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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File No. 1-4364
-------------------------------------
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 73,225,125 shares of common stock ($0.50 par value per
share) outstanding as of July 31, 1998.
<PAGE>
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, 1998 and 1997 (unaudited) 3
Consolidated Condensed Balance Sheets -
June 30, 1998 (unaudited) and December 31, 1997 4
Consolidated Condensed Statements of Cash Flows - Six months
ended June 30, 1998 and 1997 (unaudited) 5
Notes to Consolidated Condensed Financial Statements 6
Independent Accountants' Review Report 8
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 9
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 19
ITEM 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
EXHIBIT INDEX 22
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
<CAPTION>
Ryder System, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Six Months
Periods ended June 30, 1998 and 1997 ----------------------------- ---------------------------
(In thousands, except per share amounts) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE $ 1,281,577 1,233,999 2,527,194 2,421,118
----------- --------- --------- ---------
Operating expense 921,549 906,261 1,831,492 1,802,630
Freight under management expense 77,360 62,173 155,273 108,963
Year 2000 expense 9,757 - 14,845 -
Depreciation expense, net of gains (three months, 1998 - $13,355,
1997 - $12,627; six months, 1998 - $27,666, 1997 - $29,028) 148,981 146,338 295,739 291,148
Interest expense 49,103 49,346 97,511 96,664
Miscellaneous income (476) (2,947) (4,891) (6,509)
----------- --------- --------- ---------
1,206,274 1,161,171 2,389,969 2,292,896
----------- --------- --------- ---------
Earnings from continuing operations before income taxes 75,303 72,828 137,225 128,222
Provision for income taxes 30,036 29,500 54,684 52,443
----------- --------- --------- ---------
Earnings from continuing operations 45,267 43,328 82,541 75,779
Earnings from discontinued operations - 6,707 - 7,922
----------- --------- --------- ---------
NET EARNINGS $ 45,267 50,035 82,541 83,701
=========== ========= ========= =========
Basic Earnings per Common Share:
Continuing operations $ 0.61 0.56 1.12 0.98
Discontinued operations - 0.09 - 0.10
----------- --------- --------- ---------
$ 0.61 0.65 1.12 1.08
=========== ========= ========= =========
Diluted Earnings per Common Share:
Continuing operations $ 0.61 0.55 1.10 0.97
Discontinued operations - 0.09 - 0.10
----------- --------- --------- ---------
$ 0.61 0.64 1.10 1.07
=========== ========= ========= =========
Cash dividends per common share $ 0.15 0.15 0.30 0.30
=========== ========= ========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
ITEM 1. Financial Statements (continued)
<TABLE>
<CAPTION>
Ryder System, Inc. and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
(Dollars in thousands, except per share amounts) 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 73,731 78,370
Receivables 587,164 625,955
Inventories 67,591 66,006
Tires in service 169,192 163,771
Deferred income taxes - 22,309
Prepaid expenses and other current assets 191,589 135,574
---------- ----------
Total current assets 1,089,267 1,091,985
Revenue earning equipment 3,266,197 3,145,461
Operating property and equipment 586,759 581,705
Direct financing leases and other assets 442,841 414,932
Intangible assets and deferred charges 288,453 274,977
---------- ----------
$ 5,673,517 5,509,060
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 171,697 301,361
Accounts payable 424,151 305,337
Accrued expenses 422,411 482,811
---------- ----------
Total current liabilities 1,018,259 1,089,509
Long-term debt 2,449,608 2,267,554
Other non-current liabilities 357,222 365,264
Deferred income taxes 747,503 726,025
---------- ----------
Total liabilities 4,572,592 4,448,352
---------- ----------
Shareholders' equity:
Common stock of $0.50 par value per share (shares outstanding at
June 30, 1998 - 73,332,506; December 31, 1997 - 73,692,226) 309,189 328,117
Retained earnings 804,062 743,713
Accumulated other comprehensive income (12,326) (11,122)
---------- ----------
Total shareholders' equity 1,100,925 1,060,708
---------- ----------
$ 5,673,517 5,509,060
========== ==========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
ITEM 1. Financial Statements (continued)
<TABLE>
<CAPTION>
Ryder System, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------
Six months ended June 30, 1998 and 1997
(In thousands) 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONTINUING OPERATIONS
CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings from continuing operations $ 82,541 75,779
Depreciation expense, net of gains 295,739 291,148
Amortization expense and other non-cash charges, net 1,373 4,709
Deferred income tax expense 44,516 53,748
Changes in operating assets and liabilities:
Increase in aggregate balance of trade receivables sold 50,000 -
Receivables 10,436 (17,461)
Inventories (2,249) (1,895)
Prepaid expenses and other current assets (56,455) (44,367)
Other assets (670) (8,402)
Accounts payable 76,294 (911)
Accrued expenses and other non-current liabilities (77,605) (111,082)
---------- ---------
423,920 241,266
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in commercial paper borrowings 184,781 112,947
Debt proceeds 151,403 36,718
Debt repaid, including capital lease obligations (263,052) (89,994)
Common stock repurchased (46,069) (54,631)
Common stock issued 23,060 27,279
Dividends on common stock (22,192) (23,082)
---------- ---------
27,931 9,237
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and revenue earning equipment (702,955) (497,258)
Sales of property and revenue earning equipment 172,554 191,160
Proceeds from vehicle securitization 73,430 -
Acquisitions, net of cash acquired (11,483) (46,346)
Other, net 11,964 16,937
---------- ---------
(456,490) (335,507)
---------- ---------
NET CASH FLOWS FROM CONTINUING OPERATIONS (4,639) (85,004)
NET CASH FLOWS FROM DISCONTINUED OPERATIONS - 11,418
---------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (4,639) (73,586)
Cash and cash equivalents at January 1 78,370 191,384
---------- ---------
CASH AND CASH EQUIVALENTS AT JUNE 30 $ 73,731 117,798
========== =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
ITEM 1. Financial Statements (continued)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(A) INTERIM FINANCIAL STATEMENTS
The accompanying unaudited consolidated condensed financial statements
include the accounts of Ryder System, Inc. and subsidiaries (the
"Company") and have been prepared by the Company in accordance with the
accounting policies described in the 1997 Annual Report and should be
read in conjunction with the consolidated financial statements and
notes which appear in that report. These statements do not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included and the disclosures herein are adequate to make the
information presented not misleading. Operating results for interim
periods are not necessarily indicative of the results that can be
expected for a full year. Certain 1997 amounts have been reclassified
to conform with the current year presentation.
