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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File No. 1-4364
-------------------------------------
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 64,222,795 shares of common stock ($0.50 par value per
share) outstanding as of October 31, 1999.
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<PAGE>
RYDER SYSTEM, INC.
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Condensed Statements of Earnings -
Three and nine months ended September 30, 1999
and 1998 (unaudited) 3
Consolidated Condensed Balance Sheets -
September 30, 1999 (unaudited) and December 31, 1998 4
Consolidated Condensed Statements of Cash Flows -
Nine months ended September 30, 1999 and 1998 (unaudited) 5
Notes to Consolidated Condensed Financial Statements 6
Independent Accountants' Review Report 9
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk 28
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 29
Signatures 30
Exhibit Index 31
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Ryder System, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Three Months Nine Months
Periods ended September 30, 1999 and 1998 ------------------------- ----------------
(In thousands, except per share amounts) 1999 1998* 1999 1998*
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $1,261,566 1,176,332 3,630,420 3,399,851
---------- --------- --------- ---------
Operating expense 902,684 828,815 2,613,730 2,420,215
Freight under management expense 98,389 76,849 305,141 232,122
Year 2000 expense and other unusual items 4,959 10,671 25,930 25,365
Depreciation expense, net of gains
(three months, 1999 - $14,736,
1998 - $12,175; nine months,
1999 - $42,768, 1998 - $39,147) 146,401 145,423 428,366 423,679
Interest expense 50,067 48,681 144,141 140,620
Miscellaneous expense (income), net 2,666 2,167 5,835 (2,376)
---------- --------- --------- ---------
1,205,166 1,112,606 3,523,143 3,239,625
---------- --------- --------- ---------
Earnings from continuing operations
before income taxes 56,400 63,726 107,277 160,226
Provision for income taxes 21,291 23,309 40,701 61,359
---------- --------- --------- ---------
Earnings from continuing operations 35,109 40,417 66,576 98,867
Earnings (loss) from discontinued operations,
net of income taxes (8,992) (3,369) 11,831 20,722
Gain on sale of discontinued operations,
net of income taxes 335,350 - 335,350 -
---------- --------- --------- ---------
Net earnings $ 361,467 37,048 413,757 119,589
========== ========= ========= =========
Earnings per common share - Basic **:
Continuing operations $ 0.51 0.55 0.95 1.35
Discontinued operations (0.13) (0.05) 0.17 0.28
Gain on sale of discontinued operations 4.84 - 4.77 -
---------- --------- --------- ---------
$ 5.22 0.51 5.89 1.63
========== ========= ========= =========
Earnings per common share - Diluted **:
Continuing operations $ 0.51 0.55 0.94 1.33
Discontinued operations (0.13) (0.05) 0.17 0.28
Gain on sale of discontinued operations 4.83 - 4.76 -
---------- --------- --------- ---------
$ 5.21 0.51 5.87 1.61
========== ========= ========= =========
Cash dividends per common share $ 0.15 0.15 0.45 0.45
========== ========= ========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
* Certain amounts have been restated to reflect discontinued operations.
** Earnings per share amounts are calculated independently for each component
and may not be additive due to rounding.
3
<PAGE>
ITEM 1. Financial Statements (continued)
Ryder System, Inc. and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
September 30, December 31,
(Dollars in thousands, except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 315,036 138,353
Receivables 671,457 559,141
Inventories 64,866 67,605
Tires in service 181,719 166,578
Prepaid expenses and other current assets 120,728 111,170
---------- --------
Total current assets 1,353,806 1,042,847
Revenue earning equipment 3,453,673 3,211,969
Operating property and equipment 585,406 597,951
Direct financing leases and other assets 623,824 543,242
Intangible assets and deferred charges 237,988 312,592
---------- ---------
$6,254,697 5,708,601
========== =========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 623,383 483,334
Accounts payable 465,190 399,495
Accrued expenses 494,864 479,410
Income taxes payable 223,287 425
---------- ---------
Total current liabilities 1,806,724 1,362,664
Long-term debt 1,874,822 2,099,697
Deferred income taxes 856,206 807,623
Other non-current liabilities 314,718 343,003
---------- ---------
Total liabilities 4,852,470 4,612,987
---------- ---------
Shareholders' equity:
Common stock of $0.50 par value per share (shares outstanding at
September 30, 1999 - 68,319,736; December 31, 1998 - 71,280,247) 589,648 610,543
Retained earnings 833,764 504,105
Accumulated other comprehensive income (21,185) (19,034)
---------- ---------
Total shareholders' equity 1,402,227 1,095,614
---------- ---------
$6,254,697 5,708,601
========== =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
ITEM 1. Financial Statements (continued)
Ryder System, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Nine months ended September 30, 1999 and 1998
(In thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Continuing operations
Cash flows from operating activities:
Earnings from continuing operations $ 66,576 98,867
Depreciation expense, net of gains 428,366 423,679
Amortization expense and other non-cash charges, net 12,676 5,934
Deferred income tax expense 79,460 104,667
Changes in operating assets and liabilities, net of acquisitions:
Increase (decrease) in aggregate balance of trade receivables sold (125,000) 65,000
Receivables (74,436) (73,693)
Inventories (5,401) (1,208)
Prepaid expenses and other assets (31,804) (67,338)
Accounts payable 75,154 64,973
Accrued expenses and other liabilities (58,331) (20,915)
---------- ----------
367,260 599,966
---------- ----------
Cash flows from financing activities:
Net change in commercial paper borrowings (50,743) 236,774
Debt proceeds 275,738 244,598
Debt repaid, including capital lease obligations (335,911) (287,329)
Common stock repurchased (81,148) (80,619)
Common stock issued 6,599 29,411
Dividends on common stock (31,552) (33,135)
---------- ----------
(217,017) 109,700
---------- ----------
Cash flows from investing activities:
Purchases of property and revenue earning equipment (1,522,448) (1,010,918)
Sales of property and revenue earning equipment 286,380 226,066
Sale and leaseback of revenue earning equipment 300,030 73,430
Acquisitions, net of cash acquired (12,699) (52,792)
Proceeds from sale of public transportation services business 940,000 -
Other, net 30,575 21,593
---------- ----------
21,838 (742,621)
---------- ----------
Net cash flows from continuing operations 172,081 (32,955)
Net cash flows from discontinued operations 4,602 9,150
---------- ----------
Increase (decrease) in cash and cash equivalents 176,683 (23,805)
Cash and cash equivalents at January 1 138,353 78,370
---------- ----------
Cash and cash equivalents at September 30 $ 315,036 54,565
========== ==========
</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 1998 Annual Report and should be
read in conjunction with the consolidated financial statements and
notes which appear in that report. These statements do not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included and the disclosures herein are adequate to make the
information presented not misleading. Operating results for interim
periods are not necessarily indicative of the results that can be
expected for a full year. Certain 1998 amounts have been reclassified
to conform to current year presentation.
