10-K
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2008
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission
File
Number: 1-4364
RYDER SYSTEM, INC.
(Exact name of registrant as
specified in its charter)
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Florida
(State or other jurisdiction
of incorporation or organization)
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59-0739250
(I.R.S. Employer
Identification No.)
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11690 N.W.
105th Street,
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Miami, Florida 33178
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(305) 500-3726
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(Address of principal executive
offices, including zip code)
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(Telephone number, including
area code)
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of exchange on which registered
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Ryder System, Inc. Common Stock ($0.50 par value)
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New York Stock Exchange
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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 o
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 o 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 o
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
þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act.:
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o 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, 2008 was $3,876,375,009. The number of shares of
Ryder System, Inc. Common Stock ($0.50 par value per share)
outstanding at January 31, 2009 was 55,638,154.
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Documents Incorporated by Reference into this Report
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Part of Form 10-K into which Document is Incorporated
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Ryder System, Inc. 2009 Proxy Statement
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Part III
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RYDER
SYSTEM, INC.
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
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PART I
ITEM 1.
BUSINESS
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 in Europe, South 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.
On December 17, 2008, we announced strategic initiatives to
increase our competitiveness and drive long-term profitable
growth. As part of these initiatives, during 2009 we will
discontinue current SCS operations in certain international
markets and transition out of specific SCS customer contracts in
order to focus the organization and resources on the industries,
accounts, and geographical regions that present the greatest
opportunities for competitive advantage and long-term
sustainable profitable growth. This will include discontinuing
current operations in the markets of Brazil, Argentina, and
Chile, and transitioning out of SCS customer contracts in
Europe. We believe these changes will allow us to focus on
enhancing the competitiveness and growth of our service
offerings in the U.S., Canada, Mexico, the U.K. and Asia markets.
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 flexible
fleet solutions that are designed to improve their competitive
position by allowing them to focus on their core business, lower
their costs and redirect their capital to other parts of their
business. Our FMS product offering is comprised primarily of
contractual-based full service leasing and contract maintenance
services. We also offer transactional fleet solutions including
commercial truck rental, maintenance services, 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 $63 billion
U.S. private commercial fleet market and the
$26 billion U.S. commercial fleet lease and rental
market. The maintenance and operation of commercial vehicles has
become more complicated 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
businesses access to capital.
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Operations
For the year ended December 31, 2008, our global FMS
business accounted for 65% of our consolidated revenue.
U.S. Our FMS customers in the U.S. range
from small businesses to large national enterprises. These
customers operate in a wide variety of industries, including
transportation, grocery, lumber and wood products, food service
and home furnishings. At December 31, 2008, we had 636
locations in 49 states and Puerto Rico and operated 217
maintenance facilities
on-site at
customer properties. A location typically consists of a
maintenance facility or shop, offices for sales and
other personnel, and in many cases, a commercial rental 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.
Canada. We have been operating in Canada for
over 50 years. The Canadian private commercial fleet market
is estimated to be $8 billion and the Canadian commercial
fleet lease and rental market is estimated to be
$2 billion. At December 31, 2008, we had 41 locations
throughout 9 Canadian provinces. We also have 5
on-site
maintenance facilities in Canada.
Europe. We began operating in the U.K. in 1971
and since then have expanded into Ireland and Germany by
leveraging our operations in the U.S. and the U.K. The U.K.
commercial fleet lease and rental market is estimated to be
$6 billion. At December 31, 2008, we had 40 locations
throughout the U.K., Ireland and Germany, 29 of which are owned
or leased by Ryder. We also manage a network of 344 independent
maintenance facilities in the U.K. to serve our customers where
it is more effective than providing the service in a Ryder
managed 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.
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
leasing 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 agreed on a leasing program, 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 include non-Ryder owned vehicles related to our full
service lease customers as well as other customers that 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 and
predictive 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 (typically from less than one month up to
one year in length) either because of seasonal increases in
their business or discrete projects that require additional
transportation resources. Our
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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 seek to build national relationships with large
national 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 extend 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, 2008:
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U.S.
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Foreign
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Total
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Vehicles
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Customers
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Vehicles
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Customers
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Vehicles
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Customers
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Full service leasing
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100,300
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12,400
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20,100
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2,300
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120,400
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14,700
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Contract
maintenance(1)
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31,000
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1,400
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4,500
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200
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35,500
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1,600
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Commercial rental
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26,300
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10,400
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6,000
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4,000
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32,300
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14,400
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(1) |
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Contract maintenance customers
include 700 full service lease customers. |
Contract-Related Maintenance. Our full service
lease and contract maintenance customers periodically require
additional maintenance services that are not included in their
contracts. 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. 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.
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. Currently, we offer the following fleet
support services:
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Service
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Description
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Fuel
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Full service diesel fuel dispensing at competitive prices; fuel
planning; fuel tax reporting; centralized billing; and fuel cards
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Insurance
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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
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Safety
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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
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Administrative
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Vehicle use and other tax reporting; permitting and licensing;
and regulatory compliance (including hours of service
administration)
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Environmental management
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Storage tank monitoring; stormwater management; environmental
training; and ISO 14001 certification
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Information technology
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RydeSmartTM
is a full-featured GPS fleet location, tracking, and vehicle
performance management system designed to provide our customers
improved fleet operations and cost controls. FleetCARE
is our web based tool that provides customers with 24/7
access to key operational and maintenance management information
about their fleets.
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Used Vehicles. We primarily sell our used
vehicles at one of our 57 retail sales centers throughout North
America, 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
ReadyTM,
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 strategy revolves around the following
interrelated goals and priorities:
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improve customer retention levels and focus on conversion of
private fleets and commercial rental customers to full service
lease customers;
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successfully implement sales growth initiatives in our
contractual product offerings;
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focus on contractual revenue growth strategies, including the
evaluation of selective acquisitions;
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deliver unparalleled maintenance to our customers while
continuing to implement process designs, productivity
improvements and compliance discipline;
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optimize asset utilization and management;
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leverage infrastructure;
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offer a wide range of support services that complement our
leasing, rental and maintenance businesses; and
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offer competitive pricing through cost management initiatives
and maintain pricing discipline on new business.
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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 for the Company 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.
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During 2008, we took several actions to enhance our growth,
including the following acquisitions:
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On January 11, 2008, we acquired the assets of Lily
Transportation Corporation (Lily) which included
Lilys fleet of approximately 1,600 vehicles and over 200
contractual customers, complementing our FMS market coverage and
service network in the Northeast United States.
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On May 12, 2008, we acquired the assets of Gator Leasing,
Inc. (Gator) which included Gators fleet of
approximately 2,300 vehicles and nearly 300 contractual
customers, complementing our FMS market coverage and service
network in Florida.
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On August 29, 2008, we acquired the assets of Gordon Truck
Leasing (Gordon) which included Gordons fleet
of approximately 500 vehicles and approximately 130 contractual
customers complementing our FMS market coverage and service
network in Pennsylvania.
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On February 2, 2009, we acquired the assets of Edart
Leasing LLC (Edart), which included Edarts
fleet of approximately 1,600 vehicles and more than 340
contractual customers, complementing our FMS market coverage in
the Northeast. We also acquired approximately 525 vehicles that
will be re-marketed.
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 global supply chain and address key customer
business requirements. The term supply chain refers
to a strategically designed process that directs the movement of
materials, funds and related information from the acquisition of
raw materials to the delivery of finished products to the
end-user. Our SCS product offerings are organized into three
categories: professional services, distribution operations and
transportation solutions. These offerings are supported by a
variety of information technology 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.
Market
Trends
The global supply chain logistics market is estimated to be
$487 billion. Several key trends are affecting the market
for third-party logistics services. Outsourcing all or a portion
of a customers supply chain is becoming a more attractive
alternative for several reasons including: (1) the
lengthening of the global supply chain due to the location of
manufacturing activities further away from the point of
consumption, (2) the increasing complexity of
customers supply chains, and (3) the need for new and
innovative technology-based solutions. In addition, industry
consolidation is increasing as providers look to expand their
service offerings and create economies of scale in order to be
competitive and satisfy customers global needs. To meet
our customers demands in light of these trends, we provide
an integrated suite of global supply chain solutions with
sophisticated technologies and industry-leading engineering
services, designed to help our customers manage their supply
chains more efficiently.
Operations
For the year ended December 31, 2008, our global SCS
business accounted for 26% of our consolidated revenue. For the
year ended December 31, 2008, approximately 50% of our
global SCS revenue was related to dedicated contract carriage
services.
U.S. At December 31, 2008, we had 102 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, electronics, 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, including retail/consumer goods.
Most of our core SCS business operations in the
U.S. revolve around our customers supply chains and
are geographically
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located to maximize efficiencies and reduce costs. At
December 31, 2008, managed warehouse space totaled
approximately 15 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, and 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, 2008, we had 57
SCS customer accounts and managed warehouse space totaling
approximately 900,000 square feet. Given the proximity of
this market to our U.S. operations, the Canadian operations
are highly coordinated with their U.S. counterparts,
managing cross-border transportation and freight movements.
Mexico. We began operating in Mexico in the
mid-1990s. At December 31, 2008, we operated and maintained
700 vehicles in Mexico. At December 31, 2008, we had 77 SCS
customer accounts and managed warehouse space totaling
approximately 2 million square feet. Our Mexico operations
offer a full range of SCS services and manages approximately
3,000 border crossings each week between Mexico and the U.S.,
often highly integrated with our domestic distribution and
transportation operations.
Asia. We began operating in Asia in 2001.
Although our Asian operations are headquartered in Singapore, we
also provide services in China via our Shanghai office and
coordinate logistics activities in countries such as Malaysia.
At December 31, 2008, we had 47 SCS customer accounts and
managed warehouse space totaling approximately
795,000 square feet. As part of our strategy to expand with
our customers into major markets, we will continue to refine our
strategy in China and focus our efforts on growing our
operations in that region.
Europe. At December 31, 2008, we had 21
SCS customer accounts and managed warehouse space totaling
approximately 400,000 square feet. In addition to the full
range of SCS services, we operate a comprehensive shipment,
planning and execution system through our European
transportation management services center located in
Düsseldorf, Germany. Due to current global economic
conditions, we plan to transition out of SCS contracts during
2009.
South America. We began operating in Brazil
and Argentina in the mid-1990s and in Chile in 2004. At
December 31, 2008, we operated and maintained 700 vehicles
in South America. At December 31, 2008, we had 129 SCS
customer accounts and managed warehouse space totaling
approximately 4 million square feet. In all of these
markets we offer a full range of SCS services. In our Argentina
and Brazil operations, we also offered international
transportation services for freight moving between these
markets, including transportation, backhaul and customs
procedure management. Due to current global economic conditions,
we plan to discontinue our operations in South America during
2009.
Our largest customer, General Motors Corporation (GM), is
comprised of multiple contracts in various geographic regions.
In 2008, GM accounted for approximately 17% of SCS total revenue
and 4% of consolidated revenue. We derive approximately 48% of
our SCS revenue from the automotive industry, mostly from
manufacturers and suppliers of original equipment parts.
SCS
Product Offerings
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
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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, 2008,
knowledge-based professional services accounted for 5% of our
U.S. SCS revenue.
Distribution Operations. Our SCS business
offers a wide range of services relating to a customers
distribution operations from designing a customers
distribution network to managing the customers existing
distribution facilities or a facility we acquire. 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, 2008, distribution operations
accounted for 28% of our U.S. SCS revenue.
Transportation Solutions. Our SCS business
offers services relating to all aspects of a customers
transportation network including equipment maintenance and
drivers. 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, 2008, we purchased
and (or) executed over $4 billion in freight moves on our
customers behalf. For the year ended December 31, 2008,
transportation solutions accounted for 67% of our U.S. SCS
revenue.
SCS
Business Strategy
Our SCS business strategy revolves around the following
interrelated goals and priorities:
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further diversify customer base through expansion into new
industry verticals;
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offer comprehensive supply chain solutions to our customers;
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enhance distribution management as a core platform to grow
integrated solutions;
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leverage our transportation management capabilities including
the expertise and resources of our FMS business;
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achieve strong partnering relationships with our customers;
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be a market innovator by continuously improving the
effectiveness and efficiency of our solution delivery
model; and
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serve our customers global needs as lead manager,
integrator and high-value operator.
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Competition
In the SCS business segment, we compete with a large number of
companies providing similar services on an international,
national, regional and local level, each of which has a
different set of core competencies. Additionally, this business
is subject to potential competition in most of the regions it
serves from air cargo, shipping, railroads, motor carriers and
other companies that are expanding logistics services such as
freight forwarders, contract manufacturers and integrators.
Competitive factors include price, service, equipment,
maintenance, geographic coverage, market knowledge, expertise in
logistics-related technology, and overall
7
performance (e.g., timeliness, accuracy and flexibility).
