three years from the grant date and have a contractual term of seven years. The fair value of each option award was estimated using a Black-Scholes-Merton option-pricing valuation model. The weighted-average grant-date fair value of options granted during the three months ended March 31, 2008 and 2007 was $13.82 and $12.81 respectively.
During the three months ended March 31, 2008 and 2007, 0.2 million and 0.1 million awards, respectively, of restricted stock rights and restricted stock units (RSUs) were granted under the Plans. The time-vested restricted stock rights entitle the holder to shares of common stock as the awards vest over a three-year period. The majority of the restricted stock rights granted during the period included a market-based vesting provision. Under such provision, the employees only receive the grant of stock if Ryder’s total shareholder return (TSR) as a percentage of the S&P 500 comparable period TSR is 100% or greater over a three-year period. The fair value of the market-based restricted stock rights was estimated using a lattice-based option-pricing valuation model that incorporates a Monte-Carlo simulation. The weighted-average grant-date fair value of restricted stock rights and RSUs granted during the three months ended March 31, 2008 and 2007 was $53.04 and $30.32, respectively.
During the three months ended March 31, 2008 and 2007, we also granted employees cash awards. The awards granted in 2008 will vest on the same date as the market-based restricted stock rights if Ryder’s TSR is equal to or better than the S&P 500’s 33rd percentile over a three-year period. The cash awards in 2007 were granted in tandem and with the same vesting provisions as the market-based restricted stock rights. The fair value of the cash awards was estimated using a lattice-based option-pricing valuation model that incorporates a Monte-Carlo simulation. During the three months ended March 31, 2008, we recognized $1 million of compensation expense related to these cash awards in addition to the share-based compensation expense reported in the previous table. During the three months ended March 31, 2007, the amount of compensation expense recognized related to these cash awards was not significant.
6
(E) EARNINGS PER SHARE
A reconciliation of the number of shares used in computing basic and diluted earnings per common share follows:
(F) RESTRUCTURING AND OTHER (RECOVERIES) CHARGES
Restructuring and other recoveries, net totaled $0.1 million in the three months ended March 31, 2008 and related primarily to employee severance and benefits recorded in prior restructuring charges that were reversed due to subsequent refinement in estimates. Restructuring and other charges, net totaled $0.5 million in the three months ended March 31, 2007 and related primarily to information technology transition costs and employee severance and benefit costs incurred in connection with global cost savings initiatives announced during the fourth quarter of 2006.
Activity related to restructuring reserves was as follows:
At March 31, 2008, the majority of outstanding restructuring obligations are required to be paid over the next nine months.
(G) REVENUE EARNING EQUIPMENT
At March 31, 2008 and December 31, 2007, the net carrying value of revenue earning equipment held for sale was $68 million and $81 million, respectively. Revenue earning equipment held for sale is stated at the lower of carrying amount or fair value less costs to sell. During the three months ended March 31, 2008 and 2007, we reduced the carrying value of vehicles held for sale by $7 million and $9 million, respectively to reflect changes in fair value. Reductions in the carrying values of vehicles held for sale are recorded within “Depreciation expense” in the Consolidated Condensed Statements of Earnings.
7
(H) ACCRUED EXPENSES AND OTHER LIABILITIES
We retain a portion of the accident risk under vehicle liability and worker’s compensation insurance programs. Self-insurance accruals are based primarily on actuarially estimated, undiscounted cost of claims, and include claims incurred but not reported. Such liabilities are based on estimates. Historical loss development factors are utilized to project the future development of incurred losses, and these amounts are adjusted based upon actual claim experience and settlements. While we believe the amounts are adequate, there can be no assurance that changes to our estimates may not occur due to limitations inherent in the estimation process. In recent years, our development has been favorable compared to historical selected loss development factors because of improved safety performance, payment patterns and settlement patterns. During each of the three months ended March 31, 2008 and 2007, we recorded a benefit of $5 million within “Operating expense” in our Consolidated Condensed Statements of Earnings to reduce estimated prior years’ self-insured loss reserves for the reasons noted above.
(I) INCOME TAXES
Uncertain Tax Positions
We are subject to tax audits in numerous jurisdictions in the U.S. and around the world. Tax audits by their very nature are often complex and can require several years to complete. In the normal course of business, we are subject to challenges from the Internal Revenue Service (IRS) and other tax authorities regarding amounts of taxes due. These challenges may alter the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions. As part of our calculation of the provision for income taxes on earnings, we determine whether the benefits of our tax positions are at least more likely than not of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, we accrue the largest amount of the benefit that is more likely than not of being sustained in our Consolidated Condensed Financial Statements. Such accruals require management to make estimates and judgments with respect to the ultimate outcome of a tax audit. Actual results could vary materially from these estimates.
The following is a summary of tax years that are no longer subject to examination:
Federal — audits of our U.S. federal income tax returns are closed through fiscal year 2003. The statute of limitations for the 2001 through 2003 tax returns expires on December 31, 2008. In 2007, the IRS commenced an examination of our U.S. income tax returns for 2004 through 2006.
State — for the majority of states, we are no longer subject to tax examinations by tax authorities for tax years before 2001.
8
Foreign — we are no longer subject to foreign tax examinations by tax authorities for tax years before 2000, 2001, 2002 and 2006 in Canada, Brazil, Mexico and the U.K., respectively, which are our major foreign tax jurisdictions. In Brazil, we were assessed $11 million, including penalties and interest, related to the tax due on the sale of our outbound auto carriage business in 2001. We believe it is more likely than not that our tax position will ultimately be sustained and no amounts have been reserved for this matter.
At March 31, 2008 and December 31, 2007, the total amount of gross unrecognized tax benefits (excluding the federal benefit received from state positions) was $76 million and $75 million, respectively. Unrecognized tax benefits related to federal, state and foreign tax positions may decrease by $8 million by December 31, 2008, if audits are completed or tax years close during 2008.