(B) SALE OF RYDER PUBLIC TRANSPORTATION SERVICES
On September 13, 1999, the Company completed the sale of its Public
Transportation Services business to FirstGroup plc for $940 million in
cash and realized an after-tax gain of $335.4 million. The purchase
price is subject to adjustment in the fourth quarter of 1999 for
changes in the net assets of the Public Transportation Services
business through the sale date. The disposal of the Public
Transportation Services segment has been accounted for as a
discontinued operation and accordingly, its operations and cash flows
are segregated and reported as a discontinued operation in the
accompanying Consolidated Condensed Statements of Earnings and Cash
Flows. Summarized results of the Public Transportation Services
business for the periods ended September 30 were as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
1999 1998 1999 1998
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue $ 83,542 114,485 411,743 418,160
======== ======= ======= =======
Earnings (loss) before taxes $(14,488) (5,654) 20,050 35,071
Income tax provision (benefit) (5,496) (2,285) 8,219 14,349
-------- ------- ------- -------
Earnings (loss) before gain $ (8,992) (3,369) 11,831 20,722
======== ======= ======= =======
Gain on sale of business $573,187 - 573,187 -
Income tax provision 237,837 - 237,837 -
-------- -------
$335,350 - 335,350 -
======== =======
</TABLE>
Interest expense was allocated to the Public Transportation Services
business based upon an assumed debt to equity ratio consistent with
other similar businesses and with the Company's historical interest
allocation method for segment profit reporting and discontinued
operations. Interest expense of $8.5 million was included in the
operating results of Public Transportation Services for the nine months
ended September 30, 1999 and 1998. The results of operations exclude
corporate and branch overhead charges allocated by the Company and
previously included in segment profit reporting.
The gain on sale of the Public Transportation Services business is net
of direct transaction costs, gains on the curtailment and settlement of
certain employee benefit plans and exit costs to separate the
discontinued business.
6
<PAGE>
ITEM 1. Financial Statements (continued)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
(C) EARNINGS PER SHARE INFORMATION
Basic earnings per share is computed by dividing net earnings by the
weighted average number of common shares outstanding. Diluted earnings
per share reflects the dilutive effect of potential common shares from
securities such as stock options. The dilutive effect of stock options
is computed using the treasury stock method, which assumes the
repurchase of common shares by the Company at the average market price
for the period. A reconciliation of the number of shares used in
computing basic and diluted earnings per share for the three and nine
months ended September 30, 1999 and 1998 follows (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
1999 1998 1999 1998
------------------- ---------------------
<S> <C> <C> <C> <C>
Weighted average shares
outstanding - Basic 69,247 72,998 70,307 73,507
Common equivalents:
Shares issuable under outstanding
dilutive options 846 2,874 1,300 4,252
Shares assumed repurchased based on the
average market price for the period (761) (2,639) (1,165) (3,678)
Dilutive effect of exercised options
prior to being exercised, net 76 18 83 195
------------------- ------------------
Weighted average shares outstanding -
Diluted 69,408 73,251 70,525 74,276
=================== ==================
Anti-dilutive options not included above 6,364 2,659 5,910 1,281
=================== ==================
</TABLE>
(D) SEGMENT INFORMATION
The Company operates in three business segments: (1) Transportation
Services, which provides full service leasing, commercial rental and
programmed maintenance of trucks, tractors and trailers to customers
throughout the U.S. and Canada; (2) Integrated Logistics, which
provides support services for customers' entire supply chains, from
inbound raw materials supply through finished goods distribution,
including dedicated contract carriage, the management of carriers, and
inventory deployment throughout the U.S. and Canada; and (3)
International, which provides full service leasing, commercial rental,
programmed maintenance and logistics services in Europe, South America
and Mexico.
Management evaluates business segment financial performance based upon
several factors, of which the primary measure is earnings before income
taxes, Year 2000 expense and other unusual items. Business segment
earnings before income taxes represent the total profit earned from
each segment's customers across all of the Company's segments and
include allocations of certain overhead costs. These 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. The Transportation Services segment leases
revenue earning equipment, sells fuel and provides maintenance and
other ancillary services to the Integrated Logistics segment.
Intersegment sales are accounted for at approximate fair value as if
the sales were made to third parties. Interest expense is allocated to
the business segments based upon targeted debt to equity ratios using
an interest factor, which reflects the Company's average total cost of
debt. The following table sets forth the revenue and pretax earnings
for each of the Company's business segments for the three and nine
months ended September 30, 1999 and 1998 (in thousands):
7
<PAGE>
ITEM 1. Financial Statements (continued)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
Three Months Nine Months
---------- --------- --------- ---------
1999 1998 1999 1998
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Transportation Services $ 764,845 717,390 2,192,182 2,101,942
Integrated Logistics 422,771 367,966 1,241,975 1,096,535
International 154,907 167,813 437,766 431,684
Intersegment eliminations and other (80,957) (76,837) (241,503) (230,310)
---------- --------- --------- ---------
Total revenue $1,261,566 1,176,332 3,630,420 3,399,851
========== ========= ========= =========
Earnings from continuing operations before income taxes:
Transportation Services $ 54,675 64,715 145,885 163,955
Integrated Logistics 17,779 23,110 37,725 57,753
International 3,348 1,485 (2,318) 1,984
Intersegment eliminations (9,707) (9,686) (28,806) (29,280)
---------- --------- --------- ---------
Total from reportable segments 66,095 79,624 152,486 194,412
Corporate administrative expenses and other (4,736) (5,227) (19,279) (8,821)
Year 2000 expense (2,314) (10,671) (23,285) (25,365)
Other unusual items (2,645) - (2,645) -
---------- --------- --------- ---------
Total earnings from continuing operations
before income taxes $ 56,400 63,726 107,277 160,226
========== ========= ========= =========
</TABLE>
(E) COMPREHENSIVE INCOME
Comprehensive income presents a measure of all changes in shareholders'
equity except for changes resulting from transactions with shareholders
in their capacity as shareholders. The Company's total comprehensive
income presently consists of net earnings and currency translation
adjustments associated with foreign operations which use the local
currency as their functional currency. Total comprehensive income for
the three months ended September 30, 1999 and 1998 was $366.8 million
and $33.0 million, respectively. Total comprehensive income for the
nine months ended September 30, 1999 and 1998 was $411.6 million and
$114.3 million, respectively. The increase in comprehensive income was
due primarily to the gain on sale of discontinued operations.
(F) UNUSUAL ITEMS
During the third quarter of 1999, the Company recorded pretax charges
of $0.9 million for services performed to date in connection with an
organizational review project to develop a long-term plan to improve
the Company's overall operating performance. The organizational review
project is expected to be completed during the fourth quarter of 1999.
In October 1999, the Company approved the expenditure for a new
information system to support the vehicle maintenance and procurement
business processes within Transportation Services. As a result of the
decision to commence with this project, during the third quarter of
1999, the Company recorded a $1.7 million pretax charge to address the
impairment of an existing maintenance software project in development
which will not be utilized in the future.
8
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Shareholders
Ryder System, Inc.:
We have reviewed the accompanying consolidated condensed balance sheet of Ryder
System, Inc. and subsidiaries as of September 30, 1999, and the related
consolidated condensed statements of earnings for the three and nine months
ended September 30, 1999 and 1998 and the consolidated condensed statements of
cash flows for the nine months ended September 30, 1999 and 1998. These
consolidated condensed financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated condensed financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Ryder System, Inc. and subsidiaries
as of December 31, 1998, and the related consolidated statements of operations,
shareholders' equity and cash flows for the year then ended (not presented
herein); and in our report dated February 4, 1999, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated condensed balance sheet
as of December 31, 1998, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
/s/ KPMG LLP
Miami, Florida
October 20, 1999
9
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations --
Three and nine months ended September 30, 1999 and 1998
OVERVIEW
The following discussion should be read in conjunction with the unaudited
consolidated condensed financial statements and notes thereto included under
ITEM 1. In addition, reference should be made to the Company's audited
consolidated financial statements and notes thereto and related Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's most recent Annual Report on Form 10-K.