(B) EARNINGS PER SHARE INFORMATION
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards (FAS) No. 128, "Earnings per Share." This
Statement requires the presentation of basic and diluted earnings per
share (EPS). Basic EPS is computed by dividing net earnings by the
weighted average number of common shares outstanding. Diluted EPS
reflects the dilutive effect of potential common shares from securities
such as stock options. All prior years EPS data has been restated to
conform with the provisions of the new Statement. A reconciliation of
the number of shares used in computing basic and diluted EPS follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Six Months
For the periods ended June 30, 1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted average shares outstanding-Basic 73,729 76,750 73,850 77,179
Dilutive common stock equivalents from
option and purchase plans 840 1,422 938 1,281
------ ------ ------ ------
Weighted average shares outstanding-Diluted 74,569 78,172 74,788 78,460
====== ====== ====== ======
</TABLE>
At June 30, 1998 and 1997, options to purchase approximately 1,240,000
and 42,000 shares of common stock, respectively, were outstanding but
were not included in the computation of diluted EPS because the
options' exercise prices were greater than the average market price of
the common shares during the respective periods.
6
<PAGE>
ITEM 1. Financial Statements (continued)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
(C) COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted FAS No. 130, "Reporting
Comprehensive Income." Comprehensive income presents a measure of all
changes in shareholders' equity except for changes resulting from
transactions with shareholders in their capacity as shareholders. The
Company's total comprehensive income presently consists of net earnings
and currency translation adjustments associated with foreign operations
which use the local currency as their functional currency. Total
comprehensive income was $42.8 million and $49.4 million for the three
months ended June 30, 1998 and 1997, respectively; and $81.3 million
and $78.5 million for the six months ended June 30, 1998 and 1997,
respectively. The Statement also requires the separate presentation of
the accumulated balance of comprehensive income other than net earnings
in the Consolidated Condensed Balance Sheets.
(D) SALE OF AUTOMOTIVE CARRIER BUSINESS
On September 30, 1997, the Company completed the sale of its automotive
carrier business. Accordingly, the Company's automotive carrier
business has been reported as a discontinued operation for all periods
presented in the accompanying Consolidated Condensed Statements of
Earnings and Cash Flows. Revenue of the automotive carrier business for
the three and six months ended June 30, 1997 was $165.0 million and
$318.1 million, respectively; and earnings before income taxes were
$11.3 million and $13.1 million, respectively.
7
<PAGE>
KPMG PEAT MARWICK LLP
CERTIFIED PUBLIC ACCOUNTANTS
One Biscayne Tower Telephone 305-358-2300
2 South Biscayne Boulevard Telecopier 305-577-0544
Suite 2900
Miami, Florida 33131
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Shareholders
Ryder System, Inc.:
We have reviewed the accompanying consolidated condensed balance sheet of Ryder
System, Inc. and subsidiaries as of June 30, 1998, and the related consolidated
condensed statements of earnings for the three-month and six-month periods ended
June 30, 1998 and 1997 and the consolidated statements of cash flows for the
six-month periods ended June 30, 1998 and 1997. These consolidated condensed
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated condensed financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Ryder System, Inc. and subsidiaries
as of December 31, 1997, and the related consolidated statements of operations
and cash flows for the year then ended (not presented herein); and in our report
dated February 4, 1998, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated condensed balance sheet as of December 31, 1997,
is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
KPMG PEAT MARWICK LLP
Miami, Florida
July 21, 1998
8
<PAGE>
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition --
Three and six months ended June 30, 1998 and 1997
OVERVIEW
The following discussion should be read in conjunction with the unaudited
consolidated condensed financial statements and notes thereto included under
ITEM 1. In addition, reference should be made to the Company's audited
consolidated financial statements and notes thereto and related Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's most recent Annual Report on Form 10-K.