Value-added differentiation of these service offerings across
the global supply chain continues to be our overriding strategy.
Acquisitions
On December 19, 2008, we completed the acquisition of
substantially all of the assets of Transpacific Container
Terminal Ltd. (TCTL) and CRSA Logistics Ltd. (CRSA) in Canada,
as well as CRSA Logistics operations in Hong Kong and Shanghai,
China. This strategic acquisition adds complementary solutions
to our SCS capabilities including consolidation services in key
Asian hubs, as well as deconsolidation operations in Vancouver,
Toronto and Montreal.
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 to 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. Such 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 address, on behalf of our customers, high
service levels, efficient routing and 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 high service requirements such as
tight delivery windows, high-value or time-sensitive freight,
closed-loop distribution, and multi-stop shipments.
Market
Trends
The U.S. dedicated contract carriage market is estimated to
be $12 billion. This market is affected by many of the
trends that impact our FMS business such as the increased cost
associated with purchasing and maintaining a fleet of vehicles.
The administrative burden 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, make our DCC
product an attractive alternative to private fleet management.
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.
Operations/Product
Offerings
For the year ended December 31, 2008, our DCC business
accounted for 9% of our consolidated revenue. At
December 31, 2008, we had 182 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, such as newspapers (6% of U.S. DCC revenue),
as well as to companies whose distribution systems involve
multiple stops within a closed loop highway route. These
customers operate in a wide variety of industries, the most
significant of which include retail (38% of DCC revenue).
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
8
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 revolves around the following
interrelated goals and priorities:
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increase market share with customers with large fleets that
require a more comprehensive and flexible transportation
solution;
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align our DCC business with other SCS product lines to create
revenue opportunities and improve operating efficiencies in both
segments, particularly through increased backhaul utilization;
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leverage the expertise and resources of our SCS and FMS
businesses; and
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expand our DCC support services to create customized
transportation solutions for new customers and enhance the
solutions we have created for existing customers.
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Competition
Our DCC business segment competes with truckload carriers and
other dedicated providers servicing on a national, regional and
local level. Competitive factors include price, equipment,
maintenance, service and geographic coverage and driver and
operations expertise. Value-added differentiation of the DCC
offerings has been, and will continue to be, our emphasis.
ADMINISTRATION
We have consolidated most of our financial administrative
functions for the U.S. and Canada, including credit,
billing and collections, 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 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
9
Terrorism certification. We may also become subject to new or
more restrictive regulations imposed by these agencies, or other
authorities relating to engine exhaust emissions, drivers
hours of service, security and ergonomics.
The U.S. Environmental Protection Agency has issued
regulations that require progressive reductions in exhaust
emissions from diesel engines from 2007 through 2010. Some of
these regulations require subsequent reductions in the sulfur
content of diesel fuel which began in June 2006 and the
introduction of emissions after-treatment devices on newly
manufactured engines and vehicles beginning with the model year
2007.
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 published our first
environmental performance report in 1996 following PERI (Public
Environmental Reporting Initiative) guidelines. 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.
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. In 2008, we launched a
Green Center on
http://www.Ryder.com/greencenter
to share our key environmental programs and initiatives with
all stakeholders.
SAFETY
Our safety culture is founded upon a core commitment to the
safety, health and well-being of our employees, customers, and
the community. It is this commitment that made us an industry
leader in safety throughout our
75-year
history and contributed to our being awarded the Green Cross for
Safety from the National Safety Council.
Safety is an integral part of our business strategy because
preventing injury improves employee quality of life, eliminates
service disruptions to our customers, increases efficiency and
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 topics delivered by location safety committees
cover specific and relevant safety topics and managers receive
annual safety leadership training. Regular safety behavioral
observations are conducted by managers throughout the
organization everyday and remedial training takes place
on-the-spot and at every location with a reported injury. We
also deliver a comprehensive suite of highly interactive
training lessons through Ryder Pro-TREAD to each driver
individually over the internet.
Our safety policies require that all managers, supervisors and
employees incorporate 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.
10
EMPLOYEES
At December 31, 2008, we had approximately
28,000 full-time employees worldwide, of which 24,100 were
employed in North America, 2,000 in South America, 1,400 in
Europe and 500 in Asia. On December 17, 2008, we announced
strategic initiatives to increase our global competitiveness,
which we expect to result in the elimination of approximately
3,200 positions worldwide during 2009. We have approximately
15,200 hourly employees in the U.S., approximately 3,400 of
which are organized by labor unions. These employees 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 99 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.
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 2, 2008
in conjunction with Ryders 2008 Annual Meeting. They all
hold such offices, at the discretion of the Board of Directors,
until their removal, replacement or retirement.
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Name
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Age
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Position
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Gregory T. Swienton
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Chairman of the Board and Chief Executive Officer
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Robert E. Sanchez
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Executive Vice President and Chief Financial Officer
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Robert D. Fatovic
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Executive Vice President, General Counsel and Corporate Secretary
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Art A. Garcia
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Senior Vice President and Controller
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Gregory F. Greene
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Executive Vice President and Chief Human Resources Officer
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Thomas S. Renehan
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Executive Vice President, Sales and Marketing, U.S. Fleet
Management Solutions
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Anthony G. Tegnelia
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President, Global Fleet Management Solutions
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John H. Williford
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President, Global Supply Chain Solutions
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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.
Robert E. Sanchez has served as Executive Vice President and
Chief Financial Officer since October 2007. He 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.
Robert D. Fatovic has served as Executive Vice President,
General Counsel 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.
Art A. Garcia has 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.
Gregory F. Greene has served 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
11
Planning and Development from April 2003. Mr. Greene joined
Ryder in August 1993 and has since held various positions within
Human Resources.
Thomas S. Renehan has served as Executive Vice President, Sales
and Marketing, U.S. Fleet Management Solutions, since
October 2005 and as Senior Vice President, Sales and Marketing
from July 2005 to October 2005. He previously served as Senior
Vice President, Asset Management, Sales and Marketing from March
2004 to July 2005, as Senior Vice President, Asset Management
from December 2002. Mr. Renehan joined Ryder in October
1985 and has held various positions within Ryders FMS
business.
Anthony G. Tegnelia has served as President, Global Fleet
Management Solutions since October 2005. He previously served as
Executive Vice President, U.S. Supply Chain Solutions from
December 2002 to October 2005. Prior to that, he was Senior Vice
President, Global Business Value Management. Mr. Tegnelia
joined Ryder in 1977 and has held a variety of other positions
with Ryder including Senior Vice President and Chief Financial
Officer of Supply Chain Solutions and Senior Vice President,
Field Finance.
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.
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.
ITEM 1A.
RISK FACTORS
In addition to the factors discussed elsewhere in this report,
the following are some of the important factors 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:
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changes in current financial, tax or regulatory requirements
that could negatively impact the leasing market;
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our inability to obtain expected customer retention levels or
sales growth targets;
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unanticipated interest rate and currency exchange rate
fluctuations;
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labor strikes, work stoppages or driver shortages affecting us
or our customers;
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sudden changes in fuel prices and fuel shortages;
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competition from vehicle manufacturers in our U.K. business
operations; and
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changes in accounting rules, estimates, assumptions and accruals.
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Our
business and operating results could be adversely affected by
unfavorable economic and industry conditions.
We have achieved annual operating revenue growth over the last
few years in spite of a U.S. freight recession, in part due
to a strong focus on increased contractual revenue growth and
market expansion and acquisitions. During the fourth quarter of
2008, however, our business, particularly our transactional
commercial rental business, began to experience the effects of
worsening macroeconomic conditions, further exacerbated by
certain customer-specific challenges and significant disruptions
in the financial and credit markets globally. As economic
conditions worsened globally during late 2008, we began to see a
significant decline in rental performance and utilization as
well as slow used vehicle sales activity resulting from a
worsening freight recession. Significant uncertainty around
macroeconomic and industry conditions may impact the spending
and financial position of our customers.
Challenging economic and market conditions may also result in:
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difficulty forecasting, budgeting and planning due to limited
visibility into the spending plans of current or prospective
customers;
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increased competition for fewer projects and sales opportunities;
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pricing pressure that may adversely affect revenue and gross
margin;
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higher overhead costs as a percentage of revenue;
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increased risk of charges relating to asset impairments,
including goodwill and other intangible assets;
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customer financial difficulty and increased risk of
uncollectible accounts receivable;
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increased pension costs due to negative asset returns; and
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increased risk of declines in the residual values of our
vehicles.
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We are uncertain as to how long current, unfavorable
macroeconomic and industry conditions will persist and the
magnitude of their effects on our business and results of
operations. If these conditions persist or further weaken, our
business and results of operations could be materially adversely
affected.
We are
exposed to risks associated with the current financial
crisis.
Financial markets in the U.S. and abroad have experienced
extreme disruption, including severely diminished liquidity and
credit availability resulting in higher short-term borrowing
costs and more stringent borrowing terms. Recessionary
conditions in the global economy threaten to cause further
tightening of the credit markets, more stringent lending
standards and terms and higher volatility in interest rates.
While these conditions and the current economic downturn have
not impaired our ability to access credit markets, these
conditions may adversely affect our business in the future,
particularly if there is further deterioration in the world
financial markets and major economies. The current credit
conditions may also adversely affect the business of our
customers. Difficulties in obtaining capital may lead to the
inability of some customers to obtain affordable financing to
fund their operations, resulting in lower demand for leasing
services from Ryder. Furthermore, liquidity issues could impair
the ability of those with whom we do business to satisfy their
obligations to us.
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 product.
13
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 for short-term and long-term rentals. 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
this market demand 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.
Continued
decline in automotive volumes and instability in the automotive
industry would adversely affect our results and increase our
credit risk.
Approximately 48% of our global SCS revenues is from the
automotive industry and is directly impacted by automotive
vehicle production. In addition, a number of our FMS customers,
particularly transportation and trucking companies, provide
services to the automotive industry. Automotive sales and
production are impacted by general economic conditions, consumer
preference, fuel prices, labor relations, the availability of
credit and other factors. The North American automotive industry
which generally includes General Motor Corporation (GM), Ford
Motor Company and Cerberus Capital Management L.P. (Chrysler
LLC) (the Detroit 3), has been weak for some time as a result of
strong competition from foreign OEMs, high fixed costs
particularly related to significant employee pension and
healthcare benefit commitments, unsuccessful product launches
and overcapacity. More recently both domestic and foreign
automakers have reported significantly lower sales, and have
responded by reducing production capacity both through plant
shutdowns and a reduction in the number of production shifts.
These plant shutdowns and shift eliminations have negatively
impacted our results in 2008. Any prolonged plant shutdowns and
additional shift eliminations can significantly reduce our
operations with the OEMs as well as the operations of the
automotive suppliers and transportation providers that we
service in both our FMS and SCS businesses, and can have a
negative impact on our future results.
We are also subject to credit risk associated with the
concentration of our accounts receivable from our automotive and
automotive-related customers. In response to declining market
share and significant losses, the Detroit 3 have announced
significant restructuring actions. In addition, GM has sought
and obtained assistance from the U.S. government. If these
actions do not improve GMs financial condition and
liquidity position, they may not be able to fund their
operations and may seek bankruptcy protection. If GM or our
other automotive or automotive-related customers combined 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, incur impairment charges or
require additional restructuring actions, all of which could
have a material negative impact on our operating results and
financial condition.
We derive
a significant portion of our SCS revenue from a relatively small
number of customers.
During 2008, sales to our top ten SCS customers representing all
of the industry groups we service, accounted for 65% of our SCS
total revenue and 61% of our SCS operating revenue (revenue less
14
subcontracted transportation), with GM accounting for 17% of our
SCS total and operating revenue. The loss of any of these
customers or a significant reduction in the services provided to
any of these customers, particularly GM, could impact our
domestic and international operations and adversely affect our
SCS financial results. While we continue to focus our efforts on
diversifying our customer base we may not be successful in doing
so in the short-term.
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.
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.
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:
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we compete with many other transportation and logistics service
providers, some of which have greater capital resources than we
do;
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some of our competitors periodically reduce their prices to gain
business, which may limit our ability to maintain or increase
prices;
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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; and
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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.
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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 entities. 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 Environmental Protection Agency or other
authorities, relating to the hours of service that our drivers
may provide in any one-time period, security and other matters.
Compliance with these regulations could substantially impair
equipment productivity and increase our costs.
New regulations governing exhaust emissions could adversely
impact our business. The Environmental Protection Agency has
issued regulations that require progressive reductions in
exhaust emissions from certain diesel engines through 2007.