The Company operates in three business segments: (1) Transportation Services,
which provides full service leasing, commercial rental and programmed
maintenance of trucks, tractors and trailers to customers throughout the U.S.
and Canada; (2) Integrated Logistics, which provides support services for
customers' entire supply chains, from inbound raw materials supply through
finished goods distribution, including dedicated contract carriage, the
management of carriers, and inventory deployment throughout the U.S. and Canada;
and (3) International, which provides full service leasing, commercial rental,
programmed maintenance and logistics services in Europe, South America and
Mexico.
On September 13, 1999, the Company completed the sale of its Public
Transportation Services business to FirstGroup plc for $940 million in cash. The
Company intends to use the proceeds from the sale for working capital needs and
other prudent capital investment purposes, for debt reduction consistent with
the objective of maintaining and improving existing credit ratings and for share
repurchases. The following operating discussion excludes the results of the
Public Transportation Services business which has been classified as
discontinued operations in all periods presented (see "Notes to Consolidated
Condensed Financial Statements" and "Discontinued Operations" below).
The Company reported earnings from continuing operations of $35.1 million, or
$0.51 a diluted share, in the third quarter of 1999, compared with $40.4
million, or $0.55 a diluted share, in the same 1998 period. Excluding unusual
items, earnings from continuing operations in the third quarter of 1999 were
$38.2 million, or $0.55 a diluted share, compared with $47.2 million, or $0.64 a
diluted share, in the third quarter of 1998. The decline in earnings from
continuing operations, excluding unusual items, was due primarily to reduced
profitability in the Transportation Services and Integrated Logistics business
segments. See "Operating Results by Business Segment" for a further discussion
of operating results for the third quarter.
In the first nine months of 1999, earnings from continuing operations were $66.6
million, or $0.94 a diluted share, compared with $98.9 million, or $1.33 a
diluted share, in the same 1998 period. Excluding unusual items, earnings from
continuing operations in the first nine months of 1999 were $82.7 million, or
$1.17 a diluted share, compared with $114.5 million, or $1.54 a diluted share,
in the first nine months of 1998. The decline in earnings from continuing
operations, excluding unusual items, was due primarily to reduced profitability
in each business segment and the absence of certain corporate gains realized in
the first half of 1998. See "Operating Results by Business Segment" for a
further discussion of operating results through September 30.
10
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued) --
Three and nine months ended September 30, 1999 and 1998
The decline in earnings per share is less than the decline in earnings because
the average number of shares outstanding during the third quarter and first nine
months of 1999 decreased by 5% compared with the same 1998 periods. The decrease
in shares was due to the Company's stock repurchase programs.
Revenue in the third quarter of 1999 increased 7%, to $1.26 billion, compared
with $1.18 billion in the third quarter of 1998. Revenue also increased 7% to
$3.63 billion in the nine months of 1999 from $3.40 billion in the first nine
months of 1998. The revenue growth was led primarily by the Integrated Logistics
business segment which posted revenue gains of 15% and 13% in the third quarter
and first nine months of 1999, respectively. Transportation Services revenue
grew 7% in the third quarter of 1999 and 4% in the first nine months of 1999.
Operating expense increased 9% in the third quarter and 8% in the first nine
months of 1999 compared with the same periods of 1998. These increases are
attributable to higher compensation and employee benefits expenses, outside
driver costs, vehicle liability and technology costs primarily as a result of
higher business volumes, as well as higher fuel costs principally as a result of
increasing fuel prices, especially in the third quarter of 1999. Equipment
rental costs have also increased because of sale/leaseback transactions,
totaling over $315 million, which were completed since December 1998. In
addition, operating expense in the third quarter of 1998 was favorably impacted
by a $3.4 million reduction in estimated facility closure costs, which were
originally established in connection with several of the Company's 1996
restructuring initiatives. Operating expense as a percentage of revenue was 72%
in the third quarter and first nine months of 1999 compared with 70% and 71% in
the comparable 1998 periods.
Freight under management expense, which represents subcontracted freight costs
on logistics contracts where the Company purchases transportation, increased $22
million, or 28%, in the third quarter of 1999 and $73 million, or 31%, in the
first nine months of 1999 compared with the same periods in 1998. Freight under
management expense as a percentage of revenue also increased to 8% in the third
quarter and first nine months of 1999 from 7% for the comparable 1998 periods.
The increases reflect the growth in these type of integrated logistics
contracts, especially during the latter half of 1998.
11
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued) --
Three and nine months ended September 30, 1999 and 1998
Unusual items include Year 2000 expenses in both 1999 and 1998 and a $2.6
million ($1.6 million after tax, or $0.02 a diluted share) third quarter 1999
charge related to strategic consulting expenses and the write-off of an impaired
maintenance information system. Incremental Year 2000 expense totaled $2 million
in the third quarter of 1999 ($1 million after tax, or $0.02 per diluted common
share) and $23 million in the first nine months of 1999 ($14 million after tax,
or $0.20 per diluted common share) compared with $11 million ($7 million after
tax, or $0.09 per diluted common share) in the third quarter of 1998 and $25
million ($16 million after tax, or $0.21 per diluted common share) in the first
nine months of 1998. The decline in spending in the third quarter of 1999
reflects the Company's progress and near completion of Year 2000 remediation.
See "Year 2000 Preparation" for a further discussion of this matter.
Depreciation expense (before gains on vehicle sales) increased 2% in the third
quarter and first nine months of 1999 compared with the same periods in 1998.
For 1999, the impact on depreciation expense from the growth in the average size
of the in-serviced full service lease and commercial rental fleets has been
substantially offset by the impact of sale/leaseback transactions completed
since December 1998. Gains on vehicle sales increased 21% in the third quarter
and 9% in the first nine months of 1999, compared with the same periods last
year, due to an increase in the number of vehicles sold which offset a decrease
in the average gain per vehicle sold. The reduced average gains reflect overall
increased carrying value of vehicles at the date of disposition, a changing mix
of vehicles sold and disposal methods. Average proceeds per vehicle sold in 1999
exceeded 1998 levels. As a percentage of revenue, depreciation expense, net of
gains, was unchanged at 12% in the third quarter and first nine months of 1999
and 1998.
Interest expense increased 3% in the third quarter and first nine months of
1999, compared with the same periods in 1998, due to higher average outstanding
debt levels prior to the debt reductions in September 1999 associated with the
use of proceeds from the sale of the Public Transportation Services business.The
higher outstanding debt levels resulted primarily from increased levels of
capital spending. Interest costs were favorably impacted by lower average
interest rates and sale/leaseback transactions completed since December 1998.
Miscellaneous expense (income), net was $2.7 million and $5.8 million in the
third quarter and first nine months of 1999, respectively, compared with $2.2
million and $(2.4) million in the comparable 1998 periods. The growth in
miscellaneous expense in 1999 was due primarily to absence of corporate gains on
the sale of facilities and properties realized in the first half of 1998 and
increased costs associated with selling, with limited recourse, more trade
receivables during the 1999 period.
The Company's effective tax rates in the third quarter and first nine months of
1999 were 37.8% and 37.9%, respectively, compared with 36.6% and 38.3% in the
same 1998 periods.