The Company's primary business units consist of integrated logistics,
transportation services (which primarily provides full service leasing and
commercial rental in the United States and Canada), International (which
provides full service leasing and integrated logistics in Europe, South America
and Mexico) and public transportation services. On September 30, 1997, the
Company completed the sale of its automotive carrier business. In the
accompanying consolidated condensed statements of earnings and cash flows, the
automotive carrier business has been reported as a discontinued operation (see
"Notes to Consolidated Condensed Financial Statements").
The Company reported earnings from continuing operations before income taxes of
$75 million in the second quarter of 1998, compared with $73 million in last
year's second quarter. Results for the second quarter of 1998 included
incremental pretax expenses of $10 million associated with the Company's
initiative to modify computer information systems to be Year 2000 compliant.
Excluding Year 2000 costs, earnings from continuing operations before income
taxes were 17% higher in the second quarter of 1998 compared with the same
period last year. Earnings from continuing operations before income taxes in the
first half of 1998 were $137 million, compared with $128 million in the first
half of 1997. Results for the first half of 1998 included incremental pretax
Year 2000 expenses of $15 million. Excluding Year 2000 costs, earnings from
continuing operations before income taxes were 19% higher in the first half of
1998 compared with the same period last year. All of the Company's business
units contributed to the improved results in the second quarter and first half
of 1998.
Earnings from continuing operations in the second quarter of 1998 were $45
million, or $0.61 per diluted common share, compared with $43 million, or $0.55
per diluted common share, in the second quarter of 1997. Excluding Year 2000
costs, earnings from continuing operations were $51 million, or $0.69 per
diluted common share, a per-share increase of 25% compared with the same period
last year. In the first six months of 1998, earnings from continuing operations
were $83 million, or $1.10 per diluted common share, compared with $76 million,
or $0.97 per diluted common share, in the first six months of 1997. Excluding
Year 2000 costs, earnings from continuing operations were $92 million, or $1.22
per diluted common share, an increase of 26% compared with the same period last
year. The earnings per share growth rate exceeds the earnings growth rate
because the Company's stock repurchase programs reduced by almost 5% the average
number of diluted shares outstanding in the second quarter and first six months
of 1998 from the comparative 1997 periods.
9
<PAGE>
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued) --
Three and six months ended June 30, 1998 and 1997
Total revenue increased 4% to $1.28 billion in the second quarter of 1998 from
$1.23 billion in the second quarter of 1997. For the first half of 1998, revenue
totaled $2.53 billion, compared with $2.42 billion in the first half of 1997, an
increase of 4%. The revenue growth in the second quarter and first half of 1998
was led by International, public transportation and integrated logistics. These
increases were somewhat offset by lower revenue in transportation services due
to decreased fuel revenue associated with declining fuel prices and volumes.
Operating expense increased 2% in both the second quarter and first six months
of 1998 compared with the same periods of 1997. The increase is attributable to
higher compensation, including driver rental costs, maintenance costs and
workers' compensation costs primarily as a result of higher business volumes.
These increases were partially offset by lower fuel costs. Operating expense as
a percentage of revenue was 72% in the second quarter and first six months of
1998 compared with 73% and 74% for the comparable 1997 periods. The decrease was
attributable primarily to lower fuel costs.
Freight under management expense, which represents subcontracted freight costs
on logistics contracts where the Company purchases transportation, increased $15
million, or 24%, in the second quarter of 1998 and $46 million, or 43%, in the
first half of 1998 compared with the same periods in 1997. Freight under
management expense as a percentage of revenue also increased to 6% in the second
quarter and first half of 1998 from 5% for the comparable 1997 periods. These
increases reflect the growth in these type of integrated logistics contracts
experienced during the latter half of 1997.
Incremental Year 2000 expenses totaled $10 million in the second quarter of 1998
($6 million after tax, or $0.08 per diluted common share) and $15 million in the
first six months of 1998 ($9 million after tax, or $0.12 per diluted common
share). See "Year 2000 Issue" for a further discussion of this matter.
Depreciation expense (before gains on vehicle sales) increased 2% in the second
quarter and 1% in the first six months of 1998 compared with the same periods in
1997. The growth in depreciation expense was primarily in revenue earning
equipment. Gains on vehicle sales increased 6% in the second quarter of 1998
compared with the same period last year due to an increase in the number of
vehicles sold in 1998 and, to a lesser extent, higher average gains per vehicle
sold. For the first six months of 1998, gains on vehicle sales decreased 5%,
compared with the first six months of 1997 due to lower average gains per
vehicle sold in the first quarter of 1998. The reduced average gains in the
first quarter of 1998 reflected a changing mix of vehicles sold. As a percentage
of revenue, depreciation expense, net of gains on vehicle sales, remained at 12%
in the second quarter and first six months of 1998 and 1997.
10
<PAGE>
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued) --
Three and six months ended June 30, 1998 and 1997
Interest expense was relatively unchanged in the second quarter of 1998 compared
with the second quarter of 1997 as higher average outstanding debt levels were
more than offset by lower average interest rates. Interest expense increased $1
million, or 1%, in the first half of 1998 compared with the first half of 1997
as higher average outstanding debt levels were only partially offset by lower
average interest rates. The higher outstanding debt levels resulted primarily
from increased levels of capital spending and stock repurchases.