Like-Kind Exchange Program
We have a like-kind exchange program for certain of our U.S. revenue earning equipment. Pursuant to the program, we dispose of vehicles and acquire replacement vehicles in a form whereby tax gains on the disposal of eligible vehicles are deferred. To qualify for like-kind exchange treatment, we exchange, through a qualified intermediary, eligible vehicles being disposed of with vehicles being acquired allowing us to generally carryover the tax basis of the vehicles sold (“like-kind exchanges”). The program is expected to result in a material deferral of federal and state income taxes. As part of the program, the proceeds from the sale of eligible vehicles are restricted for the acquisition of replacement vehicles and other specified applications. Due to the structure utilized to facilitate the like-kind exchanges, the qualified intermediary that holds the proceeds from the sales of eligible vehicles and the entity that holds the vehicles to be acquired under the program are required to be consolidated in the accompanying Consolidated Condensed Financial Statements in accordance with U.S. GAAP. At March 31, 2008 and December 31, 2007, these consolidated entities had $37 million and $59 million, respectively, of cash proceeds from the sale of eligible vehicles and $111 million and $63 million, respectively, of vehicles to be acquired under the like-kind exchange program.
At March 31, 2008 and December 31, 2007, we had $60 million and $84 million, respectively, of restricted cash for all like-kind exchange programs included within “Prepaid expenses and other current assets” on the Consolidated Condensed Balance Sheets.
(J) DEBT
9
We can borrow up to $870 million through a global revolving credit facility with a syndicate of twelve lenders. The credit facility matures in May 2010 and is used primarily to finance working capital and provide support for the issuance of commercial paper in the U.S. and Canada. This facility can also be used to issue up to $75 million in letters of credit (there were no letters of credit outstanding against the facility at March 31, 2008). At our option, the interest rate on borrowings under the credit facility is based on LIBOR, prime, federal funds or local equivalent rates. The credit facility’s current annual facility fee is 11.0 basis points, which applies to the total facility of $870 million, and is based on Ryder’s current credit ratings. The credit facility contains no provisions restricting its availability in the event of a material adverse change to Ryder’s business operations; however, the credit facility does contain standard representations and warranties, events of default, cross-default provisions, and certain affirmative and negative covenants. In order to maintain availability of funding, we must maintain a ratio of debt to consolidated tangible net worth, as defined in the agreement, of less than or equal to 300%. The ratio at March 31, 2008 was 135%. At March 31, 2008, $533 million was available under the credit facility. Foreign borrowings of $31 million were outstanding under the facility at March 31, 2008.
In February 2008, we issued $250 million of unsecured medium-term notes maturing in March 2013. The proceeds from the notes were used for general corporate purposes. Concurrently, we entered into an interest rate swap with a notional amount of $250 million. The swap was designated as a fair value hedge whereby we receive fixed interest rate payments in exchange for making variable interest rate payments. The differential to be paid or received is accrued and recognized as interest expense. The swap agreement matures in March 2013. At March 31, 2008, the interest rate swap agreement effectively changed $250 million of fixed-rate debt with an interest rate of 6.00% to LIBOR-based floating-rate debt at a rate of 5.15%. Changes in the fair value of the interest rate swap are offset by changes in the fair value of the debt instrument. Accordingly, there is no ineffectiveness related to the interest rate swap. During the three months ended March 31, 2008, the increase in the fair value of the interest rate swap was $6 million.
On February 27, 2007, Ryder filed an automatic shelf registration statement on Form S-3 with the Securities and Exchange Commission. The registration is for an indeterminate number of securities and is effective for three years. Under this universal shelf registration statement, we have the capacity to offer and sell from time to time various types of securities, including common stock, preferred stock and debt securities.
Ryder Receivable Funding II, L.L.C. (RRF LLC), a bankruptcy remote, consolidated subsidiary of Ryder has a Trade Receivables Purchase and Sale Agreement (the Trade Receivables Agreement) with two financial institutions. Under this program, Ryder sells certain of its domestic trade accounts receivable to RRF LLC that in turn may sell, on a revolving basis, an ownership interest in certain of these accounts receivable to a receivables conduit and (or) committed purchasers. Under the terms of the program, RRF LLC and Ryder have provided representations, warranties, covenants and indemnities that are customary for accounts receivable facilities of this type. We use this program to provide additional liquidity to fund our operations, particularly when the cost of such sales is cost effective compared with other funding programs, notably the issuance of unsecured commercial paper. This program is accounted for as a collateralized financing arrangement. The available proceeds that may be received by RRF LLC under the program are limited to $300 million. RRF LLC’s costs under this program may vary based on changes in Ryder’s unsecured debt ratings and changes in interest rates. If no event occurs which causes early termination, the 364-day program will expire on September 9, 2008. At March 31, 2008 there were no amounts outstanding under the program. There was $100 million outstanding under the program at December 31, 2007.
(K) FAIR VALUE MEASUREMENTS
Effective January 1, 2008, we adopted SFAS No. 157 for all financial assets and liabilities and for nonfinancial assets and liabilities recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). SFAS No. 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS No. 157 also establishes a fair
10
value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Ryder carries various assets and liabilities at fair value in the Consolidated Condensed Balance Sheets. The most significant assets and liabilities are vehicles held for sale, which are carried at fair value less costs to sell, investments held in Rabbi Trusts, derivatives and certain liabilities. The initial adoption of SFAS No. 157 on January 1, 2008 was limited to our investments held in Rabbi Trusts, other liabilities and derivatives. On January 1, 2009, SFAS No. 157 will be adopted for our vehicles held for sale as well as other nonfinancial assets and liabilities recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The following table presents the fair value of our financial assets and liabilities for which we have adopted SFAS No. 157 as of March 31, 2008, segregated among the appropriate levels within the fair value hierarchy:
The following is a description of the valuation methodologies used for these items, as well as the general classification of such items pursuant to the fair value hierarchy of SFAS No. 157:
Derivative asset — the derivative is a pay-variable, receive-fixed interest rate swap based on a LIBOR rate. Fair value is based on a model-derived valuation using the LIBOR rate, which is observable at commonly quoted intervals for the full term of the swap. Therefore, our derivative is classified within Level 2 of the fair value hierarchy.
Investments held in Rabbi Trusts — the investments include exchange-traded equity securities and mutual funds. Fair values for these investments are based on quoted prices in active markets and are therefore classified within Level 1 of the fair value hierarchy.