12
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued) --
Three and nine months ended September 30, 1999 and 1998
OPERATING RESULTS BY BUSINESS SEGMENT
Periods ended September 30, 1999 and 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Nine Months
-------------------------- ---------------------
1999 1998 1999 1998
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Transportation Services:
Full service lease and
programmed maintenance $ 409,744 395,626 1,200,654 1,161,445
Commercial rental 134,555 126,166 373,671 342,969
Fuel 150,965 130,804 413,140 401,389
Other 69,581 64,794 204,717 196,139
---------- --------- --------- ---------
764,845 717,390 2,192,182 2,101,942
Integrated Logistics 422,771 367,966 1,241,975 1,096,535
International 154,907 167,813 437,766 431,684
Intersegment eliminations (80,957) (76,837) (241,503) (230,310)
---------- --------- --------- ---------
Total revenue $1,261,566 1,176,332 3,630,420 3,399,851
========== ========= ========= =========
Earnings from continuing operations before
income taxes:
Transportation Services $ 54,675 64,715 145,885 163,955
Integrated Logistics 17,779 23,110 37,725 57,753
International 3,348 1,485 (2,318) 1,984
Intersegment eliminations (9,707) (9,686) (28,806) (29,280)
---------- --------- --------- ---------
Total from reportable segments 66,095 79,624 152,486 194,412
Corporate administrative expenses
and other (4,736) (5,227) (19,279) (8,821)
Year 2000 expense (2,314) (10,671) (23,285) (25,365)
Other unusual items (2,645) - (2,645) -
---------- --------- --------- ---------
Total earnings from continuing
operation before income taxes $ 56,400 63,726 107,277 160,226
========== ========= ========= =========
</TABLE>
Vehicle Fleet Size (owned and leased):
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1999 1998 1998
------------- ------------ -------------
<S> <C> <C> <C>
Transportation Services*:
Full service lease 118,567 109,124 106,497
Commerical rental 42,177 37,517 38,968
Service vehicles 2,188 2,127 2,105
------- ------- -------
162,932 148,768 147,570
International 13,270 13,802 14,000
Integrated Logistics 106 107 109
------- ------- -------
176,308 162,677 161,679
======= ======= =======
* Includes vehicles:
Not yet earning revenue 5,990 4,314 2,913
No longer earning revenue 6,301 4,159 4,063
------- ------- -------
12,291 8,473 6,976
======= ======= =======
</TABLE>
13
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued) --
Three and nine months ended September 30, 1999 and 1998
Management evaluates financial performance based upon several factors, of which
the primary measure is business segment earnings before income taxes, Year 2000
expense and other unusual items. Business segment earnings before income taxes
represent the total profit earned from each segment's customers across all of
the Company's segments and include allocations of certain overhead costs. These
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.
INTEGRATED LOGISTICS
Revenue from Integrated Logistics increased 15% and 13% in the third quarter and
first nine months of 1999, respectively, compared with the same 1998 periods,
primarily due to expansion of revenue with existing customers, start-up of
business sold in the previous year, the negative impact on 1998 results of a
strike at select General Motors plants which ended in July 1998 and, to a lesser
extent, the pass-through impact of increased fuel costs. A large component of
growth in 1999 has come from logistics contracts where the Company manages the
transportation of freight and subcontracts the delivery of products to third
parties. Operating revenue (which excludes subcontracted freight costs)
increased 11% and 8% in the third quarter and first nine months of 1999,
respectively, compared with the same 1998 periods. New business sales have
grown, on a year-over-year basis, in each of the last five quarters. Net
business sales in the third quarter of 1999 were about 15% below prior year
levels due primarily to timing; however, for the year, net business sales have
increased almost 90% over last year. Management continues to believe that
improved sales force capabilities, industry segmentation, and the ability to
leverage rapidly emerging logistics technologies should result in continued new
sales growth for the remainder of 1999. However, in light of the timing of the
start-up of business sales (in both 1998 and 1999) and lost business, revenue
growth rates are not expected to continue at current levels over the near term.
Integrated Logistics pretax business segment earnings in the third quarter of
1999 were $18 million compared with $23 million in the same period last year.
Pretax business segment earnings as a percentage of operating revenue also
decreased to 5.5% in the third quarter of 1999 from 7.9% in the comparable 1998
period. Pretax earnings in the first nine months of 1999 were $38 million, or
4.0% of operating revenue, compared with $58 million, or 6.7% of operating
revenue, in the same period last year. Pretax business segment earnings in the
third quarter of 1999 were impacted by increased vehicle liability, employee
benefit and litigation costs and higher overhead and technology costs to support
product development and marketing initiatives.
14
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued) --
Three and nine months ended September 30, 1999 and 1998
For the year, pretax business segment earnings were also impacted by lower
volumes in some volume-sensitive automotive and carrier management accounts,
reduced margins as a result of lost dedicated contract carriage business and a
second quarter $3 million contract settlement charge related to one strategic
account. In light of these factors, management expects unfavorable earnings
comparisons to continue through year end.
TRANSPORTATION SERVICES
Total revenue in the Transportation Services segment increased 7% in the third
quarter and 4% in the first nine months of 1999 compared with the same periods
in 1998. Dry revenue (revenue excluding fuel) increased 5% in the third quarter
and first nine months of 1999 compared with the same 1998 periods.
Despite continued strong new sales of truck leases in the first nine months of
1999, full service leasing and programmed maintenance revenue in the third
quarter and first nine months of 1999 grew only about 4% from the comparable
periods of 1998. The leasing revenue growth rate continues to be impacted by
non-renewals, overall reduced pricing and delays associated with the in-service
processing of vehicles. As of September 30, 1999, new vehicles not yet earning
revenue have doubled from prior year levels; however, management expects to
reduce these counts to prior year levels by the end of the fiscal year. Based on
the level of non-renewals, current pricing conditions and status of in-servicing
efforts, management does not expect lease revenue growth rates to substantially
exceed current levels in the near term.
Commercial rental revenue increased 7% to $135 million in the third quarter of
1999 and 9% to $374 million in the first nine months of 1999, compared with the
same 1998 periods. The increase in revenue reflects continued strong, but lower,
utilization of a larger average commercial rental fleet, especially from full
service lease customers awaiting delivery of new lease equipment. Such "awaiting
new lease" rental revenue increased $2 million, or 16%, in the third quarter of
1999 and $15 million, or 49%, in the first nine months of 1999, compared with
the same periods last year. The growth in this ancillary service slowed in the
current quarter due to conversions to full service lease as well as unfavorable
comparisons to last year's third quarter. Management expects this trend to
continue with the anticipated reduction of vehicles not yet earning revenue. The
Company also adjusts fleet levels in response to seasonal demands, utilization
targets and projected future spending, and fleet levels are expected to decline
over the near term. In light of all of these factors, management does not expect
commercial rental revenue growth rates to remain at current levels in the near
term.
15
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued) --
Three and nine months ended September 30, 1999 and 1998
Fuel revenue increased 15% in the third quarter of 1999, compared with the third
quarter of 1998, as a result of much higher world-wide fuel prices which offset
slightly lower volumes. Fuel revenue increased 3% in the first nine months of
1999 compared with the first nine months of 1998, as a result of higher fuel
prices which offset lower volumes. Other transportation services revenue,
consisting of third-party maintenance, trailer rentals and other ancillary
revenue to support product lines, increased 7% and 4% in the third quarter and
first nine months of 1999, respectively, compared with the same periods in 1998.
