UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) |
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
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 Number: 1-4364
RYDER SYSTEM, INC.
(Exact name of registrant as specified in its charter)
Florida | 59-0739250 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
11690 N.W. 105th Street, Miami, Florida 33178 |
(305) 500-3726 | |
(Address of principal executive offices, including zip code) | (Telephone number, including area code) | |
Securities registered pursuant to Section 12(b) of the Act: | ||
Title of each class |
Name of exchange on which registered | |
Ryder System, Inc. Common Stock ($0.50 par value) | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES þ NO ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ¨ NO þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant computed by reference to the price at which the common equity was sold at June 30, 2011 was $2,840,465,755. The number of shares of Ryder System, Inc. Common Stock ($0.50 par value per share) outstanding at January 31, 2012 was 51,169,546.
Documents Incorporated by Reference into this Report |
Part of Form 10-K into which Document is Incorporated | |
Ryder System, Inc. 2012 Proxy Statement | Part III |
RYDER SYSTEM, INC.
FORM 10-K ANNUAL REPORT
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OVERVIEW
Ryder System, Inc. (Ryder), a Florida corporation founded in 1933, is a global leader in transportation and supply chain management solutions. Our business is divided into three business segments: Fleet Management Solutions (FMS), which provides full service leasing, contract maintenance, contract-related maintenance and commercial rental of trucks, tractors and trailers to customers principally in the U.S., Canada and the U.K.; Supply Chain Solutions (SCS), which provides comprehensive supply chain solutions including distribution and transportation services throughout North America and Asia; and Dedicated Contract Carriage (DCC), which provides vehicles and drivers as part of a dedicated transportation solution in the U.S. Our customers range from small businesses to large international enterprises. These customers operate in a wide variety of industries, the most significant of which include automotive, electronics, transportation, grocery, lumber and wood products, food service, and home furnishings.
For financial information and other information relating to each of our business segments see Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, of this report.
INDUSTRY AND OPERATIONS
Fleet Management Solutions
Value Proposition
Through our FMS business, we provide our customers with one-stop simplicity by offering flexible fleet solutions that are designed to improve their competitive position and allow them to focus on their core business and lower their costs. Our FMS product offering is comprised primarily of contractual-based full service leasing and contract maintenance services. We also offer transactional fleet solutions including maintenance services and commercial truck rental and value-added fleet support services such as insurance, vehicle administration and fuel services. In addition, we provide our customers with access to a large selection of used trucks, tractors and trailers through our used vehicle sales program.
Market Trends
Over the last several years, many key trends have been reshaping the transportation industry, particularly the U.S. fleet market which is estimated to include approximately 7.4 million vehicles(1). The maintenance and operation of commercial vehicles has become more complicated and expensive requiring companies to spend a significant amount of time and money to keep up with new technology, diagnostics, retooling and training. Because of increased demand for efficiency and reliability, companies that own and manage their own fleet of vehicles have put greater emphasis on the quality of their preventive maintenance and safety programs. More recently, fluctuating energy prices have made it difficult for businesses to predict and manage fleet costs and the tightened credit market has limited some businesses access to capital.
Operations
For the year ended December 31, 2011, our global FMS business accounted for 64% of our consolidated revenue.
U.S. Our FMS customers in the U.S. range from small businesses to large national enterprises operating in a wide variety of industries. At December 31, 2011, we had 539 operating locations excluding ancillary storage locations in 49 states and Puerto Rico. A location typically consists of a maintenance facility or shop, offices for sales and other personnel, and in many cases, a commercial rental vehicle counter. Our maintenance facilities typically include a service island for fueling, safety inspections and preliminary maintenance checks as well as a shop for preventive maintenance and repairs. We also operated 167 locations on-site at customer properties, which primarily provide vehicle maintenance.
(1) | US Fleet as of June 2011, Class 3-8, Source: RL Polk |
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Canada. We have been operating in Canada for over 50 years. The Canadian private commercial fleet market is estimated to be approximately 0.4 million vehicles(1) and the Canadian commercial fleet lease and rental market is estimated to include approximately 0.02 million vehicles(2). At December 31, 2011, we had 35 operating locations throughout 8 Canadian provinces. We also have 10 on-site maintenance facilities in Canada.
Europe. We began operating in the U.K. in 1971 and expanded into Germany in 1987 by leveraging our operations in the U.S. and the U.K. The U.K. commercial lease and rental market are estimated to include approximately 0.2 million vehicles(3). At December 31, 2011, we had 56 operating locations throughout the U.K. and Germany. We also manage a network of 483 independent maintenance facilities in the U.K. to serve our customers when it is more effective than providing the service in a Ryder location. In addition to our typical FMS operations, we also supply and manage vehicles, equipment and personnel for military organizations in the U.K. and Germany.
On June 8, 2011, we acquired all of the common stock of Hill Hire plc (Hill Hire), a U.K. based full service leasing, rental and maintenance company which included Hill Hires fleet of approximately 8,000 full service lease and 5,700 rental vehicles, and approximately 400 contractual customers.
FMS Product Offerings
Full Service Leasing. Under a typical full service lease, we provide vehicle maintenance, supplies and related equipment necessary for operation of the vehicles while our customers furnish and supervise their own drivers and dispatch and exercise control over the vehicles. Our full service lease includes all the maintenance services that are part of our contract maintenance service offering. We target customers that would benefit from outsourcing their fleet management function or upgrading their fleet without having to dedicate a significant amount of their own capital. We will assess a customers situation, and after considering the size of the customer, residual risk and other factors, will tailor a leasing program that best suits the customers needs. Once we have signed an agreement, we acquire vehicles and components that are custom engineered to the customers requirements and lease the vehicles to the customer for periods generally ranging from three to seven years for trucks and tractors and up to ten years for trailers. Because we purchase a large number of vehicles from a limited number of manufacturers, we are able to leverage our buying power for the benefit of our customers. In addition, given our continued focus on improving the efficiency and effectiveness of our maintenance services, we can provide our customers with a cost effective alternative to maintaining their own fleet of vehicles. We also offer our leasing customers the additional fleet support services described below.
Contract Maintenance. Our contract maintenance customers use non-Ryder owned vehicles and want to utilize our extensive network of maintenance facilities and trained technicians to maintain the vehicles they own or lease from third parties. The contract maintenance service offering is designed to reduce vehicle downtime through preventive maintenance based on vehicle type and time or mileage intervals. The service also provides vehicle repairs including parts and labor, 24-hour emergency roadside service and replacement vehicles for vehicles that are temporarily out of service. Vehicles covered under this offering are typically serviced at our own facilities. However, based on the size and complexity of a customers fleet, we may operate an on-site maintenance facility at the customers location.
Commercial Rental. We target rental customers that have a need to supplement their private fleet of vehicles on a short-term basis (one day up to one year in length) either because of seasonal increases in their business or discrete projects that require additional transportation resources. Our commercial rental fleet also provides additional vehicles to our full service lease customers to handle their peak or seasonal business needs. In addition to one-off commercial rental transactions, we build national relationships with large customers to become their preferred source of commercial vehicle rentals. Our rental representatives assist in selecting a vehicle that satisfies the customers needs and supervise the rental process, which includes execution of a rental agreement and a vehicle inspection. In addition to vehicle rental, we offer to our rental customers liability insurance coverage under our existing policies and the benefits of our comprehensive fuel services program.
The following table provides information regarding the number of vehicles and customers by FMS product offering at December 31, 2011:
U.S. | Foreign | Total | ||||||||||||||||||||||
Vehicles | Customers | Vehicles | Customers | Vehicles | Customers | |||||||||||||||||||
Full service leasing |
95,500 | 10,600 | 25,500 | 2,400 | 121,000 | 13,000 | ||||||||||||||||||
Contract maintenance (4) |
31,300 | 1,200 | 4,000 | 200 | 35,300 | 1,400 | ||||||||||||||||||
Commercial rental (5) |
28,700 | 33,200 | 10,900 | 6,500 | 39,600 | 39,700 |
(1) | Canada Private Fleet as of November 2011, Class 3-8, Source: RL Polk |
(2) | Canada Outsourced Fleet Market as of November 2011, Class 3-8, Source: RL Polk |
(3) | UK Lease and Rental HGV Market, Projection for December 2011, Source: The Society of Motor Manufacturers & Traders (SMMT) 2010 |
(4) | Contract maintenance customers include approximately 810 full service lease customers |
(5) | Commercial rental customers include customers who rented a vehicle for more than 3 days during the year and includes approximately 8,800 full service lease customers |
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Contract-Related Maintenance. Our full service lease and contract maintenance customers periodically require additional maintenance services that are not included in their contracts. We obtain contract-related maintenance work because of our contractual relationship with the customers; however, the service provided is in addition to that included in their contractual agreements. For example, additional maintenance services may arise when a customers driver damages the vehicle and these services are performed or managed by Ryder. Some customers also periodically require maintenance work on vehicles that are not covered by a long-term lease or maintenance contract. Ryder may provide service on these vehicles and charge the customer on an hourly basis for work performed.
Fleet Support Services. We have developed a variety of fleet support services tailored to the needs of our large base of lease customers. Customers may elect to include these services as part of their full service lease or contract maintenance agreements. We offer the following fleet support services:
Service |
Description | |
Fuel |
Full service diesel fuel and natural gas dispensing at competitive prices; fuel planning; fuel tax reporting; centralized billing; and fuel cards | |
Insurance |
Liability insurance coverage under our existing insurance policies which includes monthly invoicing, flexible deductibles, claims administration and discounts based on driver performance and vehicle specifications; physical damage waivers; gap insurance; and fleet risk assessment | |
Safety |
Establishing safety standards; providing safety training, driver certification, prescreening and road tests; safety audits; instituting procedures for transport of hazardous materials; coordinating drug and alcohol testing; and loss prevention consulting | |
Administrative |
Vehicle use and other tax reporting; permitting and licensing; and regulatory compliance (including hours of service administration) | |
Environmental Management |
Storage tank monitoring; storm water management; environmental training; and ISO 14001 certification | |
Information Technology |
RydeSmart® is a full-featured GPS fleet location, tracking, and vehicle performance management system designed to provide our customers improved fleet operations and cost controls. Ryder FleetCARE is our web based tool that provides customers with 24/7 access to key operational and maintenance management information about their fleets. |
Used Vehicles. We primarily sell our used vehicles at one of our 57 retail sales centers throughout North America (19 of which are co-located at an FMS shop), at our branch locations or through our website at www.Usedtrucks.Ryder.com. Typically, before we offer used vehicles for sale, our technicians assure that it is Road Ready®, which means that the vehicle has passed a comprehensive, multi-point performance inspection based on specifications formulated through our contract maintenance program. Our retail sales centers throughout North America allow us to leverage our expertise and in turn realize higher sales proceeds than in the wholesale market. Although we generally sell our used vehicles for prices in excess of book value, the extent to which we are able to realize a gain on the sale of used vehicles is dependent upon various factors including the general state of the used vehicle market, the age and condition of the vehicle at the time of its disposal and depreciation rates with respect to the vehicle.
FMS Business Strategy
Our FMS business mission is to be the leading leasing and maintenance service provider for light, medium and heavy duty vehicles. This will be achieved through the following goals and priorities:
| Deliver product innovation to enable us to further penetrate private fleet markets and expand into adjacent markets; |
| focus on conversion of private fleets and commercial rental customers to full service lease customers; |
| successfully implement sales growth initiatives in our contractual product offerings; |
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| focus on contractual revenue growth strategies, including selective acquisitions; |
| deliver consistent industry leading maintenance to our customers while continuing to implement process designs, productivity improvements and compliance discipline in a cost effective manner; |
| offer a wide range of support services that complement our leasing, rental and maintenance businesses; |
| offer competitive pricing through cost management initiatives and maintain pricing discipline on new business; |
| optimize asset utilization and management; and |
| leverage our maintenance facility infrastructure. |
Competition
As an alternative to using our services, customers may choose to provide these services for themselves, or may choose to obtain similar or alternative services from other third-party vendors.
Our FMS business segment competes with companies providing similar services on a national, regional and local level. Many regional and local competitors provide services on a national level through their participation in various cooperative programs. Competitive factors include price, equipment, maintenance, service and geographic coverage. We compete with finance lessors and also with truck and trailer manufacturers, and independent dealers, who provide full service lease products, finance leases, extended warranty maintenance, rental and other transportation services. Value-added differentiation of the full service leasing, contract maintenance, contract-related maintenance and commercial rental service has been, and will continue to be, our emphasis.
Acquisitions
In addition to our continued focus on organic growth, acquisitions play an important role in enhancing our growth strategy in the U.S., Canada and the U.K. In assessing potential acquisition targets, we look for companies that would create value through the creation of operating synergies, leveraging our existing facility infrastructure and fixed costs, improving our geographic coverage, diversifying our customer base and improving our competitive position in target markets. We completed five FMS acquisitions from 2009 to 2011, under which we acquired the companys fleets and contractual customers. The FMS acquisitions operate under Ryders name and complement our existing market coverage and service network.
Supply Chain Solutions
Value Proposition
Through our SCS business, we offer a broad range of innovative logistics management services that are designed to optimize a customers supply chain and address key customer business requirements. The organization is aligned by industry verticals (Automotive, Hi-Tech, Retail, Consumer Packaged Goods and Industrial) to enable the teams to focus on the specific needs of their customers. Our SCS product offerings are organized into four categories: distribution management, transportation management, dedicated contract carriage and professional services. These offerings are supported by a variety of information technology and engineering solutions which are an integral part of our other SCS services. These product offerings can be offered independently or as an integrated solution to optimize supply chain effectiveness. A key aspect of our value proposition is our operational execution which is an important differentiator in the marketplace.
Market Trends
Global logistics is approximately $7 trillion(1), of which approximately $550 billion(1) is outsourced. Logistics spending in our primary markets of North America and Asia equates to approximately $3.6 trillion, of which $310 billion is outsourced. Outsourced logistics is a market with significant growth opportunity. As supply chains expand and product needs continue to proliferate more sophisticated supply chain practices are required. In addition, recent natural disasters, such as the tsunami in Japan, have caused companies to focus on risk management of their supply chains. The more complicated the supply chain or the product requirements, the greater the need for companies to turn to the expertise of supply chain providers. Despite a somewhat flat economy, 2011 was a year of strong outsourced logistics growth and we expect 2012 to bring even more opportunity.
(1) | Armstrong & Associates Global logistics cost & third-party logistics revenue report, July 2011 |
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Operations
For the year ended December 31, 2011, our SCS business accounted for 26% of our consolidated revenue.
U.S. At December 31, 2011, we had 318 SCS customer accounts in the U.S., most of which are large enterprises that maintain large, complex supply chains. These customers operate in a variety of industries including automotive, high-tech, telecommunications, industrial, consumer goods, paper and paper products, office equipment, food and beverage, and general retail industries. We continue to further diversify our customer base by expanding into new industry verticals, most recently retail and consumer packaged goods. Most of our core SCS business operations in the U.S. revolve around our customers supply chains and are geographically located to maximize efficiencies and reduce costs. At December 31, 2011, managed warehouse space totaled approximately 25 million square feet for the U.S. and Puerto Rico. Along with those core customer specific locations, we also concentrate certain logistics expertise in locations not associated with specific customer sites. For example, our carrier procurement, contract management, and freight bill audit and payment services groups operate out of our carrier management center. Additionally, our transportation optimization and execution groups operate out of our logistics center, both of which have locations in Novi, Michigan and Fort Worth, Texas.
Canada. At December 31, 2011, we had 45 SCS customer accounts and managed warehouse space totaling approximately 1 million square feet. Given the proximity of this market to our U.S. and Mexico operations, the Canadian operations are highly coordinated with their U.S. and Mexico counterparts, managing cross-border transportation and freight movements.
Mexico. We began operating in Mexico in the mid-1990s. At December 31, 2011, we had 83 SCS customer accounts and managed warehouse space totaling approximately 4 million square feet. Our Mexico operations offer a full range of SCS services and manage approximately 1,000 border crossings each month between Mexico and the U.S. and Canada, often highly integrated with our distribution and transportation operations.
Asia. We began operating in Asia in 2000. At December 31, 2011, we had 34 SCS customer accounts and managed warehouse space totaling approximately 340,000 square feet. Asia is a key component to our retail strategy. With the 2008 acquisition of CRSA Logistics and Transpacific Container Terminals, we were able to gain significant presence in Asia. We now have a network of owned and agent offices throughout Asia, with headquarters in Shanghai.
SCS Product Offerings
Distribution Management. Our SCS business offers a wide range of services relating to a customers distribution operations from designing a customers distribution network to managing distribution facilities. Services within the facilities generally include managing the flow of goods from the receiving function to the shipping function, coordinating warehousing and transportation for inbound and outbound material flows, handling import and export for international shipments, coordinating just-in-time replenishment of component parts to manufacturing and final assembly, and providing shipments to customer distribution centers or end-customer delivery points. Additional value-added services such as light assembly of components into defined units (kitting), packaging and refurbishment are also provided. For the year ended December 31, 2011, distribution management solutions accounted for 49% of our SCS revenue.
Transportation Management. Our SCS business offers services relating to all aspects of a customers transportation network. Our team of transportation specialists provides shipment planning and execution, which includes shipment optimization, load scheduling and delivery confirmation through a series of technological and web-based solutions. Our transportation consultants, including our freight brokerage department, focus on carrier procurement of all modes of transportation with an emphasis on truck-based transportation, rate negotiation, and freight bill audit and payment services. In addition, our SCS business provides customers as well as our FMS and DCC businesses with capacity management services that are designed to meet backhaul opportunities and minimize excess miles. For the year ended December 31, 2011, we purchased and/or executed over $4.2 billion in freight moves on our customers behalf. For the year ended December 31, 2011, transportation management solutions accounted for 14% of our SCS revenue.
Dedicated Contract Carriage. Dedicated contract carriage is offered both as a stand-alone service and as part of an integrated supply chain solution to our customers. The DCC offerings combine the equipment, maintenance and administrative services of a full service lease with drivers and additional services. This combination provides a customer with a dedicated transportation solution that is designed to increase their competitive position, improve risk management and integrate their transportation needs with their overall supply chain. Our DCC solution offers a high degree of specialization to meet the needs of customers with sophisticated service requirements such as tight delivery windows, high-value or time-sensitive freight, closed-loop distribution, multi-stop shipments, specialized equipment or integrated transportation needs. For the year ended December 31, 2011, approximately 37% of our SCS revenue was related to dedicated contract carriage services.
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Professional Services. Our SCS business offers a variety of knowledge-based services that support every aspect of a customers supply chain. Our SCS professionals are available to evaluate a customers existing supply chain to identify inefficiencies, as well as opportunities for integration and improvement. Once the assessment is complete, we work with the customer to develop a supply chain strategy that will create the most value for the customer and their target clients. Once a customer has adopted a supply chain strategy, our SCS logistics team, supported by functional experts, and representatives from our information technology, real estate and finance groups work together to design a strategically focused supply chain solution. The solution may include both a network design that sets forth the number, location and function of key components of the network and a transportation solution that optimizes the mode or modes of transportation and route selection. In addition to providing the distribution and transportation expertise necessary to implement the supply chain solution, our SCS representatives can coordinate and manage all aspects of the customers supply chain provider network to assure consistency, efficiency and flexibility. For the year ended December 31, 2011, knowledge-based professional services accounted for 6% of our SCS revenue.
SCS Business Strategy
Our SCS business strategy is to offer our customers differentiated functional execution, and proactive solutions from deep expertise in key industry verticals. The strategy revolves around the following interrelated goals and priorities:
| Further diversifying our customer base through expansion with key industry verticals; |
| Developing services specific to the needs of the retail and consumer packaged goods industry; |
| Providing customers with a differentiated quality of service through reliable and flexible supply chain solutions; |
| Creating a culture of innovation that fosters new solutions for our customers supply chain needs; |
| Focusing on continuous improvement and standardization; and |
| Training and developing employees to share best practices and improve talent. |
Competition
In the SCS business segment, we compete with a large number of companies providing similar services, each of which has a different set of core competencies. We compete with a handful of large, multi-service companies across all of our service offerings and industries. We also compete against other companies only on a specific service offering (for example, in transportation management or distribution management) or in a specific industry. We face different competitors in each country or region where they may have a greater operational presence. Competitive factors include price, service, market knowledge, expertise in logistics-related technology, and overall performance (e.g. timeliness, accuracy, and flexibility).