Emissions standards require reductions in the sulfur content of
diesel fuel since June 2006 and the introduction of emissions
after-treatment devices on newly-manufactured engines and
15
vehicles utilizing engines built after January 1, 2007. In
addition, each of these requirements could result in higher
prices for tractors, diesel engines and fuel, 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 sponsor a number of defined benefit plans for employees in
the U.S., U.K. and other foreign locations. 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, 2008 were
$1.48 billion and $976 million, 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.
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 upward 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. In recent years, our development has been
favorable compared to historical selected loss development
factors because of improved safety performance, payment patterns
and settlement patterns; however, there is no assurance we will
continue to enjoy similar favorable development in the future.
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.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
Our properties consist primarily of vehicle maintenance and
repair facilities, warehouses and other real estate and
improvements.
We maintain 677 FMS locations in the U.S., Puerto Rico and
Canada; we own 440 of these facilities and lease the remaining
facilities. Our FMS locations generally include a repair shop,
rental counter, fuel service island and administrative offices.
Additionally, we manage 222
on-site
maintenance facilities, located at customer locations.
We also maintain 126 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.
16
We maintain 140 international locations (locations outside of
the U.S. and Canada) for our international businesses.
These locations are in the U.K., Ireland, Germany, Mexico,
Argentina, Brazil, Chile, China, Thailand and Singapore. The
majority of these locations are leased and generally include a
repair shop, warehouse and administrative offices.
ITEM 3.
LEGAL PROCEEDINGS
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.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of our security
holders during the quarter ended December 31, 2008.
PART II
ITEM 5.
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Ryder
Common Stock Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per
|
|
|
|
Stock Price
|
|
|
Common
|
|
|
|
High
|
|
|
Low
|
|
|
Share
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
65.25
|
|
|
|
40.31
|
|
|
|
0.23
|
|
Second quarter
|
|
|
76.64
|
|
|
|
60.28
|
|
|
|
0.23
|
|
Third quarter
|
|
|
75.09
|
|
|
|
58.02
|
|
|
|
0.23
|
|
Fourth quarter
|
|
|
62.19
|
|
|
|
27.71
|
|
|
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
55.62
|
|
|
|
47.88
|
|
|
|
0.21
|
|
Second quarter
|
|
|
55.89
|
|
|
|
49.24
|
|
|
|
0.21
|
|
Third quarter
|
|
|
57.70
|
|
|
|
48.19
|
|
|
|
0.21
|
|
Fourth quarter
|
|
|
49.93
|
|
|
|
38.95
|
|
|
|
0.21
|
|
Our common shares are listed on the New York Stock Exchange
under the trading symbol R. At January 30,
2009, there were 9,713 common stockholders of record and our
stock price on the New York Stock Exchange was $33.78.
17
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, 2003 to December 31, 2008.
The stock performance graph assumes for comparison that the
value of the Companys Common Stock and of each index was
$100 on December 31, 2003 and that all dividends were
reinvested. Past performance is not necessarily an indicator of
future results.
18
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, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum Number
|
|
|
Value That May
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
|
of Shares That May
|
|
|
Yet Be Purchased
|
|
|
|
Total Number
|
|
|
Average Price
|
|
|
Part of Publicly
|
|
|
Yet Be Purchased
|
|
|
Under the
|
|
|
|
of Shares
|
|
|
Paid per
|
|
|
Announced
|
|
|
Under the Anti-Dilutive
|
|
|
Discretionary
|
|
|
|
Purchased(1)
|
|
|
Share
|
|
|
Program
|
|
|
Program(2)
|
|
|
Program(3)
|
|
|
October 1 through
October 31, 2008
|
|
|
5,857
|
|
|
$
|
51.71
|
|
|
|
|
|
|
|
636,564
|
|
|
$
|
130,400,437
|
|
November 1 through November 30, 2008
|
|
|
10,294
|
|
|
|
30.01
|
|
|
|
|
|
|
|
636,564
|
|
|
|
130,400,437
|
|
December 1 through December 31, 2008
|
|
|
1,280
|
|
|
|
35.14
|
|
|
|
|
|
|
|
636,564
|
|
|
|
130,400,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
17,431
|
|
|
$
|
37.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
During the three months ended December 31, 2008, we
purchased an aggregate of 17,431 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 plan relating to investments by employees
in our common stock, one of the investment options available
under the plan.
|
|
(2)
|
In December 2007, our Board of Directors authorized a
two-year anti-dilutive repurchase program. Under the
anti-dilutive program, management is authorized to repurchase
shares of common stock in an amount not to exceed the lesser of
the number of shares issued to employees upon the exercise of
stock options or through the employee stock purchase plan for
the period from September 1, 2007 to December 12,
2009, or 2 million shares. Share repurchases of common
stock may be 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
anti-dilutive repurchase program, which would allow for share
repurchases during Ryders quarterly blackout periods as
set forth in the trading plan. During the three months ended
December 31, 2008, no repurchases had been made under this
program. Towards the end of the third quarter, we temporarily
paused purchases under both programs given current market
conditions. We will continue to monitor financial conditions and
will resume repurchases when we believe it is prudent to do
so.
|
|
(3)
|
In December 2007, our Board of Directors also authorized a
$300 million share repurchase program over a period not to
exceed two years. Share repurchases of common stock may be 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
$300 million share repurchase program, which would allow
for share repurchases during Ryders quarterly blackout
periods as set forth in the trading plan. During the three
months ended December 31, 2008, no repurchases had been
made under this program. Towards the end of the third quarter,
we temporarily paused purchases under both programs given
current market conditions. We will continue to monitor financial
conditions and will resume repurchases when we believe it is
prudent to do so.
|
Securities
Authorized for Issuance under Equity Compensation
Plans
The following table includes information as of December 31,
2008 about certain plans which provide for the issuance of
common stock in connection with the exercise of stock options
and other share-based awards.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Available for
|
|
|
|
Number of
|
|
|
|
|
|
Future Issuance
|
|
|
|
Securities to be
|
|
|
|
|
|
Under Equity
|
|
|
|
Issued upon
|
|
|
Weighted-Average
|
|
|
Compensation
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
Plans Excluding
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Securities
|
|
|
|
Options, Warrants
|
|
|
Options, Warrants
|
|
|
Reflected in
|
|
Plans
|
|
and Rights
|
|
|
and Rights
|
|
|
Column (a)
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved by security holders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Broad based employee stock option plans
|
|
|
2,836,965
|
|
|
$
|
39.87
|
|
|
|
5,044,201
|
|
Employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
557,924
|
|
Non-employee directors stock plans
|
|
|
123,074
|
|
|
|
11.09
|
|
|
|
41,471
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,960,039
|
|
|
$
|
38.67
|
|
|
|
5,643,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
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
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars and shares in thousands, except per share amounts)
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
6,203,743
|
|
|
|
6,565,995
|
|
|
|
6,306,643
|
|
|
|
5,740,847
|
|
|
|
5,150,278
|
|
Earnings from continuing
operations(1)
|
|
$
|
199,881
|
|
|
|
253,861
|
|
|
|
248,959
|
|
|
|
227,628
|
|
|
|
215,609
|
|
Net
earnings(1),(2)
|
|
$
|
199,881
|
|
|
|
253,861
|
|
|
|
248,959
|
|
|
|
226,929
|
|
|
|
215,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
Diluted(1)
|
|
$
|
3.52
|
|
|
|
4.24
|
|
|
|
4.04
|
|
|
|
3.53
|
|
|
|
3.28
|
|
Net earnings
Diluted(1),(2)
|
|
$
|
3.52
|
|
|
|
4.24
|
|
|
|
4.04
|
|
|
|
3.52
|
|
|
|
3.28
|
|
Cash dividends
|
|
$
|
0.92
|
|
|
|
0.84
|
|
|
|
0.72
|
|
|
|
0.64
|
|
|
|
0.60
|
|
Book
value(3)
|
|
$
|
24.17
|
|
|
|
32.52
|
|
|
|
28.34
|
|
|
|
24.69
|
|
|
|
23.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
6,689,508
|
|
|
|
6,854,649
|
|
|
|
6,828,923
|
|
|
|
6,033,264
|
|
|
|
5,683,164
|
|
Average
assets(4)
|
|
$
|
6,924,342
|
|
|
|
6,914,060
|
|
|
|
6,426,546
|
|
|
|
5,922,758
|
|
|
|
5,496,429
|
|
Return on average
assets(%)(4)
|
|
|
2.9
|
|
|
|
3.7
|
|
|
|
3.9
|
|
|
|
3.8
|
|
|
|
3.9
|
|
Long-term debt
|
|
$
|
2,478,537
|
|
|
|
2,553,431
|
|
|
|
2,484,198
|
|
|
|
1,915,928
|
|
|
|
1,393,666
|
|
Total debt
|
|
$
|
2,862,799
|
|
|
|
2,776,129
|
|
|
|
2,816,943
|
|
|
|
2,185,366
|
|
|
|
1,783,216
|
|
Shareholders
equity(3),
|
|
$
|
1,345,161
|
|
|
|
1,887,589
|
|
|
|
1,720,779
|
|
|
|
1,527,456
|
|
|
|
1,510,188
|
|
Debt to
equity(%)(3)
|
|
|
213
|
|
|
|
147
|
|
|
|
164
|
|
|
|
143
|
|
|
|
118
|
|
Average shareholders
equity(3),(4)
|
|
$
|
1,778,489
|
|
|
|
1,790,814
|
|
|
|
1,610,328
|
|
|
|
1,554,718
|
|
|
|
1,412,039
|
|
Return on average shareholders
equity(%)(3),(4)
|
|
|
11.2
|
|
|
|
14.2
|
|
|
|
15.5
|
|
|
|
14.6
|
|
|
|
15.3
|
|
Adjusted return on
capital(%)(5)
|
|
|
7.3
|
|
|
|
7.4
|
|
|
|
7.9
|
|
|
|
7.8
|
|
|
|
7.7
|
|
Net cash provided by operating activities
|
|
$
|
1,255,531
|
|
|
|
1,102,939
|
|
|
|
853,587
|
|
|
|
779,062
|
|
|
|
866,849
|
|
Capital expenditures paid
|
|
$
|
1,234,065
|
|
|
|
1,317,236
|
|
|
|
1,695,064
|
|
|
|
1,399,379
|
|
|
|
1,092,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares Diluted
|
|
|
56,790
|
|
|
|
59,845
|
|
|
|
61,578
|
|
|
|
64,560
|
|
|
|
65,671
|
|
Number of vehicles Owned and leased
|
|
|
163,400
|
|
|
|
160,700
|
|
|
|
167,200
|
|
|
|
163,600
|
|
|
|
165,800
|
|
Average number of vehicles Owned and
leased(4)
|
|
|
162,200
|
|
|
|
165,400
|
|
|
|
164,400
|
|
|
|
166,700
|
|
|
|
165,100
|
|
Number of employees
|
|
|
28,000
|
|
|
|
28,800
|
|
|
|
28,600
|
|
|
|
27,800
|
|
|
|
26,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(1)
|
|
|
Comparable earnings from continuing operations
|
|
$
|
254,753
|
|
|
|
251,910
|
|
|
|
245,883
|
|
|
|
220,001
|
|
|
|
190,979
|
|
|
|
|
|
Comparable earnings per diluted common share from continuing
operations
|
|
$
|
4.49
|
|
|
|
4.21
|
|
|
|
3.99
|
|
|
|
3.41
|
|
|
|
2.91
|
|
|
|
|
|
|
|
|
|
|
Refer to the section titled
Non-GAAP Financial Measures in Item 7 of this
report for a reconciliation of comparable earnings to net
earnings.
|
|
|
|
|
|
|
(2)
|
|
|
Net earnings in 2005 included (i) income from
discontinued operations associated with the reduction of
insurance reserves related to discontinued operations resulting
in an after-tax benefit of $2 million, or $0.03 per diluted
common share, and (ii) the cumulative effect of a change in
accounting principle for costs associated with the future
removal of underground storage tanks resulting in an after-tax
charge of $2 million, or $0.04 per diluted common share.
|
|
|
|
|
|
|
(3)
|
|
|
Shareholders equity at December 31, 2008, 2007,
2006, 2005 and 2004 reflected after-tax equity charges of
$480 million, $148 million, $201 million,
$221 million, and $189 million, respectively, related
to our pension and postretirement plans.
|
|
|
|
|
|
|
(4)
|
|
|
Amounts were computed using an 8-point average based on
quarterly information.
|
|
|
|
|
|
|
(5)
|
|
|
Our adjusted return on capital (ROC) 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 net earnings
to adjusted net earnings and average total debt and
shareholders equity to adjusted average total capital.
|
20
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.
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,
electronics, transportation, grocery, lumber and wood products,
food service, 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 2008 were
$4.01 billion and $6.14 billion, respectively,
representing 65% of our consolidated revenue and 92% of
consolidated assets.