Transportation Services pretax earnings decreased 16% to $55 million in the
third quarter of 1999 compared with the third quarter of 1998. As a percentage
of dry revenue, earnings before income taxes decreased from 11.0% in the third
quarter of 1998 to 8.9% in the third quarter of 1999. Pretax earnings in the
first nine months of 1999 were $146 million, or 8.2% of dry revenue, compared
with $164 million, or 9.6% of dry revenue, in the same period last year. The
decline in segment pretax earnings resulted primarily from higher compensation
and employee benefit expenses, higher vehicle liability and technology costs,
the overall impact of non-renewals, lower pricing and higher fixed costs
associated with the continuing delays of in-service and out-service processing
of lease vehicles. Operating margin (revenue less direct operating expenses,
depreciation and interest expense) from full service leasing increased in the
third quarter and first nine months of 1999 compared with the same periods last
year, primarily as a result of revenue growth. Operating margin as a
percentage of revenue remained the same for all periods as reduced maintenance
spending was offset by higher equipment fixed costs, especially during the third
quarter of 1999 . Commercial rental operating margin also increased in the third
quarter and first nine months of 1999, compared with the same 1998 periods,
reflecting continued strong, but lower, utilization of a larger average fleet.
Operating margin as a percentage of revenue decreased in the third quarter and
first nine months of 1999 compared with the same periods last year reflecting
lower fleet utilization. In light of these factors, management expects
unfavorable earnings comparisons to continue through year end.
INTERNATIONAL
International segment revenue decreased 8% in the third quarter of 1999 and
increased 1% in the first nine months of 1999, compared with the same periods in
1998. The International revenue growth rate reflects the impact of the economic
difficulties in Brazil and Argentina and revenue reductions in U.K. truck
leasing and rental which offset revenue gains in Mexico and the U.K. logistics
operations. The 1999 year-to-date revenue growth also includes the impact of the
acquisition of the remaining interest in Companhia Transportadora e Comercial
Translor, S.A., a Brazilian logistics company which was fully consolidated in
May 1998.
16
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued) --
Three and nine months ended September 30, 1999 and 1998
The International segment reported pretax earnings of $3.3 million in the third
quarter of 1999 compared with earnings of $1.5 million in the same 1998 period.
In the first nine months of 1999, International reported a pretax loss of $2.3
million compared with earnings in the same period last year of $2.0 million.
Third quarter results reflect improved profitability in the U.K operations, both
logistics and truck leasing and rental. For the first nine months of 1999,
International results benefited from $3 million of gains on early contract
terminations by U.K. logistics customers, but were negatively impacted by
reduced overall profitability in the U.K. operations, due primarily to a softer
U.K. economy, as well as higher costs due in part to the reorganization of the
U.K. truck leasing and rental business, previously held for sale. International
results also suffered from the impact of economic difficulties experienced in
Brazil and Argentina primarily in automotive contracts, as well as higher costs
in the European logistics operations reflecting infrastructure spending and
marketing costs associated with a large proposal.
CORPORATE ADMINISTRATIVE EXPENSES AND OTHER
Corporate administrative expenses and other totaled $5 million and $19 million
in the third quarter and first nine months of 1999, respectively, compared with
$5 million and $9 million in the third quarter and first nine months of 1998,
respectively. The year-to-date variance in corporate administrative expenses and
other reflects recruitment costs associated with recent senior management hires
and the absence of gains in 1999, compared with $8 million of gains realized in
the first half of 1998 primarily from the sale of surplus non-operating
properties.
DISCONTINUED OPERATIONS
Revenue from Public Transportation Services totaled $84 million in the third
quarter and $412 million in the first nine months of 1999, a decrease of 27% and
2%, respectively, compared with the same periods in 1998. The decline in revenue
is due primarily to the sale of the unit on September 13, 1999. The timing of
the sale offset revenue growth in 1999 primarily from new contracts and
expansions in student transportation and transit management businesses and the
impact of several 1998 acquisitions completed in student transportation
services. Pretax business segment earnings (loss) in Public Transportation
Services were $(14) million in the third quarter of 1999 compared with $(6)
million in the third quarter of 1998 and $20 million in the first nine months of
1999 compared with $35 million in the comparable period of 1998. These results
reflect the unfavorable comparisons associated with selling the unit in
mid-September, especially the impact on student transportation which is not
fully productive until that time, and reduced profitability in the student
transportation business, which suffered from higher driver recruiting and
compensation costs in several regions due to labor shortages and increased
vehicle liability costs.
17
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued) --
Three and nine months ended September 30, 1999 and 1998
Interest expense was allocated to the Public Transportation Services business
based upon an assumed debt to equity ratio consistent with other similar
businesses and with the Company's historical interest allocation method for
segment profit reporting and discontinued operations. Interest expense of $8.5
million was included in the operating results of Public Transportation Services
for the nine months ended September 30, 1999 and 1998. The results of operations
of Public Transportation Services exclude corporate and branch overhead charges
allocated by the Company and previously included in segment profit reporting.
The Company realized a pretax gain of $573 million ($335 million after tax) on
the sale of the Public Transportation Services business. The gain on sale is net
of direct transaction costs, gains on the curtailment and settlement of certain
employee benefit plans and exit costs to separate the discontinued business.
LIQUIDITY AND CAPITAL RESOURCES
The sale of the Public Transportation Services business and the application of
proceeds therefrom has significantly improved the Company's balance sheet
structure and liquidity position. The sale generated proceeds of $940 million
($670 million after tax) which have been or will be used for debt reduction,
working capital purposes and stock repurchase.
CASH FLOW
The following is a summary of the Company's cash flows from continuing
operating, financing and investing activities for the nine months ended
September 30, (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net cash provided by (used in):
Operating activities $ 367,260 599,966
Financing activities (217,017) 109,700
Investing activities 21,838 (742,621)
--------- --------
$ 172,081 (32,955)
========= ========
</TABLE>
The decrease in cash flow from continuing operating activities in the first nine
months of 1999, compared with the same period last year, was attributable to a
decrease in trade receivables sold of $190 million and lower earnings. The
decrease in sale of receivables reflects the use of a portion of the proceeds
from the sale of public transportation services business to fund working capital
requirements. A summary of the individual items contributing to the cash flow
changes is included in the Consolidated Condensed Statements of Cash Flows. Cash
flow from continuing operating activities (excluding sales of receivables) plus
asset sales as a percentage of capital expenditures (net of proceeds from the
sale and leaseback of revenue earning equipment) was 64% in the first nine
months of 1999, compared with 81% in the same period last year. The decrease is
due to a significant increase in capital expenditures to support new lease
business and fleet replacement requirements.