Miscellaneous income was $0.5 million and $4.9 million in the second quarter and
first six months of 1998, respectively, compared with $2.9 million and $6.5
million for the comparable 1997 periods. The reduction in miscellaneous income
in the second quarter includes lower earnings from equity investments due in
part to the International acquisition of an entity previously reported on the
equity method of accounting. On a year-to-date basis, the reduction in earnings
from equity investments was partially offset by increased gains from the sale of
surplus non-operating properties.
The Company's effective tax rates for continuing operations in the second
quarter and first half of 1998 were 39.9% compared with 40.5% and 40.9%,
respectively, in the same 1997 periods. The lower 1998 effective rates resulted
primarily from lower state income taxes and a reduction in the corporate income
tax rate in the United Kingdom.
BUSINESS UNIT PERFORMANCE
Revenue from integrated logistics increased 6% and 10% in the second quarter and
first half of 1998, respectively, compared with the same 1997 periods, primarily
due to expansion of revenue with existing customers and start-up of business
sold in the previous year. The largest component of growth in 1998 has come from
contracts for which integrated logistics manages the transportation of freight
and subcontracts the delivery of products to third parties. Operating revenue
(which excludes subcontracted freight costs) increased 2% and 3% in the second
quarter and first half of 1998, respectively, compared with the same 1997
periods. Revenue growth from integrated logistics was impacted by the
termination of two large accounts in the last year and, to a lesser extent, the
strike at General Motors. Adjusting for these lost accounts, revenue would have
increased 14% and 18% in the second quarter and first half of 1998,
respectively, compared with the same 1997 periods and operating revenue would
have increased 10% in the second quarter and first half of 1998.
11
<PAGE>
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued) --
Three and six months ended June 30, 1998 and 1997
In light of the current level of new business sales as well as lost business,
revenue growth for this product line in 1998 will be lower than growth rates
experienced in 1997. However, the Company believes that improved sales force
capabilities, industry segmentation, and the ability to leverage rapidly
emerging logistics technologies and alliances to enhance service offerings will
result in improved sales in the second half of 1998, followed by higher revenue
growth rates in 1999.
Revenue from transportation services decreased 1% and 2% in the second quarter
and first six months of 1998, respectively, compared with the same periods in
1997 primarily due to decreased fuel revenue. Full service leasing revenue was
slightly lower in the second quarter and first six months of 1998 as a result of
extended manufacturer's delivery times for new vehicle purchases which delays
the period for lease revenue recognition and, to a lesser extent, the impact of
lower levels of new business sales in 1997 and selected non-renewal of lower
margin business, as the Company has become more selective in signing new
business in accordance with specified Economic Value Added (EVA) criteria
adopted in 1997. New lease sales in the second quarter and first six months of
1998 were at record levels and significantly ahead of new lease sales in the
same periods of 1997 which management expects to result in renewed revenue
growth in the latter half of 1998.
Commercial rental revenue increased 13% and 12% in the second quarter and first
six months of 1998, respectively, compared with the same periods in 1997, due to
higher utilization of a larger fleet. Higher utilization reflects, in part,
increased demand from full service lease customers requiring additional vehicles
during peak periods and while awaiting delivery of new full service lease
vehicles. Such "awaiting new lease" rental revenue increased $5 million, or 83%,
in the second quarter and $8 million, or 71%, in the first six months of 1998,
compared with the same periods in 1997. Fuel revenue decreased 16% and 18% in
the second quarter and first six months of 1998, respectively, compared with the
same periods in 1997 as a result of both lower fuel prices and volume. Other
transportation services revenue, consisting of third-party maintenance, trailer
rentals and other ancillary revenue to support product lines, increased 11% and
6% in the second quarter and first six months of 1998, respectively, compared
with the same periods in 1997.
12
<PAGE>
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued) --
Three and six months ended June 30, 1998 and 1997
International revenue increased 22% in the second quarter of 1998 and 23% in the
first half of 1998, compared with the same periods in 1997. The growth in the
second quarter of 1998 resulted from expanding operations in virtually every
location (principally Argentina, Mexico and Poland) as well as the impact of the
May 1998 acquisition of a Brazilian logistics company. The 1998 year-to-date
revenue growth also reflected the impact of the British Airways ground equipment
maintenance contract in the United Kingdom which commenced in the second quarter
of 1997. Revenue from public transportation services increased 9% in the second
quarter of 1998 and 10% in the first half of 1998, compared with the same
periods in 1997. The revenue growth was primarily achieved through contributions
from new contracts, as well as the impact of three acquisitions completed since
December 1997.
Operating margin (revenue less direct operating expenses, depreciation and
interest expense) and operating margin as a percentage of revenue from
integrated logistics increased in the second quarter and first six months of
1998, compared with the same 1997 periods, due to operating efficiencies
achieved in the second quarter and, to a lesser extent, the growth in revenue.
Full service leasing operating margin and operating margin as a percentage of
revenue were about the same in the second quarter and first six months of 1998
as compared with the same 1997 periods, as improved pricing on new lease sales
was offset by higher vehicle maintenance costs. Commercial rental operating
margin and operating margin as a percentage of revenue were significantly higher
in the second quarter and first six months of 1998, compared with the same 1997
periods, due primarily to higher vehicle utilization on a larger rental fleet.