The Supply Chain Solutions (SCS) business segment
provides comprehensive supply chain consulting including
distribution and transportation services throughout North
America and in South America, Europe and Asia. SCS revenue in
2008 was $1.64 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 2008 was
$548 million, representing 9% of our consolidated revenue.
2008 was a year of significant accomplishments for us, as
we delivered strong earnings, operating revenue growth and
positive free cash flow following more than two full years of a
U.S. freight recession. We also successfully completed four
accretive acquisitions in 2008. However, in the fourth quarter
of 2008, we saw significant deterioration in general economic
conditions, particularly affecting our transactional commercial
rental business. In December 2008, we announced several
strategic actions, including discontinuing certain operations
and workforce reductions, that will better position us for the
market conditions we anticipate in the upcoming year.
Total revenue was $6.20 billion, down 6% from
$6.57 billion in 2007. Revenue comparisons were impacted by
a previously announced change from gross to net revenue
reporting in a subcontracted transportation agreement, which had
no impact on operating revenue or earnings. Excluding this item,
total revenue increased 5% primarily as a result of higher fuel
services revenue. Operating revenue (total revenue less fuel and
subcontracted transportation) was $4.70 billion in 2008, up
1%. Operating revenue growth was driven by contractual revenue,
including acquisitions in our FMS business segment, new and
expanded business in SCS partially offset by lower commercial
rental revenue.
Net earnings decreased to $200 million from
$254 million in 2007 and net earnings per diluted common
share decreased to $3.52 from $4.24 in 2007. Net earnings
included certain items we do not consider indicative of our
ongoing operations and have been excluded from our comparable
earnings measure. The
21
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
following discussion provides a summary of the 2008 and 2007
special items which are discussed in more detail throughout our
MD&A and within the Notes to Consolidated Financial
Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NBT
|
|
|
Net Earnings
|
|
|
EPS
|
|
|
|
(Dollars in thousands,
|
|
|
|
except per share amounts)
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings / EPS
|
|
$
|
349,922
|
|
|
$
|
199,881
|
|
|
$
|
3.52
|
|
Restructuring and other charges primarily
related to exit costs associated with a previously announced
plan to discontinue certain international supply chain
operations and workforce reductions
|
|
|
58,435
|
|
|
|
53,159
|
|
|
|
0.94
|
|
Benefit associated with the reversal of
reserves for uncertain tax positions due to the expiration of
statutes of limitation in various jurisdictions
|
|
|
|
|
|
|
(7,931
|
)
|
|
|
(0.14
|
)
|
Benefit from a tax law change in Massachusetts
|
|
|
|
|
|
|
(1,614
|
)
|
|
|
(0.03
|
)
|
Brazil charges for prior years
adjustments(1)
|
|
|
6,498
|
|
|
|
6,831
|
|
|
|
0.12
|
|
Charges related to impairments and write-offs
of international
assets(1)
|
|
|
5,548
|
|
|
|
4,427
|
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable earnings
|
|
$
|
420,403
|
|
|
$
|
254,753
|
|
|
$
|
4.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings / EPS
|
|
$
|
405,464
|
|
|
$
|
253,861
|
|
|
$
|
4.24
|
|
Benefit from tax law changes in Canada
|
|
|
|
|
|
|
(3,333
|
)
|
|
|
(0.06
|
)
|
Gain on sale of
property(1)
|
|
|
(10,110
|
)
|
|
|
(6,154
|
)
|
|
|
(0.10
|
)
|
Restructuring and other charges related to
cost management and process improvement actions
|
|
|
11,578
|
|
|
|
7,536
|
|
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable earnings
|
|
$
|
406,932
|
|
|
$
|
251,910
|
|
|
$
|
4.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Refer to Note 25,
Other Items Impacting Comparability, in the
Notes to Consolidated Financial Statements. |
Excluding the special items listed above, comparable net
earnings were $255 million, up 1% from $252 million in
2007. Comparable earnings per diluted common share were $4.49,
up 7% from $4.21 in 2007. Earnings growth in the FMS and DCC
business segments was largely offset by a decline in SCS
earnings.
With our strong earnings and cash flows, we repurchased a total
of 4 million shares of common stock in 2008 for
$256 million. We also increased our annual dividend by 10%
to $0.92 per share of common stock. In addition, during 2008, we
paid $246 million and acquired the assets of Lily
Transportation, Gator Leasing, Gordon Truck Leasing and
Transpacific Container Terminal Ltd. and CRSA Logistics Ltd.
Capital expenditures increased to $1.27 billion compared to
$1.19 billion in 2007. The growth in capital expenditures
reflects higher full service lease vehicle spending for
replacements and expansion of customer fleets. Our debt balances
grew 3% to $2.86 billion at December 31, 2008 due to
acquisitions and share repurchase programs. Our debt to equity
ratio also increased to 213% from 147% in 2007. Our total
obligations (including off-balance sheet debt) to equity ratio
also increased to 225% from 157% in 2007. Leverage ratios were
impacted by the unrecognized pension plan losses, share
repurchases, foreign currency translation adjustments and
acquisitions.
2009 Outlook
In 2009, we plan to manage through the impacts of a prolonged
economic recession by focusing our efforts on the cyclical
impacts in commercial rental and used vehicle sales and
concentrating on cost improvement actions. We expect 2009
comparable earnings per diluted common share to decline because
of
22
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
higher pension expense, lower commercial rental and used vehicle
sales results and lower volumes, particularly in the automotive
industry. We expect to partially offset these negative impacts
through cost reduction initiatives, operational improvements and
the carryover impact of acquisitions and share repurchases. In
2009, we will continue to focus on our contractual revenue
growth and retention strategies, including the evaluation of
selective acquisitions, while retaining financial discipline.
Total revenue is targeted to decrease by 10% to 16% while
operating revenue is expected to decrease by 5% to 11%. The 2009
forecast for total revenue includes the adverse impact of lower
anticipated fuel prices and unfavorable foreign exchange rates.
ITEMS AFFECTING
COMPARABILITY BETWEEN PERIODS
Revenue Reporting
In transportation management arrangements where we act as
principal, revenue is reported on a gross basis for
subcontracted transportation services billed to our customers.
We realize minimal changes in profitability as a result of
fluctuations in subcontracted transportation. Determining
whether revenue should be reported as gross (within total
revenue) or net (deducted from total revenue) is based on an
assessment of whether we are acting as the principal or the
agent in the transaction and involves judgment based on the
terms and conditions of the arrangement. Effective
January 1, 2008, our contractual relationship with a
significant customer for certain transportation management
services changed, and we determined, after a formal review of
the terms and conditions of the services, that we were acting as
an agent based on the revised terms of the arrangement. This
contract modification required a change in revenue recognition
from a gross basis to a net basis for subcontracted
transportation beginning on January 1, 2008. This contract
represented $640 million and $565 million of total
revenue for the years ended December 31, 2007 and 2006,
respectively.
Accounting Changes
See Note 2, Accounting Changes, for a
discussion of the impact of changes in accounting standards.
ACQUISITIONS
We have completed various asset purchase agreements in the past
two years, under which we acquired a companys fleet and
contractual customers. The FMS 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
|
|
|
|
|
Contractual
|
|
|
|
Company Acquired
|
|
Segment
|
|
Date
|
|
Vehicles
|
|
|
Customers
|
|
|
Market
|
|
Gordon Truck Leasing
|
|
FMS
|
|
August 29, 2008
|
|
|
500
|
|
|
|
130
|
|
|
Pennsylvania
|
Gator Leasing, Inc.
|
|
FMS
|
|
May 12, 2008
|
|
|
2,300
|
|
|
|
300
|
|
|
Florida
|
Lily Transportation Corp.
|
|
FMS
|
|
January 11, 2008
|
|
|
1,600
|
|
|
|
200
|
|
|
Northeast U.S.
|
Pollock NationaLease
|
|
FMS/SCS
|
|
October 5, 2007
|
|
|
2,000
|
|
|
|
200
|
|
|
Canada
|
On December 19, 2008, we completed the acquisition of
substantially all of the assets of Transpacific Container
Terminal Ltd. and CRSA Logistics Ltd. (CRSA) in Canada, as well
as CRSA operations in Hong Kong and Shanghai, China. This
strategic acquisition adds complementary solutions to our SCS
capabilities including consolidation services in key Asian hubs,
as well as deconsolidation operations in Vancouver, Toronto and
Montreal.
23
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
FULL YEAR
CONSOLIDATED RESULTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
2008/
|
|
2007/
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
2006
|
|
|
(Dollars and shares in thousands,
|
|
|
|
|
|
|
|
except per share amounts)
|
|
|
|
|
|
|
Earnings before income taxes
|
|
$
|
349,922
|
|
|
|
405,464
|
|
|
|
392,973
|
|
|
(14)%
|
|
3%
|
Provision for income taxes
|
|
|
150,041
|
|
|
|
151,603
|
|
|
|
144,014
|
|
|
(1)
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
199,881
|
|
|
|
253,861
|
|
|
|
248,959
|
|
|
(21)%
|
|
2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per diluted common share
|
|
$
|
3.52
|
|
|
|
4.24
|
|
|
|
4.04
|
|
|
(17)%
|
|
5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding Diluted
|
|
|
56,790
|
|
|
|
59,845
|
|
|
|
61,578
|
|
|
(5)%
|
|
(3)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes (NBT) decreased to
$350 million in 2008 compared to $405 million in 2007.
NBT in 2008 included a fourth quarter restructuring charge
primarily associated with a plan to discontinue current supply
chain operations in Brazil, Argentina, Chile and Europe.
Comparable NBT increased to $420 million compared to
$407 million in the prior year. The improvement in
comparable NBT was driven by better operating performance in our
FMS contractual business partially offset by a decline in
commercial rental results and reduced profitability in our SCS
business segment. Net earnings decreased to $200 million in
2008 or $3.52. Net earnings in 2008 included income tax benefits
primarily related to the reversal of reserves for uncertain tax
positions. Comparable net earnings increased to
$255 million or $4.49 in 2008 from $252 million or
$4.21 in 2007 due to the improvement in NBT. This improvement
was slightly offset by a higher tax rate on comparable earnings
resulting from an increase in non-deductible foreign losses.
Earnings per diluted common share growth in 2008 exceeded the
net earnings growth rate reflecting the impact of share
repurchase programs.
NBT increased to $405 million in 2007 compared to
$393 million in 2006. NBT in 2007 included restructuring
charges and a gain on the sale of property. Comparable NBT
increased to $407 million compared to $399 million in
2006 reflecting the benefits of (i) lower pension costs;
(ii) contractual revenue growth in the FMS business
segment; (iii) lower safety and insurance costs;
(iv) lower incentive-based compensation; and (v) lower
depreciation as a result of our annual depreciation review
implemented January 1, 2007. These items more than offset
the significant impact of weak U.S. commercial rental
market demand and lower used vehicle sales results in our FMS
business segment. Net earnings increased to $254 million in
2007 compared to $249 million in 2006. Net earnings in 2007
included an income tax benefit primarily associated with enacted
changes in Canadian tax laws. Net earnings in 2006 included an
income tax benefit associated with enacted changes in Texas and
Canadian tax laws. Comparable net earnings increased to
$252 million or $4.21 in 2007 from $246 million or
$3.99 in 2006. Earnings per diluted common share growth in 2007
exceeded the net earnings growth rate reflecting the impact of
share repurchase programs.
24
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
See subsequent discussion within Full Year Consolidated
Results and Full Year Operating Results by Business
Segment for additional information on the results noted
above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
2008/
|
|
2007/
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
2006
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fleet Management Solutions
|
|
$
|
4,450,016
|
|
|
|
4,162,644
|
|
|
|
4,096,046
|
|
|
7%
|
|
2%
|
Supply Chain Solutions
|
|
|
1,643,056
|
|
|
|
2,250,282
|
|
|
|
2,028,489
|
|
|
(27)
|
|
11
|
Dedicated Contract Carriage
|
|
|
547,751
|
|
|
|
567,640
|
|
|
|
568,842
|
|
|
(4)
|
|
|
Eliminations
|
|
|
(437,080
|
)
|
|
|
(414,571
|
)
|
|
|
(386,734
|
)
|
|
(5)
|
|
(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,203,743
|
|
|
|
6,565,995
|
|
|
|
6,306,643
|
|
|
(6)%
|
|
4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenue(1)
|
|
$
|
4,704,506
|
|
|
|
4,636,557
|
|
|
|
4,454,231
|
|
|
1%
|
|
4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
Total revenue decreased 6% to $6.20 billion in 2008
compared with 2007. Total revenue in 2008 was impacted by a
change, effective January 1, 2008, in our contractual
relationship with a significant customer that required a change
in revenue recognition from a gross basis to a net basis for
subcontracted transportation. This change did not impact
operating revenue or earnings. During 2007, total revenue from
this contractual relationship was $640 million. Excluding
this item, total revenue increased 5% during 2008 compared with
2007 primarily as a result of higher fuel services revenue.