Other liabilities — other liabilities represent deferred compensation and incentive-based compensation obligations to employees under certain plans. The liabilities related to these plans are adjusted based on changes in the fair value of the underlying employee-directed investments. Since the employee-directed investments are exchange traded equity securities and mutual funds with quoted prices in active markets, the liabilities are classified within Level 1 of the fair value hierarchy.
(L) GUARANTEES
We have executed various agreements with third parties that contain standard indemnifications that may require us to indemnify a third party against losses arising from a variety of matters such as lease obligations, financing agreements, environmental matters, and agreements to sell business assets. In each of these instances, payment by Ryder is contingent on the other party bringing about a claim under the procedures outlined in the specific agreement. Normally, these procedures allow Ryder to dispute the other party’s claim. Additionally, our obligations under these agreements may be limited in terms of the amount and (or) timing of any claim. We have entered into individual indemnification agreements with each of our independent directors, through which we will indemnify such director acting in good faith against any and all losses, expenses and liabilities arising out of such director’s service as a director of Ryder. The maximum amount of potential future payments under these agreements is generally unlimited.
11
We cannot predict the maximum potential amount of future payments under certain of these agreements, including the indemnification agreements, due to the contingent nature of the potential obligations and the distinctive provisions that are involved in each individual agreement. Historically, no such payments made by Ryder have had a material adverse effect on our business. We believe that if a loss were incurred in any of these matters, the loss would not result in a material adverse impact on our consolidated results of operations or financial position.
At March 31, 2008 and December 31, 2007, the maximum determinable exposure of each type of guarantee and the corresponding liability, if any, recorded on the Consolidated Condensed Balance Sheets were as follows:
At March 31, 2008 and December 31, 2007, we had letters of credit and surety bonds outstanding totaling $260 million and $263 million, respectively, which primarily guarantee the payment of insurance claims. Certain of these letters of credit and surety bonds guarantee insurance activities associated with insurance claim liabilities transferred in conjunction with the sale of our automotive transport business, reported as a discontinued operation since 1997. To date, the insurance claims, representing per-claim deductibles payable under third-party insurance policies, have been paid and continue to be paid by the company that assumed such liabilities. However, if all or a portion of the estimated outstanding assumed claims of approximately $6 million at March 31, 2008 are unable to be paid, the third-party insurers may have recourse against certain of the outstanding letters of credit provided by Ryder in order to satisfy the unpaid claim deductibles. In order to reduce our potential exposure to these claims, we have received an irrevocable letter of credit from the purchaser of the business referred to above totaling $8 million at March 31, 2008. Periodically, an actuarial valuation will be made in order to better estimate the amount of outstanding insurance claim liabilities.
(M) SHARE REPURCHASE PROGRAMS
In December 2007, our Board of Directors authorized a $300 million discretionary share repurchase program over a period not to exceed two years. Additionally, our Board of Directors also authorized a separate two-year anti-dilutive repurchase program. Under the anti-dilutive program, management is authorized to repurchase shares of common stock in an amount not to exceed the lesser of the number of shares issued to employees upon the exercise of stock options or through the employee stock purchase plan from the period beginning on September 1, 2007 to December 12, 2009, or 2 million shares. Share repurchases of common stock under both plans may be made periodically in open-market transactions and are subject to market conditions, legal requirements and other factors. Management has established prearranged written plans for the Company under Rule 10b5-1 of the Securities Exchange Act of 1934 as part of the December 2007 programs, which allow for share repurchases during Ryder’s quarterly blackout periods as set forth in the trading plan. For the three months ended March 31, 2008, we repurchased and retired 840,000 shares under the $300 million program at an aggregate cost of $50 million. For the three months ended March 31, 2008, we repurchased and retired 750,951 shares under the anti-dilutive repurchase program at an aggregate cost of $44 million.
In May 2006, our Board of Directors authorized a two-year share repurchase program intended to mitigate the dilutive impact of shares issued under our various employee stock option and stock purchase plans. The May 2006 program limited aggregate share repurchases to no more than 2 million shares of Ryder common stock. This program was completed during the first quarter of 2007. In 2007, we repurchased and retired 168,715 shares under the May 2006 program at an aggregate cost of $9 million.
12
(N) 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. Our total comprehensive income presently consists of net earnings, currency translation adjustments associated with foreign operations that use the local currency as their functional currency, adjustments for derivative instruments accounted for as cash flow hedges and various pension and other postretirement benefits related items.
The following table provides a reconciliation of net earnings as reported in the Consolidated Condensed Statements of Earnings to comprehensive income.
(O) EMPLOYEE BENEFIT PLANS
Components of net periodic benefit cost were as follows:
Pension Contributions
As previously disclosed in our 2007 Annual Report, we expect to contribute approximately $22 million to our pension plans during 2008. During the three months ended March 31, 2008, global contributions of $6 million had been made to our pension plans.
13
Pension Curtailment
On January 5, 2007, our Board of Directors approved an amendment to freeze U.S. pension plans effective December 31, 2007 for current participants who did not meet certain grandfathering criteria. As a result, these employees ceased accruing further benefits under the pension plans after December 31, 2007 and began participating in an enhanced 401(k) plan. Those participants that met the grandfathering criteria were given the option to either continue to earn benefits in the U.S. pension plans or transition into the enhanced 401(k) plan. All retirement benefits earned as of December 31, 2007 will be fully preserved and will be paid in accordance with the plan and legal requirements. Employees hired after January 1, 2007 are not eligible to participate in the U.S. pension plans. The freeze of the U.S. pension plans did not create a curtailment gain or loss.
Enhanced 401(k) Plan
Effective January 1, 2008, employees who did not meet the grandfathering criteria for continued participation in the U.S. pension plan are eligible to participate in a new enhanced 401(k) Savings Plan (Enhanced 401(k) Savings Plan). The Enhanced 401(k) Savings Plan provides for a (i) company contribution even if employees do not make contributions, (ii) a company match of employee contributions of eligible pay, subject to IRS limits and (iii) a discretionary company match based on our performance. Our original 401(k) Plan only provided for a discretionary Ryder match based on Ryder’s performance. We did not change the savings plans available to non-pensionable employees. During the three months ended March 31, 2008 and 2007, we recognized total savings plan costs of $10 million and $4 million, respectively.