Acquisitions
On December 31, 2010, we completed the acquisition of Total Logistic Control (TLC). TLC is a leading provider of comprehensive supply chain solutions to food, beverage, and consumer packaged goods manufacturers with significant supply chains in the U.S. TLC provides clients a broad suite of end-to-end services, including distribution management, contract packaging services and solutions engineering. TLCs clients consist of local, regional, national, and international firms engaged in food and beverage manufacturing, consumer and wholesale distribution. As of December 31, 2011, TLC operates 31 facilities comprising 11.7 million square feet of dry and temperature-controlled warehousing across 15 states.
TLC complements our strategic initiative to develop a new industry group focused on the consumer packaged goods industry. TLCs leading capabilities in the areas of packaging and warehousing, including temperature-controlled facilities, continue to be at the center of our consumer packaged goods offering.
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Dedicated Contract Carriage
Value Proposition
Through our DCC business segment, we combine the equipment, maintenance and administrative services of a full service lease with drivers and additional services. These services provide a customer with a dedicated transportation solution that is designed to increase their competitive position, improve risk management and integrate their transportation needs with their overall supply chain. Additional services include routing and scheduling, fleet sizing, safety, regulatory compliance, risk management, technology and communication systems support including on-board computers, and other technical support. These additional services allow us to provide high service levels and efficient routing. They also address the labor issues associated with maintaining a private fleet of vehicles, such as driver turnover, government regulation, including hours of service regulations, DOT audits and workers compensation. Our DCC solution offers a high degree of specialization to meet the needs of customers with sophisticated service requirements such as tight delivery windows, high-value or time-sensitive freight, closed-loop distribution, multi-stop shipments, specialized equipment or integrated transportation needs.
Market Trends
The current outsourced U.S. dedicated contract carriage market is estimated to be $14 billion. This market is affected by many of the trends that impact our FMS business, including the current capacity in the current U.S. trucking market and the CSA 2010 regulatory changes. The administrative requirements relating to regulations issued by the Department of Transportation (DOT) regarding driver screening, training and testing, as well as record keeping and other costs associated with the hours of service requirements impact the dedicated contract carriage industry. As fleet and driver management continues to become more tedious, companies turn to the DCC offering. In addition, market demand for just-in-time delivery creates a need for well-defined routing and scheduling plans that are based on comprehensive asset utilization analysis and fleet rationalization studies are a key piece of the DCC offering.
Operations/Product Offerings
For the year ended December 31, 2011, our DCC business accounted for 10% of our consolidated revenue. At December 31, 2011, we had 157 DCC customer accounts in the U.S. Because it is highly customized, our DCC product is particularly attractive to companies that operate in industries that have time-sensitive deliveries or special handling requirements, as well as to companies who require specialized equipment. Because DCC accounts typically operate in a limited geographic area, most of the drivers assigned to these accounts are short haul drivers, meaning they return home at the end of each work day. Although a significant portion of our DCC operations are located at customer facilities, our DCC business utilizes and benefits from our extensive network of FMS facilities.
In order to customize an appropriate DCC transportation solution for our customers, our DCC logistics specialists perform a transportation analysis using advanced logistics planning and operating tools. Based on this analysis, they formulate a logistics design that includes the routing and scheduling of vehicles, the efficient use of vehicle capacity and overall asset utilization. The goal of the plan is to create a distribution system that optimizes freight flow while meeting a customers service goals. A team of DCC transportation specialists can then implement the plan by leveraging the resources, expertise and technological capabilities of both our FMS and SCS businesses.
To the extent a distribution plan includes multiple modes of transportation (air, rail, sea and highway), our DCC team, in conjunction with our SCS transportation specialists, selects appropriate transportation modes and carriers, places the freight, monitors carrier performance and audits billing. In addition, through our SCS business, we can reduce costs and add value to a customers distribution system by aggregating orders into loads, looking for shipment consolidation opportunities and organizing loads for vehicles that are returning from their destination point back to their point of origin (backhaul).
DCC Business Strategy
Our DCC business strategy is to focus on customers who need specialized equipment, specialized handling or integrated services. This strategy revolves around the following interrelated goals and priorities:
| Increase market share with customers across a broad range of industries; |
| Leverage the support and talent of the FMS sales team in a joint sales program; |
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| Align DCC business with other SCS product lines to create revenue opportunities and improve operating efficiencies in both segments; and |
| Improve competitiveness in the non-specialized and non-integrated customer segments. |
Competition
Our DCC business segment competes with truckload carriers and other dedicated providers servicing on a national, regional and local level. Competitive factors include safety performance, price, equipment, maintenance, service and geographic coverage and driver and operations expertise. We are able to differentiate the DCC product offering by leveraging FMS services and integrating the DCC services with those of SCS to create a more comprehensive transportation solution for our customers. Our strong safety record and focus on customer service enable us to uniquely meet the needs of customers with high-value products that require specialized handling in a manner that differentiates us from truckload carriers.
Acquisitions
On January 28, 2011, we acquired the assets of The Scully Companies Inc.s DCC business, which included 17 customers served from 25 locations throughout the Western United States.
ADMINISTRATION
Our financial administrative functions for the U.S. and Canada, including credit, billing and collections are consolidated into our Shared Services Center operations, a centralized processing center located in Alpharetta, Georgia. Our Shared Services Center also manages contracted third parties providing administrative finance and support services outside of the U.S. in order to reduce ongoing operating expenses and maximize our technology resources. This centralization results in more efficient and consistent centralized processing of selected administrative operations. Certain administrative functions are also performed at the Shared Services Center for our customers. The Shared Services Centers main objectives are to reduce ongoing annual administrative costs, enhance customer service through process standardization, create an organizational structure that will improve market flexibility and allow future reengineering efforts to be more easily attained at lower implementation costs.
REGULATION
Our business is subject to regulation by various federal, state and foreign governmental entities. The Department of Transportation and various federal and state agencies exercise broad powers over certain aspects of our business, generally governing such activities as authorization to engage in motor carrier operations, safety and financial reporting. We are also subject to a variety of requirements of national, state, provincial and local governments, including the U.S. Environmental Protection Agency and the Occupational Safety and Health Administration, that regulate safety, the management of hazardous materials, water discharges and air emissions, solid waste disposal and the release and cleanup of regulated substances. We may also be subject to licensing and other requirements imposed by the U.S. Department of Homeland Security and U.S. Customs Service as a result of increased focus on homeland security and our Customs-Trade Partnership Against Terrorism certification. We may also become subject to new or more restrictive regulations imposed by these agencies, or other authorities relating to carbon controls and reporting, engine exhaust emissions, drivers hours of service, security and ergonomics.
The Environmental Protection Agency has issued regulations that require progressive reductions in exhaust emissions from certain diesel engines from 2007 through 2010. Emissions standards require reductions in the sulfur content of diesel fuel since June 2006. Also, the first phase of progressively stringent emissions standards relating to emissions after-treatment devices was introduced on newly-manufactured engines and vehicles utilizing engines built after January 1, 2007. The second phase, which required an additional after treatment system, became effective January 1, 2010.
ENVIRONMENTAL
We have always been committed to sound environmental practices that reduce risk and build value for us and our customers. We have a history of adopting green designs and processes because they are efficient, cost effective transportation solutions that improve our bottom line and bring value to our customers. We adopted our first worldwide Environmental Policy mission in 1991 and have updated it periodically as regulatory and customer needs have changed. Our environmental policy reflects our commitment to supporting the goals of sustainable development, environmental protection and pollution prevention in our business. We have adopted pro-active environmental strategies that have advanced business growth and continued to improve our performance in ways that reduce emission outputs and environmental impact. Our environmental team works with our staff and operating employees to develop and administer programs in support of our environmental policy and to help ensure that environmental considerations are integrated into all business processes and decisions.
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In establishing appropriate environmental objectives and targets for our wide range of business activities around the world, we focus on (i) the needs of our customers; (ii) the communities in which we provide services; and (iii) relevant laws and regulations. We regularly review and update our environmental management procedures, and information regarding our environmental activities is routinely disseminated throughout Ryder. We published our second Corporate Sustainability Report in 2011 which details our sustainable business practices and environmental strategies to improve energy use, fuel costs and reduce overall carbon emissions. Currently there is no global carbon disclosure requirement for reporting emissions. However, for the past four years, we have participated in the Carbon Disclosure Project (CDP), voluntarily disclosing direct and indirect emissions resulting from our operations. Both of these reports are publicly available on Ryders Green Center at http://www.Ryder.com/greencenter. The Green Center provides all stakeholders information on our key environmental programs and initiatives.
SAFETY
Our safety culture is founded upon a core commitment to the safety, health and well-being of our employees, customers, and the community, a commitment that has made us an industry leader in safety throughout our history.
Safety is an integral part of our business strategy because preventing injuries and collisions improves employee quality of life, eliminates service disruptions to our customers, increases efficiency and improves customer satisfaction. As a core value, our focus on safety is a daily regimen, reinforced by many safety programs and continuous operational improvement and supported by a talented and dedicated safety organization.
Training is a critical component of our safety program. Monthly safety training delivered by location safety committees cover specific and relevant safety topics and managers receive annual safety leadership training. Quarterly and remedial training is also delivered online to each driver through our highly interactive Ryder Pro-TREAD comprehensive lesson platform. Regular safety behavioral observations are conducted by managers throughout the organization everyday and remedial training and coaching takes place on-the-spot. We also deploy state-of-the-art safety technologies in Ryder vehicles and our safety policies require that all managers, supervisors and employees incorporate safe processes in all aspects of our business. Monthly safety scorecards are tracked and reviewed by management for progress toward key safety objectives. Our proprietary web-based safety tracking system, RyderStar, delivers proactive safety programs tailored to every location and helps measure safety activity effectiveness across the organization.
EMPLOYEES
At December 31, 2011, we had approximately 27,500 full-time employees worldwide, of which 25,900 were employed in North America, 1,300 in Europe and 300 in Asia. We have approximately 16,700 hourly employees in the U.S., approximately 2,900 of which are organized by labor unions. Those employees organized by labor unions are principally represented by the International Brotherhood of Teamsters, the International Association of Machinists and Aerospace Workers, and the United Auto Workers, and their wages and benefits are governed by 84 labor agreements that are renegotiated periodically. Some of the businesses in which we currently engage have experienced a material work stoppage, slowdown or strike. We consider that our relationship with our employees is good.
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EXECUTIVE OFFICERS OF THE REGISTRANT
All of the executive officers of Ryder were elected or re-elected to their present offices either at or subsequent to the meeting of the Board of Directors held on May 14, 2010 in conjunction with Ryders 2010 Annual Meeting. They all hold such offices, at the discretion of the Board of Directors, until their resignation or removal.
Name |
Age | Position | ||||
Gregory T. Swienton |
62 | Chairman of the Board and Chief Executive Officer | ||||
Art A. Garcia |
50 | Executive Vice President and Chief Financial Officer | ||||
Dennis C. Cooke |
47 | President, Global Fleet Management Solutions | ||||
Robert D. Fatovic |
46 | Executive Vice President, Chief Legal Officer and Corporate Secretary | ||||
Cristina A. Gallo-Aquino |
38 | Vice President, Controller and Chief Accounting Officer | ||||
Gregory F. Greene |
52 | Executive Vice President and Chief Administrative Officer | ||||
Robert E. Sanchez |
46 | President and Chief Operating Officer | ||||
John H. Williford |
55 | President, Global Supply Chain Solutions |
Gregory T. Swienton has been Chairman since May 2002 and Chief Executive Officer since November 2000. He also served as President from June 1999 to June 2005. Before joining Ryder, Mr. Swienton was Senior Vice President of Growth Initiatives of Burlington Northern Santa Fe Corporation (BNSF) and before that Mr. Swienton was BNSFs Senior Vice President, Coal and Agricultural Commodities Business Unit.
Art A. Garcia has served as Executive Vice President and Chief Financial Officer since September 2010. Previously, Mr. Garcia served as Senior Vice President and Controller since October 2005 and as Vice President and Controller since February 2002. Mr. Garcia joined Ryder in December 1997 and has held various positions within Corporate Accounting.
Dennis C. Cooke was recently promoted to President, Global Fleet Management Solutions. Previously, Mr. Cooke served as Senior Vice President and Chief of Operations, U.S. and Canada Fleet Management Solutions since joining Ryder in July 2011. Prior to joining Ryder, Mr. Cooke held various positions with General Electric (GE) including Vice President and General Manager of GE Healthcares Global MRI business and Chief Executive Officer of GEs Securitys Homeland Protection business.
Robert D. Fatovic has served as Executive Vice President, Chief Legal Officer and Corporate Secretary since May 2004. He previously served as Senior Vice President, U.S. Supply Chain Operations, High-Tech and Consumer Industries from December 2002 to May 2004. Mr. Fatovic joined Ryders Law department in 1994 as Assistant Division Counsel and has held various positions within the Law department including Vice President and Deputy General Counsel.
Cristina A. Gallo-Aquino has served as Vice President, Controller and Chief Accounting Officer since September 2010. Previously, Ms. Gallo-Aquino served as Assistant Controller from November 2009 to September 2010, where she was responsible for Ryders Corporate Accounting, Benefits Accounting and Payroll Accounting departments. Ms. Gallo-Aquino joined Ryder in 2004 and has held various positions within Corporate Accounting.
Gregory F. Greene has served as Chief Administrative Officer since September 2010, as Executive Vice President since December 2006 and as Chief Human Resources Officer since February 2006. Previously, Mr. Greene served as Senior Vice President, Strategic Planning and Development from April 2003. Mr. Greene joined Ryder in August 1993 and has since held various positions within Human Resources.
Robert E. Sanchez was recently promoted to Chief Operating Officer. Previously, Mr. Sanchez served as President, Global Fleet Management Solutions since September 2010 and as Executive Vice President and Chief Financial Officer from October 2007 to September 2010. He also previously served as Executive Vice President of Operations, U.S. Fleet Management Solutions from October 2005 to October 2007 and as Senior Vice President and Chief Information Officer from January 2003 to October 2005. Mr. Sanchez joined Ryder in 1993 and has held various positions.
John H. Williford has served as President, Global Supply Chain Solutions since June 2008. Prior to joining Ryder, Mr. Williford founded and served as President and Chief Executive Officer of Golden Gate Logistics LLC from 2006 to June 2008. From 2002 to 2005, he served as President and Chief Executive Officer of Menlo Worldwide, Inc., the supply chain business of CNF, Inc. From 2005 to 2006, Mr. Williford was engaged as an advisor to Menlo Worldwide subsequent to the sale of Menlo Forwarding to United Parcel Service.
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FURTHER INFORMATION
For further discussion concerning our business, see the information included in Items 7 and 8 of this report. Industry and market data used throughout Item 1 was obtained through a compilation of surveys and studies conducted by industry sources, consultants and analysts.
We make available free of charge through the Investor Relations page on our website at www.ryder.com our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.
In addition, our Corporate Governance Guidelines, Principles of Business Conduct (including our Finance Code of Conduct), and Board committee charters are posted on the Corporate Governance page of our website at www.ryder.com.
The following contains all known material risks that could affect our business.
Our operating and financial results may fluctuate due to a number of factors, many of which are beyond our control.
Our annual and quarterly operating and financial results are affected by a number of economic, regulatory and competitive factors, including:
| our inability to obtain expected customer retention levels or sales growth targets; |
| our inability to integrate acquisitions as projected, achieve planned synergies and retain customers of companies we acquire; |
| labor strikes and work stoppages; |
| sudden changes in fuel prices and fuel shortages; |
| changes in accounting rules, estimates, assumptions and accruals; |
| changes in current financial, tax or regulatory requirements that could negatively impact our business; |
| outages, system failures or delays in timely access to data in legacy information technology systems that support key business processes; and |
| reputational risk and other detrimental business consequences associated with employees, customers, agents, suppliers or other persons using our supply chain or assets to commit illegal acts, including the use of company assets for terrorist activities. |
Our business and operating results could be adversely affected by uncertain or unfavorable economic and industry conditions.
In 2011, we continued to see signs of economic recovery. We saw improvement in our commercial rental and used vehicle sales. We also began to see slight improvement in our full service contractual lease business, although it was impacted by the cumulative effects of customer fleet reductions. We are uncertain whether the improvements in demand for commercial rental will continue and whether we will be able to maintain our current commercial rental rates, which increased again this year due to customer demand. Despite improvement in full service lease, our customers still remain cautious about entering into long-term leases. Uncertainty and lack of customer confidence around macroeconomic and industry conditions may continue to impact future growth prospects.
Challenging economic and market conditions may also result in:
| difficulty forecasting, budgeting and planning due to limited visibility into the spending plans of current or prospective customers; |
| increased competition for fewer projects and sales opportunities; |
| pricing pressure that may adversely affect revenue and gross margin; |
| higher overhead costs as a percentage of revenue; |
| increased risk of charges relating to asset impairments, including goodwill and other intangible assets; |
| customer financial difficulty and increased risk of uncollectible accounts receivable; |
| additional fleet downsizing which could adversely impact profitability; and |
| increased risk of declines in the residual values of our vehicles. |
In addition, volatility in the global credit and financial markets may lead to:
| unanticipated interest rate and currency exchange rate fluctuations; |
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| increased risk of default by counterparties under derivative instruments and hedging agreements; and |
| diminished liquidity and credit availability resulting in higher short-term borrowing costs and more stringent borrowing terms. |
We are uncertain as to how long a full economic recovery will take and whether we will continue to be impacted by the residual effects of the unfavorable macroeconomic and industry conditions that have persisted over the last few years. If these conditions continue or further weaken, our business and results of operations could be materially adversely affected.
We bear the residual risk on the value of our vehicles.
We generally bear the residual risk on the value of our vehicles. Therefore, if the market for used vehicles declines, or our vehicles are not properly maintained, we may obtain lower sales proceeds upon the sale of used vehicles. Changes in residual values also impact the overall competitiveness of our full service lease product line, as estimated sales proceeds are a critical component of the overall price of the lease. Additionally, technology changes and sudden changes in supply and demand together with other market factors beyond our control vary from year to year and from vehicle to vehicle, making it difficult to accurately predict residual values used in calculating our depreciation expense. Although we have developed disciplines related to the management and maintenance of our vehicles that are designed to prevent these losses, there is no assurance that these practices will sufficiently reduce the residual risk. For a detailed discussion on our accounting policies and assumptions relating to depreciation and residual values, please see the section titled Critical Accounting Estimates Depreciation and Residual Value Guarantees in Managements Discussion and Analysis of Financial Condition and Results of Operations.
Our profitability could be adversely impacted by our inability to maintain appropriate commercial rental utilization rates through our asset management initiatives.
We typically do not purchase vehicles for our full service lease product line until we have an executed contract with a customer. In our commercial rental product line, however, we do not purchase vehicles against specific customer contracts. Rather, we purchase vehicles and optimize the size and mix of the commercial rental fleet based upon our expectations of overall market demand. As a result, we bear the risk for ensuring that we have the proper vehicles in the right condition and location to effectively capitalize on market demand in order to drive the highest levels of utilization and revenue per unit. We employ a sales force and operations team on a full-time basis to manage and optimize this product line; however, their efforts may not be sufficient to overcome a significant change in market demand in the rental business or used vehicle market.
We derive a significant portion of our SCS revenue from a relatively small number of customers.
During 2011, sales to our top ten SCS customers representing all of the industry groups we service, accounted for 55% of our SCS total revenue and 51% of our SCS operating revenue (revenue less subcontracted transportation). Additionally, approximately 34% of our global SCS revenue is from the automotive industry and is directly impacted by automotive vehicle production. The loss of any of these customers or a significant reduction in the services provided to any of these customers could impact our operations and adversely affect our SCS financial results. In addition, our largest SCS customers can exert downward pricing pressure and often require modifications to our standard commercial terms. While we believe our ongoing cost reduction initiatives have helped mitigate the effect of price reduction pressures from our SCS customers, there is no assurance that we will be able to maintain or improve profitability in those accounts. In 2010, we further diversified our customer base with the acquisition of TLC, which is concentrated in the consumer packaged goods industry. While we continue to focus our efforts on diversifying our customer base we may not be successful in doing so in the short-term.
We are also subject to credit risk associated with the concentration of our accounts receivable from our SCS customers If one or more of these customers were to become bankrupt, insolvent or otherwise were unable to pay for the services provided by us, we may incur significant write-offs of accounts receivable or incur lease or asset impairment charges that could adversely affect our operating results and financial condition.
Our profitability could be negatively impacted if the key assumptions and pricing structure of our SCS contracts prove to be invalid.