Operating revenue increased 1% primarily due to FMS contractual
revenue growth, including acquisitions, which more than offset
the decline in commercial rental revenue. Total revenue in 2008
included an unfavorable foreign exchange impact of 0.3% due
primarily to the weakening of the British pound.
Total revenue increased 4% to $6.57 billion in 2007
compared with 2006. Total revenue growth was driven by
contractual revenue growth in our SCS and FMS business segments,
and by favorable movements in foreign currency exchange rates
related to our international operations, offset partially by a
decline in FMS commercial rental revenue. SCS revenue growth was
due primarily to new and expanded business. Contractual revenue
growth in our FMS segment, principally full service lease
revenue, resulted from new contract sales and lease replacements
beginning in the second half of 2006. We realized revenue growth
in all geographic markets served by FMS in 2007. Total revenue
in 2007 included a favorable foreign exchange impact of 1.2% due
primarily to the strengthening of the Canadian dollar and
British pound.
Our FMS segment leases revenue earning equipment and provides
fuel, maintenance and other ancillary services to our SCS and
DCC segments. Eliminations relate to inter-segment sales that
are accounted for at
25
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
rates similar to those executed with third parties. The
increases in eliminations in 2008 and 2007, reflects primarily
the pass-through of higher average fuel costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
Change
|
|
|
|
|
|
|
|
|
2008/
|
|
2007/
|
|
|
2008
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Operating expense (exclusive of items shown separately)
|
|
$3,029,673
|
|
2,776,999
|
|
2,735,752
|
|
9%
|
|
2%
|
Percentage of revenue
|
|
49%
|
|
42%
|
|
43%
|
|
|
|
|
Operating expense increased in 2008 compared with 2007 from the
impact of higher fuel costs due to higher average market prices.
Fuel costs are largely a pass-through to customers for which we
realize minimal changes in profitability during periods of
steady market fuel prices. We continue to realize favorable
development in prior years self-insurance loss reserves
and as a result benefited from lower safety and insurance costs.
In recent years, our development has been favorable compared
with historical selected loss development factors because of
improved safety performance, payment patterns and settlement
patterns.
Operating expense increased in 2007 compared with 2006 in
conjunction with the growth in operating revenue as well as
higher fuel costs due to higher average market prices. The
increase in operating expense was partially offset by lower
safety and insurance costs due to favorable development in prior
years self-insurance loss reserves.
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
Change
|
|
|
|
|
|
|
|
|
2008/
|
|
2007/
|
|
|
2008
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Salaries and employee-related costs
|
|
$1,399,121
|
|
1,410,388
|
|
1,397,391
|
|
(1)%
|
|
1%
|
Percentage of revenue
|
|
23%
|
|
21%
|
|
22%
|
|
|
|
|
Percentage of operating revenue
|
|
30%
|
|
30%
|
|
31%
|
|
|
|
|
Salaries and employee-related costs decreased in 2008 compared
with 2007 primarily due to lower headcount, including cost
savings initiatives from 2007. Average headcount decreased 3% in
2008 compared with 2007. The number of employees at
December 31, 2008 decreased to approximately 28,000
compared to 28,800 at December 31, 2007. We expect
headcount to decline in 2009 due to the previously announced
strategic initiatives.
Pension expense totaled $3 million in 2008 compared to
$29 million in 2007. Lower pension expense was primarily a
result of the freeze of our U.S. and Canadian pension
plans. On January 5, 2007, our Board of Directors approved
an amendment to freeze U.S. pension plans effective
December 31, 2007 for current participants who did not meet
certain grandfathering criteria. As a result, these employees
ceased accruing further benefits after December 31, 2007
and began participating in an enhanced 401(k) plan. During the
third quarter of 2008, our Board of Directors approved the
freeze of the defined benefit portion of the Canadian retirement
plan, which resulted in a curtailment gain of $4 million.
In connection with the freeze of the pension plans, we provided
an enhanced 401(k) savings plan to employees. See Note 23,
Employee Benefit Plans, in the Notes to Consolidated
Financial Statements, for additional information regarding these
items. Total savings plan costs increased $20 million
during 2008 primarily as a result of the enhanced 401(k) plan.
The net impact of pension and savings plan costs was a net
decrease of $6 million for 2008 compared with 2007.
We apply actuarial methods to determine the annual net periodic
pension expense and pension plan liabilities. 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 and the expected
26
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
long-term rate of return on assets. Accounting guidance
applicable to pension plans does not require immediate
recognition of the current year effects of a deviation between
these assumptions and actual experience. We have experienced
significant negative pension asset returns in 2008 the result of
which will materially increase pension expense for 2009. We
expect 2009 pension expense, on a pre-tax basis, to increase
approximately $62 million primarily because of a lower than
expected return on assets in 2008 partially offset by higher
discount rates. See the section titled Critical Accounting
Estimates Pension Plans for further discussion
on pension accounting estimates.
Salaries and employee-related costs increased in 2007 compared
with 2006 primarily as a result of merit increases and higher
outside labor costs from new and expanded business in our SCS
business segment offset partially by lower pension expense and
incentive-based compensation. Average headcount increased 2% in
2007 compared with 2006. Pension expense decreased
$41 million in 2007 compared with 2006 due to
(i) higher expected return on assets because of prior year
actual returns and contributions, and (ii) the impact of
higher interest rate levels at December 31, 2006.
Incentive-based compensation expense decreased $15 million
in 2007 compared with 2006, as we achieved a lower level of
performance relative to target in 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
Change
|
|
|
|
|
|
|
|
|
|
2008/
|
|
2007/
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Subcontracted transportation
|
|
$323,382
|
|
950,500
|
|
865,475
|
|
(66)%
|
|
|
10%
|
|
Percentage of revenue
|
|
5%
|
|
14%
|
|
14%
|
|
|
|
|
|
|
Subcontracted transportation expense represents freight
management costs on logistics contracts for which we purchase
transportation from third parties. Subcontracted transportation
expense decreased in 2008 as a result of net reporting from a
contract change. Subcontracted transportation expense in 2007
grew due to increased volumes of freight management activity
from new and expanded business and higher average pricing on
subcontracted freight costs, resulting from increased fuel costs.
Subcontracted transportation expense is directly impacted by
whether we are acting as an agent or principal in our
transportation management contracts. To the extent that we are
acting as a principal, revenue is reported on a gross basis and
carriage costs to third parties are recorded as subcontracted
transportation expense. The impact to net earnings is the same
whether we are acting as an agent or principal in the
arrangement. Effective January 1, 2008, our contractual
relationship with a significant customer changed, and we
determined, after a formal review of the terms and conditions of
the services, we were acting as an agent based on the revised
terms of the arrangement. As a result, the amount of total
revenue and subcontracted transportation expense decreased by
$640 million in 2008 compared with 2007 due to the
reporting of revenue net of subcontracted transportation expense
for this particular customer contract.
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
Change
|
|
|
|
|
|
|
|
|
2008/
|
|
2007/
|
|
|
2008
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Depreciation expense
|
|
$843,459
|
|
815,962
|
|
743,288
|
|
3%
|
|
10%
|
Gains on vehicle sales, net
|
|
(39,312)
|
|
(44,094)
|
|
(50,766)
|
|
(11)
|
|
(13)
|
Equipment rental
|
|
80,105
|
|
93,337
|
|
90,137
|
|
(14)
|
|
4
|
Depreciation expense relates primarily to FMS revenue earning
equipment. Depreciation expense increased to $843 million
in 2008 compared to $816 million in 2007, reflecting the
impact of recent acquisitions and increased capital spending.
The increases were partially offset by lower adjustments in the
carrying value of vehicles held for sale of $13 million in
2008 compared with 2007. Depreciation expense increased to
$816 million in 2007 compared to $743 million in 2006,
reflecting higher average vehicle investment from increased
capital spending and higher adjustments in the carrying value of
vehicles held for
27
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
sale of $18 million. 2007 benefited from adjustments made
to residual values as part of our annual depreciation review.
We periodically review and adjust residual values, reserves for
guaranteed lease termination values and useful lives of revenue
earning equipment based on current and expected operating trends
and projected realizable values. See the section titled
Critical Accounting Estimates Depreciation and
Residual Value Guarantees for further discussion. 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 2008,
2007 and 2006, we completed our annual depreciation review of
the residual values and useful lives of our revenue earning
equipment. 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
and extent of alternative uses. Based on the results of the 2007
review, the adjustment to 2008 depreciation was not significant.
Based on the results of our 2006 analysis, we adjusted the
residual values of certain classes of our revenue earning
equipment effective January 1, 2007. The residual value
changes increased pre-tax earnings for 2007 by approximately
$11 million compared with 2006. Based on the results of the
2008 review, the adjustment to 2009 depreciation is not
significant.
Gains on vehicle sales, net decreased in 2008 compared with 2007
due to a 32% decline in the number of vehicles sold partially
offset by improved gains per unit sold. In 2007, we had excess
used truck inventories and increased our wholesale activity in
order to reduce inventory levels. Wholesale prices are lower
than our retail prices and result in lower gains per unit. In
light of current market conditions, we expect a significant
decline in overall used vehicle sales results, including gains
and carrying value adjustments, reflecting lower retail prices
and higher wholesale activity. Gains on vehicle sales, net
decreased in 2007 compared with 2006 due to a decline in the
average price of vehicles sold mostly as a result of wholesale
activity taken to reduce excess used truck inventories.
Equipment rental consists primarily of rent expense for FMS
revenue earning equipment under lease by us as lessee. Equipment
rental decreased $13 million in 2008 due to the reduction
in the average number of leased vehicles. Equipment rental
increased $3 million in 2007 compared with 2006 as a result
of the sale and leaseback of $150 million of revenue
earning equipment completed in May 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
Change
|
|
|
|
|
|
|
|
|
|
2008/
|
|
2007/
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Interest expense
|
|
$157,257
|
|
160,074
|
|
140,561
|
|
(2)%
|
|
|
14%
|
|
Effective interest rate
|
|
5.5%
|
|
5.6%
|
|
5.7%
|
|
|
|
|
|
|
Interest expense totaled $157 million in 2008 compared to
$160 million in 2007. The decrease in interest expense
reflects a lower average cost of debt principally from lower
commercial paper borrowing rates. The growth in interest expense
in 2007 compared with 2006 reflects higher average debt levels
to support capital spending, the funding of global pension
contributions in 2006 and share repurchase programs. A
hypothetical 10 basis point change in short-term market
interest rates would change annual pre-tax earnings by
$0.7 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
2008/
|
|
2007/
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
2006
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Miscellaneous expense (income), net
|
|
$
|
1,735
|
|
|
|
(15,904
|
)
|
|
|
(11,732
|
)
|
|
(111)%
|
|
36%
|
Miscellaneous expense (income), net consists of investment
losses (income) on securities used to fund certain benefit
plans, interest income, losses (gains) from sales of property,
foreign currency transaction losses (gains), and non-operating
items. Miscellaneous expense (income), net decreased
$18 million in 2008
28
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
primarily due to a $10 million gain on sale of property
recognized in the prior year. See Note 25, Other
Items Impacting Comparability, in the Notes to
Consolidated Financial Statements for additional information on
the property sale. Miscellaneous expense in the current year was
also negatively impacted by $6 million due to the declining
market performance of our investments classified as trading
securities and was partially offset by foreign currency
transaction gains this year compared to losses in the prior year.
Miscellaneous expense (income), net increased to
$16 million in 2007 compared to $12 million in 2006
because of the $10 million gain recognized on the sale of
property. Miscellaneous expense (income), net also increased by
$2 million as a result of a favorable contractual
litigation settlement in 2007 compared with an unfavorable
settlement in 2006. These favorable items were offset by
(i) $3 million of additional foreign currency
transaction losses compared with 2006, (ii) a 2006 business
interruption insurance claim recovery from hurricane-related
losses of $3 million ($2 million within our FMS
business segment and $1 million within our DCC business
segment), and (iii) a one-time recovery of $2 million
in 2006 for the recognition of common stock received from mutual
insurance companies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Restructuring and other charges, net
|
|
$
|
58,401
|
|
|
|
13,269
|
|
|
|
3,564
|
|
2008 Activity
During the fourth quarter of 2008, we announced several
restructuring initiatives designed to address current global
economic conditions and drive long-term profitable growth. The
initiatives include discontinuing supply chain operations in
Brazil, Argentina and Chile during 2009 and transitioning out of
SCS customer contracts in Europe. These actions will enable us
to focus the organization and resources to expand our service
offerings, further diversify our mix of industries served and
continue our pursuit of tuck-in and strategic
acquisitions that create synergies
and/or
expand capabilities. Our actions resulted in a pre-tax
restructuring charge of $37 million, including severance
and other termination benefits, contract termination costs and
asset impairments. Approximately, 2,500 employees support
the discontinued operations. The majority of the separation
actions are expected to be completed and will start to benefit
earnings by the latter part of 2009.