(P) SEGMENT REPORTING
Our operating segments are aggregated into reportable business segments based upon similar economic characteristics, products, services, customers and delivery methods. We operate in three reportable business segments: (1) FMS, which provides full service leasing, contract maintenance, contract-related maintenance and commercial rental of trucks, tractors and trailers to customers, principally in the U.S., Canada and the U.K.; (2) SCS, which provides comprehensive supply chain consulting including distribution and transportation services throughout North America and in Latin America, Europe and Asia; and (3) DCC, which provides vehicles and drivers as part of a dedicated transportation solution in the U.S.
Our primary measurement of segment financial performance, defined as “Net Before Taxes” (NBT), includes an allocation of Central Support Services (CSS) and excludes restructuring and other (charges), net. CSS represents those costs incurred to support all business segments, including human resources, finance, corporate services, public affairs, information technology, health and safety, legal and corporate communications. The objective of the NBT measurement is to provide clarity on the profitability of each business segment and, ultimately, to hold leadership of each business segment and each operating segment within each business segment accountable for their allocated share of CSS costs. Certain costs are considered to be overhead not attributable to any segment and remain unallocated in CSS. Included among the unallocated overhead remaining within CSS are the costs for investor relations, corporate communications, public affairs and certain executive compensation. CSS costs attributable to the business segments are predominantly allocated to FMS, SCS and DCC as follows:
Our FMS segment leases revenue earning equipment and provides fuel, maintenance and other ancillary services to the SCS and DCC segments. Inter-segment revenue and NBT are accounted for at rates similar to those executed with third parties. NBT related to inter-segment equipment and services billed to customers (equipment contribution) are included in both FMS and the business segment which served the customer and then eliminated (presented as “Eliminations”).
14
The following tables set forth financial information for each of Ryder’s business segments and a reconciliation between segment NBT and earnings before income taxes for the three months ended March 31, 2008 and 2007. Segment results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented.
Our customer base includes enterprises operating in a variety of industries including automotive, electronics, high-tech, telecommunications, industrial, consumer goods, paper and paper products, office equipment, food and beverage, general retail industries, and governments. Our largest customer, General Motors Corporation, accounted for approximately 5% and 15% of consolidated revenue for the three months ended March 31, 2008 and 2007, respectively, and is comprised of multiple contracts within our SCS business segment in various geographic regions. Effective January 1, 2008, our contractual relationship for certain transportation management services changed, and we determined, after a formal review of the terms and conditions of the services, that we are acting as an agent based on the revised terms of the arrangement. As a result, total revenue decreased in 2008 due to the reporting of revenue net of subcontracted transportation expense related to this arrangement. This contract represented $175 million of total revenue for the three months ended March 31, 2007.
(Q) RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations.” This statement amends SFAS No. 141 and provides revised guidance for recognizing and measuring assets acquired and liabilities assumed in a business combination. This statement also requires that transaction costs in a business combination be expensed as incurred. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. SFAS No. 141R will impact our accounting for business combinations completed beginning January 1, 2009.
15
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS -THREE MONTHS ENDED MARCH 31, 2008 AND 2007
OVERVIEW
The following discussion should be read in conjunction with the unaudited Consolidated Condensed Financial Statements and notes thereto included under Item 1. In addition, reference should be made to our audited Consolidated Financial Statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2007 Annual Report on Form 10-K.
Ryder System, Inc. (Ryder) is a global leader in transportation and supply chain management solutions. Our business is divided into three business segments: Fleet Management Solutions (FMS), which provides full service leasing, contract maintenance, contract-related maintenance and commercial rental of trucks, tractors and trailers to customers principally in the U.S., Canada and the U.K.; Supply Chain Solutions (SCS), which provides comprehensive supply chain consulting including distribution and transportation services throughout North America and in Latin America, Europe and Asia; and Dedicated Contract Carriage (DCC), which provides vehicles and drivers as part of a dedicated transportation solution in the U.S. We operate in highly competitive markets. Our customers select us based on numerous factors including service quality, price, and technology and service offerings. As an alternative to using our services, customers may choose to provide these services for themselves, or may choose to obtain similar or alternative services from other third-party vendors. Our customer base includes enterprises operating in a variety of industries including automotive, electronics, high-tech, telecommunications, industrial, consumer goods, paper and paper products, office equipment, food and beverage, general retail industries and governments.
ITEMS AFFECTING COMPARABILITY BETWEEN PERIODS
Accounting Changes
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This statement permits companies to choose to measure many financial instruments and certain other items at fair value in order to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Effective January 1, 2008, we adopted SFAS No. 159; however, we have not elected to measure any financial instruments and other items at fair value under the provisions of this standard. Consequently, SFAS No. 159 had no impact on our Consolidated Condensed Financial Statements.
Revenue Reporting
In transportation management arrangements where we act as principal, revenue is reported on a gross basis for subcontracted transportation services billed to our customers. We realize minimal changes in profitability as a result of fluctuations in subcontracted transportation. Determining whether revenue should be reported as gross (within total revenue) or net (deducted from total revenue) is based on an assessment of whether we are acting as the principal or the agent in the transaction and involves judgment based on the terms and conditions of the arrangement. Effective January 1, 2008, our contractual relationship with a significant customer for certain transportation management services changed, and we determined, after a formal review of the terms and conditions of the services, that we are acting as an agent based on the revised terms of the arrangement. This contract modification required a change in revenue recognition from a gross basis to a net basis for subcontracted transportation beginning on January 1, 2008. This contract represented $175 million of total revenue for the three months ended March 31, 2007.
16
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS — (Continued)
Acquisitions
On January 11, 2008, we completed an asset purchase agreement with Lily Transportation Corporation (“Lily”), under which we acquired Lily’s fleet of approximately 1,600 vehicles and over 200 contractual customers. The combined network operates under the Ryder name, complementing Ryder’s market coverage and service network in the Northeast United States. On October 5, 2007, we also completed an asset purchase agreement with Pollock NationaLease (“Pollock”), under which we acquired Pollock’s fleet of approximately 2,000 vehicles and nearly 200 contractual customers. The combined network operates under the Ryder name, complementing our market coverage and service network in Canada. The results of these acquisitions have been included in our consolidated results since the dates of acquisitions.