International operating margin was higher in the second quarter and first six
months of 1998 compared with the same periods in 1997 as a result of revenue
growth, while operating margin as percentage of revenue was about the same for
all periods. In public transportation services, operating margin was higher in
the second quarter and first six months of 1998 compared with the same periods
in 1997, primarily as a result of revenue growth. Operating margin as a
percentage of revenue was higher in the second quarter and first six months of
1998 as lower fuel costs and improved fleet utilization in student
transportation services offset increased maintenance associated with several
transit contracts at Ryder/ATE.
CORPORATE ADMINISTRATIVE EXPENSES AND OTHER
Corporate administrative expenses and other totaled $4 million and $3 million in
the second quarter and first half of 1998, respectively, compared with $5
million and $10 million in the second quarter and first half of 1997,
respectively. The year-to-date variance in corporate administrative expenses and
other is due primarily to gains from the sale of surplus non-operating
properties and the re-insurance of certain vehicle-related liabilities in the
first quarter of 1998.
13
<PAGE>
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued) --
Three and six months ended June 30, 1998 and 1997
LIQUIDITY AND CAPITAL RESOURCES
Total capital expenditures, excluding acquisitions, related to continuing
operations in the first half of 1998 were $703 million, compared with $497
million in the first half of 1997. Expenditures for full service lease were
higher in the first half of 1998, as compared with the same period of 1997,
reflecting the growth in new lease sales, higher fleet replacement and the
timing of vehicle purchases. Commercial rental expenditures were also higher due
primarily to planned fleet replacement and positioning to meet expected demand
levels. Expenditures for International in the first half of 1998 increased over
the first half of 1997, reflecting higher expenditures for rental vehicles and
operating equipment. Expenditures for public transportation decreased due
primarily to timing of fleet replacement. Total capital expenditures, excluding
acquisitions, for all of 1998 are expected to be approximately $1.3 billion.
During the first half of 1998, the Company completed acquisitions in both
International and public transportation services. The aggregate annualized
revenue associated with these acquisitions is estimated to be $140 million. Cash
paid for acquisitions totaled $11 million in the first half of 1998 compared
with $46 million in the same 1997 period. During July 1998, the Company
completed additional acquisitions in transportation services and public
transportation services with aggregate annualized revenue estimated at $27
million. The Company will continue to evaluate strategic acquisition
opportunities as a means of strengthening its core contractual businesses.
Cash flow from continuing operating activities in the first half of 1998 was
$424 million, compared with $241 million in the same period last year. The
increase resulted from lower working capital needs, including an increase in the
aggregate balance of trade receivables sold, reduced receivables due to improved
collections, increased accounts payable for vehicle purchases due to the timing
of new lease sales and vehicle deliveries, and lower requirements for accrued
expenses as 1997 activity reflected payments associated with restructuring
activities initiated in 1996, all of which more than offset increased prepaid
expenses and other current assets primarily for licensing and employee benefit
costs. Cash flow from continuing operating activities (excluding increase in
aggregate balance of trade receivables sold) plus asset sales as a percentage of
capital expenditures (excluding acquisitions) was 78% in the first half of 1998,
compared with 87% in the same period last year, primarily as a result of
increased capital expenditures which offset improved cash flow from operating
activities.
14
<PAGE>
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued) --
Three and six months ended June 30, 1998 and 1997
Total debt at June 30, 1998 was $2.6 billion, relatively unchanged from the
balance at December 31, 1997. During the first half of 1998, the Company made
scheduled unsecured note payments of $251 million. During May 1998, the Company
issued $100 million of unsecured debentures with the proceeds used to pay down
commercial paper. U.S. commercial paper outstanding at June 30, 1998 increased
to $518 million, compared with $340 million at December 31, 1997, primarily to
fund scheduled debt maturities and stock repurchases. The Company's foreign debt
increased $25 million, or 6%, from December 31, 1997, due primarily to debt
assumed as part of the May 1998 acquisition of a Brazilian logistics company.
The Company's debt to equity ratio at June 30, 1998, was lowered to 238% from
242% at December 31, 1997. The ratio of debt to tangible equity at June 30,1998
was 314% compared with 318% at December 31, 1997. The Company's percentage of
variable-rate financing obligations was 32% at June 30, 1998, which is above the
Company's targeted level of 25%-30% and higher than the 27% at December 31,
1997. During July 1998, the Company issued $107 million of fixed-rate medium
term notes with the proceeds used to pay down commercial paper. After
consideration of these refinancings, the Company's percentage of variable-rate
financing obligations would have been 29% at June 30, 1998. The Company expects
this percentage to continue to trend downward over the next several quarters.
The Company had contractual lines of credit totaling $726 million at June 30,
1998, of which $145 million was available. The Company also had $168 million of
debt securities available at June 30, 1998 under a shelf registration statement
filed in 1995. In order to provide additional liquidity for capital
expenditures, debt refinancing and general corporate purposes, the Company
intends to file a new shelf registration statement of debt securities this year.