In connection with the decision to transition out of European
supply chain contracts and a declining economic environment, we
performed an impairment analysis relating to our U.K. FMS
reporting unit. Based on our analysis, given current market
conditions and business expectations, in the fourth quarter of
2008, we recorded a non-cash pre-tax impairment charge of
$10 million related to the write-off of goodwill.
In addition to the longer-term strategic initiatives described
above, we approved a plan to eliminate approximately 700
positions, primarily in the U.S. across all business
segments. The workforce reduction resulted in a pre-tax
restructuring charge of $11 million in the fourth quarter
of 2008, all of which related to the payment of severance and
other termination benefits. These actions will be substantially
completed by the end of the first quarter of 2009. The workforce
reduction is expected to result in annual cost savings of
approximately $38 million once all activities are completed.
2007 Activity
Restructuring and other charges, net in 2007 related primarily
to $10 million of employee severance and benefit costs
incurred in connection with global cost savings initiatives and
$2 million of contract termination costs. We approved a
plan to eliminate approximately 300 positions as a result of
cost management and process improvement actions throughout our
domestic and international operations and Central Support
Services (CSS). By December 31, 2008, the 2007 actions were
completed and the cost reductions associated with these
activities benefited salaries and employee-related costs
throughout most of 2008.
29
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Restructuring and other charges, net also included a charge of
$1 million incurred to extinguish debentures that were
originally set to mature in 2017. The charge included the
premium paid on the early extinguishment of debt and the
write-off of related debt discount and issuance costs.
2006 Activity
During 2006, we recorded net restructuring and other charges of
$4 million that primarily consisted of early debt
retirement costs and employee severance and benefit costs
incurred in connection with global cost savings initiatives. The
majority of these charges were recorded during the fourth
quarter. These charges were partially offset by adjustments to
prior year severance and employee-related accruals and contract
termination costs. By December 31, 2007, the 2006 actions
were completed and the cost reductions associated with these
activities benefited salaries and employee-related costs in the
latter half of 2007.
As part of ongoing cost management actions, we incurred
$2 million of costs in the fourth quarter to extinguish
debentures that were originally set to mature in 2016. The total
debt retirement costs consisted of the premium paid on the early
extinguishment and the write-off of the related debt discount
and issuance costs. We realized annual pre-tax interest savings
of approximately $2 million from the early extinguishment
of these debentures. In 2006, we also approved a plan to
eliminate approximately 150 positions as a result of ongoing
cost management and process improvement actions throughout our
domestic and international business segments and CSS. The charge
related to these actions included severance and employee-related
costs totaling $1 million. During 2006, we also had
employee-related accruals and contract termination costs
recorded in prior restructuring charges that were adjusted due
to subsequent refinements in estimates.
See Note 4, Restructuring and Other Charges, in
the Notes to Consolidated Financial Statements for further
discussion.
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
Change
|
|
|
|
|
|
|
|
|
2008/
|
|
2007/
|
|
|
2008
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Provision for income taxes
|
|
$150,041
|
|
151,603
|
|
144,014
|
|
(1)%
|
|
5%
|
Effective tax rate
|
|
42.9%
|
|
37.4%
|
|
36.6%
|
|
|
|
|
The 2008 effective income tax rate increased due to the adverse
impact of non-deductible restructuring and other charges and
higher non-deductible foreign losses in the current year, mostly
in our Brazil, Argentina and Chile operations. The income tax
rate in 2008 benefited from enacted tax law changes in
Massachusetts and the reversal of reserves for uncertain tax
positions for which the statute of limitation in various
jurisdictions had expired. The 2007 effective income tax rate
included a net tax benefit of $5 million from the reduction
of deferred income taxes as a result of enacted changes in tax
laws in various jurisdictions. The 2006 effective income tax
rate included a tax benefit of $7 million from the
reduction of deferred income taxes as a result of enacted
changes in Texas and Canadian tax laws. See Note 13,
Income Taxes, in the Notes to Consolidated Financial
Statements for further discussion.
30
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
FULL YEAR
OPERATING RESULTS BY BUSINESS SEGMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
2008/
|
|
2007/
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
2006
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fleet Management Solutions
|
|
$
|
4,450,016
|
|
|
|
4,162,644
|
|
|
|
4,096,046
|
|
|
7%
|
|
2%
|
Supply Chain Solutions
|
|
|
1,643,056
|
|
|
|
2,250,282
|
|
|
|
2,028,489
|
|
|
(27)
|
|
11
|
Dedicated Contract Carriage
|
|
|
547,751
|
|
|
|
567,640
|
|
|
|
568,842
|
|
|
(4)
|
|
|
Eliminations
|
|
|
(437,080
|
)
|
|
|
(414,571
|
)
|
|
|
(386,734
|
)
|
|
(5)
|
|
(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,203,743
|
|
|
|
6,565,995
|
|
|
|
6,306,643
|
|
|
(6)%
|
|
4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fleet Management Solutions
|
|
$
|
3,034,688
|
|
|
|
2,979,416
|
|
|
|
2,921,062
|
|
|
2%
|
|
2%
|
Supply Chain Solutions
|
|
|
1,330,671
|
|
|
|
1,314,531
|
|
|
|
1,182,925
|
|
|
1
|
|
11
|
Dedicated Contract Carriage
|
|
|
536,754
|
|
|
|
552,891
|
|
|
|
548,931
|
|
|
(3)
|
|
1
|
Eliminations
|
|
|
(197,607
|
)
|
|
|
(210,281
|
)
|
|
|
(198,687
|
)
|
|
6
|
|
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,704,506
|
|
|
|
4,636,557
|
|
|
|
4,454,231
|
|
|
1%
|
|
4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NBT:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fleet Management Solutions
|
|
$
|
398,540
|
|
|
|
373,697
|
|
|
|
368,069
|
|
|
7%
|
|
2%
|
Supply Chain Solutions
|
|
|
42,745
|
|
|
|
63,223
|
|
|
|
62,144
|
|
|
(32)
|
|
2
|
Dedicated Contract Carriage
|
|
|
49,628
|
|
|
|
47,409
|
|
|
|
42,589
|
|
|
5
|
|
11
|
Eliminations
|
|
|
(31,803
|
)
|
|
|
(31,248
|
)
|
|
|
(33,732
|
)
|
|
(2)
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
459,110
|
|
|
|
453,081
|
|
|
|
439,070
|
|
|
1
|
|
3
|
Unallocated Central Support Services
|
|
|
(38,741
|
)
|
|
|
(44,458
|
)
|
|
|
(39,486
|
)
|
|
13
|
|
(13)
|
Restructuring and other charges, net and other
items(1)
|
|
|
(70,447
|
)
|
|
|
(3,159
|
)
|
|
|
(6,611
|
)
|
|
NM
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
$
|
349,922
|
|
|
|
405,464
|
|
|
|
392,973
|
|
|
(14)%
|
|
3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 25, 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 Net Before Taxes (NBT),
which includes an allocation of CSS and excludes restructuring
and other charges, net. These exclusions are described more
fully in Note 4, Restructuring and Other
Charges, and Note 25, Other
Items Impacting Comparability, in the Notes to
Consolidated Financial Statements.
31
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 NBT measure to their classification within our
Consolidated Statements of Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
Statements of Earnings
|
|
Years ended December 31
|
|
Description
|
|
Line
Item(1)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(In thousands)
|
|
|
Severance and employee-related
costs(2)
|
|
Restructuring
|
|
$
|
(26,470
|
)
|
|
|
(10,442
|
)
|
|
|
(1,048
|
)
|
Contract termination
costs(2)
|
|
Restructuring
|
|
|
(3,787
|
)
|
|
|
(1,547
|
)
|
|
|
(375
|
)
|
Early retirement of
debt(2)
|
|
Restructuring
|
|
|
|
|
|
|
(1,280
|
)
|
|
|
(2,141
|
)
|
Asset
impairments(2)
|
|
Restructuring
|
|
|
(28,144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and other charges, net
|
|
|
|
|
(58,401
|
)
|
|
|
(13,269
|
)
|
|
|
(3,564
|
)
|
Brazil
charges(3)
|
|
Operating expense
|
|
|
(4,877
|
)
|
|
|
|
|
|
|
|
|
Brazil
charges(3)
|
|
Subcontracted transportation
|
|
|
(1,621
|
)
|
|
|
|
|
|
|
|
|
International asset
write-offs(3)
|
|
Operating expense
|
|
|
(3,931
|
)
|
|
|
|
|
|
|
|
|
International asset
impairment(3)
|
|
Depreciation expense
|
|
|
(1,617
|
)
|
|
|
|
|
|
|
|
|
Gain on sale of
property(3)
|
|
Miscellaneous income
|
|
|
|
|
|
|
10,110
|
|
|
|
|
|
Pension accounting
charge(3)
|
|
Salaries
|
|
|
|
|
|
|
|
|
|
|
(5,872
|
)
|
Pension remeasurement
benefit(3)
|
|
Salaries
|
|
|
|
|
|
|
|
|
|
|
4,667
|
|
Postretirement benefit plan
charge(3)
|
|
Salaries
|
|
|
|
|
|
|
|
|
|
|
(1,842
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and other charges, net and other items
|
|
|
|
$
|
(70,447
|
)
|
|
|
(3,159
|
)
|
|
|
(6,611
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Restructuring refers to the
Restructuring and other charges, net; Miscellaneous
income refers to Miscellaneous expense (income), net
and Salaries refers to Salaries and employee-related
costs; on our Consolidated Statements of
Earnings. |
|
(2) |
|
See Note 4,
Restructuring and Other Charges, in the Notes to
Consolidated Financial Statements for additional
information. |
|
(3) |
|
See Note 25, 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 NBT are accounted for at
rates similar to those executed with third parties. NBT related
to inter-segment equipment and services billed to customers
(equipment contribution) are included in both FMS and the
business segment which served the customer and then eliminated
(presented as Eliminations).
The following table sets forth equipment contribution included
in NBT for our SCS and DCC segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Equipment Contribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
Supply Chain Solutions
|
|
$
|
16,701
|
|
|
|
16,282
|
|
|
|
16,983
|
|
Dedicated Contract Carriage
|
|
|
15,102
|
|
|
|
14,966
|
|
|
|
16,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
31,803
|
|
|
|
31,248
|
|
|
|
33,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CSS represents those costs incurred to support all business
segments, including human resources, finance, corporate services
and public affairs, information technology, health and safety,
legal and corporate communications. The objective of the NBT
measurement is to provide clarity on the profitability of each
business segment and, ultimately, to hold leadership of each
business segment and each operating segment within each business
segment accountable for their allocated share of CSS costs.
Segment results are not necessarily indicative of the results of
operations that would have occurred had each segment been an
independent, stand-alone entity during the periods presented.
Certain costs are considered to be overhead not
32
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
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 27, Segment
Reporting, in the Notes to Consolidated Financial
Statements for a description of how the remainder of CSS costs
is allocated to the business segments.
Fleet
Management Solutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
2008/
|
|
2007/
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
2006
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Full service lease
|
|
$
|
2,042,064
|
|
|
|
1,965,308
|
|
|
|
1,848,141
|
|
|
4%
|
|
6%
|
Contract maintenance
|
|
|
168,157
|
|
|
|
159,635
|
|
|
|
141,933
|
|
|
5
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual revenue
|
|
|
2,210,221
|
|
|
|
2,124,943
|
|
|
|
1,990,074
|
|
|
4
|
|
7
|
Contract-related maintenance
|
|
|
193,856
|
|
|
|
198,747
|
|
|
|
193,134
|
|
|
(2)
|
|
3
|
Commercial rental
|
|
|
557,532
|
|
|
|
583,336
|
|
|
|
665,730
|
|
|
(4)
|
|
(12)
|
Other
|
|
|
73,079
|
|
|
|
72,390
|
|
|
|
72,124
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenue(1)
|
|
|
3,034,688
|
|
|
|
2,979,416
|
|
|
|
2,921,062
|
|
|
2
|
|
2
|
Fuel services revenue
|
|
|
1,415,328
|
|
|
|
1,183,228
|
|
|
|
1,174,984
|
|
|
20
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
4,450,016
|
|
|
|
4,162,644
|
|
|
|
4,096,046
|
|
|
7%
|
|
2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment NBT
|
|
$
|
398,540
|
|
|
|
373,697
|
|
|
|
368,069
|
|
|
7%
|
|
2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment NBT as a % of total revenue
|
|
|
9.0%
|
|
|
|
9.0%
|
|
|
|
9.0%
|
|
|
bps
|
|
bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment NBT as a % of operating
revenue(1)
|
|
|
13.1%
|
|
|
|
12.5%
|
|
|
|
12.6%
|
|
|
60 bps
|
|
(10) 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. |
2008 versus 2007
Total revenue increased 7% in 2008 to $4.45 billion
compared to $4.16 billion in 2007 due to higher fuel
services revenue and contractual revenue growth. Fuel services
revenue increased in 2008 due to higher fuel prices partially
offset by reduced fuel volumes. Operating revenue increased 2%
in 2008 to $3.03 billion compared to $2.98 billion in
2007 as a result of contractual revenue growth, including
acquisitions, which more than offset the decline in commercial
rental revenue. Total and operating revenue in 2008 also
included an unfavorable foreign exchange impact of 0.5% and
0.7%, respectively.