Substantially all of our SCS services are provided under contractual arrangements with our customers. Under most of these contracts, all or a portion of our pricing is based on certain assumptions regarding the scope of services, production volumes, operational efficiencies, the mix of fixed versus variable costs, productivity and other factors. If, as a result of subsequent changes in our customers business needs or operations or market forces that are outside of our control, these assumptions prove to be invalid, we could have lower margins than anticipated. Although certain of our contracts provide for renegotiation upon a material change, there is no assurance that we will be successful in obtaining the necessary price adjustments.
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Some of our vehicle and equipment manufacturers in our FMS business rely on a small number of suppliers.
We buy vehicles and related equipment from a relatively small number of original equipment manufacturers (OEMs) in our FMS business to purchase our vehicles and vehicle parts. Further, some of our vehicle manufacturers rely on a small concentration of suppliers for certain vehicle parts, components and equipment. A discrete event in a particular OEMs or suppliers industry or location, or adverse regional economic conditions impacting an OEM or suppliers ability to provide vehicles or a particular component could adversely impact our FMS business and profitability.
We operate in a highly competitive industry and our business may suffer if we are unable to adequately address potential downward pricing pressures and other competitive factors.
Numerous competitive factors could impair our ability to maintain our current profitability. These factors include the following:
| advances in technology require increased investments to remain competitive, and our customers may not be willing to accept higher prices to cover the cost of these investments; |
| we compete with many other transportation and logistics service providers, some of which have greater capital resources than we do; |
| some of our competitors periodically reduce their prices to gain business, which may limit our ability to maintain or increase prices; and |
| because cost of capital is a significant competitive factor, any increase in either our debt or equity cost of capital as a result of reductions in our debt rating or stock price volatility could have a significant impact on our competitive position. |
We operate in a highly regulated industry, and costs of compliance with, or liability for violation of, existing or future regulations could significantly increase our costs of doing business.
Our business is subject to regulation by various federal, state and foreign governmental agencies. These agencies could institute new laws, rules or regulations or issue interpretation changes to existing regulations at any time. We have also seen an increase in proactive enforcement of existing regulations by some entities. Compliance with new laws, rules or regulations could substantially impair labor and equipment productivity and increase our costs. Conversely, our failure to comply with any applicable laws, rules or regulations to which we are subject, whether actual or alleged, could expose us to fines, penalties or potential litigation liabilities, including costs, settlements, and judgments.
Specifically, the U.S. Department of Transportation and various state and federal agencies exercise broad powers over our motor carrier operations, safety, and the generation, handling, storage, treatment and disposal of waste materials. We may also become subject to new or more restrictive regulations imposed by the Department of Transportation, the Occupational Safety and Health Administration, the Department of Homeland Security and U.S. Customs Service, the Environmental Protection Agency or other authorities, relating to the hours of service that our drivers may provide in any onetime period, homeland security, carbon emissions and reporting and other matters. Also, the ongoing development of data privacy laws in the U.S. and other jurisdictions in which we operate may require changes to our data security policies and procedures in order to comply with new standards.
We maintain operations and employees in numerous states throughout the U.S., which are governed by federal and state labor and employment laws and regulations relating to compensation, benefits, healthcare and various workplace issues, all of which are applicable to our employees, and in some cases, independent contractors. State labor and employment rules vary from state to state and in some states, require us to meet much stricter standards than required in other states. Although we are generally protected from previous action taken by the sellers of theses businesses, any existing regulatory deficiencies could impact the value of the business purchased. Also, we are or may become subject to various class-action lawsuits related to wage and hour violations and improper pay in certain states. Unfavorable or unanticipated outcomes in any of the lawsuits could subject us to increase costs and impact our profitability. Also we are or may become subject to various class-action lawsuits related to wage and hour violations and improper pay in certain states.
We currently operate in Asia, Europe, Mexico and Canada, where we are subject to compliance with local laws and regulatory requirements of foreign jurisdictions, including local tax laws, and compliance with the Federal Corrupt Practices Act. Local laws and regulatory requirements may vary significantly from country to country. Customary levels of compliance with local regulations and the tolerance for noncompliance by regulatory authorities may also vary in different countries and geographical locations, and impact our ability to successfully implement our compliance and business initiatives in certain jurisdictions. Also, adherence to rigorous local laws and regulatory requirements may limit our ability to expand into certain international markets and result in residual liability for legal claims and tax disputes arising out of previously discontinued operations.
13
Regulations governing exhaust emissions that have been enacted over the last few years could adversely impact our business. The Environmental Protection Agency (EPA) issued regulations that required progressive reductions in exhaust emissions from certain diesel engines from 2007 through 2010. Emissions standards require reductions in the sulfur content of diesel fuel since June 2006. Also, the first phase of progressively stringent emissions standards relating to emissions after-treatment devices was introduced on newly-manufactured engines and vehicles utilizing engines built after January 1, 2007. The second phase, which required an additional after-treatment system, became effective after January 1, 2010. We face additional technology changes under EPA regulations that will go into effect in 2014 and 2017, which will require modifications to existing vehicle chassis and engine combinations. The 2014 and 2017 regulations will require reductions in carbon dioxide, which can only be reduced by improving fuel economy, and which requires compliance with different emissions standards for both engines and chassis, based on vocation. OEMs may be required to install additional engine componentry, additional aerodynamics on chassis, and low-rolling resistance tires to comply with the upcoming regulations which may result in a shorter useful tread life and increased operating costs for us. Although customers may see reduced fuel consumption under the new standards, this could be offset by increased fuel costs on a per gallon basis. Each of these requirements could result in higher prices for vehicles, diesel engines, fuel vehicle maintenance, which are passed on to our customers, as well as higher maintenance costs and uncertainty as to reliability of the new engines, all of which could, over time, increase our costs and adversely affect our business and results of operations. The new technology may also impact the residual values of these vehicles when sold in the future.
Volatility in assumptions and asset values related to our pension plans may reduce our profitability and adversely impact current funding levels.
We historically sponsored a number of defined benefit plans for employees in the U.S., U.K. and other foreign locations. In recent years, we made amendments to defined benefit plans which froze the retirement benefits for non-grandfathered and certain non-union employees. Our major defined benefit plans are funded, with trust assets invested in a diversified portfolio. The cash contributions made to our defined benefit plans are required to comply with minimum funding requirements imposed by employee benefit and tax laws. The projected benefit obligation and assets of our global defined benefit plans as of December 31, 2011 were $1.97 billion and $1.42 billion, respectively. The difference between plan obligations and assets, or the funded status of the plans, is a significant factor in determining pension expense and the ongoing funding requirements of those plans. Macroeconomic factors, as well as changes in investment returns and discount rates used to calculate pension expense and related assets and liabilities can be volatile and may have an unfavorable impact on our costs and funding requirements. We also participate in eleven U.S. multi-employer pension (MEP) plans that provide defined benefits to employees covered by collective bargaining agreements. In the event that we withdraw from participation in one of these plans, then applicable law could require us to make an additional lump-sum contribution to the plan. Our withdrawal liability for any MEP plan would depend on the extent of the plans funding of vested benefits. Economic conditions have caused MEP plans to be significantly underfunded. If the financial condition of the MEP plans were to continue to deteriorate, participating employers could be subject to additional assessments. Although we have actively sought to control increases in these costs and funding requirements, there can be no assurance that we will succeed, and continued cost pressure could reduce the profitability of our business and negatively impact our cash flows.
We establish self-insurance reserves based on historical loss development factors, which could lead to adjustments in the future based on actual development experience.
We retain a portion of the accident risk under vehicle liability and workers compensation insurance programs. Our self-insurance accruals are based on actuarially estimated, undiscounted cost of claims, which includes claims incurred but not reported. While we believe that our estimation processes are well designed, every estimation process is inherently subject to limitations. Fluctuations in the frequency or severity of accidents make it difficult to precisely predict the ultimate cost of claims. The actual cost of claims can be different than the historical selected loss development factors because of safety performance, payment patterns and settlement patterns. For a detailed discussion on our accounting policies and assumptions relating to our self-insurance reserves, please see the section titled Critical Accounting Estimates Self-Insurance Accruals in Managements Discussion and Analysis of Financial Condition and Results of Operations.
14
We may face difficulties in attracting and retaining drivers and technicians.
We hire drivers primarily for our DCC and SCS business segments. There is significant competition for qualified drivers in the transportation industry. As a result of driver shortages, we could be required to increase driver compensation, let trucks sit idle, utilize lower quality drivers or face difficulty meeting customer demands, all of which could adversely affect our growth and profitability. Similarly, we hire technicians in our FMS business to perform vehicle maintenance services on our lease, contract maintenance and rental fleets. We have recently seen a decrease in the overall supply of skilled maintenance technicians, particularly new technicians with qualifications from technical programs and schools, which could make it more difficult to attract and retain skilled technicians.
Changes in lease accounting may impact our customers leasing decisions.
Demand for our full service lease product line is based in part on customers decisions to lease versus buy vehicles. A number of factors can impact whether customers decide to lease or buy vehicles, including accounting considerations, tax treatment, interest rates and operational flexibility. In 2010, the Financial Accounting Standards Board issued a proposed update to accounting standards that would involve a new approach to lease accounting that differs from current practice. Most notably, the new approach would eliminate off balance sheet treatment of leases and require lessees to record leased assets on their balance sheets. If the proposed accounting standard becomes effective in its current form, it could be perceived to make leasing a less attractive option for some of our full service lease customers.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
Our properties consist primarily of vehicle maintenance and repair facilities, warehouses and other real estate and improvements.
We maintain 631 FMS properties in the U.S., Puerto Rico and Canada; we own 434 of these and lease the remaining 197. Our FMS properties are primarily comprised of maintenance facilities generally including a repair shop, rental counter, fuel service island administrative offices, and used vehicle retail sales centers.
Additionally, we manage 177 on-site maintenance facilities, located at customer locations.
We also maintain 123 locations in the U.S. and Canada in connection with our domestic SCS and DCC businesses. Almost all of our SCS locations are leased and generally include a warehouse and administrative offices.
We maintain 107 international locations (locations outside of the U.S. and Canada) for our international businesses. These locations are in the U.K., Luxembourg, Germany, Mexico, China and Singapore. The majority of these locations are leased and may be a repair shop, warehouse or administrative office.
Additionally, we maintain 8 U.S. locations primarily used for Central Support Services. These facilities are generally administrative offices, of which we own one and lease the remaining seven.
We are involved in various claims, lawsuits and administrative actions arising in the normal course of our businesses. Some involve claims for substantial amounts of money and/or claims for punitive damages. While any proceeding or litigation has an element of uncertainty, management believes that the disposition of such matters, in the aggregate, will not have a material impact on our consolidated financial condition or liquidity.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
15
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Ryder Common Stock Prices
Stock Price | Dividends per Common | |||||||||
High | Low | Share | ||||||||
2011 |
||||||||||
First quarter |
$ | 53.63 | 45.93 | 0.27 | ||||||
Second quarter |
57.04 | 49.32 | 0.27 | |||||||
Third quarter |
60.38 | 37.51 | 0.29 | |||||||
Fourth quarter |
54.35 | 34.28 | 0.29 | |||||||
2010 |
||||||||||
First quarter |
$ | 42.08 | 31.86 | 0.25 | ||||||
Second quarter |
48.49 | 38.57 | 0.25 | |||||||
Third quarter |
44.78 | 37.00 | 0.27 | |||||||
Fourth quarter |
52.80 | 41.43 | 0.27 |
Our common shares are listed on the New York Stock Exchange under the trading symbol R. At January 31, 2012, there were 8,926 common stockholders of record and our stock price on the New York Stock Exchange was $56.28.
Performance Graph
The following graph compares the performance of our common stock with the performance of the Standard & Poors 500 Composite Stock Index and the Dow Jones Transportation 20 Index for a five year period by measuring the changes in common stock prices from December 31, 2006 to December 31, 2011.
The stock performance graph assumes for comparison that the value of the Companys Common Stock and of each index was $100 on December 31, 2006 and that all dividends were reinvested. Past performance is not necessarily an indicator of future results.
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Purchases of Equity Securities
The following table provides information with respect to purchases we made of our common stock during the three months ended December 31, 2011:
Total Number of Shares Purchased (1) |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Program |
Maximum Number of Shares That May Yet Be Purchased Under the Anti-Dilutive Program(2), (3) |
|||||||||||||
October 1 through October 31, 2011 |
2,010 | $ | 39.71 | | 415,373 | |||||||||||
November 1 through November 30, 2011 |
112,351 | 50.43 | 110,000 | 305,373 | ||||||||||||
December 1 through December 31, 2011 |
44,202 | 49.67 | 42,812 | 2,000,000 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total |
158,563 | $ | 50.08 | 152,812 | ||||||||||||
|
|
|
|
|
|
(1) | During the three months ended December 31, 2011, we purchased an aggregate of 5,751 shares of our common stock in employee-related transactions. Employee-related transactions may include: (i) shares of common stock delivered as payment for the exercise price of options exercised or to satisfy the option holders tax withholding liability associated with our share-based compensation programs and (ii) open-market purchases by the trustee of Ryders deferred compensation plans relating to investments by employees in our stock, one of the investment options available under the plans. |
(2) | In December 2009, our Board of Directors authorized a share repurchase program intended to mitigate the dilutive impact of shares issued under our various employee stock, stock option and stock purchase plans. Under the December 2009 program, management is authorized to repurchase shares of common stock in an amount not to exceed the number of shares issued to employees under our various employee stock, stock option and stock purchase plans from December 1, 2009 through December 15, 2011. The December 2009 program limits aggregate share repurchases to no more than 2 million shares of Ryder common stock. Share repurchases of common stock are made periodically in open-market transactions and are subject to market conditions, legal requirements and other factors. Management may establish a prearranged written plan for the Company under Rule 10b5-1 of the Securities Exchange Act of 1934 as part of the December 2009 program, which allows for share repurchases during Ryders quarterly blackout periods as set forth in the trading plan. For the three months ended December 31, 2011, we repurchased and retired 152,812 shares under this program at an aggregate cost of $7.7 million. |
(3) | In December 2011, our Board of Directors authorized a share repurchase program intended to mitigate the dilutive impact of shares issued under our various employee stock, stock option and employee stock purchase plans. Under the December 2011 program, management is authorized to repurchase shares of common stock in an amount not to exceed the number of shares issued to employees under the Companys various employee stock, stock option and employee stock purchase plans from December 1, 2011 through December 13, 2013. The December 2011 program limits aggregate share repurchases to no more than 2 million shares of Ryder common stock. Share repurchases of common stock are made periodically in open-market transactions and are subject to market conditions, legal requirements and other factors. Management may establish prearranged written plans for the Company under Rule 10b5-1 of the Securities Exchange Act of 1934 as part of the December 2011 program, which allow for share repurchases during Ryders quarterly blackout periods as set forth in the trading plan. We did not repurchase any shares under this program in 2011. |
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial information should be read in conjunction with Items 7 and 8 of this report.
Years ended December 31 | ||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
(Dollars and shares in thousands, except per share amounts) | ||||||||||||||||||||
Operating Data: |
||||||||||||||||||||
Revenue (1) |
$ | 6,050,534 | 5,136,435 | 4,887,254 | 5,999,041 | 6,363,130 | ||||||||||||||
Earnings from continuing operations |
$ | 171,368 | 124,608 | 90,117 | 257,579 | 251,779 | ||||||||||||||
Comparable earnings from continuing operations (2) |
$ | 180,630 | 116,988 | 94,630 | 267,144 | 248,227 | ||||||||||||||
Net earnings (3) |
$ | 169,777 | 118,170 | 61,945 | 199,881 | 253,861 | ||||||||||||||
Per Share Data: |
||||||||||||||||||||
Earnings from continuing operations Diluted |
$ | 3.31 | 2.37 | 1.62 | 4.51 | 4.19 | ||||||||||||||
Comparable earnings from continuing operations Diluted (2) |
$ | 3.49 | 2.22 | 1.70 | 4.68 | 4.13 | ||||||||||||||
Net earnings Diluted (3) |
$ | 3.28 | 2.25 | 1.11 | 3.50 | 4.22 | ||||||||||||||
Cash dividends |
$ | 1.12 | 1.04 | 0.96 | 0.92 | 0.84 | ||||||||||||||
Book value (4) |
$ | 25.77 | 27.44 | 26.71 | 24.17 | 32.52 | ||||||||||||||
Financial Data: |
||||||||||||||||||||
Total assets |
$ | 7,617,835 | 6,652,374 | 6,259,830 | 6,689,508 | 6,854,649 | ||||||||||||||
Average assets (5) |
$ | 7,251,854 | 6,366,647 | 6,507,432 | 6,924,342 | 6,914,060 | ||||||||||||||
Return on average assets (%) (5) |
2.3 | 1.9 | 1.0 | 2.9 | 3.7 | |||||||||||||||
Long-term debt |
$ | 3,107,779 | 2,326,878 | 2,265,074 | 2,478,537 | 2,553,431 | ||||||||||||||
Total debt |
$ | 3,382,145 | 2,747,002 | 2,497,691 | 2,862,799 | 2,776,129 | ||||||||||||||
Shareholders equity (4) |
$ | 1,318,153 | 1,404,313 | 1,426,995 | 1,345,161 | 1,887,589 | ||||||||||||||
Debt to equity (%) (4) |
257 | 196 | 175 | 213 | 147 | |||||||||||||||
Average shareholders equity (4), (5) |
$ | 1,428,062 | 1,401,681 | 1,395,629 | 1,778,489 | 1,790,814 | ||||||||||||||
Return on average shareholders equity (%) (4), (5) |
11.9 | 8.4 | 4.4 | 11.2 | 14.2 | |||||||||||||||
Adjusted return on average capital (%) (5), (6) |
5.7 | 4.8 | 4.1 | 7.3 | 7.4 | |||||||||||||||
Net cash provided by operating activities of continuing operations |
$ | 1,041,956 | 1,028,034 | 984,956 | 1,248,169 | 1,096,559 | ||||||||||||||
Free cash flow (7) |
$ | (256,773 | ) | 257,574 | 614,090 | 340,665 | 380,269 | |||||||||||||
Capital expenditures paid |
$ | 1,698,589 | 1,070,092 | 651,953 | 1,230,401 | 1,304,033 | ||||||||||||||
Other Data: |
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Average common shares Diluted |
50,878 | 51,884 | 55,094 | 56,539 | 59,728 | |||||||||||||||
Number of vehicles Owned and leased |
169,900 | 148,700 | 152,400 | 163,400 | 160,700 | |||||||||||||||
Average number of vehicles Owned and leased |
160,900 | 150,700 | 159,500 | 161,500 | 165,400 | |||||||||||||||
Number of employees |
27,500 | 25,900 | 22,900 | 28,000 | 28,800 |
(1) | Effective January 1, 2008, our contractual relationship with a significant customer changed, and we determined, after formal review of the terms and conditions of the services, we are acting as an agent based on the revised terms of the agreement. As a result, the amount of total revenue and subcontracted transportation expense decreased by $640 million in 2008 due to the reporting of revenue net of subcontracted transportation expense for this particular customer contract. |
(2) | Non-GAAP financial Measure. Refer to the section titled Overview and Non-GAAP Financial Measures in Item 7 of this report for a reconciliation of comparable earnings from continuing operations to net earning from continuing operations. |
(3) | Net earnings in 2011, 2010, 2009, 2008 and 2007 included (losses) earnings from discontinued operations of $(2) million, or $(0.03) per diluted common share, $(6) million, or $(0.12) per diluted common share, $(28) million, or $(0.51) per diluted common share, $(58) million, or $(1.01) per diluted common share, and $2 million, or $0.03 per diluted common share, respectively. |
(4) | Shareholders equity at December 31, 2011, 2010, 2009, 2008 and 2007 reflected after-tax equity charges of $595 million, $423 million, $412 million, $480 million, and $148 million, respectively, related to our pension and postretirement plans. |
(5) | Amounts were computed using an 8-point average based on quarterly information. |
(6) | Our adjusted return on capital (ROC), a non-GAAP financial measure, represents the rate of return generated by the capital deployed in our business. We use ROC as an internal measure of how effectively we use the capital invested (borrowed or owned) in our operations. Refer to the section titled Non-GAAP Financial Measures in Item 7 of this report for a reconciliation of return on average shareholders equity to adjusted return on average capital. |
(7) | Refer to the section titled Financial Resources and Liquidity in Item 7 of this report for a reconciliation of net cash provided by operating activities to free cash flow. |
18
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with our consolidated financial statements and related notes contained in Item 8 of this report on Form 10-K. The following MD&A describes the principal factors affecting results of operations, financial resources, liquidity, contractual cash obligations, and critical accounting estimates. The information presented in the MD&A is for the years ended December 31, 2011, 2010 and 2009 unless otherwise noted.