In June 1998, the Company completed a vehicle securitization whereby it sold a
beneficial interest in certain long-term vehicle leases and related lease
vehicles to a separately-rated and unconsolidated vehicle lease trust (the
"Trust") for $77.8 million, which approximated the carrying value of the
vehicles. The Company received $73.4 million in cash and a $4.4 million
subordinated note from the Trust. The Trust funded the cash requirement with the
issuance of triple-A rated senior notes and single-A rated asset-backed
certificates collateralized by the beneficial interest in the long-term vehicle
leases and the residual value of the vehicles. The senior notes and asset-backed
certificates are not insured or guaranteed by the Company; however, the Company
has provided credit enhancement in the form of a cash reserve fund of
approximately $2.7 million and a pledge of its subordinated note as additional
security for the Trust to the extent that delinquencies and losses on the truck
leases and related vehicles are incurred. The Company used the proceeds from the
securitization to pay down commercial paper. The completion of the vehicle
securitization provides the Company with further liquidity and access to new
capital markets.
15
<PAGE>
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued) --
Three and six months ended June 30, 1998 and 1997
On April 29, 1998, Moody's Investors Service lowered its senior unsecured debt
rating on the Company to Baa1 from A3 and assigned a Baa1 rating to the
Company's $720 million Global Revolving Credit Agreement. Moody's Investors
Service affirmed the Company's P2 rating for commercial paper. As of June 30,
1998, Standard and Poor's Ratings Group and Duff and Phelps continued to
maintain ratings of BBB+ and A, respectively, for the Company's unsecured debt
and A2 and D1, respectively, for commercial paper.
During April 1998, the Company completed a six-million-share buyback program,
announced in July 1997, through the repurchase of 800,000 shares of common stock
at an average price of approximately $36.60 per common share. A new
three-million-share buyback program, linked to shares issued under employee
incentive programs, was initiated in May 1998. As of June 30, 1998, a total of
524,000 shares of common stock were repurchased at an average price of
approximately $32.00 per common share. The Company utilized cash flow from
operating activities and commercial paper borrowings to fund these purchases.
YEAR 2000 ISSUE
During 1997, after consideration of the potential impact to operations,
including customer and supplier relationships, an enterprise-wide program was
initiated to modify computer information systems to be Year 2000 compliant
(properly read dates, perform calculations and continue to perform business
critical functions when the calendar year changes to the year 2000) or to
replace non-compliant systems. The Company established a program office
dedicated to implementing the Year 2000 compliance plan, and has engaged
external consultants to provide management oversight.
The Company has identified three major areas determined to be critical for
successful Year 2000 compliance: (1) information systems, (2) third-party
relationships, primarily vendors and (3) facilities and equipment exposures
because of embedded technology. The Company's Year 2000 compliance program can
be segregated into three broad phases. Phase I of the program is the assessment
of information systems in order to identify exposures to Year 2000 issues and to
develop a master plan of action including remediation, retirement or replacement
of non-compliant systems. Phase II of the program is the implementation of
action plans. Phase III of the program is the final testing of each major area
of exposure to ensure compliance.
In the information system area, the Company has completed the assessment of the
majority of legacy, application and system software; and related action plans,
primarily remediation, have been initiated for most of the software reviewed.
Final testing of remediated code is scheduled to be completed by mid-1999. In
the third-party area, the Company has contacted most of its major vendors
regarding Year 2000 compliance. Respondents to date state they intend to be
compliant by 2000; however, the Company can provide no assurance that Year 2000
compliance plans will be successfully completed by vendors in a timely manner.
In the facilities and equipment area, the Company is in the process of
completing its assessment of exposure as well as development of appropriate
action plans.
The Company's preliminary estimate of the impact on after tax earnings for
incremental Year 2000 costs range from $21 to $26 million of which $12 million
has been incurred through June 30, 1998. Future costs are difficult to estimate
and actual results could differ significantly from the Company's expectations
due to changes in software remediation or replacement plans, unanticipated
technological difficulties, project vendor delays or overruns, and the cost and
availability of resources. In addition, due to the uncertainties inherent in
this undertaking, the Company has initiated contingency planning to evaluate a
course of action to minimize the impact of any unforeseen disruption resulting
from non-compliance.
16
<PAGE>
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued) --
Three and six months ended June 30, 1998 and 1997
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued FAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." This
Statement establishes standards for reporting information about a company's
operating segments and related disclosures about its products, services,
geographic areas of operations and major customers. This Statement will be
adopted by the Company in 1998 year-end financial statements and will not impact
the Company's results of operations or financial position.
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which is effective for fiscal
years beginning after December 15, 1998. The Statement outlines the accounting
treatment for certain costs related to the development or purchase of software
to be used internally and requires that costs incurred during the preliminary
project and post-implementation/operation stages be expensed, and costs incurred
during the application development stage be capitalized and amortized over the
estimated useful life of the software. Costs incurred prior to initial
application of the Statement cannot be adjusted to the amounts that would have
been capitalized had the Statement been in effect when those costs were
incurred. Adoption of this Statement is not expected to have a material impact
on the Company's results of operations or financial position.
In April 1998, the AICPA also issued SOP 98-5, "Reporting on the Costs of
Start-up Activities." SOP 98-5, which is effective for fiscal years beginning
after December 15, 1998, requires that all costs of start-up activities,
including organization costs, be expensed as incurred. The impact of adoption of
SOP 98-5 should be reported as the cumulative effect of a change in accounting
principle. Adoption of this Statement is not expected to have a material impact
on the Company's results of operations or financial position.