CONSOLIDATED RESULTS
Earnings before income taxes in the first three months of 2008 increased $7 million to $92 million compared to the same period in the prior year. The growth in operating results in the first quarter was driven primarily by better operating performance in our FMS business segment. Earnings in the first quarter of 2008 also benefited from a slightly lower income tax rate compared to 2007. EPS growth in 2008 exceeded the net earnings growth reflecting the impact of share repurchase programs.
See “Operating Results by Business Segment” for a further discussion of operating results.
17
Total revenue decreased 3% to $1.54 billion in the first quarter of 2008 compared with the same period in 2007. The decrease in total revenue was primarily due to a change, effective January 1, 2008, in our contractual relationship with a significant customer where we now act as an agent rather than a principal in the purchase of subcontracted transportation services. This contract modification required a change in revenue recognition from a gross basis to a net basis for subcontracted transportation and did not impact operating revenue or earnings. In the first quarter of 2007, we recorded revenue of $175 million related to this contractual relationship. Operating revenue increased 5% in the first quarter of 2008, compared with the same period in 2007, due primarily to growth in our FMS and SCS business segments. Total revenue and operating revenue in the first quarter of 2008 included a favorable foreign exchange impact of 1.7% and 1.8%, respectively, due primarily to the strengthening of the Canadian dollar.
Operating expense and operating expense as a percentage of revenue increased in 2008 compared with the same period in 2007 primarily as a result of higher average fuel costs in 2008.
We retain a portion of the accident risk under vehicle liability and workers’ compensation insurance programs. Our self-insurance accruals are based on actuarially estimated, undiscounted cost of claims, which includes claims incurred but not reported. While we believe that our estimation processes are well designed, every estimation process is inherently subject to limitations. Fluctuations in the frequency or severity of accidents make it difficult to precisely predict the ultimate cost of claims. In recent years, our development has been favorable compared to historical selected loss development factors because of improved safety performance, payment patterns and settlement patterns; however, there is no assurance we will continue to enjoy similar favorable development in the future. During each of the three months ended March 31, 2008 and 2007, we recorded a benefit of $5 million from favorable development in estimated prior years self-insured loss reserves for the reasons noted above.
Salaries and employee-related costs increased in the first quarter of 2008 compared with the same period in 2007 primarily due to the impact of foreign exchange rate changes and higher medical costs partially offset by a decrease in commissions. Headcount as of March 31, 2008 was flat compared to the same period in 2007.
Pension expense decreased $6 million in the first quarter of 2008 compared to the same period in the prior year primarily as a result of the freeze of the U.S. pension plans. In connection with the freeze of the U.S. pension plans on January 1, 2008, we provided an enhanced 401(k) savings plan to employees. Refer to Note (O), “Employee Benefit Plans” in the Notes to Consolidated Condensed Financial Statements for additional information. Total savings plan costs increased $6 million in the first quarter of 2008 compared to 2007, primarily as a result of the enhanced 401(k) plan.
Subcontracted transportation expense represents freight management costs on logistics contracts for which we purchase transportation from third parties. Subcontracted transportation expense is directly impacted by whether we are acting as an agent or principal in our transportation management contracts. To the extent that we are acting as a principal, revenue is reported on a gross basis and carriage costs to third parties are recorded as subcontracted transportation expense. The impact to net earnings is the same whether we are acting as an agent or principal in the arrangement. Effective January 1, 2008, our contractual relationship with a significant customer changed, and we determined, after a formal review of the terms and conditions of the services, we are acting as an agent based on the revised terms of the arrangement. As a result, the amount of total revenue and subcontracted transportation
18
expense decreased by $175 million in the first three months of 2008 compared to the same period in the prior year due to the reporting of revenue net of subcontracted transportation expense for this particular customer contract.
Depreciation expense relates primarily to FMS revenue earning equipment. Depreciation expense increased in the first quarter of 2008 compared with the same period in 2007, reflecting foreign exchange rate changes and the impact of the lease replacement cycle. The increase was partially offset by lower adjustments in the carrying value of vehicles held for sale of $2 million during the first quarter of 2008 compared to the same period in the prior year.
Gains on vehicle sales, net decreased in the first three months of 2008 compared with the same period in 2007 due to a decline in the number of vehicles sold in the first three months of 2008 compared with the same period in 2007.
Equipment rental consists primarily of rent expense for FMS revenue earning equipment under lease. The increase in equipment rental in the first quarter of 2008 compared to the same period in 2007 primarily reflects higher rental costs associated with investments made in material handling equipment to support our SCS operations.
Interest expense decreased in the first three months of 2008 compared with the same period in 2007, reflecting lower average cost of debt and lower average debt balances. The lower effective interest rate in 2008 compared to 2007 resulted from lower interest rate commercial paper borrowings.
Miscellaneous expense (income), net consists of investment losses (income) on securities used to fund certain benefit plans, interest income, losses (gains) from sales of property, foreign currency transaction losses (gains), and other non-operating items. Miscellaneous expense (income), net increased in the first quarter of 2008 compared with the same period in 2007 primarily due to declining market performance of investments classified as trading securities and higher foreign currency transaction losses.
19
Restructuring and other recoveries, net in the first three months of 2008 primarily related to employee severance charges recorded in prior restructurings that were reversed due to subsequent refinements in estimates. Restructuring and other charges, net in the first three months of 2007 related primarily to information technology transition costs and employee severance and benefit costs incurred in connection with global cost savings initiatives announced in the fourth quarter of 2006.
Our effective income tax rate for the first quarter of 2008 as compared with 2007 decreased primarily due to increased earnings in lower tax rate jurisdictions and settlement of certain tax audits partially offset by an increase of non-deductible expenses.