OVERVIEW
Ryder System, Inc. (Ryder) is a global leader in transportation and supply chain management solutions. Our business is divided into three business segments, which operate in highly competitive markets. Our customers select us based on numerous factors including service quality, price, technology, and service offerings. As an alternative to using our services, customers may choose to provide these services for themselves, or may choose to obtain similar or alternative services from other third-party vendors. Our customer base includes enterprises operating in a variety of industries including automotive, food service, electronics, transportation, consumer packaged goods, grocery, lumber and wood products, and home furnishing.
The Fleet Management Solutions (FMS) business segment is our largest segment providing full service leasing, contract maintenance, contract-related maintenance, and commercial rental of trucks, tractors and trailers to customers principally in the U.S., Canada and the U.K. FMS revenue and assets in 2011 were $3.84 billion and $6.82 billion, respectively, representing 64% of our consolidated revenue and 89% of consolidated assets.
The Supply Chain Solutions (SCS) business segment provides comprehensive supply chain consulting including distribution and transportation services throughout North America and Asia. SCS revenue in 2011 was $1.61 billion, representing 26% of our consolidated revenue.
The Dedicated Contract Carriage (DCC) business segment provides vehicles and drivers as part of a dedicated transportation solution in the U.S. DCC revenue in 2011 was $601 million, representing 10% of our consolidated revenue.
In 2011, we delivered significantly higher, double-digit growth in both revenue and earnings despite volatile economic conditions. We achieved revenue growth of 18% and earnings growth of 44%. Our transactional products, including commercial rental and used vehicle sales, continued to perform exceptionally well, showing improvement not only in volumes, but commanding better pricing as well. In our contractual business, our largest product line, full service lease, began to show organic fleet growth in the latter part of the year, and we also saw significant organic improvement in SCS. Although DCC earnings showed an increase for the year, segment results were lower than our expectations. We generated very strong performance from the integration of five immediately accretive acquisitions completed since December of 2010. We achieved a positive spread between our return on capital and cost of capital, and our return on equity improved by 350 basis points to 11.9%.
Total revenue was $6.05 billion, up 18% from $5.14 billion in 2010. Operating revenue (total revenue less FMS fuel and subcontracted transportation) was $4.81 billion in 2011, up 16%. Operating revenue increased primarily due to acquisitions and higher commercial rental revenue.
Earnings before income taxes (EBT) from continuing operations increased 50% in 2011 to $279 million. The increase in EBT was primarily driven by improved commercial rental performance and used vehicle sales results. Acquisitions accounted for 22% of year-over-year EBT growth. However, these increases were partially offset by higher compensation costs as a result of improved company performance and higher maintenance costs on a relatively older lease fleet. EBT also included acquisition-related restructuring and other costs of $6 million. Earnings from continuing operations increased 38% to $171 million in 2011 and earnings per diluted common share (EPS) from continuing operations increased 40% to $3.31 per diluted common share as the impact of improved EBT was partially offset by a higher income tax rate.
EBT from continuing operations increased 30% in 2010 to $186 million. The increase in EBT from continuing operations was primarily driven by strong commercial rental performance, improved used vehicle sales results and higher SCS volumes. These improvements were partially offset by lower full service lease performance reflecting higher maintenance costs on a relatively older fleet and the cumulative impact of customer fleet downsizing. EBT also included acquisition transaction costs of $4 million. Earnings from continuing operations increased 38% to $125 million in 2010 and EPS from continuing operations increased 46% to $2.37 per diluted common share. Earnings and EPS reflect improved EBT, a lower income tax rate and the benefit of share repurchases.
19
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
EBT, earnings and EPS from continuing operations included certain items we do not consider indicative of our ongoing operations and have been excluded from our comparable earnings measure. The following discussion provides a summary of the 2011 and 2010 special items which are discussed in more detail throughout our MD&A and within the Notes to Consolidated Financial Statements:
Continuing Operations | ||||||||||||
Earnings Before Income Taxes (EBT) |
Earnings | Diluted Earnings per Share (EPS) |
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(Dollars in thousands except per share amounts) | ||||||||||||
2011 |
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Earnings / EPS from continuing operations |
$ | 279,387 | $ | 171,368 | $ | 3.31 | ||||||
Restructuring and other charges |
3,655 | 2,489 | 0.05 | |||||||||
Acquisition transaction costs (1) |
2,134 | 1,991 | 0.04 | |||||||||
Charge related to tax law change in Michigan |
| 5,350 | 0.10 | |||||||||
Tax benefit from acquisition-related transaction costs |
| (568 | ) | (0.01 | ) | |||||||
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Comparable earnings from continuing operations (2) |
$ | 285,176 | $ | 180,630 | $ | 3.49 | ||||||
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2010 |
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Earnings / EPS from continuing operations |
$ | 186,305 | $ | 124,608 | $ | 2.37 | ||||||
Tax benefit associated with settlement of prior tax years audits and the expirationof a statute of limitation |
| (10,771 | ) | (0.21 | ) | |||||||
Gain on sale of an international asset previously impaired (1) |
(946 | ) | (946 | ) | (0.02 | ) | ||||||
Acquisition transaction costs (1) |
4,097 | 4,097 | 0.08 | |||||||||
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Comparable earnings from continuing operations (2) |
$ | 189,456 | $ | 116,988 | $ | 2.22 | ||||||
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(1) | Refer to Note 26, Other Items Impacting Comparability, in the Notes to Consolidated Financial Statements. |
(2) | Non-GAAP financial measure. We believe comparable earnings from continuing operations and comparable earnings per diluted common share from continuing operations measures provide useful information to investors because they exclude significant items that are unrelated to our ongoing business operations. |
Excluding the special items listed above, comparable earnings from continuing operations increased 54% to $181 million in 2011 and increased 24% to $117 million in 2010. Comparable EPS from continuing operations increased 57% to $3.49 in 2011 and 31% to $2.22 per diluted common share, respectively.
Net earnings (earnings including discontinued operations) increased 44% in 2011 to $170 million or $3.28 per diluted common share and increased 91% in 2010 to $118 million or $2.25 per diluted common share. Net earnings in 2011 and 2010 were negatively impacted by losses from discontinued operations of $2 million and $6 million, respectively. EPS growth in 2011 exceeded the earnings growth reflecting the impact of share repurchase programs.
Free cash flow from continuing operations was negative $257 million in 2011 compared to positive $258 million in 2010. The decline was driven by higher capital expenditures, primarily for revenue earning equipment. In addition, during 2011 we made $362 million in acquisition-related payments. With our stronger earnings and positive operating cash flows, we repurchased approximately 1 million shares of common stock in 2011 for $59 million and made pension contributions of approximately $65 million. We also increased our annual dividend by 8% to $1.12 per share of common stock.
Capital expenditures increased 62% to $1.76 billion in 2011 and reflects higher full service lease spending for new business and replacement of customer fleets and increased commercial rental spending to refresh and grow the fleet. Our debt balance increased 23% to $3.38 billion at December 31, 2011 due to acquisitions and higher vehicle capital spending levels. Our debt to equity ratio also increased to 257% from 196% in 2010. Our total obligations (including off-balance sheet debt) to equity ratio also increased to 261% from 203% in 2010.
20
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
2012 Outlook
We are entering 2012 with good momentum, specific initiatives in place to accelerate organic growth, and confidence in our ability to deliver increased revenue and earnings even with only modest economic improvement anticipated in 2012. We intend to build on the significant progress made in 2011. We plan to deliver increased revenue and solid earnings leverage. In FMS, we expect organic growth of our full service lease fleet, with maintenance costs continuing at somewhat higher levels, resulting from a slightly older fleet. Our commercial rental product should continue to perform very well and we plan to grow that portion of our fleet, while also maintaining improved pricing. Our used vehicle sales activity is expected to generate higher volumes with stable pricing. During the first half of 2012, FMS earnings comparisons will also reflect the benefit of the Hill Hire acquisition completed in June of 2011. In SCS, which beginning in 2012 will be integrated to include all dedicated services, we expect performance to benefit from new business and higher volumes. We are forecasting pension expense to increase by $0.18 per share, based on lower actual and projected pension asset returns. At this early stage of the multi-year vehicle replacement cycle, we plan to invest significant capital to refresh and grow both the lease and commercial rental fleets. These investments will benefit revenue and earnings in 2012 as well as in future years.
Total revenue for the full-year 2012 is forecast to be $6.3 billion, an increase of 4% compared with 2011. Operating revenue for the full-year 2012 is forecast to increase 6% to $5.1 billion compared with 2011. In FMS, contractual leasing and maintenance revenue is expected to increase 5%. Commercial rental revenue is forecast to grow by 17%, driven by strong demand and higher pricing. Total SCS revenue is forecast to increase by 1% and SCS operating revenue is anticipated to increase by 2%, reflecting new sales activity and higher volumes.
ACQUISITIONS
We completed the following FMS acquisitions from 2009 to 2011, under which we acquired a companys fleet and contractual customers. The acquisitions operate under Ryders name and complement our existing market coverage and service network. The results of these acquisitions have been included in our consolidated results since the dates of acquisition. See Note 3, Acquisitions, for further discussion.
Company Acquired | Date | Vehicles | Contractual Customers |
Market | ||||
Hill Hire plc |
June 8, 2011 | 13,700 | 400 | U.K. | ||||
B.I.T. Leasing, Inc. |
April 1, 2011 | 490 | 130 | California | ||||
The Scully Companies (Scully) |
January 28, 2011 | 2,100 | 200 | Western U.S. | ||||
Carmenita Leasing, Inc. |
January 10, 2011 | 190 | 60 | California | ||||
Edart Leasing LLC |
February 2, 2009 | 1,600 | 340 | Northeast U.S. |
On December 31, 2010, we acquired all of the common stock of Total Logistic Control (TLC), a leading provider of comprehensive supply chain solutions to food, beverage, and consumer packaged goods manufacturers in the U.S. TLC provides customers a broad suite of end-to-end services, including distribution management, contract packaging services and solutions engineering. This acquisition enhances our SCS capabilities and growth prospects in the areas of packaging and warehousing, including temperature-controlled facilities.
21
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FULL YEAR CONSOLIDATED RESULTS
Change | ||||||||||||||||||||
2011 | 2010 | 2009 | 2011/2010 | 2010/2009 | ||||||||||||||||
(Dollars in thousands, except per share amounts) | ||||||||||||||||||||
Total revenue |
$ | 6,050,534 | 5,136,435 | 4,887,254 | 18% | 5% | ||||||||||||||
Operating revenue (1) |
4,814,557 | 4,158,239 | 4,062,512 | 16 | 2 | |||||||||||||||
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Pre-tax earnings from continuing operations |
$ | 279,387 | 186,305 | 143,769 | 50 | 30 | ||||||||||||||
Earnings from continuing operations |
171,368 | 124,608 | 90,117 | 38 | 38 | |||||||||||||||
Net earnings |
169,777 | 118,170 | 61,945 | 44 | 91 | |||||||||||||||
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Earnings per common share Diluted |
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Continuing operations |
$ | 3.31 | 2.37 | 1.62 | 40% | 46% | ||||||||||||||
Net earnings |
$ | 3.28 | 2.25 | 1.11 | 46% | 103% |
(1) | We use operating revenue, a non-GAAP financial measure, to evaluate the operating performance of our businesses and as a measure of sales activity. FMS fuel services revenue net of related intersegment billings, which is directly impacted by fluctuations in market fuel prices, is excluded from the operating revenue computation as fuel is largely a pass-through to our customers for which we realize minimal changes in profitability during periods of steady market fuel prices. However, profitability may be positively or negatively impacted by increases or decreases in market fuel prices during a short period of time as customer pricing for fuel services is established based on market fuel costs. Subcontracted transportation revenue in our SCS and DCC business segments is excluded from the operating revenue computation as subcontracted transportation is largely a pass-through to our customers and we realize minimal changes in profitability as a result of fluctuations in subcontracted transportation. Refer to the section titled Non-GAAP Financial Measures for a reconciliation of total revenue to operating revenue. |
Revenue and cost of revenue by source
Total revenue increased 18% in 2011 to $6.05 billion and increased 5% in 2010 to $5.14 billion. Operating revenue (revenue excluding FMS fuel and all subcontracted transportation) increased 16% in 2011 to $4.81 billion and increased 2% in 2010 to $4.16 billion. The following table summarizes the components of the change in revenue on a percentage basis versus the prior year:
2011 | 2010 | |||||||||||||||
Total | Operating | Total | Operating | |||||||||||||
Acquisitions |
9% | 10% | % | % | ||||||||||||
Organic including price and volume |
3 | 5 | 1 | 1 | ||||||||||||
FMS fuel |
4 | | 2 | | ||||||||||||
Subcontracted transportation |
1 | | 1 | | ||||||||||||
Foreign exchange |
1 | 1 | 1 | 1 | ||||||||||||
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Total increase |
18% | 16% | 5% | 2% | ||||||||||||
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See Operating Results by Business Segment for a further discussion of the revenue impact from acquisitions and organic growth.
Lease and Rental
Change | ||||||||||||||||
2011 | 2010 | 2009 | 2011/2010 | 2010/2009 | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
Lease and rental revenues |
$ | 2,553,877 | 2,309,816 | 2,265,857 | 11% | 2% | ||||||||||
Cost of lease and rental |
1,746,057 | 1,604,253 | 1,552,954 | 9 | 3 | |||||||||||
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Gross margin |
807,820 | 705,563 | 712,903 | 14 | (1) | |||||||||||
Gross margin % |
32% | 31% | 31% |
Lease and rental revenues represent full service lease and commercial rental product offerings within our FMS business segment. Revenues increased 11% in 2011 to $2.55 billion and increased 2% in 2010 to $2.31 billion. In 2011, the increase was primarily driven by acquisitions and improved global rental demand and pricing. In 2010, the increase was driven by higher global rental market demand and rental pricing, partially offset by lower lease revenue as a result of the cumulative impact of customer fleet downsizings.
22
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Cost of lease and rental represents the direct costs related to lease and rental revenues. These costs are comprised of depreciation of revenue earning equipment, maintenance costs (primarily repair parts and labor), and other fixed costs such as licenses, insurance and operating taxes. Cost of lease and rental excludes interest costs from vehicle financing. Cost of lease and rental increased 9% in 2011 to $1.75 billion and increased 3% in 2010 to $1.60 billion. In 2011 and 2010, the cost increase was due to an increase in revenue and higher maintenance costs of 12% and 10%, respectively, on an older lease fleet.
Gross margin increased 14% to $808 million in 2011 as a result of a 14% increase in rental pricing partially offset by higher maintenance costs on an older lease fleet. Gross margin decreased 1% to $706 million in 2010. Gross margin as a percentage of revenue remained at 31% in 2010.
Services
Change | ||||||||||||||||
2011 | 2010 | 2009 | 2011/2010 | 2010/2009 | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
Services revenue |
$ | 2,609,174 | 2,109,748 | 1,995,515 | 24% | 6% | ||||||||||
Cost of services |
2,186,353 | 1,763,018 | 1,662,303 | 24 | 6 | |||||||||||
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Gross margin |
422,821 | 346,730 | 333,212 | 22 | 4 | |||||||||||
Gross margin % |
16% | 16% | 17% |
Services revenue represents all the revenues associated with our SCS and DCC business segments as well as contract maintenance, contract-related maintenance and fleet support services associated with our FMS business segment. Services revenue increased 24% in 2011 to $2.61 billion and increased 6% in 2010 to $2.11 billion. In 2011, the revenue increase was primarily driven by acquisitions in our SCS and DCC business segments. In 2010, the revenue increase was driven by higher freight volumes and fuel cost pass-through in our SCS and DCC business segments.
Cost of services represent the direct costs related to services revenue and is primarily comprised of salaries and employee-related costs, SCS and DCC subcontracted transportation (purchased transportation from third parties) and maintenance costs. Cost of services increased 24% in 2011 to $2.19 billion and increased 6% in 2010 to $1.76 billion. In 2011 and 2010, the cost increase was due to an increase in revenue.
Services gross margin increased 22% to $423 million in 2011 and increased 4% to $347 million in 2010. Services gross margin as a percentage of revenue remained at 16% in 2011 and 2010.
Fuel
Change | ||||||||||||||||
2011 | 2010 | 2009 | 2011/2010 | 2010/2009 | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
Fuel services revenue |
$ | 887,483 | 716,871 | 625,882 | 24% | 15% | ||||||||||
Cost of fuel services |
873,466 | 699,107 | 604,371 | 25 | 16 | |||||||||||
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Gross margin |
14,017 | 17,764 | 21,511 | (21) | (17) | |||||||||||
Gross margin % |
2% | 2% | 3% |
Fuel services revenue increased 24% in 2011 to $887 million and increased 15% in 2010 to $717 million. In 2011 and 2010, the revenue increase was due to higher fuel prices passed through to customers.
Cost of fuel services includes the direct costs associated with providing our customers with fuel. These costs include fuel, salaries and employee-related costs of fuel island attendants and depreciation of our fueling facilities and equipment. Cost of fuel increased 25% in 2011 to $873 million and increased 16% in 2010 to $699 million. In 2011 and 2010, the cost increase was due to an increase in fuel prices. Subcontracted transportation costs, which are passed through to customers, increased $87 million and $62 million, respectively, in 2011 and 2010.
23
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Fuel services gross margin decreased 21% to $14 million in 2011 and decreased 17% to $18 million in 2010. Fuel is largely a pass-through to customers for which we realize minimal changes in margin during periods of steady market fuel prices. However, fuel services margin is impacted by sudden increases or decreases in market fuel prices during a short period of time as customer pricing for fuel is established based on market fuel costs. The decline in fuel margin in 2011 and 2010 is the result of less volatility in market fuel costs than in the prior year.
Change | |||||||||||||||||||||||||
2011 | 2010 | 2009 | 2011/2010 | 2010/2009 | |||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||
Other operating expenses |
$ | 129,180 | 134,224 | 163,534 | (4)% | (18)% |
Other operating expenses includes costs related to our owned and leased facilities within the FMS business segment such as depreciation, rent, insurance, utilities and taxes. These facilities are utilized to provide maintenance to our lease, rental, contract maintenance and fleet support services customers. Other operating expenses also include the costs associated with used vehicle sales such as writedowns of used vehicles to fair market value and facilities costs. Other operating expenses as a percentage of lease and rental revenue decreased in 2011 and in 2010 due to lower writedowns on vehicles held for sale of $15 million in 2011 and $26 million in 2010.
Change | |||||||||||||||||||||||||
2011 | 2010 | 2009 | 2011/2010 | 2010/2009 | |||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||
Selling, general and administrative expenses (SG&A) |
$ | 771,244 | 655,375 | 625,524 | 18 | % | 5 | % | |||||||||||||||||
Percentage of total revenue |
13% | 13% | 13% |
SG&A expenses increased 18% to $771 million in 2011 and increased 5% to $655 million in 2010. SG&A expenses as a percent of total revenue remained at 13% in 2011 and 2010. Incentive based compensation, which primarily impacts SG&A expenses, increased $37 million in 2011 compared to 2010. SG&A expenses were also impacted in 2011 by significant investments in information technology and sales initiatives. The increases in SG&A expenses were offset by the 2011 acquisitions for which we were able to leverage our overhead structure on the additional revenue contributed by the acquisitions.
Change | |||||||||||||||||||||||||||
2011 | 2010 | 2009 | 2011/2010 | 2010/2009 | |||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||
Gains on vehicle sales, net |
$ | (62,879) | (28,727 | ) | (12,292 | ) | 119 | % | 134 | % |
Gains on vehicle sales, net increased 119% to $63 million in 2011 due to a 30% increase in average pricing on vehicles sold. Gains on vehicle sales, net increased 134% to $29 million in 2010 due to a 41% increase in average pricing on vehicles sold.
Change | |||||||||||||||||||||||||
2011 | 2010 | 2009 | 2011/2010 | 2010/2009 | |||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||
Interest expense |
$ | 133,164 | 129,994 | 144,342 | 2 | % | (10 | )% | |||||||||||||||||
Effective interest rate |
4.3% | 5.2% | 5.4% |
Interest expense increased 2% to $133 million in 2011 because of higher average outstanding debt partially offset by a lower effective interest rate. The increase in average outstanding debt reflects funding for acquisitions and increased capital spending. The lower effective interest rate reflects the replacement of higher interest rate debt with debt issuances at lower rates as well as an increased percentage of variable rate debt. Interest expense decreased 10% to $130 million in 2010 because of lower average debt balances and a lower effective interest rate. A hypothetical 100 basis point change in short-term market interest rates would change annual pre-tax earnings by $10 million.