Revenue growth was realized in both contractual FMS product
lines in 2008. Full service lease revenue grew 4% reflecting
increases in the North American market primarily due to
acquisitions. Contract maintenance revenue increased 5% due
primarily to new contract sales. We expect contractual revenue
levels to remain flat with the current year as real growth will
be offset by unfavorable foreign exchange rates. Commercial
rental revenue decreased 4% in 2008, reflecting weak global
market demand and reduced pricing particularly in the fourth
quarter of 2008. The average global rental fleet size declined
5% in 2008 compared
33
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
with 2007. We expect commercial rental revenue comparisons in
2009 to decline from 2008 levels because of continuing weak
market demand and pricing decline.
The following table provides rental statistics for the
U.S. fleet, which generates more than 80% of total
commercial rental revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
2008/
|
|
2007/
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
2006
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Non-lease customer rental revenue
|
|
$
|
265,704
|
|
|
|
259,723
|
|
|
|
282,528
|
|
|
2%
|
|
(8)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease customer rental
revenue(1)
|
|
$
|
182,735
|
|
|
|
210,657
|
|
|
|
277,461
|
|
|
(13)%
|
|
(24)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average commercial rental fleet size in
service(2)
|
|
|
27,600
|
|
|
|
29,600
|
|
|
|
32,800
|
|
|
(7)%
|
|
(10)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average commercial rental power fleet
size in
service(2),(3)
|
|
|
20,300
|
|
|
|
21,100
|
|
|
|
24,100
|
|
|
(4)%
|
|
(12)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial rental utilization power fleet
|
|
|
71.7%
|
|
|
|
71.0%
|
|
|
|
71.9%
|
|
|
70 bps
|
|
(90) 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 NBT increased $25 million in 2008 due primarily to
improved contractual business performance, including
acquisitions, and to a lesser extent, from higher fuel margins
associated with unusually volatile fuel prices and better used
vehicle sales results. This improvement was partially offset by
a decline in commercial rental results, especially in the fourth
quarter of 2008, as weak market demand drove lower pricing. Used
vehicle sales results improved $9 million in 2008 primarily
because of lower average used truck inventories.
2007 versus 2006
Total revenue increased 2% in 2007 to $4.16 billion
compared to $4.10 billion in 2006 and operating revenue
increased 2% in 2007 to $2.98 billion compared to
$2.92 billion in 2006, due to contractual revenue growth
offset by decreased commercial rental revenue. Total and
operating revenue in 2007 also included a favorable foreign
exchange impact of 1.0% and 1.3%, respectively.
Revenue growth was realized in both contractual FMS product
lines in 2007. Full service lease revenue grew 6% due to higher
new contract sales and lease replacements in all geographic
markets served. Contract maintenance revenue increased 12% due
primarily to new contract sales. Commercial rental revenue
decreased 12% in 2007 due to weak U.S. market demand. We
reduced our rental fleet size throughout the year in response to
weak demand. The average global rental fleet size declined 8% in
2007 compared with 2006.
FMS NBT increased $6 million in 2007 due primarily to
improved contractual business performance and lower pension
expense of $32 million. This improvement was partially
offset by a substantial decline in commercial rental results due
to a lower rental fleet and, to a lesser extent, reduced pricing
as well as lower used vehicle sales results. Used vehicles sales
results declined $25 million in 2007 due to higher
valuation adjustments on an increased inventory of used vehicles
held for sale in North America and lower gains from the sale of
used vehicles due to wholesale activity taken to reduce excess
used truck inventories. Depreciation expense, although higher
than 2006, benefited $11 million from our annual
depreciation review effective January 1, 2007. FMS NBT in
2007 also benefited from lower safety and insurance costs and
lower incentive-based compensation. The decrease in safety and
insurance costs was mainly due to favorable development in
estimated prior years self-insured loss reserves.
34
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
2008/
|
|
2007/
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
2006
|
|
End of period vehicle count
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trucks(1)
|
|
|
68,300
|
|
|
|
62,800
|
|
|
|
65,200
|
|
|
9%
|
|
(4)%
|
Tractors(2)
|
|
|
51,900
|
|
|
|
50,400
|
|
|
|
56,100
|
|
|
3
|
|
(10)
|
Trailers(3)
|
|
|
39,900
|
|
|
|
40,400
|
|
|
|
38,900
|
|
|
(1)
|
|
4
|
Other
|
|
|
3,300
|
|
|
|
7,100
|
|
|
|
7,000
|
|
|
(54)
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
163,400
|
|
|
|
160,700
|
|
|
|
167,200
|
|
|
2%
|
|
(4)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By ownership:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned
|
|
|
158,200
|
|
|
|
155,100
|
|
|
|
160,800
|
|
|
2%
|
|
(4)%
|
Leased
|
|
|
5,200
|
|
|
|
5,600
|
|
|
|
6,400
|
|
|
(7)
|
|
(13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
163,400
|
|
|
|
160,700
|
|
|
|
167,200
|
|
|
2%
|
|
(4)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By product line:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full service lease
|
|
|
120,400
|
|
|
|
115,500
|
|
|
|
118,800
|
|
|
4%
|
|
(3)%
|
Commercial rental
|
|
|
32,300
|
|
|
|
34,100
|
|
|
|
37,000
|
|
|
(5)
|
|
(8)
|
Service vehicles and other
|
|
|
2,800
|
|
|
|
3,600
|
|
|
|
3,500
|
|
|
(22)
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active units
|
|
|
155,500
|
|
|
|
153,200
|
|
|
|
159,300
|
|
|
2
|
|
(4)
|
Held for sale
|
|
|
7,900
|
|
|
|
7,500
|
|
|
|
7,900
|
|
|
5
|
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
163,400
|
|
|
|
160,700
|
|
|
|
167,200
|
|
|
2
|
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer vehicles under contract maintenance
|
|
|
35,500
|
|
|
|
31,500
|
|
|
|
30,700
|
|
|
13%
|
|
3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average vehicle count
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By product line:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full service lease
|
|
|
118,500
|
|
|
|
116,400
|
|
|
|
115,700
|
|
|
2%
|
|
1%
|
Commercial rental
|
|
|
34,200
|
|
|
|
35,800
|
|
|
|
38,900
|
|
|
(4)
|
|
(8)
|
Service vehicles and other
|
|
|
3,200
|
|
|
|
3,500
|
|
|
|
3,300
|
|
|
(9)
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active units
|
|
|
155,900
|
|
|
|
155,700
|
|
|
|
157,900
|
|
|
|
|
(1)
|
Held for sale
|
|
|
6,300
|
|
|
|
9,700
|
|
|
|
6,500
|
|
|
(35)
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
162,200
|
|
|
|
165,400
|
|
|
|
164,400
|
|
|
(2)
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer vehicles under contract maintenance
|
|
|
33,600
|
|
|
|
30,800
|
|
|
|
27,900
|
|
|
9%
|
|
10%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
Note: Prior year
vehicle counts have been reclassified to conform to current year
presentation.
35
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 U.S. fleet (number of
units rounded to the nearest hundred):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
2008/
|
|
2007/
|
Number of Units
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
2006
|
|
Not yet earning revenue (NYE)
|
|
|
1,300
|
|
|
|
900
|
|
|
|
4,200
|
|
|
44%
|
|
(79)%
|
No longer earning revenue (NLE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units held for sale
|
|
|
6,300
|
|
|
|
6,400
|
|
|
|
7,500
|
|
|
(2)
|
|
(15)
|
Other NLE units
|
|
|
1,300
|
|
|
|
1,000
|
|
|
|
1,900
|
|
|
30
|
|
(47)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(1)
|
|
|
8,900
|
|
|
|
8,300
|
|
|
|
13,600
|
|
|
7%
|
|
(39)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Non-revenue earning equipment
for FMS operations outside the U.S. totaled approximately 1,500
vehicles at December 31, 2008, 1,900 vehicles at
December 31, 2007, and 1,700 at December 31, 2006,
which are not included above. |
NYE units represent new vehicles on hand that are being prepared
for deployment to a lease customer or into the rental fleet.
Preparations include activities such as adding lift gates,
paint, decals, cargo area and refrigeration equipment. For 2008,
the number of NYE units increased compared with prior year
consistent with higher lease replacement activity. 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 2008, the
number of NLE units increased slightly compared with the prior
year because of the decline in commercial rental demand. We
expect the number of NLE units in 2009 to be up modestly from
2008 levels.
Supply Chain Solutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
2008/
|
|
|
2007/
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
U.S. operating revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive and industrial
|
|
$
|
547,843
|
|
|
|
551,730
|
|
|
|
495,363
|
|
|
|
(1
|
)%
|
|
11%
|
High-tech and consumer industries
|
|
|
310,455
|
|
|
|
288,913
|
|
|
|
291,933
|
|
|
|
7
|
|
|
(1)
|
Transportation management
|
|
|
38,523
|
|
|
|
32,596
|
|
|
|
30,737
|
|
|
|
18
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. operating revenue
|
|
|
896,821
|
|
|
|
873,239
|
|
|
|
818,033
|
|
|
|
3
|
|
|
7
|
International operating revenue
|
|
|
433,850
|
|
|
|
441,292
|
|
|
|
364,892
|
|
|
|
(2
|
)
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating
revenue(1)
|
|
|
1,330,671
|
|
|
|
1,314,531
|
|
|
|
1,182,925
|
|
|
|
1
|
|
|
11
|
Subcontracted transportation
|
|
|
312,385
|
|
|
|
935,751
|
|
|
|
845,564
|
|
|
|
(67
|
)
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
1,643,056
|
|
|
|
2,250,282
|
|
|
|
2,028,489
|
|
|
|
(27
|
)%
|
|
11%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment NBT
|
|
$
|
42,745
|
|
|
|
63,223
|
|
|
|
62,144
|
|
|
|
(32
|
)%
|
|
2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment NBT as a % of total revenue
|
|
|
2.6%
|
|
|
|
2.8%
|
|
|
|
3.1%
|
|
|
|
(20
|
) bps
|
|
(30) bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment NBT as a % of operating
revenue(1)
|
|
|
3.2%
|
|
|
|
4.8%
|
|
|
|
5.3%
|
|
|
|
(160
|
) bps
|
|
(50) bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Memo: Fuel
costs(2)
|
|
$
|
147,440
|
|
|
|
124,519
|
|
|
|
104,233
|
|
|
|
18
|
%
|
|
19%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We use operating revenue, a
non-GAAP financial measure, to evaluate the operating
performance of our SCS business segment and as a measure of
sales activity. Subcontracted transportation is excluded from
our operating revenue computation as subcontracted
transportation is largely a pass-through to customers. We
realize minimal changes in profitability as a result of
fluctuations in subcontracted transportation. |
|
(2) |
|
Fuel costs are largely a
pass-through to customers and therefore have a direct impact on
revenue. |
36
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
2008 versus 2007
Total revenue decreased 27% to $1.64 billion in 2008
compared to $2.25 billion in 2007 as a result of net
reporting of a transportation management arrangement previously
reported on a gross basis. Effective January 1, 2008, our
contractual relationship with a significant customer for certain
transportation management services changed, and we determined,
after a formal review of the terms and conditions of the
services, that we were acting as an agent based on the revised
terms of the arrangement. As a result, total revenue and
subcontracted transportation expense decreased by
$640 million in 2008. Operating revenue grew 1% due to new
and expanded business and higher fuel cost pass-throughs and was
offset by lower automotive volumes, especially in the fourth
quarter of 2008. For 2008, SCS operating revenue included an
unfavorable foreign currency exchange impact of 0.2%. Our
largest customer, General Motors Corporation (GM), accounted for
approximately 17% of both SCS total and operating revenue in
2008, and is comprised of multiple contracts in various
geographic regions.