OPERATING RESULTS BY BUSINESS SEGMENT
As part of management’s evaluation of segment operating performance, we define the primary measurement of our segment financial performance as “Net Before Taxes” (NBT), which includes an allocation of CSS and excludes restructuring and other recoveries (charges), net. CSS represents those costs incurred to support all business segments, including human resources, finance, corporate services and public affairs, information technology, health and safety, legal and corporate communications. The objective of the NBT measurement is to provide clarity on the profitability of each business segment and, ultimately, to hold leadership of each business segment and each operating segment within each business segment accountable for their allocated share of CSS costs. Segment results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented. Certain costs are considered to be overhead not attributable to any segment and remain unallocated in CSS. Included within the unallocated overhead remaining within CSS are the costs for investor relations, public affairs and certain executive compensation. See Note (P), “Segment Reporting,” in the Notes to Consolidated Condensed Financial Statements for a description of how the remainder of CSS costs is allocated to the business segments.
Our FMS segment leases revenue earning equipment and provides fuel, maintenance and other ancillary services to our SCS and DCC segments. Inter-segment revenue and NBT are accounted for at rates similar to those executed with third parties. NBT related to inter-segment equipment and services billed to customers (equipment contribution) are included in both FMS and the business segment which served the customer and then eliminated (presented as “Eliminations”).
20
The following table sets forth equipment contribution included in NBT for our SCS and DCC business segments:
Total and operating revenue (revenue excluding fuel) increased during the three months ended March 31, 2008 compared with the same period in 2007 as a result of the growth in contractual revenue. Total revenue was also positively impacted by higher fuel services revenue as a result of higher average fuel prices slightly offset by reduced volumes. Total revenue and operating revenue in the first quarter of 2008 included a favorable foreign exchange impact of 1.3% and 1.5%, respectively.
Full service lease revenue grew 6% in 2008 compared with the same period in 2007 due primarily to new contract sales and acquisitions in North America. Contract maintenance revenue increased 9% in 2008 compared with the same period in 2007 due to new contract sales. We expect favorable contractual revenue comparisons to continue for the remainder of the year due to recent acquisitions and contract sales. Commercial rental revenue increased 1% in the first quarter of 2008 compared with 2007 due to growth in our international operations partially offset by the impact of a lower U.S. rental fleet. We expect similar commercial rental revenue comparisons to continue in the near term.
21
The following table provides rental statistics for the U.S. fleet, which generates approximately 80% of total commercial rental revenue:
FMS NBT increased $11 million in the first three months of 2008 compared with the same period in 2007 because of improved contractual business performance, lower sales and marketing expenses and acquisitions. Lower gains from the sale of used vehicles driven by a reduced number of used vehicles sold was largely offset by lower carrying costs on a smaller used vehicle inventory. The first quarter of 2008 and 2007 also benefited from $2 million and $3 million, respectively, of favorable development in estimated prior years self-insured loss reserves.
On April 11, 2008, we entered into an asset purchase agreement with Gator Leasing, Inc. (“Gator”), under which we agreed to acquire Gator’s fleet of approximately 2,300 vehicles and nearly 300 contractual customers. The acquisition is expected to be finalized in May 2008 and is subject to customary closing conditions. If consummated, the combined network will operate under the Ryder name, complementing Ryder’s market coverage and service network in Florida.
22
Our global fleet of owned and leased revenue earning equipment and contract maintenance vehicles is summarized as follows (number of units rounded to the nearest hundred):
23
The totals in the previous table include the following non-revenue earning equipment for the U.S. fleet (number of units rounded to nearest hundred):
NYE units represent new vehicles on hand that are being prepared for deployment to a lease customer or into the rental fleet. Preparations include activities such as adding lift gates, paint, decals, cargo area and refrigeration equipment. For 2008, the number of NYE units decreased compared to the same period in the prior year consistent with the reduced volume of lease sales and replacement activity. NLE units represent all vehicles held for sale and vehicles for which no revenue has been earned in the previous 30 days. For 2008, the number of NLE units decreased compared to the prior year because of reduced used vehicle inventory levels. We expect favorable NLE comparisons to continue throughout the year as 2007 levels were impacted by high amounts of rental units being out serviced to match market demands.
Supply Chain Solutions
Total revenue declined in the three months ended March 31, 2008 compared to the same period in 2007 as a result of net reporting of a transportation management arrangement previously reported on a gross basis. Effective January 1, 2008, our contractual relationship with a significant customer for certain transportation management services changed, and we determined, after a formal review of the terms and conditions of the services, we are acting as an agent based on the revised terms of the arrangement. As a result, the amount of total revenue and subcontracted transportation expense decreased by $175 million from the first quarter in 2007 due to the reporting of revenue net of subcontracted transportation expense related to this arrangement. This change did not impact
24
operating revenue or net earnings. Operating revenue grew in the three months ended March 31, 2008 compared to the same period in 2007 due to the favorable impact of foreign exchange rates, higher fuel costs and new and expanded business. Operating revenue growth was partially offset by an automotive plant closure in the second quarter of 2007 and reduced business activity with certain high-tech customers. Our largest customer, General Motors Corporation, accounted for approximately 18% of SCS total revenue and operating revenue for the first three months of 2008, and is comprised of multiple contracts in various geographic regions. For the first three months of 2007, General Motors Corporation accounted for approximately 44% and 20% of SCS total revenue and operating revenue, respectively. In the first quarter of 2008, SCS total revenue and operating revenue included a favorable foreign currency exchange impact of 3.4% and 3.1%, respectively. We expect similar revenue comparisons for the remainder of the year.
SCS NBT decreased $3 million in the three months ended March 31, 2008 compared with the same period in 2007 as a result of lower revenue with certain high-tech customers, lower operating performance mostly due to increasing fuel costs related to a specific customer account and the impact of an automotive supplier strike. Higher overhead spending also contributed to the decrease in NBT as a result of higher sales and marketing and technology investment initiatives and costs incurred for a facility relocation. The first quarter of 2008 and 2007 both benefited from $1 million of favorable development in estimated prior years’ self-insured loss reserves.
Dedicated Contract Carriage
Total revenue and operating revenue for the first quarter of 2008 decreased 1% compared to the same period in 2007 as a result of the non-renewal of customer contracts partially offset by the pass through of higher fuel costs. We expect unfavorable revenue comparisons for the remainder of the year due to the non-renewal of customer contracts and recent sales activity.