24
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
2011 | 2010 | 2009 | |||||||||||||
(In thousands) | |||||||||||||||
Miscellaneous income, net |
$ | (9,093 | ) | (7,114 | ) | (3,657 | ) |
Miscellaneous income, net consists of investment income on securities held to fund certain benefit plans, interest income, gains and losses from sales of property, foreign currency transaction gains, and non-operating items. Miscellaneous income, net improved $2 million in 2011 due to gains from sales of facilities and insurance-related recoveries, partially offset by lower income on our investment securities. Miscellaneous income, net improved $3 million in 2010 primarily due to higher gains from sales of property and a life insurance recovery, partially offset by lower income on investment securities.
2011 | 2010 | 2009 | ||||||||||
(In thousands) | ||||||||||||
Restructuring and other charges, net |
$ | 3,655 | | 6,406 |
Refer to Note 5, Restructuring and Other Charges, in the Notes to Consolidated Financial Statements for a discussion of these charges.
Change | |||||||||||||||||||||||||||
2011 | 2010 | 2009 | 2011/2010 | 2010/2009 | |||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||
Provision for income taxes |
$ | 108,019 | 61,697 | 53,652 | 75 | % | 15 | % | |||||||||||||||||||
Effective tax rate from continuing operations |
38.7% | 33.1% | 37.3% |
Our provision for income taxes and effective income tax rates are impacted by such items as enacted tax law changes, settlement of tax audits and the reversal of reserves for uncertain tax positions due to the expiration of statutes of limitation. In the aggregate, these items increased the effective rate by 2.6% of pre-tax earnings from continuing operations in 2011 and reduced the effective rate by 5.7% in 2010 and 6.5% in 2009. Excluding these items, our effective tax rate in 2011 benefitted by a higher proportionate amount of earnings in lower tax rate jurisdictions and adjustments related to annual tax filings. The benefits in 2009 were partially offset by the impact of non-deductible expenses on lower pre-tax earnings from continuing operations.
On December 17, 2010, the U.S. enacted the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act and on September 27, 2010, the U.S. enacted the Small Business Job Act of 2010 (collectively, the Acts). These Acts expanded and extended bonus depreciation to qualified property placed in service during 2010 through 2012. The impact of these changes resulted in a net operating loss carry forward in 2011. In addition, these changes will significantly reduce our U.S. federal tax payments through 2013.
2011 | 2010 | 2009 | |||||||||||||
(In thousands) | |||||||||||||||
Loss from discontinued operations, net of tax |
$ | (1,591 | ) | (6,438 | ) | (28,172 | ) |
Refer to Note 4, Discontinued Operations, in the Notes to Consolidated Financial Statements for a discussion of losses from discontinued operations.
25
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FULL YEAR OPERATING RESULTS BY BUSINESS SEGMENT
Change | |||||||||||||||||||||||||||
2011 | 2010 | 2009 | 2011/2010 | 2010/2009 | |||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||
Revenue: |
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Fleet Management Solutions |
$ | 4,218,330 | 3,712,153 | 3,567,836 | 14 | % | 4 | % | |||||||||||||||||||
Supply Chain Solutions |
1,605,364 | 1,252,251 | 1,139,911 | 28 | 10 | ||||||||||||||||||||||
Dedicated Contract Carriage |
600,674 | 482,583 | 470,956 | 24 | 2 | ||||||||||||||||||||||
Eliminations |
(373,834 | ) | (310,552 | ) | (291,449 | ) | (20 | ) | (7 | ) | |||||||||||||||||
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|
||||||||||||||||||||||
Total |
$ | 6,050,534 | 5,136,435 | 4,887,254 | 18 | % | 5 | % | |||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||||
Operating Revenue: |
|||||||||||||||||||||||||||
Fleet Management Solutions |
$ | 3,135,857 | 2,846,532 | 2,817,733 | 10 | % | 1 | % | |||||||||||||||||||
Supply Chain Solutions |
1,290,901 | 1,004,962 | 955,409 | 28 | 5 | ||||||||||||||||||||||
Dedicated Contract Carriage |
566,643 | 468,547 | 456,598 | 21 | 3 | ||||||||||||||||||||||
Eliminations |
(178,844 | ) | (161,802 | ) | (167,228 | ) | (11 | ) | 3 | ||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||||
Total |
$ | 4,814,557 | 4,158,239 | 4,062,512 | 16 | % | 2 | % | |||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||||
EBT: |
|||||||||||||||||||||||||||
Fleet Management Solutions |
$ | 250,111 | 172,185 | 140,400 | 45 | % | 23 | % | |||||||||||||||||||
Supply Chain Solutions |
69,460 | 47,111 | 35,700 | 47 | 32 | ||||||||||||||||||||||
Dedicated Contract Carriage |
32,528 | 30,966 | 37,643 | 5 | (18 | ) | |||||||||||||||||||||
Eliminations |
(24,212 | ) | (19,275 | ) | (21,058 | ) | (26 | ) | 8 | ||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||||
327,887 | 230,987 | 192,685 | 42 | 20 | |||||||||||||||||||||||
Unallocated Central Support Services |
(42,711 | ) | (41,531 | ) | (35,834 | ) | (3 | ) | (16 | ) | |||||||||||||||||
Restructuring and other charges, net and other items (1) |
(5,789 | ) | (3,151 | ) | (13,082 | ) | NM | NM | |||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||||
Earnings from continuing operations before income taxes |
$ | 279,387 | 186,305 | 143,769 | 50 | % | 30 | % | |||||||||||||||||||
|
|
|
|
|
|
(1) | See Note 5, Restructuring and Other Charges and Note 26, Other Items Impacting Comparability, in the Notes to Consolidated Financial Statements for a discussion of items excluded from our segment measure of profitability. |
As part of managements evaluation of segment operating performance, we define the primary measurement of our segment financial performance as Earnings Before Tax (EBT) from continuing operations, which includes an allocation of Central Support Services (CSS) and excludes restructuring and other charges, net and other items we do not believe are representative of the ongoing operations of the segment.
CSS represents those costs incurred to support all business segments, including human resources, finance, corporate services and public affairs, information technology, health and safety, legal and corporate communications. The objective of the EBT measurement is to provide clarity on the profitability of each business segment and, ultimately, to hold leadership of each business segment and each operating segment within each business segment accountable for their allocated share of CSS costs. Segment results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented. Certain costs are considered to be overhead not attributable to any segment and remain unallocated in CSS. Included within the unallocated overhead remaining within CSS are the costs for investor relations, public affairs and certain executive compensation. See Note 29, Segment Reporting, in the Notes to Consolidated Financial Statements for a description of how the remainder of CSS costs are allocated to the business segments.
26
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The following table provides a reconciliation of items excluded from our segment EBT measure to their classification within our Consolidated Statements of Earnings:
Consolidated Statements of Earnings |
||||||||||||||
Description |
Line Item (1) | 2011 | 2010 | 2009 | ||||||||||
(In thousands) | ||||||||||||||
Severance and employee-related costs (2) |
Restructuring | $ | (3,162 | ) | | (2,206 | ) | |||||||
Contract termination costs (2) |
Restructuring | (493 | ) | | | |||||||||
Early retirement of debt (2) |
Restructuring | | | (4,178 | ) | |||||||||
Asset impairments (2) |
Restructuring | | | (22 | ) | |||||||||
|
|
|
|
|
|
|||||||||
Restructuring and other charges, net |
(3,655 | ) | | (6,406 | ) | |||||||||
International asset impairment (3) |
Cost of services | | | (6,676 | ) | |||||||||
Gain on sale of property (3) |
Miscellaneous income | | 946 | | ||||||||||
Acquisition transaction costs (3) |
SG&A | (2,134 | ) | (4,097 | ) | | ||||||||
|
|
|
|
|
|
|||||||||
Restructuring and other charges, net and other items |
$ | (5,789 | ) | (3,151 | ) | (13,082 | ) | |||||||
|
|
|
|
|
|
(1) | Restructuring refers to Restructuring and other charges, net; Miscellaneous income refers to Miscellaneous income, net; SG&A refers to Selling, general and administrative expenses on our Consolidated Statements of Earnings |
(2) | See Note 5, Restructuring and Other Charges, in the Notes to Consolidated Financial Statements for additional information. |
(3) | See Note 26, Other Items Impacting Comparability in the Notes to Consolidated Financial Statements for additional information. |
Our FMS segment leases revenue earning equipment and provides fuel, maintenance and other ancillary services to our SCS and DCC segments. Inter-segment revenue and EBT are accounted for at rates similar to those executed with third parties. EBT related to inter-segment equipment and services billed to customers (equipment contribution) are included in both FMS and the business segment which served the customer and then eliminated (presented as Eliminations).
The following table reconciles FMS segment revenue to revenue from external customers:
2011 | 2010 | 2009 | ||||||||||
(In thousands) | ||||||||||||
Full service lease revenue |
$ | 1,996,273 | 1,934,346 | 1,989,676 | ||||||||
Commercial rental revenue |
722,557 | 525,083 | 431,058 | |||||||||
|
|
|
|
|
|
|||||||
Full service lease and commercial rental revenue |
2,718,830 | 2,459,429 | 2,420,734 | |||||||||
Intercompany revenue |
(164,953 | ) | (149,613 | ) | (154,877 | ) | ||||||
|
|
|
|
|
|
|||||||
Full service lease and commercial rental revenue from external customers |
$ | 2,553,877 | 2,309,816 | 2,265,857 | ||||||||
|
|
|
|
|
|
|||||||
FMS services revenue |
$ | 417,027 | 387,103 | 396,999 | ||||||||
Intercompany revenue |
(13,891 | ) | (12,189 | ) | (12,351 | ) | ||||||
|
|
|
|
|
|
|||||||
FMS services revenue from external customers |
$ | 403,136 | 374,914 | 384,648 | ||||||||
|
|
|
|
|
|
|||||||
FMS fuel services revenue |
$ | 1,082,473 | 865,621 | 750,103 | ||||||||
Intercompany revenue |
(194,990 | ) | (148,750 | ) | (124,221 | ) | ||||||
|
|
|
|
|
|
|||||||
Fuel services revenue from external customers |
$ | 887,483 | 716,871 | 625,882 | ||||||||
|
|
|
|
|
|
The following table sets forth equipment contribution included in EBT for our SCS and DCC segments:
2011 | 2010 | 2009 | ||||||||||
(In thousands) | ||||||||||||
Equipment Contribution: |
||||||||||||
Supply Chain Solutions |
$ | 8,470 | 8,426 | 9,461 | ||||||||
Dedicated Contract Carriage |
15,742 | 10,849 | 11,597 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 24,212 | 19,275 | 21,058 | ||||||||
|
|
|
|
|
|
27
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Fleet Management Solutions
Change | |||||||||||||||||||||||||||
2011 | 2010 | 2009 | 2011/2010 | 2010/2009 | |||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||
Full service lease |
$ | 1,996,273 | 1,934,346 | 1,989,676 | 3% | (3)% | |||||||||||||||||||||
Contract maintenance |
155,182 | 158,784 | 167,182 | (2) | (5) | ||||||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||||
Contractual revenue |
2,151,455 | 2,093,130 | 2,156,858 | 3 | (3) | ||||||||||||||||||||||
Contract-related maintenance |
192,721 | 160,871 | 163,306 | 20 | (1) | ||||||||||||||||||||||
Commercial rental |
722,557 | 525,083 | 431,058 | 38 | 22 | ||||||||||||||||||||||
Other |
69,124 | 67,448 | 66,511 | 2 | 1 | ||||||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||||
Operating revenue (1) |
3,135,857 | 2,846,532 | 2,817,733 | 10 | 1 | ||||||||||||||||||||||
Fuel services revenue |
1,082,473 | 865,621 | 750,103 | 25 | 15 | ||||||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||||
Total revenue |
$ | 4,218,330 | 3,712,153 | 3,567,836 | 14% | 4% | |||||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||||
Segment EBT |
$ | 250,111 | 172,185 | 140,400 | 45% | 23% | |||||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||||
Segment EBT as a % of total revenue |
5.9% | 4.6% | 3.9% | 130 bps | 70 bps | ||||||||||||||||||||||
Segment EBT as a % of operating revenue (1) |
8.0% | 6.0% | 5.0% | 200 bps | 100 bps |
(1) | We use operating revenue, a non-GAAP financial measure, to evaluate the operating performance of our FMS business segment and as a measure of sales activity. Fuel services revenue, which is directly impacted by fluctuations in market fuel prices, is excluded from our operating revenue computation as fuel is largely a pass-through to customers for which we realize minimal changes in profitability during periods of steady market fuel prices. However, profitability may be positively or negatively impacted by sudden increases or decreases in market fuel prices during a short period of time as customer pricing for fuel services is established based on market fuel costs. |
Total revenue increased 14% in 2011 to $4.22 billion and increased 4% in 2010 to $3.71 billion. Operating revenue (revenue excluding fuel) increased 10% in 2011 to $3.14 billion and increased 1% in 2010 to $2.85 billion. The following table summarizes the components of the change in revenue on a percentage basis versus the prior year:
2011 | 2010 | |||||||
Total | Operating | Total | Operating | |||||
Acquisitions |
4% | 5% | % | % | ||||
Organic including price and volume |
4 | 4 | | | ||||
FMS fuel |
5 | | 3 | | ||||
Foreign exchange |
1 | 1 | 1 | 1 | ||||
|
|
|
| |||||
Total increase |
14% | 10% | 4% | 1% | ||||
|
|
|
|
2011 versus 2010
Fuel services revenue increased 25% in 2011 due to higher fuel prices passed through to customers. Full service lease revenue increased 3% in 2011 reflecting the impact of recent acquisitions. We expect favorable full service lease comparisons to continue next year primarily due to acquisitions as well as new sales activity. Commercial rental revenue increased 38% in 2011 reflecting improved global market demand and higher pricing. We expect favorable commercial rental revenue comparisons to continue next year driven by higher demand and higher pricing on a larger fleet.
28
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The following table provides rental statistics on our global fleet:
Change | |||||||||||||||||||||||||||
2011 | 2010 | 2009 | 2011/2010 | 2010/2009 | |||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||
Non-lease customer rental revenue |
$ | 434,043 | 332,077 | 265,143 | 31% | 25% | |||||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||||
Lease customer rental revenue (1) |
$ | 288,514 | 193,006 | 165,915 | 49% | 16% | |||||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||||
Average commercial rental power fleet size in service (2), (3) |
28,500 | 23,800 | 23,000 | 20% | 3% | ||||||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||||
Commercial rental utilization power fleet |
77.6% | 76.1% | 68.0% | 150 bps | 810 bps | ||||||||||||||||||||||
|
|
|
|
|
|
(1) | Lease customer rental revenue is revenue from rental vehicles provided to our existing full service lease customers, generally during peak periods in their operations. |
(2) | Number of units rounded to nearest hundred and calculated using average counts. |
(3) | Fleet size excluding trailers. |
FMS EBT increased 45% in 2011 to $250 million primarily due to significantly better commercial rental performance, improved used vehicle sales results and the impact of acquisitions. The increase in EBT was partially offset by higher compensation-related expenses as well as higher maintenance costs on an older fleet. Commercial rental performance improved 66% as a result of increased market demand and higher pricing on a 23% larger average fleet. The increase in the average fleet reflects organic growth of 13% and an acquisition-related impact of 10%. Used vehicle sales results improved by $49 million primarily due to higher pricing. The improvements in our commercial rental and used vehicle sales activities allowed us to better leverage our fixed costs. Acquisitions increased FMS EBT by 17%.
2010 versus 2009
Fuel services revenue increased 15% in 2010 due to higher fuel prices passed through to customers. Full service lease revenue declined 3% and contract maintenance revenue declined 5% as a result of the cumulative impact of customer fleet downsizings. Commercial rental revenue increased 22% in 2010 reflecting improving global market demand and higher pricing. The average global rental fleet increased 1% in 2010 in response to increased demand. Power fleet utilization increased to 76.1% in 2010 from 68.0% in 2009.
FMS EBT increased 23% in 2010 to $172 million primarily due to better commercial rental performance, improved used vehicle sales results, and lower retirement plans expense. The items were partially offset by lower full service lease results and, to a lesser extent, higher compensation and depreciation expense. Commercial rental performance improved as a result of increased market demand and higher pricing. Used vehicle sales results improved by $42 million primarily due to higher pricing and a lower average inventory level. Retirement plan costs decreased $20 million because of improved performance in the overall stock market in 2009 which impacted 2010 pension expense. Full service lease performance was adversely impacted by increased maintenance costs on a relatively older fleet and the cumulative impact of customer fleet downsizing. Depreciation expense increased $10 million resulting from residual value changes and accelerated depreciation.
29
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Our global fleet of owned and leased revenue earning equipment and contract maintenance vehicles is summarized as follows (number of units rounded to the nearest hundred):
Change | |||||||||||||||||||||||||
2011 | 2010 | 2009 | 2011/ 2010 | 2010/2009 | |||||||||||||||||||||
End of period vehicle count |
|||||||||||||||||||||||||
By type: |
|||||||||||||||||||||||||
Trucks(1) |
68,400 | 63,000 | 63,600 | 9 | % | (1 | )% | ||||||||||||||||||
Tractors (2) |
55,700 | 49,600 | 50,300 | 12 | (1 | ) | |||||||||||||||||||
Trailers (3), (4) |
43,300 | 33,000 | 35,400 | 31 | (7 | ) | |||||||||||||||||||
Other |
2,500 | 3,100 | 3,100 | (19 | ) | | |||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||
Total |
169,900 | 148,700 | 152,400 | 14 | % | (2 | )% | ||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||
By ownership: |
|||||||||||||||||||||||||
Owned |
166,500 | 145,000 | 147,200 | 15 | % | (1 | )% | ||||||||||||||||||
Leased |
3,400 | 3,700 | 5,200 | (8 | ) | (29 | ) | ||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||
Total |
169,900 | 148,700 | 152,400 | 14 | % | (2 | )% | ||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||
By product line: |
|||||||||||||||||||||||||
Full service lease (4) |
121,000 | 111,100 | 115,100 | 9 | % | (3 | )% | ||||||||||||||||||
Commercial rental (4) |
39,600 | 29,700 | 27,400 | 33 | 8 | ||||||||||||||||||||
Service vehicles and other |
3,000 | 2,700 | 3,000 | 11 | (10 | ) | |||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||
Active units |
163,600 | 143,500 | 145,500 | 14 | (1 | ) | |||||||||||||||||||
Held for sale |
6,300 | 5,200 | 6,900 | 21 | (25 | ) | |||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||
Total |
169,900 | 148,700 | 152,400 | 14 | (2 | ) | |||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||
Customer vehicles under contract maintenance |
35,300 | 33,400 | 34,400 | 6 | % | (3 | )% | ||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||
Average vehicle count |
|||||||||||||||||||||||||
By product line: |
|||||||||||||||||||||||||
Full service lease |
116,200 | 112,500 | 118,800 | 3 | % | (5 | )% | ||||||||||||||||||
Commercial rental |
36,600 | 29,800 | 29,400 | 23 | 1 | ||||||||||||||||||||
Service vehicles and other |
2,900 | 2,600 | 2,900 | 12 | (10 | ) | |||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||
Active units |
155,700 | 144,900 | 151,100 | 7 | (4 | ) | |||||||||||||||||||
Held for sale |
5,200 | 5,800 | 8,400 | (10 | ) | (31 | ) | ||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||
Total |
160,900 | 150,700 | 159,500 | 7 | (6 | ) | |||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||
Customer vehicles under contract maintenance |
34,100 | 33,700 | 35,200 | 1 | % | (4 | )% | ||||||||||||||||||
|
|
|
|
|
|
(1) | Generally comprised of Class 1 through Class 6 type vehicles with a Gross Vehicle Weight (GVW) up to 26,000 pounds. |
(2) | Generally comprised of over the road on highway tractors and are primarily comprised of Classes 7 and 8 type vehicles with a GVW of over 26,000 pounds. |
(3) | Generally comprised of dry, flatbed and refrigerated type trailers. |
(4) | Includes 9,500 trailers (6,100 full service lease and 3,400 commercial rental) acquired as part of the Hill Hire acquisition. |
Note: | Average vehicle counts were computed using 24-point average based on monthly information. |
30
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The totals in the previous table include the following non-revenue earning equipment for the global fleet (number of units rounded to the nearest hundred):
Change | ||||||||||||||||
Number of Units |
2011 | 2010 | 2009 | 2011/2010 | 2010/2009 | |||||||||||
Not yet earning revenue (NYE) |
2,600 | 800 | 700 | 225% | 14% | |||||||||||
No longer earning revenue (NLE): |
||||||||||||||||
Units held for sale |
6,300 | 5,200 | 6,900 | 21 | (25) | |||||||||||
Other NLE units |
2,600 | 2,000 | 2,900 | 30 | (31) | |||||||||||
|
|
|
|
|
|
|||||||||||
Total |
11,500 | 8,000 | 10,500 | 44% | (24)% | |||||||||||
|
|
|
|
|
|
NYE units represent new vehicles on hand that are being prepared for deployment to a lease customer or into the rental fleet. Preparations include activities such as adding lift gates, paint, decals, cargo area and refrigeration equipment. For 2011, the number of NYE units increased compared with prior year reflecting new lease sales. NLE units represent all vehicles held for sale and vehicles for which no revenue has been earned in the previous 30 days. Accordingly, these vehicles may be temporarily out of service, being prepared for sale or awaiting redeployment. For 2011, the number of NLE units increased because of higher used vehicle inventory levels and increased levels of vehicle replacement activity. For 2010, the number of NLE units decreased because of lower used vehicle inventory levels and higher rental utilization. We expect NLE levels in 2012 to be slightly higher due to increased levels of vehicle replacement activity from both our lease and rental fleets.