18
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued) --
Three and nine months ended September 30, 1999 and 1998
During the first nine months of 1999, cash of $217 million was used in financing
activities, primarily for net debt repayments of $111 million, dividends paid of
$32 million and common stock repurchases of $81 million. Net borrowings were
reduced during September 1999 through application of a portion of the proceeds
from the sale of the Public Transportation Services business and the proceeds
from the sale and leaseback of revenue earning equipment. During the first nine
months of 1999, the Company repurchased three million shares of its common
stock, at an average price of $24.80 per common share, under a program announced
in December 1998. In September 1999, the Company announced a new program to
repurchase $200 million of common stock over two years utilizing a portion of
the proceeds from the sale of the Public Transportation Services business. As of
September 30, 1999, the Company had repurchased 300,000 shares of common stock
under this program, at an average price of $22.05 per common share. The current
program is the fifth since 1996 resulting in the cumulative repurchase of 18.3
million shares by the Company. The decrease in cash provided by financing
activities in the first nine months of 1999 compared to the same period last
year is attributable to debt repayments made utilizing a portion of the proceeds
from the sale of assets and businesses.
During the first nine months of 1999, investing activities provided cash of $22
million compared with a net usage of $743 million in the same period last year.
The increase in cash provided by investing activities reflects the proceeds from
the sale of the Public Transportation Services business and increased proceeds
from the sale (including leasebacks) of revenue earning equipment. These
proceeds have offset a 51% increase in capital expenditures. A summary of
capital expenditures for the nine months ended September 30 follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Revenue earning equipment:
Transportation Services $1,382,245 855,522
International 59,747 69,362
---------- ---------
1,441,992 924,884
Operating property and equipment 80,456 86,034
---------- ---------
$1,522,448 1,010,918
========== =========
</TABLE>
The increase in capital expenditures for Transportation Services' revenue
earning equipment was due principally to higher than anticipated requirements
for replacement lease equipment and new lease sales. During the third quarter of
1999, management reviewed capital spending requirements and undertook several
actions to slow the rate of spending in 1999. These efforts reduced forecasted
spending by approximately 10%; however, management still expects capital
expenditures for 1999 will exceed 1998 levels by about 30%. The Company expects
to fund its 1999 capital expenditures with both internally generated funds and
additional financing.
19
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued) --
Three and nine months ended September 30, 1999 and 1998
FINANCING
Ryder utilizes external capital to support growth in its asset-based product
lines. The Company has a variety of financing alternatives available to fund its
capital needs. These alternatives include long- and medium-term public and
private debt, as well as variable-rate financing available through bank credit
facilities and commercial paper. The Company also periodically enters into sale
and leaseback agreements for revenue earning equipment, the majority of which
are accounted for as operating leases. In September 1999, the Company utilized a
portion of the proceeds from the sale of the Public Transportation Services
business and the sale and leaseback of revenue earning equipment to reduce debt
levels. These repayments have significantly altered the Company's balance sheet
debt structure compared to prior periods.
On July 21, 1999, Standard & Poor's Ratings Group confirmed its short-term
credit ratings for the Company and placed its long-term ratings for the Company
on CreditWatch with negative implications following the Company's announcement
of a definitive agreement to sell the Public Transportation Services business.
On July 21, 1999, Moody's Investors Service confirmed its credit ratings for the
Company. On April 27, 1999, Duff & Phelps Credit Rating Co. lowered its credit
ratings of the Company's commercial paper and unsecured notes to D2 and A- from
D1 and A, respectively. Duff & Phelps Credit Rating Co. reaffirmed these credit
ratings on July 21, 1999.
The Company's debt ratings as of September 30, 1999 were as follows:
<TABLE>
<CAPTION>
Commercial Unsecured
Paper Notes
---------- ---------
<S> <C> <C>
Standard & Poor's Ratings Group A2 BBB+
Moody's Investors Service P2 Baa1
Duff & Phelps Credit Rating Co. D2 A-
</TABLE>
20
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued) --
Three and nine months ended September 30, 1999 and 1998
Debt totaled $2.5 billion at September 30, 1999, a decrease of $85 million from
December 31, 1998. During the first nine months of 1999, the Company made $234
million of scheduled unsecured note payments and issued $174 million of
medium-term notes. U.S. commercial paper outstanding at September 30, 1999
decreased to $118 million, compared with $198 million at December 31, 1998. The
Company's foreign debt increased approximately $24 million from December 31,
1998 to $414 million at September 30, 1999. The Company's percentage of
variable-rate financing obligations was 20% at September 30, 1999 which is below
the Company's targeted level of 25%-30% and the actual level of 27% at December
31, 1998. The Company expects to increase variable-rate financing obligations
within targeted levels over the near term in conjunction with planned
financings. The Company's debt to equity ratio at September 30, 1999, decreased
to 178% from 236% at December 31, 1998 and 254% at September 30, 1998.
As of September 30, 1999, $539 million was available under the Company's $720
million global revolving credit facility, which expires in 2002. Foreign
borrowings of $63 million were outstanding under the facility as of September
30, 1999. In September 1998, the Company filed an $800 million shelf
registration statement with the Securities and Exchange Commission. Proceeds
from debt issues under the shelf registration are expected to be used for
capital expenditures, debt refinancing and general corporate purposes. The
Company has $487 million of debt securities available for issuance under this
shelf registration statement. The Company also participates in an agreement to
sell, with limited recourse, up to $375 million of trade receivables on a
revolving basis through July 2004. At September 30, 1999, the outstanding
balance of receivables sold pursuant to this agreement decreased to $75 million
from $200 million at December 31, 1998.
21
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued) --
Three and nine months ended September 30, 1999 and 1998
YEAR 2000 PREPARATION
The Year 2000 issue is the result of computer systems, software products and
embedded technology using two digits rather than four to indicate the applicable
year. If not addressed, such computer systems, software products and embedded
technology may be unable to properly interpret dates beyond the year 1999, which
could cause system failures or miscalculations and lead to disruptions in the
Company's activities and operations.
During 1997, after consideration of the potential impact to operations,
including customer and supplier relationships, an enterprise-wide program was
initiated to modify computer information systems to be Year 2000 compliant or to
replace non-compliant systems. The Company has established a Year 2000 Steering
Committee comprised of senior executives to address compliance issues and
strategic alternatives. The Company also established a program office dedicated
to implementing the Year 2000 compliance plan, and has engaged external
consultants to provide day-to-day management oversight and contractors to
remediate and test non-compliant source code. Accordingly, the majority of the
Company's Year 2000 costs have been incremental to operations.
The Company identified three major areas determined to be critical for
successful Year 2000 compliance: (1) information systems, such as mainframes,
PCs, networks and similar type systems maintained at customer sites, and legacy
applications relating to operations such as financial reporting, human
resources, purchasing, treasury, marketing and sales; (2) third-party
relationships, including customers, suppliers, vendors and government agencies;
and (3) facilities and equipment which may contain microprocessors with embedded
technology.
The Company's Year 2000 compliance program for each major area was segregated
into three broad phases. Phase I of the program was the assessment of
information systems, facilities and equipment, and services and products
provided by third parties in order to identify exposures to Year 2000 issues and
to develop a master plan of action including remediation, retirement or
replacement of non-compliant systems. Phase II of the program was the
implementation of action plans. Phase III of the program was the final testing
of each major area of exposure to ensure compliance, the placement of remediated
items into production and contingency planning to assess reasonably likely worst
case scenarios.
22
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued) --
Three and nine months ended September 30, 1999 and 1998
The Company's remediation plan for legacy application and system software was
segregated into 15 major partitions worldwide. Overall, approximately 99% of the
Company's effort in this area has been performed as of September 30, 1999.