DCC NBT grew $1 million in the three months ended March 31, 2008 compared with the same period in 2007 as a result of lower safety and insurance costs and better operating performance. The first quarter of 2008 and 2007 benefited from $2 million and $1 million, respectively, of favorable development in estimated prior years’ self-insured loss reserves. The increases in DCC NBT were offset slightly by lower FMS equipment contribution of $1 million for the three months ended March 31, 2008 as compared to the same period in 2007.
25
Central Support Services
Total CSS costs in the first quarter of 2008 increased compared to the same period in 2007 primarily as a result of higher spending on information technology initiatives and public affairs. Unallocated CSS expenses for the first quarter of 2008 increased compared with the same period in 2007 primarily due to public affairs and share-based compensation.
FINANCIAL RESOURCES AND LIQUIDITY
Cash Flows
The following is a summary of our cash flows from operating, financing and investing activities:
A detail of the individual items contributing to the cash flow changes is included in the Consolidated Condensed Statements of Cash Flows.
Cash provided by operating activities increased to $300 million in the first three months of 2008 compared with $253 million in 2007, due primarily to reduced working capital needs and improved cash based earnings. Cash used in financing activities in the first three months of 2008 was $56 million compared with cash provided of $50 million in 2007. Cash used in financing activities in the first three months of 2008 reflects higher share repurchase activity. Cash used in investing activities decreased to $250 million in the first three months ended March 31, 2008 compared with $338 million in 2007 primarily due to lower vehicle capital spending partially offset by higher acquisition-related payments.
Our principal sources of operating liquidity are cash from operations and proceeds from the sale of revenue earning equipment. We refer to the sum of operating cash flows, proceeds from the sales of revenue earning equipment and operating property and equipment, sale and leaseback of revenue earning equipment, collections on direct finance leases and other cash inflows as “total cash generated.” We refer to the net amount of cash generated from operating and investing activities (excluding changes in restricted cash and acquisitions) as “free cash flow.” Although total cash generated and free cash flow are non-GAAP financial measures, we consider them to be important measures of comparative operating performance. We also believe total cash generated to be an important measure of total cash inflows generated from our ongoing business activities. We believe free cash flow provides investors with an important perspective on the cash available for debt service and for shareholders after making capital investments required to support ongoing business operations. Our calculation of free cash flow may be different from the calculation used by other companies and therefore comparability may be limited.
26
The following table shows the sources of our free cash flow computation:
The improvement in free cash flow to $119 million for the three months ended March 31, 2008 compared with negative $123 million for the same period in 2007 was driven by the anticipated decrease in vehicle capital spending and improved operating cash flows. We anticipate positive free cash flow to continue in 2008.
The following table provides a summary of capital expenditures:
Capital expenditures on an accrual basis of $332 million were lower for the first three months of 2008 compared with the same period in 2007 principally as a result of decreased full service lease vehicle spending for replacement and expansion of customer fleets and reduced rental spending to meet market demand. We are anticipating full-year 2008 accrual basis capital expenditures to be approximately $1.44 billion, up from $1.19 billion in 2007 primarily as a result of higher planned levels of spending for full service lease vehicles for the remainder of the year.
Financing and Other Funding Transactions
We utilize external capital to support growth in our asset-based product lines. The variety of financing alternatives available to fund our capital needs include long-term and medium-term public and private debt, asset-backed securities, bank term loans, leasing arrangements, bank credit facilities and commercial paper.
27
The following table shows the movements in our debt balance:
In accordance with our funding philosophy, we attempt to match the average remaining re-pricing life of our debt with the average remaining life of our assets. We utilize both fixed-rate and variable-rate debt to achieve this match and generally target a mix of 25 — 45% variable-rate debt as a percentage of total debt outstanding. The variable-rate portion of our total obligations (including notional value of swap agreements) was 31% at March 31, 2008 and December 31, 2007.
Ryder’s leverage ratios and a reconciliation of on-balance sheet debt to total obligations were as follows:
On-balance sheet debt to equity consists of balance sheet debt divided by total equity. Total obligations to equity represents balance sheet debt plus the present value of minimum lease payments and guaranteed residual values under operating leases for vehicles, discounted based on our incremental borrowing rate at lease inception, all divided by total equity. Although total obligations is a non-GAAP financial measure, we believe that total obligations is useful as it provides a more complete analysis of our existing financial obligations and helps better assess our overall leverage position.
Our leverage ratios increased in 2008 as the spending required to support our contractual full service lease business, share repurchase programs and acquisitions more than offset improved operating cash flows. Our long-term target percentage of total obligations to equity is 250% to 300% while maintaining a strong investment grade rating. We believe this leverage range is appropriate for our business due to the liquidity of our vehicle portfolio and because a substantial component of our assets is supported by long-term customer leases.
Our ability to access unsecured debt in the capital markets is linked to both our short-term and long-term debt ratings. These ratings are intended to provide guidance to investors in determining the credit risk associated with particular Ryder securities based on current information obtained by the rating agencies from us or from other sources that such agencies consider to be reliable. Lower ratings generally result in higher borrowing costs as well as reduced access to unsecured capital markets. Market conditions will also impact our borrowing costs. Based on current market conditions, we have evaluated our ability to access the unsecured debt market and believe that we have the ability to issue unsecured debt.
28
A significant downgrade of our short-term debt ratings would reduce our ability to issue commercial paper. As a result, we would have to rely on our other established short-term funding sources. Our debt ratings at March 31, 2008 were as follows:
In February 2008, we issued $250 million of unsecured medium-term notes maturing in March 2013. The proceeds from the notes were used for general corporate purposes. Concurrently, we entered into an interest rate swap with a notional amount of $250 million maturing in March 2013. The swap was designated as a fair value hedge whereby we receive fixed interest rate payments in exchange for making variable interest rate payments. The differential to be paid or received is accrued and recognized as interest expense. At March 31, 2008, the interest rate swap agreement effectively changed $250 million of fixed-rate debt with an interest rate of 6.00% to LIBOR-based floating-rate debt at a rate of 5.15%. Changes in the fair value of the interest rate swap are offset by changes in the fair value of the debt instrument. Accordingly, there is no ineffectiveness related to the interest rate swap. During the three months ended March 31, 2008, the increase in the fair value of the interest rate swap was $6 million.