In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which requires all derivatives to be
recognized at fair value as either assets or liabilities on the balance sheet.
Any gain or loss resulting from changes in such fair value is required to be
recognized in earnings to the extent the derivatives are not effective as
hedges. This Statement is effective for fiscal years beginning after June 15,
1999, and is effective for interim periods in the initial year of adoption.
Adoption of this Statement is not expected to have a material impact on the
Company's results of operations or financial position.
FORWARD-LOOKING STATEMENTS
This management's discussion and analysis of results of operations and financial
condition contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are based on the
current plans and expectations of Ryder System, Inc. and involve risks and
uncertainties that could cause actual future events and results of operations to
be materially different from those in the forward-looking statements. Important
factors that could cause such differences include, among others, greater than
expected expenses associated with the Company's personnel needs or activities,
the competitive pricing environment applicable to the Company's operations,
changes in customers' business environments or changes in government
regulations.
17
<PAGE>
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued) - -
Three and six months ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
SELECTED FINANCIAL AND OPERATIONAL DATA
(Dollars in thousands)
Three Months Six Months
------------------------------- ---------------------------------
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BUSINESS UNITS
Revenue:
Transportation services:
Full service lease and programmed
maintenance $ 398,331 399,504 791,925 795,506
Commercial rental 115,604 102,468 216,803 194,047
Fuel 134,497 159,846 272,785 334,242
Other 66,385 59,697 131,345 123,425
--------------- --------------- --------------- --------------
714,817 721,515 1,412,858 1,447,220
Integrated logistics 367,557 346,804 728,569 663,017
International 140,877 115,619 263,871 213,981
Public transportation 150,576 137,600 303,675 274,975
Eliminations and Other (92,250) (87,539) (181,779) (178,075)
--------------- --------------- --------------- --------------
Total 1,281,577 1,233,999 2,527,194 2,421,118
--------------- --------------- --------------- --------------
Operating expense 916,612 900,107 1,822,915 1,790,540
Freight under management expense 77,360 62,173 155,273 108,963
Year 2000 expense 9,665 - 14,736 -
Depreciation expense 161,688 158,402 322,170 319,129
Gains on sale of revenue earning equipment (13,355) (12,627) (27,666) (29,028)
Interest expense 49,400 49,793 98,172 97,917
Miscellaneous expense (income), net 933 (1,952) 1,531 (4,737)
--------------- --------------- --------------- --------------
Earnings before income taxes from business units 79,274 78,103 140,063 138,334
CORPORATE ADMINISTRATIVE EXPENSES AND OTHER (3,971) (5,275) (2,838) (10,112)
--------------- --------------- --------------- --------------
EARNINGS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES $ 75,303 72,828 137,225 128,222
=============== =============== =============== ==============
</TABLE>
<TABLE>
<CAPTION>
Fleet size (owned and leased including International):
<S> <C> <C>
Full service lease 115,440 111,776
Commercial rental 39,309 37,216
Buses operated or managed 15,358 14,610
Transportation services locations 1,004 1,077
</TABLE>
- --------------------------------------------------------------------------------
* Certain 1997 amounts have been reclassified to conform with the presentation
adopted January 1, 1998.
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of stockholders of Ryder System, Inc. was held on
May 1, 1998.
(b) All director nominees described in (c) below were elected. The
following directors continued in office after the meeting: M. Anthony
Burns, Joseph L. Dionne, Edward T. Foote II, John A. Georges, David T.
Kearns and Lynn M. Martin.
(c) Certain matters voted on at the meeting and the votes cast with respect
to such matters are as follows:
<TABLE>
<CAPTION>
VOTES CAST
---------- BROKER
FOR AGAINST ABSTAIN NON-VOTES
--- ------- ------- ---------
MANAGEMENT PROPOSAL
- -------------------
<S> <C> <C> <C> <C>
Ratification of an amendment to the
Ryder System, Inc. 1995 Stock
Incentive Plan 48,438,187 14,398,399 227,579 0
Ratification of appointment
of independent auditors 62,898,696 93,654 71,815 0
</TABLE>
<TABLE>
ELECTION OF DIRECTORS
DIRECTOR VOTES RECEIVED VOTES WITHHELD
- -------- -------------- --------------
<S> <C> <C>
David I. Fuente 61,936,547 1,127,619
Vernon E. Jordan, Jr. 60,241,606 2,822,560
Paul J. Rizzo 61,994,603 1,069,563
Christine A. Varney 61,988,598 1,075,568
Alva O. Way 62,000,114 1,064,052
</TABLE>
19
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
(3.1) The Ryder System, Inc. Restated Articles of Incorporation,
dated November 8, 1985, as amended through May 18, 1990,
previously filed with the Commission as an exhibit to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1990, are incorporated by reference into this
report.
(3.2) The Ryder System, Inc. By-Laws, as amended through November
23, 1993, previously filed with the Commission as an exhibit
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1993, are incorporated by reference into this
report.
(15) Letter regarding unaudited interim financial statements.
(27) Financial data schedule (for SEC use only).
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Registrant during the
period covered by this report.