Supply Chain Solutions
Change | ||||||||||||||||
2011 | 2010 | 2009 | 2011/2010 | 2010/2009 | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
Operating revenue: |
||||||||||||||||
Automotive |
$ | 469,245 | 449,170 | 409,862 | 4% | 10% | ||||||||||
High-tech |
236,123 | 220,494 | 209,852 | 7 | 5 | |||||||||||
Retail and CPG |
420,545 | 177,797 | 167,097 | 137 | 6 | |||||||||||
Industrial and other |
164,988 | 157,501 | 168,598 | 5 | (7) | |||||||||||
|
|
|
|
|
|
|||||||||||
Total operating revenue (1) |
1,290,901 | 1,004,962 | 955,409 | 28 | 5 | |||||||||||
Subcontracted transportation |
314,463 | 247,289 | 184,502 | 27 | 34 | |||||||||||
|
|
|
|
|
|
|||||||||||
Total revenue |
$ | 1,605,364 | 1,252,251 | 1,139,911 | 28% | 10% | ||||||||||
|
|
|
|
|
|
|||||||||||
Segment EBT |
$ | 69,460 | 47,111 | 35,700 | 47% | 32% | ||||||||||
|
|
|
|
|
|
|||||||||||
Segment EBT as a % of total revenue |
4.3% | 3.8% | 3.1% | 50 bps | 70 bps | |||||||||||
|
|
|
|
|
|
|||||||||||
Segment EBT as a % of operating revenue (1) |
5.4% | 4.7% | 3.7% | 70 bps | 100 bps | |||||||||||
|
|
|
|
|
|
|||||||||||
Memo: Fuel costs (2) |
$ | 96,391 | 78,806 | 64,915 | 22% | 21% | ||||||||||
|
|
|
|
|
|
(1) | In SCS transportation management arrangements, we may act as a principal or as an agent in purchasing transportation on behalf of our customer. We record revenue on a gross basis when acting as principal and we record revenue on a net basis when acting as an agent. As a result, total revenue may fluctuate depending on our role in subcontracted transportation arrangements yet our profitability remains unchanged as we typically realize minimal profitability from subcontracting transportation. We deduct subcontracted transportation expense from total revenue to arrive at operating revenue. We use operating revenue and EBT as a percent of operating revenue, non-GAAP financial measures, to evaluate the operating performance of our SCS business segment and as a measure of sales activity and profitability. |
(2) | Fuel costs are largely a pass-through to customers and therefore have a direct impact on revenue. |
31
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Total revenue increased 28% in 2011 to $1.61 billion and increased 10% in 2010 to $1.25 billion. Operating revenue (revenue excluding subcontracted transportation) increased 28% in 2011 to $1.29 billion and increased 5% in 2010 to $1.00 billion. We expect favorable revenue comparisons to continue next year due to new sales activity and higher volumes. The following table summarizes the components of the change in revenue on a percentage basis versus the prior year:
2011 | 2010 | |||||||||||||||
Total | Operating | Total | Operating | |||||||||||||
TLC acquisition |
20% | 23% | % | % | ||||||||||||
Subcontracted transportation |
4 | | 6 | | ||||||||||||
Organic including price and volume |
2 | 3 | 1 | 2 | ||||||||||||
Fuel cost pass-throughs |
1 | 1 | 1 | 1 | ||||||||||||
Foreign exchange |
1 | 1 | 2 | 2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total increase |
28% | 28% | 10% | 5% | ||||||||||||
|
|
|
|
|
|
|
|
2011 versus 2010
SCS EBT increased 47% in 2011 to $69 million. The TLC acquisition increased SCS EBT by 27% during 2011. SCS EBT also benefited from higher freight volumes across all industries, new business, and favorable insurance development. These benefits were partially offset by increased compensation-related expenses.
2010 versus 2009
SCS EBT increased 32% in 2010 to $47 million primarily due to improved operating performance, particularly in high tech accounts, and higher automotive production volumes partially offset by higher incentive-based compensation costs.
Dedicated Contract Carriage
Change | ||||||||||||||||
2011 | 2010 | 2009 | 2011/2010 | 2010/2009 | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
Operating revenue (1) |
$ | 566,643 | 468,547 | 456,598 | 21% | 3% | ||||||||||
Subcontracted transportation |
34,031 | 14,036 | 14,358 | 142 | (2) | |||||||||||
|
|
|
|
|
|
|||||||||||
Total revenue |
$ | 600,674 | 482,583 | 470,956 | 24% | 2% | ||||||||||
|
|
|
|
|
|
|||||||||||
Segment EBT |
$ | 32,528 | 30,966 | 37,643 | 5% | (18)% | ||||||||||
|
|
|
|
|
|
|||||||||||
Segment EBT as a % of total revenue |
5.4 | % | 6.4 | % | 8.0 | % | (100) bps | (160) bps | ||||||||
|
|
|
|
|
|
|||||||||||
Segment EBT as a % of operating revenue (1) |
5.7 | % | 6.6 | % | 8.2 | % | (90) bps | (160) bps | ||||||||
|
|
|
|
|
|
|||||||||||
Memo: Fuel costs (2) |
$ | 127,273 | 83,928 | 69,858 | 52% | 20% | ||||||||||
|
|
|
|
|
|
(1) | In DCC transportation management arrangements we may act as a principal or as an agent in purchasing transportation on behalf of our customer. We record revenue on a gross basis when acting as principal and we record revenue on a net basis when acting as an agent. As a result, total revenue may fluctuate depending on our role in subcontracted transportation arrangements yet our profitability remains unchanged as we typically realize minimal profitability from subcontracting transportation. We deduct subcontracted transportation expense from total revenue to arrive at operating revenue. We use operating revenue and EBT as a percent of operating revenue, non-GAAP financial measures, to evaluate the operating performance of our DCC business segment and as a measure of sales activity and profitability. |
(2) | Fuel costs are largely a pass-through to customers and therefore have a direct impact on revenue. |
32
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Total revenue increased 24% in 2011 to $601 million and increased 2% in 2010 to $483 million. Operating revenue (revenue excluding subcontracted transportation) increased 21% in 2011 to $567 million and increased 3% in 2010 to $469 million. We expect favorable revenue comparisons next year due to new sales activity and higher volumes. The following table summarizes the components of the change in revenue on a percentage basis versus the prior year:
2011 | 2010 | |||||||||||||
Total | Operating | Total | Operating | |||||||||||
Scully acquisition |
18% | 15% | % | % | ||||||||||
Fuel cost pass-throughs |
5 | 5 | 3 | 3 | ||||||||||
Subcontracted transportation |
1 | | | | ||||||||||
Organic including price and volume |
| 1 | (1) | | ||||||||||
|
|
|
|
|
|
| ||||||||
Total increase |
24% | 21% | 2% | 3% | ||||||||||
|
|
|
|
|
|
|
2011 versus 2010
DCC EBT increased 5% in 2011 to $33 million reflecting lower self-insurance costs from favorable development related to prior year claims and the impact of the Scully acquisition, partially offset by lower operating performance and higher compensation-related expenses.
2010 versus 2009
DCC EBT decreased 18% in 2010 to $31 million primarily due to investments associated with new technology initiatives, higher compensation costs, increased self-insurance costs from unfavorable development related to prior year claims, and lower operating performance caused by increased driver costs.
Central Support Services
Change | ||||||||||||||||
2011 | 2010 | 2009 | 2011/ 2010 | 2010/ 2009 | ||||||||||||
(In thousands) | ||||||||||||||||
Human resources |
$ | 19,416 | 15,504 | 14,707 | 25% | 5% | ||||||||||
Finance |
49,779 | 50,871 | 48,771 | (2) | 4 | |||||||||||
Corporate services and public affairs |
12,964 | 13,979 | 14,139 | (7) | (1) | |||||||||||
Information technology |
61,583 | 56,873 | 52,826 | 8 | 8 | |||||||||||
Health and safety |
7,540 | 7,126 | 7,050 | 6 | 1 | |||||||||||
Other |
52,558 | 39,357 | 30,072 | 34 | 31 | |||||||||||
|
|
|
|
|
|
|||||||||||
Total CSS |
203,840 | 183,710 | 167,565 | 11 | 10 | |||||||||||
Allocation of CSS to business segments |
(161,129) | (142,179) | (131,731) | (13) | (8) | |||||||||||
|
|
|
|
|
|
|||||||||||
Unallocated CSS |
$ | 42,711 | 41,531 | 35,834 | 3% | 16% | ||||||||||
|
|
|
|
|
|
2011 versus 2010
Total CSS costs increased 11% in 2011 to $204 million due to higher compensation-related expenses and investments in information technology. Unallocated CSS costs increased 3% in 2011 to $43 million due to higher compensation-related expenses.
2010 versus 2009
Total CSS costs increased 10% in 2010 to $184 million primarily due to increased compensation costs, information technology investments and professional services from strategic initiatives. Unallocated CSS costs increased 16% in 2010 to $42 million due to higher compensation costs.
33
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FOURTH QUARTER CONSOLIDATED RESULTS
Three months ended December 31, |
Change | |||||||||
2011 | 2010 | 2011/ 2010 | ||||||||
(Dollars in thousands, except per share amounts) |
||||||||||
Total revenue |
$ | 1,541,094 | 1,313,426 | 17% | ||||||
Operating revenue |
1,236,992 | 1,061,939 | 16 | |||||||
| ||||||||||
Pre-tax earnings from continuing operations |
$ | 73,112 | 49,608 | 47 | ||||||
Earnings from continuing operations |
47,664 | 41,462 | 15 | |||||||
Net earnings |
48,095 | 37,121 | 30 | |||||||
| ||||||||||
Earnings per common share Diluted |
||||||||||
Continuing operations |
$ | 0.92 | 0.80 | 15% | ||||||
Net earnings |
$ | 0.93 | 0.72 | 29% |
Revenue
Total revenue increased 17% in the fourth quarter of 2011 to $1.54 billion. Operating revenue (revenue excluding FMS fuel and all subcontracted transportation) increased 16% in the fourth quarter of 2011 to $1.24 billion. The following table summarizes the components of the change in revenue on a percentage basis versus the prior year:
Three months ended December 31, 2011 | ||||
Total | Operating | |||
Acquisitions |
10% | 12% | ||
Organic including price and volume |
3 | 4 | ||
FMS fuel |
3 | | ||
Subcontracted transportation |
1 | | ||
|
| |||
Total increase |
17% | 16% | ||
|
|
EBT increased 47% in the fourth quarter of 2011 to $73 million. The increase in EBT was primarily driven by improved commercial rental performance and acquisitions. Acquisitions accounted for 24% of year-over-year EBT growth in the fourth quarter of 2011. However, these increases were partially offset by higher incentive-based compensation costs as a result of improved company performance. See Operating Results by Business Segment for a further discussion of operating results. EBT also included acquisition-related restructuring and other charges of $3 million related to our Hill Hire integration efforts. Excluding these charges, comparable EBT increased 45% in the fourth quarter of 2011 to $76 million.
Earnings and Diluted Earnings Per Share (EPS) from Continuing Operations
Earnings from continuing operations increased 15% to $48 million and EPS from continuing operations increased 15% to $0.92 in the fourth quarter of 2011. Earnings and EPS from continuing operations in the fourth quarter of 2011 included the $2.4 million or $0.05 per diluted common share acquisition-related restructuring and other charges. Earnings and EPS from continuing operations in the fourth quarter of 2010 included a $8 million or $0.15 per diluted common share benefit related to certain tax benefits partially offset by restructuring and other items. Excluding these items, comparable earnings and EPS from continuing operations increased 48% to $50 million and 49% to $0.97 per diluted common share, respectively.
We believe that comparable EBT, comparable earnings from continuing operations and comparable EPS from continuing operations measures provide useful information to investors because they exclude significant items that are unrelated to our ongoing business operations. See Note (S), Other Items Impacting Comparability, for information regarding items excluded from the 2011 results.
34
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Net Earnings and EPS
Net earnings increased 30% in the fourth quarter of 2011 to $48 million or $0.93 per diluted common share. Net earnings in the fourth quarter were impacted by earnings from discontinued operations of $0.4 million in 2011 and losses of $4 million in 2010. The earnings from discontinued operations in 2011 were due to $1 million of favorable insurance reserve developments.
FOURTH QUARTER OPERATING RESULTS BY BUSINESS SEGMENT
Three months ended December 31, | Change | |||||||||
2011 | 2010 | 2011/2010 | ||||||||
(In thousands) | ||||||||||
Revenue: |
||||||||||
Fleet Management Solutions |
$ | 1,074,655 | 948,060 | 13% | ||||||
Supply Chain Solutions |
408,670 | 325,094 | 26 | |||||||
Dedicated Contract Carriage |
156,627 | 121,825 | 29 | |||||||
Eliminations |
(98,858) | (81,553) | (21) | |||||||
|
|
|
|
|||||||
Total |
$ | 1,541,094 | 1,313,426 | 17% | ||||||
|
|
|
|
|||||||
Operating Revenue: |
||||||||||
Fleet Management Solutions |
$ | 813,313 | 726,254 | 12% | ||||||
Supply Chain Solutions |
324,663 | 258,309 | 26 | |||||||
Dedicated Contract Carriage |
147,140 | 119,257 | 23 | |||||||
Eliminations |
(48,124) | (41,881) | (15) | |||||||
|
|
|
|
|||||||
Total |
$ | 1,236,992 | 1,061,939 | 16% | ||||||
|
|
|
|
|||||||
EBT: |
||||||||||
Fleet Management Solutions |
$ | 69,889 | 49,498 | 41% | ||||||
Supply Chain Solutions |
17,767 | 12,327 | 44 | |||||||
Dedicated Contract Carriage |
7,011 | 6,529 | 7 | |||||||
Eliminations |
(7,114) | (4,770) | (49) | |||||||
|
|
|
|
|||||||
87,553 | 63,584 | 38 | ||||||||
Unallocated Central Support Services |
(11,147) | (10,825) | (3) | |||||||
Restructuring and other charges, net and other items |
(3,294) | (3,151) | NM | |||||||
|
|
|
|
|||||||
Earnings from continuing operations before income taxes |
$ | 73,112 | 49,608 | 47% | ||||||
|
|
|
|
Fleet Management Solutions
Total revenue increased 13% to $1.07 billion in the fourth quarter of 2011. Operating revenue (revenue excluding fuel) increased 12% in the fourth quarter of 2011 to $813 million. The following table summarizes the components of the change in revenue on a percentage basis versus the prior year.
Three months ended December 31, 2011 | ||||
Total | Operating | |||
Acquisitions |
6% | 7% | ||
Organic including price and volume |
3 | 5 | ||
FMS fuel |
4 | | ||
|
| |||
Total increase |
13% | 12% | ||
|
|
Fuel services revenue increased 18% in the fourth quarter of 2011 due to higher prices passed through to customers. Full service lease revenue increased 5% in the fourth quarter of 2011 from to the impact of recent acquisitions. Commercial rental revenue increased 38% in the fourth quarter of 2011 reflecting improved global market demand and higher pricing.
35
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FMS EBT increased 41% in the fourth quarter of 2011 to $70 million primarily due to significantly better commercial rental performance, acquisitions and improved used vehicle sales results. The increase in EBT was partially offset by higher maintenance costs on an older fleet, investments in sales and marketing initiatives, and higher compensation-related expenses. Commercial rental performance improved 54% as a result of increased market demand and higher pricing on a 31% larger average fleet. The increase in the average fleet reflects organic growth of 13% and an acquisition-related impact of 18%. Used vehicle sales results improved by $7 million primarily due to higher pricing and demand. Acquisitions increased FMS EBT by 23%.
Supply Chain Solutions
Total revenue increased 26% in the fourth quarter of 2011 to $409 million. Operating revenue (revenue excluding subcontracted transportation) increased 26% in the fourth quarter of 2011 to $325 million. The following table summarizes the components of the change in revenue on a percentage basis versus the prior year:
Three months ended December 31, 2011 | ||||
Total | Operating | |||
TLC acquisition |
18% | 21% | ||
Subcontracted transportation |
4 | | ||
Organic including price and volume |
5 | 6 | ||
Foreign exchange |
(1) | (1) | ||
|
| |||
Total increase |
26% | 26% | ||
|
|
SCS EBT increased 44% in the fourth quarter of 2011 to $18 million. The TLC acquisition increased SCS EBT by 11% during the fourth quarter of 2011. SCS EBT also benefited from favorable prior year insurance development and new business.
Dedicated Contract Carriage
Total revenue increased 29% in the fourth quarter of 2011 to $157 million. Operating revenue (revenue excluding subcontracted transportation) increased 23% in the fourth quarter of 2011 to $147 million. The following table summarizes the components of the change in revenue on a percentage basis versus the prior year:
Three months ended December 31, 2011 | ||||
Total | Operating | |||
Scully acquisition |
21% | 17% | ||
Organic including price and volume |
1 | 1 | ||
Fuel cost pass-throughs |
5 | 5 | ||
Subcontracted transportation |
2 | | ||
|
| |||
Total increase |
29% | 23% | ||
|
|
DCC EBT increased 7% in the fourth quarter of 2011 to $7 million reflecting lower insurance costs from favorable development related to prior year claims partially offset by lower operating performance.
Central Support Services
Total CSS costs increased 8% in the fourth quarter of 2011 to $52 million primarily due to higher compensation-related expenses, investments in information technology initiatives and increased professional fees. Unallocated CSS costs increased 3% in the fourth quarter of 2011 to $11 million primarily due to higher investments in information technology initiatives.
36
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL RESOURCES AND LIQUIDITY
Cash Flows
The following is a summary of our cash flows from operating, financing and investing activities from continuing operations:
2011 | 2010 | 2009 | ||||||||||
(In thousands) | ||||||||||||
Net cash provided by (used in): |
||||||||||||
Operating activities |
$ | 1,041,956 | 1,028,034 | 984,956 | ||||||||
Financing activities |
504,202 | 78,166 | (542,016 | ) | ||||||||
Investing activities |
(1,657,172 | ) | (982,464 | ) | (448,610 | ) | ||||||
Effect of exchange rate changes on cash |
3,219 | 1,723 | 1,794 | |||||||||
|
|
|
|
|
|
|||||||
Net change in cash and cash equivalents |
$ | (107,795 | ) | 125,459 | (3,876 | ) | ||||||
|
|
|
|
|
|
Cash provided by operating activities from continuing operations increased to $1.04 billion in 2011 compared with $1.03 billion in 2010 because of higher cash based earnings partially offset by an increase in working capital needs. Cash provided by financing activities increased to $504 million in 2011 from $78 million in 2010 due to higher borrowing needs to fund acquisitions and capital spending. Cash used in investing activities increased to $1.66 billion in 2011 compared with $982 million in 2010 primarily due to higher vehicle capital spending and acquisition-related payments in 2011.