Ryder Receivable Funding II, L.L.C. (RRF LLC), a bankruptcy remote, consolidated subsidiary of Ryder has a Trade Receivables Purchase and Sale Agreement (the Trade Receivables Agreement) with two financial institutions. Under this program, Ryder sells certain of its domestic trade accounts receivable to RRF LLC that in turn may sell, on a revolving basis, an ownership interest in certain of these accounts receivable to a receivables conduit and (or) committed purchasers. Under the terms of the program, RRF LLC and Ryder have provided representations, warranties, covenants and indemnities that are customary for accounts receivable facilities of this type. We use this program to provide additional liquidity to fund our operations, particularly when the cost of such sales is cost effective compared with other funding programs, notably the issuance of unsecured commercial paper. This program is accounted for as a collateralized financing arrangement. The available proceeds that may be received by RRF LLC under the program are limited to $300 million. RRF LLC’s costs under this program may vary based on changes in Ryder’s unsecured debt ratings and changes in interest rates. If no event occurs which causes early termination, the 364-day program will expire on September 9, 2008. At March 31, 2008, there were no amounts outstanding under the agreement. There was $100 million outstanding under the agreement at December 31, 2007.
29
At March 31, 2008, we had the following amounts available to fund operations under the aforementioned facilities:
We believe that our existing cash and cash equivalents, operating cash flows, commercial paper program, revolving credit facility, shelf registration with the SEC and the trade receivables program will adequately meet our working capital and capital expenditure needs for the foreseeable future. In addition to the unsecured sources of funding available to us, we could also meet our financing needs with asset-based securitization and sale-leaseback transactions.
Off-Balance Sheet Arrangements
We periodically enter into sale-leaseback transactions in order to lower the total cost of funding our operations, to diversify our funding among different classes of investors and to diversify our funding among different types of funding instruments. These sale-leaseback transactions are often executed with third-party financial institutions that are not deemed to be variable interest entities (VIEs). In general, these sale-leaseback transactions result in a reduction in revenue earning equipment and debt on the balance sheet, as proceeds from the sale of revenue earning equipment are primarily used to repay debt. Accordingly, sale-leaseback transactions will result in reduced depreciation and interest expense and increased equipment rental expense. These leases contain limited guarantees by us of the residual values of the leased vehicles (residual value guarantees) that are conditioned upon disposal of the leased vehicles prior to the end of their lease term. The amount of future payments for residual value guarantees will depend on the market for used vehicles and the condition of the vehicles at time of disposal. See Note (L), “Guarantees,” in the Notes to Consolidated Condensed Financial Statements for additional information. We did not enter into any sale-leaseback transactions that qualified for off-balance sheet treatment during the first three months of 2008 or 2007.
Pension Information
The funded status of our pension plans is dependent upon many factors, including returns on invested assets and the level of certain market interest rates. We review pension assumptions regularly and we may from time to time make voluntary contributions to our pension plans, which exceed the amounts required by statute. We have made $6 million in pension contributions through March 31, 2008 and we expect to make additional pension contributions for our plans during the remainder of 2008 of approximately $16 million. Changes in interest rates and the market value of the securities held by the plans during 2008 could materially change, positively or negatively, the funded status of the plans and affect the level of pension expense and required contributions in 2009 and beyond. See Note (O), “Employee Benefit Plans,” in the Notes to Consolidated Condensed Financial Statements for additional information.
Share Repurchases and Cash Dividends
30
In February 2008, our Board of Directors declared a quarterly cash dividend of $0.23 per share of common stock. This dividend reflects a $0.02 increase from the quarterly cash dividend of $0.21 paid in 2007.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note (Q), “Recent Accounting Pronouncements” in the Notes to Consolidated Condensed Financial Statements for a discussion of recent accounting pronouncements.
NON-GAAP FINANCIAL MEASURES
This Quarterly Report on Form 10-Q includes information extracted from consolidated condensed financial information but not required by generally accepted accounting principles (GAAP) to be presented in the financial statements. Certain of this information are considered “non-GAAP financial measures” as defined by SEC rules. Specifically, we refer to operating revenue, salaries and employee-related costs as a percentage of operating revenue, FMS operating revenue, FMS NBT as a % of operating revenue, SCS operating revenue, SCS NBT as a % of operating revenue, DCC operating revenue, DCC NBT as a % of operating revenue, total cash generated, free cash flow, total obligations and total obligations to equity. As required by SEC rules, we provide a reconciliation of each non-GAAP financial measure to the most comparable GAAP measure and an explanation why management believes that presentation of the non-GAAP financial measure provides useful information to investors. Non-GAAP financial measures should be considered in addition to, but not as a substitute for or superior to, other measures of financial performance prepared in accordance with GAAP.
The following table provides a numerical reconciliation of total revenue to operating revenue which was not provided within the MD&A discussion:
31
FORWARD-LOOKING STATEMENTS
Forward-looking statements (within the meaning of the Federal Private Securities Litigation Reform Act of 1995) are statements that relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends concerning matters that are not historical facts. These statements are often preceded by or include the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will,” “may,” “could,” “should” or similar expressions. This Quarterly Report on Form 10-Q contains forward-looking statements including, but not limited to, statements regarding:
These statements, as well as other forward-looking statements contained in this Quarterly Report, are based on our current plans and expectations and are subject to risks, uncertainties and assumptions. We caution readers that certain important factors could cause actual results and events to differ significantly from those expressed in any forward-looking statements. These risk factors include, but are not limited to, the following:
32
33
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to Ryder’s exposures to market risks since December 31, 2007. Please refer to the 2007 Annual Report on Form 10-K for a complete discussion of Ryder’s exposures to market risks.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the first quarter of 2008, we carried out an evaluation, under the supervision and with the participation of management, including Ryder’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Ryder’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of the end of the first quarter of 2008, Ryder’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) were effective.
Changes in Internal Controls over Financial Reporting
During the three months ended March 31, 2008, there were no changes in Ryder’s internal control over financial reporting that has materially affected or is reasonably likely to materially affect such internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information with respect to purchases we made of our common stock during the three months ended March 31, 2008:
34
ITEM 6. EXHIBITS
35
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.
36