Remediation of the Company's core business applications was complete as of
September 30, 1999. Virtually all remediated code had been tested and redeployed
as of September 30, 1999. Final testing and redeployment of remaining remediated
code is scheduled to be completed in November of 1999. Due to the uncertainties
inherent in this undertaking, the Company has developed contingency plans to
minimize the impact of any unforeseen substantial disruption resulting from
non-compliance. However, because of the imponderable nature of potential Year
2000 deficiencies, their impact cannot be quantified.
The Company relies on suppliers, vendors and government agencies to timely
provide a wide range of goods and services, including equipment, supplies,
telecommunications, utilities, transportation services and banking services.
Management believes that third-party relationships represent the greatest risk
with respect to the Year 2000 issue because of the Company's limited ability to
influence actions of third parties and to estimate the impact of non-compliance
of third parties throughout the Company's operations. The Company is making
concerted efforts to understand the Year 2000 status of third parties whose Year
2000 non-compliance could either have a material adverse effect on the Company's
business, financial condition or results of operations or involve a safety risk
to employees or customers. The Company surveyed and communicated with customers,
suppliers and vendors with whom it has important financial and operational
relationships to assess their Year 2000 compliance program and to develop joint
contingency plans in the event of Year 2000 failures. The Company is continuing
to monitor and evaluate the adequacy of these plans as new information becomes
available.
The Company's vendor compliance program includes the following: assessing vendor
compliance status; tracking vendor compliance progress; developing contingency
plans, including identifying alternate vendors, as needed; addressing contract
language; replacing, remediating or upgrading equipment; requesting
certification from vendors or making on-site assessments, as required; and
sending questionnaires and conducting phone interviews. Based on the vendor
compliance work to date, the Company has not identified a vendor whose failure
for Year 2000 reasons could have a global and material impact to operations;
however, the Company has identified approximately 60 vendors who are significant
to operations. For each of these significant suppliers and vendors, the Company
continues to obtain and evaluate information (through questionnaires, phone
interviews or publicly available data) regarding their Year 2000 compliance
programs and status. However, the Company can provide no assurance that Year
2000 compliance plans will be successfully completed by third parties in a
timely manner.
23
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued) --
Three and nine months ended September 30, 1999 and 1998
In the facilities and equipment area, the Company's exposure relates to embedded
technology in, among other things, vehicles, vehicle-related devices, and
storage and other facilities operated by the Company. Based upon testing and
discussions with major truck manufacturers, microprocessors installed by the
truck manufacturers are Year 2000 compliant. Remediation of leak detection
devices on the Company's underground fuel storage tanks has been completed. The
Company has not identified any other significant exposures.
The Company has developed a Year 2000 contingency plan development process to
mitigate, to the extent practicable, potential substantial disruptions in the
Company's activities and operations that may be created by failures of critical
business partners, facilities and equipment, and internal systems. Management
currently believes that the most likely worst case scenario will consist of some
localized disruptions of systems that may affect individual business processes,
facilities or suppliers for a short time rather than systemic or long-term
problems affecting business operations as a whole. Through visits to key
operating sites, departments, customers, and vendors, potential disruption
scenarios have been identified and contingency plans have been developed. The
Company is continuing to evaluate, modify and augment contingency plans for each
business unit and for critical business processes as additional information
becomes available.
Year 2000 contingency plans address preparation, assessment of failure, and
resumption of critical business functions. Initial plans developed cover early
warning, preventative maintenance actions and alternative processes. Quick
response teams will be formed to identify and correct problems as they occur. As
an adjunct to the contingency planning process, the Company has created a Year
2000 Event Management Center to communicate status and problems to Company
personnel, to coordinate end-of-year activities and assist in prioritizing
responses to any issues that occur around the millennium. The Company is
considering the following plans of action in anticipation of any potential Year
2000 problems: carrying additional supplies of fuel, additional data back-ups,
computer shut downs and restarts, finishing 1999 transactions early, freezing
new system installations and alternative means of communication. However, the
Company can provide no assurance that it will correctly anticipate the level,
impact or duration of non-compliance by critical business partners, facilities
and equipment or internal systems, or that contingency plans will be sufficient
to mitigate the impact of non-compliance.
24
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued) --
Three and nine months ended September 30, 1999 and 1998
The Company's contingency planning process has focused on risks, scenarios and
reasonable contingency plans involving materially important information systems
and third-party relationships. However, there are an almost infinite number of
additional risks which are not practicably assessable and for which, therefore,
specific contingency and mitigation plans have not been developed. Such risks
include the failures of one or more information systems or third-parties which
failures, individually, the Company does not consider to be materially important
but whose failure could trigger an unanticipated cascade of other Year 2000
failures, the combination of which could be materially important or could affect
the implementation of existing contingency plans. Such a combination of failures
could have a material adverse effect on the Company's results of operations,
liquidity and/or financial condition.
The failure or failures of information systems for Year 2000 reasons could also
give rise to liability to third parties. While the Company has attempted to
minimize such liability to third parties, the potential for such liability still
exists and presents a material risk independent of the risk that such failure or
failures could also have a material adverse effect on the Company's results of
operations, liquidity and/or financial condition.
Based upon current information, the Company estimates that the cumulative impact
on after-tax earnings for incremental Year 2000 costs to be $41 million, an
increase of approximately $5 million from the mid-range estimate provided in the
1998 Annual Report on Form 10-K. The increase in estimated costs reflects
primarily the impact of changing the remediation action plan for a non-compliant
application as well as the discovery of additional lines of software code
subject to remediation. Through September 30, 1999, the Company has incurred $40
million after tax on the Year 2000 project. The majority of costs incurred to
date relate to remediation activities. These costs have been funded through
operating cash flows and expensed as incurred. Future costs are difficult to
estimate and actual results could differ from the Company's expectations due to
unanticipated technological difficulties, the impact of third-party
non-compliance and the cost and availability of resources.
25
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued) --
Three and nine months ended September 30, 1999 and 1998
EURO CONVERSION
On January 1, 1999, the participating countries of the European Union adopted
the euro as their common legal currency. The participating countries' existing
national currencies will continue as legal tender until at least January 1,
2002. During this transition period, parties may pay for goods and services
using either the euro or the participating country's legacy currency. Due to the
nature of current international operations, conversion to the euro is not
expected to have a material impact on the Company's results of operations or
financial position.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which was effective for the
Company on January 1, 1999. The statement outlines the accounting treatment for
certain costs related to the development or purchase of software to be used
internally and requires that costs incurred during the preliminary project and
post-implementation/operation stages be expensed, and costs incurred during the
application development stage be capitalized and amortized over the estimated
useful life of the software. Adoption of this statement did not have a material
impact on the Company's results of operations or financial position.
In April 1998, the AICPA also issued SOP 98-5, "Reporting on the Costs of
Start-up Activities." SOP 98-5, which was effective for the Company on January
1, 1999, requires that all costs of start-up activities, including organization
costs, be expensed as incurred. The Company's existing accounting policies
conformed with the requirements of SOP 98-5; therefore, adoption of this
statement did not impact on the Company's results of operations or financial
position.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" which requires all derivatives to be recognized at fair
value as either assets or liabilities on the balance sheet. Any gain or loss
resulting from changes in such fair value is required to be recognized in
earnings to the extent the derivatives are not effective as hedges. This
statement, as amended, is effective for fiscal years beginning after June 15,
2000, and is effective for interim periods in the initial year of adoption.
Adoption of this statement is not expected to have a material impact on the
Company's results of operations or financial position.