20
<PAGE>
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 12, 1998 /S/ EDWIN A. HUSTON
------------------------------------------------
Edwin A. Huston
Senior Executive Vice President-Finance
and Chief Financial Officer
(Principal Financial Officer)
Date: August 12, 1998 /S/ GEORGE P. SCANLON
------------------------------------------------
George P. Scanlon
Vice President - Planning and Controller
(Principal Accounting Officer)
21
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
(15) Letter regarding unaudited interim financial statements.
(27) Financial Data Schedule (for SEC use only).
22
EXHIBIT 15
KPMG PEAT MARWICK LLP
CERTIFIED PUBLIC ACCOUNTANTS
One Biscayne Tower Telephone 305-358-2300
2 South Biscayne Boulevard Telecopier 305-577-0544
Suite 2900
Miami, Florida 33131
The Board of Directors and Shareholders
Ryder System, Inc.:
We acknowledge our awareness of the incorporation by reference in the following
Registration Statements of our report dated July 21, 1998 related to our review
of interim financial information:
Form S-3:
/bullet/ Registration Statement No. 33-20359 covering $1,000,000,000
aggregate principal amount of debt securities.
/bullet/ Registration Statement No. 33-50232 covering $800,000,000 aggregate
principal amount of debt securities.
/bullet/ Registration Statement No. 33-58667 covering $800,000,000 aggregate
principal amount of debt securities.
Form S-8:
/bullet/ Registration Statement No. 33-20608 covering the Ryder System
Employee Stock Purchase Plan.
/bullet/ Registration Statement No. 33-4333 covering the Ryder Employee
Savings Plan.
/bullet/ Registration Statement No. 1-4364 covering the Ryder System Profit
Incentive Stock Plan.
/bullet/ Registration Statement No. 33-69660 covering the Ryder System, Inc.
1980 Stock Incentive Plan.
/bullet/ Registration Statement No. 33-37677 covering the Ryder System UK
Stock Purchase Scheme.
/bullet/ Registration Statement No. 33-442507 covering the Ryder Student
Transportation Services, Inc. Retirement/Savings Plan.
/bullet/ Registration Statement No. 33-63990 covering the Ryder System, Inc.
Directors' Stock Plan.
/bullet/ Registration Statement No. 33-58001 covering the Ryder System, Inc.
Employee Savings Plan A.
/bullet/ Registration Statement No. 33-58003 covering the Ryder System, Inc.
Employee Savings Plan B.
/bullet/ Registration Statement No. 33-61509 covering the Ryder System, Inc.
Stock for Merit Increase Replacement Plan.
/bullet/ Registration Statement No. 33-62013 covering the Ryder System, Inc.
1995 Stock Incentive Plan.
/bullet/ Registration Statement No. 333-19515 covering the Ryder System,Inc.
1997 Deferred Compensation Plan.
/bullet/ Registration Statement No. 333-26653 covering the Ryder System,Inc.
Board of Directors Stock Award Plan.
<PAGE>
/bullet/ Registration Statement No. 333-57599 covering the Ryder Student
Transportation Services, Inc. Retirement/Savings Plan.
/bullet/ Registration Statement No. 333-57593 covering the Ryder System,
Inc. Stock Purchase Plan for Employees.
/bullet/ Registration Statement No. 333-57595 covering the Ryder System,
Inc. 1995 Stock Incentive Plan.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered a part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of Sections 7 and 11 of the Act.
/S/ KPMG PEAT MARWICK LLP
Miami, Florida
August 12, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
RYDER SYSTEM, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED CONDENSED BALANCE
SHEETS AND STATEMENTS OF EARNINGS FOR THE SIX MONTHS ENDED JUNE 30, 1998
AND JUNE 30, 1997 (RESTATED FOR DISCONTINUED OPERATIONS) AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> Dec-31-1998 Dec-31-1997
<PERIOD-START> Jan-01-1998 Jan-01-1997
<PERIOD-END> Jun-30-1998 Jun-30-1997
<CASH> 73,731 117,798
<SECURITIES> 0 0
<RECEIVABLES> 587,164 593,033
<ALLOWANCES> 0 0
<INVENTORY> 67,591 62,356
<CURRENT-ASSETS> 1,089,267 1,103,905
<PP&E> 6,284,185 6,442,063
<DEPRECIATION> 2,431,229 2,575,378
<TOTAL-ASSETS> 5,673,517 5,643,182
<CURRENT-LIABILITIES> 1,018,259 1,255,168
<BONDS> 2,449,608 2,130,614
0 0
0 0
<COMMON> 309,189 471,498
<OTHER-SE> 791,736 665,111
<TOTAL-LIABILITY-AND-EQUITY> 5,673,517 5,643,182
<SALES> 0 0
<TOTAL-REVENUES> 2,527,194 2,421,118
<CGS> 0 0
<TOTAL-COSTS> 2,292,458 2,196,232
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 97,511 96,664
<INCOME-PRETAX> 137,225 128,222
<INCOME-TAX> 54,684 52,443
<INCOME-CONTINUING> 82,541 75,779
<DISCONTINUED> 0 7,922
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 82,541 83,701
<EPS-PRIMARY> 1.12 1.08<F1>
<EPS-DILUTED> 1.10 1.07
<FN>
<F1>TAG (EPS - PRIMARY DENOTES BASIC EPS)
</FN>
</TABLE>