Cash provided by operating activities from continuing operations increased to $1.03 billion in 2010 compared with $985 million in 2009 because of reduced working capital needs primarily from lower pension contributions and compensation-related payments, partially offset by lower cash based earnings. Cash provided by financing activities increased to $78 million in 2010 from cash used in financing activities of $542 million in 2009 reflecting higher borrowing needs to fund capital spending, including acquisitions. Cash used in investing activities increased to $982 million in 2010 compared with $449 million in 2009 primarily due to higher vehicle capital spending and acquisition-related payments in 2010.
Our principal sources of operating liquidity are cash from operations and proceeds from the sale of revenue earning equipment. We refer to the sum of operating cash flows, proceeds from the sales of revenue earning equipment and operating property and equipment, collections on direct finance leases, sale and leaseback of revenue earning equipment and other cash inflows as total cash generated. We refer to the net amount of cash generated from operating and investing activities (excluding changes in restricted cash and acquisitions) as free cash flow. Although total cash generated and free cash flow are non-GAAP financial measures, we consider them to be important measures of comparative operating performance. We also believe total cash generated to be an important measure of total cash inflows generated from our ongoing business activities. We believe free cash flow provides investors with an important perspective on the cash available for debt service, acquisitions and for shareholders after making capital investments required to support ongoing business operations. Our calculation of free cash flow may be different from the calculation used by other companies and therefore comparability may be limited.
The following table shows the sources of our free cash flow computation:
2011 | 2010 | 2009 | ||||||||||
(In thousands) | ||||||||||||
Net cash provided by operating activities |
$ | 1,041,956 | 1,028,034 | 984,956 | ||||||||
Sales of revenue earning equipment |
290,336 | 220,843 | 211,002 | |||||||||
Sales of operating property and equipment |
9,905 | 13,844 | 4,634 | |||||||||
Collections on direct finance leases |
62,224 | 61,767 | 65,242 | |||||||||
Sale and leaseback of revenue earning equipment |
37,395 | | | |||||||||
Other, net |
| 3,178 | 209 | |||||||||
|
|
|
|
|
|
|||||||
Total cash generated |
1,441,816 | 1,327,666 | 1,266,043 | |||||||||
Purchases of property and revenue earning equipment |
(1,698,589 | ) | (1,070,092 | ) | (651,953 | ) | ||||||
|
|
|
|
|
|
|||||||
Free cash flow |
$ | (256,773 | ) | 257,574 | 614,090 | |||||||
|
|
|
|
|
|
37
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Free cash flow decreased to negative $257 million in 2011 compared with positive $258 million in 2010 primarily due to higher vehicle capital spending partially offset by higher proceeds from the sale of revenue earning equipment. Free cash flow decreased to $258 million in 2010 compared with $614 million in 2009 primarily due to higher vehicle capital spending and lower cash-based earnings partially offset by lower pension contributions. We expect negative free cash flow in 2012 to be approximately $430 million reflecting higher capital expenditures.
Capital expenditures are generally used to purchase revenue earning equipment (trucks, tractors and trailers) within our FMS segment. These expenditures primarily support the full service lease product line as well as the commercial rental product line. The level of capital required to support the full service lease product line varies directly with the customer contract signings for replacement vehicles and growth. These contracts are long-term agreements that result in predictable cash flows typically over a three to seven year term for trucks and tractors and ten years for trailers. The commercial rental product line utilizes capital for the purchase of vehicles to replenish and expand the fleet available for shorter-term use by contractual or occasional customers. Operating property and equipment expenditures primarily relate to FMS and SCS spending on items such as vehicle maintenance facilities and equipment, computer and telecommunications equipment, investments in technologies, and warehouse facilities and equipment.
The following is a summary of capital expenditures:
2011 | 2010 | 2009 | ||||||||||
(In thousands) | ||||||||||||
Revenue earning equipment: |
||||||||||||
Full service lease |
$ | 1,067,025 | 646,671 | 547,750 | ||||||||
Commercial rental |
622,181 | 378,678 | 7,436 | |||||||||
|
|
|
|
|
|
|||||||
1,689,206 | 1,025,349 | 555,186 | ||||||||||
Operating property and equipment |
70,673 | 62,302 | 56,216 | |||||||||
|
|
|
|
|
|
|||||||
Total capital expenditures (1) |
1,759,879 | 1,087,651 | 611,402 | |||||||||
Changes in accounts payable related to purchases of revenue earning equipment |
(61,290 | ) | (17,559 | ) | 40,551 | |||||||
|
|
|
|
|
|
|||||||
Cash paid for purchases of property and revenue earning equipment |
$ | 1,698,589 | 1,070,092 | 651,953 | ||||||||
|
|
|
|
|
|
(1) | Capital expenditures exclude non-cash additions in 2011 of $37 million in assets held under capital leases resulting from a sale-leaseback transaction. Non-cash additions also exclude approximately $2 million, $2 million and $1 million in 2011, 2010 and 2009, respectively, in assets held under capital leases resulting from the extension of existing operating leases and other additions. |
Capital expenditures (accrual basis) increased 62% to $1.76 billion in 2011 because of higher full service lease vehicle spending for new business and replacements of customer fleets and increased commercial rental spending to refresh and grow the rental fleet. Capital expenditures (accrual basis) increased 78% to $1.09 billion in 2010 primarily as a result of a planned increase in commercial rental spending to refresh and grow the fleet. We expect capital expenditures to increase to $2.15 billion, as we make investments in both the lease and rental fleet. We expect to fund 2012 capital expenditures with both internally generated funds and additional debt financing.
Working Capital
2011 | 2010 | |||||||
(In thousands) | ||||||||
Current assets |
$ | 1,088,173 | $ | 1,023,301 | ||||
Current liabilities |
1,173,823 | 1,131,519 | ||||||
|
|
|
|
|||||
Working capital |
$ | (85,650 | ) | $ | (108,218 | ) | ||
|
|
|
|
Our net working capital (current assets less current liabilities) was $(86) million at December 31, 2011 compared with $(108) million at December 31, 2010. The increase in net working capital was primarily due to a net decrease of $146 million in short-term debt and the current portion of long-term debt and cash. Excluding the decrease in short-term debt, other working capital components decreased $123 million primarily due to a lower cash balance as of the end of 2011.
Financing and Other Funding Transactions
We utilize external capital primarily to support working capital needs and growth in our asset-based product lines. The variety of financing alternatives typically available to fund our capital needs include commercial paper, long-term and medium-term public and private debt, asset-backed securities, bank term loans, leasing arrangements and bank credit facilities. Our principal sources of financing are issuances of commercial paper and medium-term notes.
38
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Our ability to access unsecured debt in the capital markets is linked to both our short-term and long-term debt ratings. These ratings are intended to provide guidance to fixed income investors in determining the credit risk associated with particular Ryder securities based on current information obtained by the rating agencies from us or from other sources. Lower ratings generally result in higher borrowing costs as well as reduced access to unsecured capital markets. A downgrade of our short-term debt ratings to a lower tier would impair our ability to issue commercial paper. As a result, we would have to rely on alternative funding sources. A downgrade of our debt ratings would not affect our ability to borrow amounts under our revolving credit facility described below, given ongoing compliance with the terms and conditions of the credit facility.
Our debt ratings at December 31, 2011 were as follows:
Short-term | Long-term | Outlook | ||||
Moodys Investors Service |
P2 | Baa1 | Stable (affirmed February 2011) | |||
Standard & Poors Ratings Services |
A2 | BBB+ | Stable (affirmed August 2011) | |||
Fitch Ratings |
F2 | A- | Stable (affirmed March 2011) |
We believe that our operating cash flows, together with our access to commercial paper markets and other available debt financing, will be adequate to meet our operating, investing and financing needs in the foreseeable future. However, there can be no assurance that unanticipated volatility and disruption in commercial paper markets would not impair our ability to access these markets on terms commercially acceptable to us or at all. If we cease to have access to commercial paper and other sources of unsecured borrowings, we would meet our liquidity needs by drawing upon contractually committed lending agreements as described below and/or by seeking other funding sources.
At December 31, 2011, we had the following amounts available to fund operations under the following facilities:
(In millions) | |||||
Global revolving credit facility |
$ | 483 | |||
Trade receivables program |
175 |
We have a $900 million global revolving credit facility with a syndicate of twelve lending institutions which matures in June 2016 and is used primarily to finance working capital and provide support for the issuance of unsecured commercial paper in the U.S. and Canada. In order to maintain availability of funding, we must maintain a ratio of debt to consolidated tangible net worth, of less than or equal to 300%. Tangible net worth, as defined in the credit facility, includes 50% of our deferred federal income tax liability and excludes the book value of our intangibles. The ratio at December 31, 2011 was 255%.
We also have a $175 million trade receivables purchase and sale program, pursuant to which we ultimately sell certain ownership interests in certain of our domestic trade accounts receivable to a receivables conduit or committed purchasers. We use this program to provide additional liquidity to fund our operations, particularly when it is cost effective to do so. The program expires on October 26, 2012. The program contains provisions restricting its availability in the event of a material adverse change to our business operations or the collectibility of the collateralized receivables.
Refer to Note 16, Debt, in the Notes to Consolidated Financial Statements for further discussion around the global revolving credit facility and the trade receivables program.
On February 25, 2010, Ryder filed an automatic shelf registration statement on Form S-3 with the SEC. The registration is for an indeterminate number of securities and is effective for three years. Under this universal shelf registration statement, we have the capacity to offer and sell from time to time various types of securities, including common stock, preferred stock and debt securities, subject to market demand and ratings status. Refer to Note 16, Debt, in the Notes to Consolidated Financial Statements for a discussion around the issuance of medium-term notes under this shelf registration statement and debt maturities.
39
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The following table shows the movements in our debt balance:
2011 | 2010 | |||||||
(In thousands) | ||||||||
Debt balance at January 1 |
$ | 2,747,002 | 2,497,691 | |||||
|
|
|
|
|||||
Cash-related changes in debt: |
||||||||
Net change in commercial paper borrowings |
46,749 | 174,939 | ||||||
Proceeds from issuance of medium-term notes |
699,244 | 300,000 | ||||||
Proceeds from issuance of other debt instruments |
267,158 | 14,169 | ||||||
Retirement of medium-term notes and debentures |
(375,000 | ) | (175,000 | ) | ||||
Other debt repaid, including capital lease obligations |
(44,287 | ) | (73,668 | ) | ||||
Net change from discontinued operations |
(140 | ) | (2,955 | ) | ||||
|
|
|
|
|||||
593,724 | 237,485 | |||||||
Non-cash changes in debt: |
||||||||
Fair market value adjustment on notes subject to hedging |
6,414 | 3,328 | ||||||
Addition of capital lease obligations |
39,279 | 2,164 | ||||||
Changes in foreign currency exchange rates and other non-cash items |
(4,274 | ) | 6,334 | |||||
|
|
|
|
|||||
Total changes in debt |
635,143 | 249,311 | ||||||
|
|
|
|
|||||
Debt balance at December 31 |
$ | 3,382,145 | 2,747,002 | |||||
|
|
|
|
In accordance with our funding philosophy, we attempt to match the aggregate average remaining re-pricing life of our debt with the aggregate average remaining re-pricing life of our assets. We utilize both fixed-rate and variable-rate debt to achieve this match and generally target a mix of 25%45% variable-rate debt as a percentage of total debt outstanding. The variable-rate portion of our total obligations (including notional value of swap agreements) was 40% and 28% at December 31, 2011 and 2010, respectively.
Ryders leverage ratios and a reconciliation of on-balance sheet debt to total obligations were as follows:
2011 | % of Equity |
2010 | % of Equity | |||||||||
(Dollars in thousands) | ||||||||||||
On-balance sheet debt |
$ | 3,382,145 | 257% | $ | 2,747,002 | 196% | ||||||
Off-balance sheet debt PV of minimum lease payments and guaranteed residual values under operating leases for vehicles (1) |
63,960 | 99,797 | ||||||||||
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|
|
|
|||||||||
Total obligations |
$ | 3,446,105 | 261% | $ | 2,846,799 | 203% | ||||||
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|
|
(1) | Present value (PV) does not reflect payments we would be required to make if we terminated the related leases prior to the scheduled expiration dates. |
On-balance sheet debt to equity consists of balance sheet debt divided by total equity. Total obligations to equity represents balance sheet debt plus the present value of minimum lease payments and guaranteed residual values under operating leases for vehicles, discounted based on our incremental borrowing rate at lease inception, all divided by total equity. Although total obligations is a non-GAAP financial measure, we believe that total obligations is useful as it provides a more complete analysis of our existing financial obligations and helps better assess our overall leverage position. The increase in our leverage ratios in 2011 was due to acquisitions and increased investments in vehicles as well as a pension equity charge.
Off-Balance Sheet Arrangements
Sale and leaseback transactions. Refer to Note 15, Leases, in the Notes to Consolidated Financial Statements for a discussion of our sale-leaseback transactions.
Guarantees. Refer to Note 19, Guarantees, in the Notes to Consolidated Financial Statements for a discussion of our agreements involving guarantees.
40
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Contractual Obligations and Commitments
As part of our ongoing operations, we enter into arrangements that obligate us to make future payments under contracts such as debt agreements, lease agreements and unconditional purchase obligations. The following table summarizes our expected future contractual cash obligations and commitments at December 31, 2011:
2012 | 2013- 2014 | 2015- 2016 | Thereafter | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Debt |
$ | 267,496 | 685,346 | 1,846,057 | 513,356 | 3,312,255 | ||||||||||||||
Capital lease obligations |
6,870 | 12,721 | 11,291 | 17,165 | 48,047 | |||||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||
Total debt, including capital leases (1) |
274,366 | 698,067 | 1,857,348 | 530,521 | 3,360,302 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Interest on debt (2) |
128,370 | 199,853 | 115,402 | 102,659 | 546,284 | |||||||||||||||
Operating leases (3) |
96,623 | 141,651 | 44,081 | 30,797 | 313,152 | |||||||||||||||
Purchase obligations (4) |
652,818 | 19,171 | 12,839 | 2,683 | 687,511 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total contractual cash obligations |
877,811 | 360,675 | 172,322 | 136,139 | 1,546,947 | |||||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||
Insurance obligations (primarily self-insurance) |
120,045 | 93,091 | 36,183 | 28,116 | 277,435 | |||||||||||||||
Other long-term liabilities (5), (6), (7) |
2,296 | 2,881 | 2,548 | 46,287 | 54,012 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 1,274,518 | 1,154,714 | 2,068,401 | 741,063 | 5,238,696 | ||||||||||||||
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|
|
|
|
|
|
|
|
|
(1) | Net of unamortized discount. |
(2) | Total debt matures at various dates through fiscal year 2025 and bears interest principally at fixed rates. Interest on variable-rate debt is calculated based on the applicable rate at December 31, 2011. Amounts are based on existing debt obligations, including capital leases, and do not consider potential refinancing of expiring debt obligations. |
(3) | Represents future lease payments associated with vehicles, equipment and properties under operating leases. Amounts are based upon the general assumption that the leased asset will remain on lease for the length of time specified by the respective lease agreements. No effect has been given to renewals, cancellations, contingent rentals or future rate changes. |
(4) | The majority of our purchase obligations are pay-as-you-go transactions made in the ordinary course of business. Purchase obligations include agreements to purchase goods or services that are legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed minimum or variable price provisions; and the approximate timing of the transaction. The most significant item included in the above table are purchase obligations related to vehicles. Purchase orders made in the ordinary course of business that are cancelable are excluded from the above table. Any amounts for which we are liable under purchase orders for goods received are reflected in our Consolidated Balance Sheets as Accounts payable and Accrued expenses and other current liabilities and are excluded from the above table. |
(5) | Represents other long-term liability amounts reflected in our Consolidated Balance Sheets that have known payment streams. The most significant items included were asset retirement obligations and deferred compensation obligations. |
(6) | The amounts exclude our estimated pension contributions. For 2012, our pension contributions, including our minimum funding requirements as set forth by ERISA and international regulatory bodies, are expected to be $81 million. Our minimum funding requirements after 2012 are dependent on several factors. However, we estimate that the undiscounted required global contributions over the next five years are approximately $544 million (pre-tax) (assuming expected long-term rate of return realized and other assumptions remain unchanged). We also have payments due under our other postretirement benefit (OPEB) plans. These plans are not required to be funded in advance, but are pay-as-you-go. See Note 24, Employee Benefit Plans, in the Notes to Consolidated Financial Statements for further discussion. |
(7) | The amounts exclude $69 million of liabilities associated with uncertain tax positions as we are unable to reasonably estimate the ultimate amount or timing of settlement. See Note 14, Income Taxes, in the Notes to Consolidated Financial Statements for further discussion. |
41
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Pension Information
Over the past few years we have made the following amendments to our defined benefit retirement plans:
| In July 2009, our Board of Directors approved an amendment to freeze our United Kingdom (U.K.) retirement plan for all participants effective March 31, 2010. |
| In July 2008, our Board of Directors approved an amendment to freeze the defined benefit portion of our Canadian retirement plan effective January 1, 2010 for current participants who do not meet certain grandfathering criteria. |
| In January 2007, our Board of Directors approved the amendment to freeze the U.S. pension plans effective December 31, 2007 for current participants who did not meet certain grandfathering criteria. |
As a result of these amendments, non-grandfathered plan participants ceased accruing benefits under the plan as of the respective amendment effective date and began receiving an enhanced benefit under a defined contribution plan. All retirement benefits earned as of the amendment effective date were fully preserved and will be paid in accordance with the plan and legal requirements. There was no material impact to our financial condition and operating results from the plan amendments in 2009, 2010 or 2011.
Due to the underfunded status of our defined benefit plans, we had an accumulated net pension equity charge (after-tax) of $595 million and $423 million at December 31, 2011 and 2010, respectively. The higher equity charge in 2011 reflects the impact of a lower discount rate and lower actual returns compared to the expected asset returns during 2011. The total asset return for our U.S. qualified pension plan (our primary plan) was negative 0.5% in 2011.
The funded status of our pension plans is dependent upon many factors, including returns on invested assets and the level of certain market interest rates. We review pension assumptions regularly and we may from time to time make voluntary contributions to our pension plans, which exceed the amounts required by statute. During 2011, total pension contributions, including our international plans, were $65 million compared with $64 million in 2010. We estimate 2012 required pension contributions will be $81 million. After considering the 2011 contributions and asset performance, the projected present value of estimated global pension contributions that would be required over the next 5 years totals approximately $496 million (pre-tax). Changes in interest rates and the market value of the securities held by the plans could materially change, positively or negatively, the funded status of the plans and affect the level of pension expense and required contributions in future years. The ultimate amount of contributions is also dependent upon the requirements of applicable laws and regulations. See Note 24, Employee Benefit Plans, in the Notes to Consolidated Financial Statements for additional information.
Pension expense totaled $34 million in 2011 compared to $42 million in 2010. The decrease in pension expense reflects reduced amortization of actuarial losses attributed to higher than expected return on pension assets in 2010 and the favorable impact from pension contributions made in the fourth quarter of 2010. We expect 2012 pension expense to increase approximately $15 million primarily because of increased amortization of actuarial losses attributed to lower than expected actual return on plan assets in 2011 as well as a reduction in our expected return on plan assets. Our 2012 pension expense estimates are subject to change based upon the completion of the actuarial analysis for all pension plans. See the section titled Critical Accounting Estimates Pension Plans for further discussion on pension accounting estimates.
We participate in eleven U.S. multi-employer pension (MEP) plans that provide defined benefits to employees covered by collective bargaining agreements. At December 31, 2011, approximately 890 employees (approximately 3% of total employees) participated in these MEP plans. The annual net pension cost of the MEP plans is equal to the annual contribution determined in accordance with the provisions of negotiated labor contracts. Our current annualized MEP plan contributions total approximately $6 million. Pursuant to current U.S. pension laws, if any MEP plans fail to meet certain minimum funding thresholds, we could be required to make additional MEP plan contributions, until the respective labor agreement expires, of up to 10% of current contractual requirements. Several factors could cause MEP plans not to meet these minimum funding thresholds, including unfavorable investment performance, changes in participant demographics, and increased benefits to participants. The plan administrators and trustees of the MEP plans provide us with the annual funding notice as required by law. This notice sets forth the funded status of the plan as of the beginning of the prior year but does not provide any company-specific information.
Employers participating in MEP plans can elect to withdraw from the plans, contingent upon labor union consent, and be subject to a withdrawal obligation based on, among other factors, the MEP plans unfunded vested benefits. U.S. pension regulations provide that an employer can fund its withdrawal obligation in a lump sum or over a time period of up to 20 years based on previous contribution rates. Based on the most recently available plan information, obtained in 2011, we estimate our pre-tax contingent MEP plan withdrawal obligation to be approximately $27 million. We have no current intention of taking any action that would subject us to the payment of material withdrawal obligations; however, under applicable law, in very limited circumstances, the plan trustee can impose these obligations on us. See Note 24, Employee Benefit Plans, in the Notes to Consolidated Financial Statements for additional information.