26
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued) --
Three and nine months ended September 30, 1999 and 1998
FORWARD-LOOKING STATEMENTS
This management's discussion and analysis of financial condition and results of
operations contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are based on
the current plans and expectations of Ryder System, Inc. and involve risks and
uncertainties that may cause actual results to differ materially from the
forward-looking statements.
Important factors that could cause such differences include, among others,
general economic conditions in the United States and worldwide, the highly
competitive environment applicable to the Company's operations (including
competition in integrated logistics from other logistics companies as well as
from air cargo, shipping, railroads and motor carriers and competition in full
service truck leasing and rental from companies providing similar services as
well as truck and trailer manufacturers who provide leasing, extended warranty
maintenance, rental and other transportation services), greater than expected
expenses associated with the Company's personnel needs or activities (including
increased cost of freight and transportation), availability of equipment,
changes in customers' business environments (or the loss of a significant
customer), changes in government regulations and disruptions due to Year 2000
non-compliance by the Company, its suppliers or customers.
The risks included here are not exhaustive. New risk factors emerge from time to
time and it is not possible for management to predict all such risk factors or
to assess the impact of such risk factors on the Company's business.
27
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
In the normal course of business, the Company is exposed to fluctuations in
interest rates, fuel prices and foreign exchange rates. The Company manages such
exposures in several ways including the use of a variety of derivative financial
instruments when deemed prudent. The Company does not enter into leveraged
derivative financial transactions or use derivative financial instruments for
trading purposes.
The Company's quantitative and qualitative disclosures about market risk for
changes in interest rates and foreign exchange rates have not materially changed
since December 31, 1998. The Company's disclosures about market risk are
contained in Item 7A of the Annual Report on Form 10-K for the year ended
December 31, 1998. The exposure to market risk for fluctuations in fuel prices
relates to fixed-price fuel sales commitments with certain customers. The
Company mitigates this exposure by entering into forward purchases for delivery
at fueling facilities. Fixed-price fuel arrangements represent approximately 5%
of total fuel purchases.
28
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
(3.1) The Ryder System, Inc. Restated Articles of Incorporation,
dated November 8, 1985, as amended through May 18, 1990,
previously filed with the Commission as an exhibit to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1990, are incorporated by reference into this
report.
(3.2) The Ryder System, Inc. By-Laws, as amended through November
23, 1993, previously filed with the Commission as an exhibit
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1993, are incorporated by reference into this
report.
(15) Letter regarding unaudited interim financial statements.
(27.1) Financial Data Schedule (for SEC use only).
(27.2) Restated Financial Data Schedule
Six months ended June 30, 1999
(27.3) Restated Financial Data Schedule
Three months ended March 31, 1999
(27.4) Restated Financial Data Schedule
Year ended December 31, 1998
(27.5) Restated Financial Data Schedule
Nine months ended September 30, 1998
(27.6) Restated Financial Data Schedule
Six months ended June 30, 1998
(27.7) Restated Financial Data Schedule
Three months ended March 31, 1998
(27.8) Restated Financial Data Schedule
Year ended December 31, 1997
(b) Reports on Form 8-K
A report on Form 8-K, dated September 24, 1999, was filed by the
registrant announcing the completion of the sale of its Public
Transportation Services business unit. The report also included pro
forma consolidated condensed financial information for the registrant,
after giving effect to the sale of its Public Transportation Services
business unit.
29
<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: November 5, 1999 /S/ CORLISS J. NELSON
----------------------------------------------------
Corliss J. Nelson
Senior Executive Vice President-Finance
and Chief Financial Officer
(Principal Financial Officer)
Date: November 5, 1999 /S/ GEORGE P. SCANLON
----------------------------------------------------
George P. Scanlon
Senior Vice President - Planning and Controller
(Principal Accounting Officer)
30
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
(15) Independent Accountants' Consent
(27.1) Financial Data Schedule (for SEC use only)
(27.2) Restated Financial Data Schedule
Six months ended June 30, 1999
(27.3) Restated Financial Data Schedule
Three months ended March 31, 1999
(27.4) Restated Financial Data Schedule
Year ended December 31, 1998
(27.5) Restated Financial Data Schedule
Nine months ended September 30, 1998
(27.6) Restated Financial Data Schedule
Six months ended June 30, 1998
(27.7) Restated Financial Data Schedule
Three months ended March 31, 1998
(27.8) Restated Financial Data Schedule
Year ended December 31, 1997
31
EXHIBIT 15
KPMG LLP
CERTIFIED PUBLIC ACCOUNTANTS
One Biscayne Tower Telephone 305-358-2300
Suite 2800 Telecopier 305-913-2692
2 South Biscayne Boulevard
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 October 20, 1999 related to our
review of interim financial information:
Form S-3:
o Registration Statement No. 33-20359 covering $1,000,000,000 aggregate
principal amount of debt securities.
o Registration Statement No. 33-50232 covering $800,000,000 aggregate
principal amount of debt securities.
o Registration Statement No. 33-58667 covering $800,000,000 aggregate
principal amount of debt securities.
o Registration Statement No. 333-63049 covering $800,000,000 aggregate
principal amount of debt securities.
Form S-8:
o Registration Statement No. 33-20608 covering the Ryder System
Employee Stock Purchase Plan.
o Registration Statement No. 33-4333 covering the Ryder Employee
Savings Plan.
o Registration Statement No. 1-4364 covering the Ryder System Profit
Incentive Stock Plan.
o Registration Statement No. 33-69660 covering the Ryder System, Inc.
1980 Stock Incentive Plan.
o Registration Statement No. 33-37677 covering the Ryder System UK
Stock Purchase Scheme.
o Registration Statement No. 33-442507 covering the Ryder Student
Transportation Services, Inc. Retirement /Savings Plan.
o Registration Statement No. 33-63990 covering the Ryder System, Inc.
Directors' Stock Plan.
o Registration Statement No. 33-58001 covering the Ryder System, Inc.
Employee Savings Plan A.
o Registration Statement No. 33-58003 covering the Ryder System, Inc.
Employee Savings Plan B.
o Registration Statement No. 33-61509 covering the Ryder System, Inc.
Stock for Merit Increase Replacement Plan.
<PAGE>
o Registration Statement No. 33-62013 covering the Ryder System, Inc.
1995 Stock Incentive Plan.
o Registration Statement No. 333-19515 covering the Ryder System, Inc.
1997 Deferred Compensation Plan.
o Registration Statement No. 333-26653 covering the Ryder System, Inc.
Board of Directors Stock Award Plan.
o Registration Statement No. 333-57593 covering the Ryder System, Inc.
Stock Purchase Plan for Employees.
o Registration Statement No. 333-57595 covering the Ryder System, Inc.
1995 Stock Incentive Plan.
o Registration Statement No. 333-57599 covering the Ryder Student
Transportation Services, Inc. Retirement/Savings 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 LLP
Miami, Florida
November 5, 1999
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0
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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0
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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0
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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0
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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0
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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<MULTIPLIER> 1,000
<S> <C>
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0
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<COMMON> 328,117
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<INCOME-CONTINUING> 127,888
<DISCONTINUED> 47,797
<EXTRAORDINARY> 0
<CHANGES> 0
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<EPS-BASIC> 2.28<F1>
<EPS-DILUTED> 2.25
<FN>
<F1>TAG (EPS-PRIMARY DENOTES BASIC EPS)
</FN>
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