42
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Share Repurchase Programs and Cash Dividends
Refer to Note 20, Share Repurchase Programs, in the Notes to Consolidated Financial Statements for a discussion on our share repurchase programs.
Cash dividend payments to shareholders of common stock were $58 million in 2011, $54 million in 2010, and $53 million in 2009. During 2011, we increased our annual dividend to $1.16 per share of common stock.
Market Risk
In the normal course of business, we are exposed to fluctuations in interest rates, foreign currency exchange rates and fuel prices. We manage these exposures in several ways, including, in certain circumstances, the use of a variety of derivative financial instruments when deemed prudent. We do not enter into leveraged derivative financial transactions or use derivative financial instruments for trading purposes.
Exposure to market risk for changes in interest rates exists for our debt obligations. Our interest rate risk management program objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. We manage our exposure to interest rate risk primarily through the proportion of fixed-rate and variable-rate debt we hold in the total debt portfolio. From time to time, we also use interest rate swap and cap agreements to manage our fixed-rate and variable-rate exposure and to better match the repricing of debt instruments to that of our portfolio of assets. See Note 18, Derivatives, in the Notes to Consolidated Financial Statements for further discussion on interest rate swap agreements.
At December 31, 2011, we had $1.98 billion of fixed-rate debt outstanding (excluding capital leases) with a weighted-average interest rate of 5.2% and a fair value of $2.15 billion. A hypothetical 10% decrease or increase in the December 31, 2011 market interest rates would impact the fair value of our fixed-rate debt by approximately $25 million at December 31, 2011. Changes in the relative sensitivity of the fair value of our financial instrument portfolio for these theoretical changes in the level of interest rates are primarily driven by changes in our debt maturities, interest rate profile and amount.
At December 31, 2011, we had $1.36 billion of variable-rate debt, including the impact of interest rate swaps, which effectively changed $550 million of fixed-rate debt instruments to LIBOR-based floating-rate debt. Changes in the fair value of the interest rate swaps were offset by changes in the fair value of the debt instruments and no net gain or loss was recognized in earnings. The fair value of our interest rate swap agreements at December 31, 2011 was recorded as an asset totaling $22 million. The fair value of our variable-rate debt at December 31, 2011 was $1.36 billion. A hypothetical 10% increase in market interest rates would have impacted 2011 pre-tax earnings from continuing operations by approximately $2 million.
We also are subject to interest rate risk with respect to our pension and postretirement benefit obligations, as changes in interest rates will effectively increase or decrease our liabilities associated with these benefit plans, which also results in changes to the amount of pension and postretirement benefit expense recognized each period.
Exposure to market risk for changes in foreign currency exchange rates relates primarily to our foreign operations buying, selling and financing in currencies other than local currencies and to the carrying value of net investments in foreign subsidiaries. The majority of our transactions are denominated in U.S. dollars. The principal foreign currency exchange rate risks to which we are exposed include the Canadian dollar, British pound sterling and Mexican peso. We manage our exposure to foreign currency exchange rate risk related to our foreign operations buying, selling and financing in currencies other than local currencies by naturally offsetting assets and liabilities not denominated in local currencies to the extent possible. A hypothetical uniform 10% strengthening in the value of the dollar relative to all the currencies in which our transactions are denominated would result in a decrease to pre-tax earnings from continuing operations of approximately $5 million. We also use foreign currency option contracts and forward agreements from time to time to hedge foreign currency transactional exposure. We generally do not hedge the translation exposure related to our net investment in foreign subsidiaries, since we generally have no near-term intent to repatriate funds from such subsidiaries.
Exposure to market risk for fluctuations in fuel prices relates to a small portion of our service contracts for which the cost of fuel is integral to service delivery and the service contract does not have a mechanism to adjust for increases in fuel prices. At December 31, 2011, we also had various fuel purchase arrangements in place to ensure delivery of fuel at market rates in the event of fuel
43
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
shortages. We are exposed to fluctuations in fuel prices in these arrangements since none of the arrangements fix the price of fuel to be purchased. Increases and decreases in the price of fuel are generally passed on to our customers for which we realize minimal changes in profitability during periods of steady market fuel prices. However, profitability may be positively or negatively impacted by sudden increases or decreases in market fuel prices during a short period of time as customer pricing for fuel services is established based on market fuel costs. We believe the exposure to fuel price fluctuations would not materially impact our results of operations, cash flows or financial position.
ENVIRONMENTAL MATTERS
Refer to Note 25, Environmental Matters, in the Notes to Consolidated Financial Statements for a discussion surrounding environmental matters.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions. Our significant accounting policies are described in the Notes to Consolidated Financial Statements. Certain of these policies require the application of subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. These estimates and assumptions are based on historical experience, changes in the business environment and other factors that we believe to be reasonable under the circumstances. Different estimates that could have been applied in the current period or changes in the accounting estimates that are reasonably likely can result in a material impact on our financial condition and operating results in the current and future periods. We review the development, selection and disclosure of these critical accounting estimates with Ryders Audit Committee on an annual basis.
The following discussion, which should be read in conjunction with the descriptions in the Notes to Consolidated Financial Statements, is furnished for additional insight into certain accounting estimates that we consider to be critical.
Depreciation and Residual Value Guarantees. We periodically review and adjust the residual values and useful lives of revenue earning equipment of our FMS business segment as described in Note 1, Summary of Significant Accounting Policies Revenue Earning Equipment, Operating Property and Equipment, and Depreciation and Summary of Significant Accounting Policies Residual Value Guarantees and Deferred Gains, in the Notes to Consolidated Financial Statements. Reductions in residual values (i.e., the price at which we ultimately expect to dispose of revenue earning equipment) or useful lives will result in an increase in depreciation expense over the life of the equipment. Based on the mix of revenue earning equipment at December 31, 2011, a 10% decrease in expected vehicle residual values would increase depreciation expense in 2012 by approximately $116 million. We review residual values and useful lives of revenue earning equipment on an annual basis or more often if deemed necessary for specific groups of our revenue earning equipment. Reviews are performed based on vehicle class, generally subcategories of trucks, tractors and trailers by weight and usage. Our annual review is established with a long-term view considering historical market price changes, current and expected future market price trends, expected life of vehicles included in the fleet and extent of alternative uses for leased vehicles (e.g., rental fleet, and SCS and DCC applications). As a result, future depreciation expense rates are subject to change based upon changes in these factors. While we believe that the carrying values and estimated sales proceeds for revenue earning equipment are appropriate, there can be no assurance that deterioration in economic conditions or adverse changes to expectations of future sales proceeds will not occur, resulting in lower gains or losses on sales.
At the end of each year, we complete our annual review of the residual values and useful lives of revenue earning equipment. Based on the results of our analysis in 2011, we will adjust the residual values and useful lives of certain classes of our revenue earning equipment effective January 1, 2012. The change will increase earnings in 2012 by approximately $18 million compared with 2011. Factors that could cause actual results to materially differ from the estimated results include significant changes in the used-equipment market brought on by unforeseen changes in technology innovations and any resulting changes in the useful lives of used equipment. Based on the results of the 2010 review, we adjusted the residual values and useful lives of certain classes of revenue earning equipment effective January 1, 2011. The residual value changes increased pre-tax earnings for 2011 by approximately $5 million compared with 2010. Based on the results of our 2009 analysis, we adjusted the residual values of certain classes of our revenue earning equipment effective January 1, 2010. The residual value changes decreased pre-tax earnings for 2010 by approximately $14 million compared with 2009.
Depreciation expense was $872 million, $834 million and $881 million in 2011, 2010 and 2009, respectively, and has been recorded within Cost of lease and rental, Cost of services, Cost of fuel services and Other operating expenses depending on the nature of the related asset. Depreciation expense relates primarily to FMS revenue earning equipment. Depreciation expense increased 5% in 2011 driven by $41 million from acquisitions, foreign exchange movements of $7 million and higher average net
44
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
vehicle investments. The increase was partially offset by $15 million of lower write-downs of vehicles held for sale and $10 million from both changes in residual values and accelerated depreciation. Depreciation expense decreased 5% in 2010 because of a smaller fleet as well as decreased write-downs of $26 million. The decrease in depreciation expense was partially offset by higher average vehicle investments as well as changes in both residual values of certain classes of our revenue earning equipment effective January 1, 2010 and accelerated depreciation for select vehicles expected to be sold by 2011.
We also lease vehicles under operating lease agreements. Certain of these agreements contain limited guarantees for a portion of the residual values of the equipment. Results of the reviews described above for owned equipment are also applied to equipment under operating lease. The amount of residual value guarantees expected to be paid is recognized as rent expense over the expected remaining term of the lease. At December 31, 2011, total liabilities for residual value guarantees of $4 million were included in Accrued expenses and other current liabilities (for those payable in less than one year) and in Other non-current liabilities. Based on the existing mix of vehicles under operating lease agreements at December 31, 2011, a 10% decrease in expected vehicle residual values would increase rent expense in 2012 by approximately $2 million.
Pension Plans. We apply actuarial methods to determine the annual net periodic pension expense and pension plan liabilities on an annual basis, or on an interim basis if there is an event requiring remeasurement. Each December, we review actual experience compared with the more significant assumptions used and make adjustments to our assumptions, if warranted. In determining our annual estimate of periodic pension cost, we are required to make an evaluation of critical factors such as discount rate, expected long-term rate of return, expected increase in compensation levels, retirement rate and mortality. Discount rates are based upon a duration analysis of expected benefit payments and the equivalent average yield for high quality corporate fixed income investments as of our December 31 annual measurement date. In order to provide a more accurate estimate of the discount rate relevant to our plan, we use models that match projected benefits payments of our primary U.S. plan to coupons and maturities from a hypothetical portfolio of high quality corporate bonds. Long-term rate of return assumptions are based on actuarial review of our asset allocation strategy and long-term expected asset returns. Investment management and other fees paid using plan assets are factored into the determination of asset return assumptions. In 2011, we adjusted our long-term expected rate of return assumption for our primary U.S. plan down to 7.45% from 7.65% based on the factors reviewed. The composition of our pension assets was 64% equity securities and 36% debt securities and other investments. As part of our strategy to manage future pension costs and net funded status volatility, we regularly assess our pension investment strategy. We evaluate our mix of investments between equity and fixed income securities and may adjust the composition of our pension assets when appropriate. For 2012, our target asset allocation is 60% equity securities, 30% fixed income, and 10% all other types of investments. The rate of increase in compensation levels and retirement rates are based primarily on actual experience.
Accounting guidance applicable to pension plans does not require immediate recognition of the effects of a deviation between these assumptions and actual experience or the revision of an estimate. This approach allows the favorable and unfavorable effects that fall within an acceptable range to be netted and recorded within Accumulated other comprehensive loss. We had a pre-tax actuarial loss of $927 million at the end of 2011 compared with a loss of $658 million at the end of 2010. The increase in the net actuarial loss in 2011 resulted primarily from a lower discount rate and lower than expected pension asset returns. To the extent the amount of actuarial gains and losses exceed 10% of the larger of the benefit obligation or plan assets, such amount is amortized over the average remaining life expectancy of active participants or the remaining life expectancy of inactive participants if all or almost all of a plans participants are inactive. The amount of the actuarial loss subject to amortization in 2012 and future years will be $730 million. We expect to recognize approximately $31 million of the net actuarial loss as a component of pension expense in 2012. The effect on years beyond 2012 will depend substantially upon the actual experience of our plans.
Disclosure of the significant assumptions used in arriving at the 2011 net pension expense is presented in Note 24, Employee Benefit Plans, in the Notes to Consolidated Financial Statements. A sensitivity analysis of 2011 net pension expense to changes in key underlying assumptions for our primary plan, the U.S. pension plan, is presented below.
Assumed Rate | Change | Impact on 2011 Net Pension Expense |
Effect on December 31, 2011 | |||||||||||
Expected long-term rate of return on assets |
7.45 | % | +/ 0.25 | % | /+ $2.7 million | |||||||||
Discount rate increase |
5.70 | % | + 0.25 | % | $0.8 million | $44 million | ||||||||
Discount rate decrease |
5.70 | % | 0.25 | % | + $0.5 million | + $44 million | ||||||||
Actual return on assets |
7.45 | % | +/ 0.25 | % | /+ $0.3 million |
Self-Insurance Accruals. Self-insurance accruals were $253 million and $243 million as of December 31, 2011 and 2010, respectively. The majority of our self-insurance relates to vehicle liability and workers compensation. We use a variety of statistical and actuarial methods that are widely used and accepted in the insurance industry to estimate amounts for claims that have been reported but not paid and claims incurred but not reported. In applying these methods and assessing their results, we consider such
45
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
factors as frequency and severity of claims, claim development and payment patterns and changes in the nature of our business, among other factors. Such factors are analyzed for each of our business segments. Our estimates may be impacted by such factors as increases in the market price for medical services, unpredictability of the size of jury awards and limitations inherent in the estimation process. During 2011, 2010, and 2009, we recorded a benefit (charge) within earnings from continuing operations of $4 million, $(3) million, and $1 million, respectively, from development in estimated prior years self-insured loss reserves. Based on self-insurance accruals at December 31, 2011, a 5% adverse change in actuarial claim loss estimates would increase operating expense in 2012 by approximately $11 million.
Goodwill Impairment. We assess goodwill for impairment, as described in Note 1, Summary of Significant Accounting Policies Goodwill and Other Intangible Assets, in the Notes to Consolidated Financial Statements, on an annual basis or more often if deemed necessary. At December 31, 2011, goodwill totaled $377 million. To determine whether goodwill impairment indicators exist, we are required to assess the fair value of the reporting unit and compare it to the carrying value. A reporting unit is a component of an operating segment for which discrete financial information is available and management regularly reviews its operating performance.
Our valuation of fair value for each reporting unit is determined based on an average of discounted future cash flow models that use ten years of projected cash flows and various terminal values based on multiples, book value or growth assumptions. We considered the current trading multiples for comparable publicly-traded companies and the historical pricing multiples for comparable merger and acquisition transactions that have occurred in our industry. Rates used to discount cash flows are dependent upon interest rates and the cost of capital at a point in time. Our discount rates reflect a weighted average cost of capital based on our industry and capital structure adjusted for equity risk premiums and size risk premiums based on market capitalization. Estimates of future cash flows are dependent on our knowledge and experience about past and current events and assumptions about conditions we expect to exist, including long-term growth rates, capital requirements and useful lives. Our estimates of cash flows are also based on historical and future operating performance, economic conditions and actions we expect to take. In addition to these factors, our SCS reporting units are dependent on several key customers or industry sectors. The loss of a key customer may have a significant impact to one of our SCS reporting units, causing us to assess whether or not the event resulted in a goodwill impairment loss. While we believe our estimates of future cash flows are reasonable, there can be no assurance that deterioration in economic conditions, customer relationships or adverse changes to expectations of future performance will not occur, resulting in a goodwill impairment loss. Our annual impairment test performed as of April 1, 2011 did not result in any impairment of goodwill. The excess of fair value over carrying value for each of our reporting units as of April 1, 2011, our annual testing date, ranged from approximately $13 million to approximately $361 million. In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test, we applied a hypothetical 5% decrease to the fair values of each reporting unit. This hypothetical 5% decrease would result in excess fair value over carrying value ranging from approximately $9 million to approximately $204 million for each of our reporting units.
Revenue Recognition. We recognize revenue when persuasive evidence of an arrangement exists, the services have been rendered to customers or delivery has occurred, the pricing is fixed or determinable, and collectibility is reasonably assured. In the normal course of business, we may act as or use an agent in executing transactions with our customers. In these arrangements, we evaluate whether we should report revenue based on the gross amount billed to the customer or on the net amount received from the customer after payments to third parties.
Determining whether revenue should be reported as gross or net is based on an assessment of whether we are acting as the principal or the agent in the transaction and involves judgment based on the terms of the arrangement. To the extent we are acting as the principal in the transaction, revenue is reported on a gross basis. To the extent we are acting as an agent in the transaction, revenue is reported on a net basis. In the majority of our arrangements, we are acting as a principal and therefore report revenue on a gross basis. However, our SCS business segment engages in some transactions where we act as agents and thus record revenue on a net basis. The impact on net earnings is the same whether we record revenue on a gross or net basis. From time to time, the terms and conditions of our transportation management arrangements may change, which could require a change in revenue recognition from a gross basis to a net basis or vice versa. Our non-GAAP measure of operating revenue would not be impacted from this change in revenue reporting.
Income Taxes. Our overall tax position is complex and requires careful analysis by management to estimate the expected realization of income tax assets and liabilities.
46
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Tax regulations require items to be included in the tax return at different times than the items are reflected in the financial statements. As a result, the effective tax rate reflected in the financial statements is different than that reported in the tax return. Some of these differences are permanent, such as expenses that are not deductible on the tax return, and some are timing differences, such as depreciation expense. Timing differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in the tax return in future years for which we have already recorded the tax benefit in the financial statements. Deferred tax assets amounted to $626 million and $365 million at December 31, 2011 and 2010, respectively. We record a valuation allowance for deferred tax assets to reduce such assets to amounts expected to be realized. At December 31, 2011 and 2010, the deferred tax valuation allowance, principally attributed to foreign tax loss carryforwards in the SCS business segment, was $41 million and $39 million, respectively. In determining the required level of valuation allowance, we consider whether it is more likely than not that all or some portion of deferred tax assets will not be realized. This assessment is based on managements expectations as to whether sufficient taxable income of an appropriate character will be realized within tax carryback and carryforward periods. Our assessment involves estimates and assumptions about matters that are inherently uncertain, and unanticipated events or circumstances could cause actual results to differ from these estimates. Should we change our estimate of the amount of deferred tax assets that we would be able to realize, an adjustment to the valuation allowance would result in an increase or decrease to the provision for income taxes in the period such a change in estimate was made.
We are subject to tax audits in numerous jurisdictions in the U.S. and around the world. Tax audits by their very nature are often complex and can require several years to complete. In the normal course of business, we are subject to challenges from the Internal Revenue Service (IRS) and other tax authorities regarding amounts of taxes due. These challenges may alter the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions. As part of our calculation of the provision for income taxes on earnings, we determine whether the benefits of our tax positions are at least more likely than not of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, we accrue the largest amount of the benefit that is more likely than not of being sustained in our consolidated financial statements. Such accruals require management to make estimates and judgments with respect to the ultimate outcome of a tax audit. Actual results could vary materially from these estimates. We adjust these reserves, including any impact on the related interest and penalties, in light of changing facts and circumstances, such as progress of a tax audit.
A number of years may elapse before a particular matter for which we have established a reserve is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction. The tax benefit that has been previously reserved because of a failure to meet the more likely than not recognition threshold would be recognized in our income tax expense in the first interim period when the uncertainty is resolved under any one of the following conditions: (1) the tax position is more likely than not to be sustained, (2) the tax position, amount, and/or timing is ultimately settled through negotiation or litigation, or (3) the statute of limitations for the tax position has expired. Settlement of any particular issue would usually require the use of cash. See Note 14, Income Taxes, in the Notes to Consolidated Financial Statements for further discussion of the status of tax audits and uncertain tax positions.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1, Summary of Significant Accounting Policies Recent Accounting Pronouncements, in the Notes to Consolidated Financial Statements for a discussion of recent accounting pronouncements.
NON-GAAP FINANCIAL MEASURES
This Annual Report on Form 10-K includes information extracted from consolidated financial information but not required by generally accepted accounting principles (GAAP) to be presented in the financial statements. Certain of this information are considered non-GAAP financial measures as defined by SEC rules. Specifically, we refer to adjusted return on average capital, operating revenue, FMS operating revenue, FMS EBT as a % of operating revenue, SCS operating revenue, SCS EBT as a % of operating revenue, DCC operating revenue, DCC EBT as a % of operating revenue, total cash generated, free cash flow, total obligations, total obligations to equity, and comparable earnings from continuing operations and comparable earnings per diluted common share from continuing operations. As required by SEC rules, we provide a reconciliation of each non-GAAP financial measure to the most comparable GAAP measure and an explanation why management believes that presentation of the non-GAAP financial measure provides useful information to investors. Non-GAAP financial measures should be considered in addition to, but not as a substitute for or superior to, other measures of financial performance prepared in accordance with GAAP.
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