In the fourth quarter of 2008, we announced that we were
transitioning out of our current operations in Brazil, Argentina
and Chile and supply chain contracts in Europe. These operations
accounted for approximately $209 million, $209 million
and $174 million of total revenue in 2008, 2007 and 2006,
respectively, and approximately $119 million,
$127 million and $106 million of operating revenue in
2008, 2007 and 2006, respectively. Approximately 45% of
operating revenue was in the automotive sector for the year
ended December 31, 2008. These operations will be reported
as part of continuing operations in our Consolidated Financial
Statements until all operations cease. We expect unfavorable
operating revenue comparisons in the near term because of
current market conditions, particularly related to automotive
production volumes, the impact of discontinued operations in
South America and unfavorable foreign exchange rates.
SCS NBT decreased $20 million in 2008 largely driven by
lower operating results related to South America and the
start-up of
a U.S. based operation. South Americas results
declined $15 million, primarily in Brazil, due to higher
transportation and labor costs and adverse developments in
certain litigation-related matters. NBT was also impacted by
higher overhead spending from increased sales and marketing
investments and facility relocation costs slightly offset by
lower incentive-based compensation.
2007 versus 2006
Total revenue grew 11% to $2.25 billion in 2007 compared to
$2.03 billion in 2006 as a result of new and expanded
business, increased levels of managed subcontracted
transportation and favorable foreign currency exchange rates
slightly offset by the impact of a significant automotive plant
closure. SCS operating revenue grew 11% in 2007. For 2007, SCS
total revenue and operating revenue included a favorable foreign
currency exchange impact of 1.8% and 1.6%, respectively. In
2007, GM accounted for approximately 42% and 19% of SCS total
revenue and operating revenue, respectively.
SCS NBT increased slightly in 2007 as a result of new and
expanded business, particularly in international markets served,
lower incentive-based compensation of $7 million and lower
safety and insurance costs. The decrease in safety and insurance
costs was mainly due to favorable development in estimated prior
years self-insured loss reserves. The increase in NBT was
partially offset by the impact of a significant automotive plant
closure and a $3 million net benefit recognized in the
prior year related to a contract termination.
37
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Dedicated Contract Carriage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
2008/
|
|
2007/
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
2006
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Operating
revenue(1)
|
|
$
|
536,754
|
|
|
|
552,891
|
|
|
|
548,931
|
|
|
(3)%
|
|
1%
|
Subcontracted transportation
|
|
|
10,997
|
|
|
|
14,749
|
|
|
|
19,911
|
|
|
(25)
|
|
(26)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
547,751
|
|
|
|
567,640
|
|
|
|
568,842
|
|
|
(4)%
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment NBT
|
|
$
|
49,628
|
|
|
|
47,409
|
|
|
|
42,589
|
|
|
5%
|
|
11%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment NBT as a % of total revenue
|
|
|
9.1%
|
|
|
|
8.4%
|
|
|
|
7.5%
|
|
|
70 bps
|
|
90 bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment NBT as a % of operating
revenue(1)
|
|
|
9.2%
|
|
|
|
8.6%
|
|
|
|
7.8%
|
|
|
60 bps
|
|
80 bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Memo: Fuel
costs(2)
|
|
$
|
123,003
|
|
|
|
107,140
|
|
|
|
104,647
|
|
|
15%
|
|
2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We use operating revenue, a
non-GAAP financial measure, to evaluate the operating
performance of our DCC business segment and as a measure of
sales activity. Subcontracted transportation is excluded from
our operating revenue computation as subcontracted
transportation is largely a pass-through to customers. We
realize minimal changes in profitability as a result of
fluctuations in subcontracted transportation. |
|
(2) |
|
Fuel costs are largely a
pass-through to customers and therefore have a direct impact on
revenue. |
2008 versus 2007
Total revenue declined 4% to $548 million and operating
revenue declined 3% to $537 million in 2008 as a result of
the non-renewal of certain customer contracts partially offset
by the pass-through of higher fuel costs. We expect unfavorable
operating revenue comparisons in the near term primarily driven
by lower volumes associated with the current economic
environment and lower fuel cost pass-throughs.
DCC NBT increased $2 million to $50 million in 2008
compared with 2007 as a result of better operating performance
partially offset by higher safety and insurance costs. The
increase in safety and insurance costs reflects less favorable
development in estimated prior years self-insured loss
reserves.
2007 versus 2006
Total revenue of $568 million was flat in 2007 compared
with 2006 because of decreased volumes of managed subcontracted
transportation. Operating revenue increased slightly in 2007 due
to pricing increases associated with higher fuel costs.
DCC NBT increased $5 million in 2007 compared with 2006 as
a result of better operating performance and lower safety and
insurance costs offset slightly by lower FMS equipment
contribution. The decrease in safety and insurance costs
reflects favorable development in estimated prior years
self-insured loss reserves.
38
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Central Support Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
2008/
|
|
2007/
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
2006
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Human resources
|
|
$
|
15,943
|
|
|
|
16,504
|
|
|
|
15,548
|
|
|
(3)%
|
|
6%
|
Finance
|
|
|
55,835
|
|
|
|
58,209
|
|
|
|
59,495
|
|
|
(4)
|
|
(2)
|
Corporate services and public affairs
|
|
|
13,117
|
|
|
|
12,124
|
|
|
|
11,620
|
|
|
8
|
|
4
|
Information technology
|
|
|
57,538
|
|
|
|
54,826
|
|
|
|
54,847
|
|
|
5
|
|
|
Health and safety
|
|
|
7,754
|
|
|
|
7,973
|
|
|
|
8,147
|
|
|
(3)
|
|
(2)
|
Other
|
|
|
35,286
|
|
|
|
40,837
|
|
|
|
41,310
|
|
|
(14)
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total CSS
|
|
|
185,473
|
|
|
|
190,473
|
|
|
|
190,967
|
|
|
(3)
|
|
|
Allocation of CSS to business segments
|
|
|
(146,732
|
)
|
|
|
(146,015
|
)
|
|
|
(151,481
|
)
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated CSS
|
|
$
|
38,741
|
|
|
|
44,458
|
|
|
|
39,486
|
|
|
(13)%
|
|
13%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 versus 2007
Total and unallocated CSS costs in 2008 decreased compared with
the prior year as a result of a decrease in foreign currency
transaction losses, reduced severance costs and lower
share-based compensation expense due to a prior year charge
related to the accelerated amortization of restricted stock unit
expense.
2007 versus 2006
Total CSS costs in 2007 were flat compared with the prior year.
CSS costs in 2007 were impacted by (i) higher severance and
foreign currency transaction losses; (ii) a non-cash
compensation charge of $2 million related to an adjustment
in the amortization of restricted stock units; and
(iii) the one-time recovery in 2006 of $2 million
associated with the recognition of common stock received from
mutual insurance companies. These cost increases were offset by
lower incentive-based compensation of $7 million and a
prior year litigation settlement charge associated with a
discontinued operation. Unallocated CSS expense increased in
2007 because of higher foreign currency transaction losses, the
adjustment in the amortization of restricted stock unit
compensation expense and higher severance expense offset
partially by lower incentive-based compensation of
$3 million and the litigation settlement charge in the
prior year.
39
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
FOURTH
QUARTER CONSOLIDATED RESULTS
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
2008/ 2007
|
|
|
(Dollars and shares in thousands,
|
|
|
|
|
|
except per share amounts)
|
|
|
|
|
Total revenue
|
|
$
|
1,373,798
|
|
|
|
1,666,200
|
|
|
(18)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
1,109,469
|
|
|
|
1,189,599
|
|
|
(7)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
$
|
33,178
|
|
|
|
111,797
|
|
|
(70)
|
Provision for income taxes
|
|
|
22,533
|
|
|
|
39,851
|
|
|
(43)
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
10,645
|
|
|
|
71,946
|
|
|
(85)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per diluted common share
|
|
$
|
0.19
|
|
|
|
1.24
|
|
|
(85)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding Diluted
|
|
|
55,499
|
|
|
|
58,099
|
|
|
(4)%
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue decreased 18% in the fourth quarter of 2008
compared with the year-earlier period. Total revenue in 2008 was
impacted by a change, effective January 1, 2008, in our
contractual relationship with a significant SCS customer that
required a change in revenue recognition from a gross basis to a
net basis for subcontracted transportation. This change did not
impact operating revenue or net earnings. In the fourth quarter
of 2007, we recorded revenue of $133 million related to
this contractual relationship. Excluding this item, total
revenue decreased in the fourth quarter of 2008 primarily as a
result of lower fuel services revenue and unfavorable foreign
exchange rate movements related to international operations.
Operating revenue decreased 7% primarily due to unfavorable
foreign exchange rate movements, lower commercial rental
revenue, lower automotive volumes and lower fuel services
revenue in DCC which more than offset contractual revenue
growth. Total revenue and operating revenue in the fourth
quarter of 2008 included an unfavorable foreign exchange impact
of 4.6%.
NBT decreased to $33 million in the fourth quarter of 2008
compared to $112 million in the same period in 2007. 2008
NBT included a fourth quarter restructuring and other charges of
$58 million ($53 million after-tax or $0.96 per
diluted common share) associated with a plan to discontinue
current supply chain operations in Brazil, Argentina, Chile and
Europe and workforce reductions, primarily in the U.S. See
Note 4, Restructuring and Other Charges, in the
Notes to Consolidated Financial Statements for additional
discussion. The decline in NBT was also due to deteriorating
economic conditions which impacted commercial rental demand in
FMS and volumes in SCS and DCC.
Net earnings in the fourth quarter of 2008 included income tax
benefits of $8 million or $0.14 per diluted common share
associated with reversal of reserves for uncertain tax positions
due to the expiration of the statutes of limitation in various
jurisdictions. Net earnings in the fourth quarter of 2007
included a benefit of $4 million, or $0.06 per diluted
common share, related primarily to changes in Canadian income
tax laws.
40
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
FOURTH
QUARTER OPERATING RESULTS BY BUSINESS SEGMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
2008/2007
|
|
|
(In thousands)
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
Fleet Management Solutions
|
|
$
|
976,319
|
|
|
|
1,085,366
|
|
|
(10)%
|
Supply Chain Solutions
|
|
|
357,196
|
|
|
|
545,837
|
|
|
(35)
|
Dedicated Contract Carriage
|
|
|
126,209
|
|
|
|
144,278
|
|
|
(13)
|
Eliminations
|
|
|
(85,926
|
)
|
|
|
(109,281
|
)
|
|
(21)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,373,798
|
|
|
|
1,666,200
|
|
|
(18)%
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenue:
|
|
|
|
|
|
|
|
|
|
|
Fleet Management Solutions
|
|
$
|
736,695
|
|
|
|
764,770
|
|
|
(4)%
|
Supply Chain Solutions
|
|
|
294,846
|
|
|
|
337,190
|
|
|
(13)
|
Dedicated Contract Carriage
|
|
|
123,624
|
|
|
|
140,278
|
|
|
(12)
|
Eliminations
|
|
|
(45,696
|
)
|
|
|
(52,639
|
)
|
|
(13)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,109,469
|
|
|
|
1,189,599
|
|
|
(7)%
|
|
|
|
|
|
|
|
|
|
|
|
NBT:
|
|
|
|
|
|
|
|
|
|
|
Fleet Management Solutions
|
|
$
|
86,552
|
|
|
|
102,254
|
|
|
(15)%
|
Supply Chain Solutions
|
|
|
14,982
|
|
|
|
18,921
|
|
|
(21)
|
Dedicated Contract Carriage
|
|
|
12,720
|
|
|
|
12,256
|
|
|
4
|
Eliminations
|
|
|
(8,399
|
)
|
|
|
(8,007
|
)
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,855
|
|
|
|
125,424
|
|
|
(16)
|
Unallocated Central Support Services
|
|
|
(8,695
|
)
|
|
|
(14,023
|
)
|
|
(38)
|
Restructuring and other (charges) recoveries, net
|
|
|
(63,982
|
)
|
|
|
396
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
$
|
33,178
|
|
|
|
111,797
|
|
|
(70)%
|
|
|
|
|
|
|
|
|
|
|
|
Fleet Management Solutions
Total revenue decreased 10% in the fourth quarter of 2008
compared with the year-earlier period reflecting lower fuel
services revenue due to lower prices and reduced volume. The
decrease in total revenue also reflects unfavorable foreign
exchange rate movements. Operating revenue decreased 4% in the
fourth quarter compared with the year-earlier period primarily
due to unfavorable foreign exchange rate movements. Declines in
commercial rental revenue of 15% more than offset contractual
revenue growth, including acquisitions. FMS total revenue and
operating revenue in the fourth quarter of 2008 included an
unfavorable foreign exchange impact of 3%.
FMS NBT decreased 15% in the fourth quarter of 2008 reflecting a
decline in global commercial rental results partially offset by
improved contractual business performance, including
acquisitions. Commercial rental results were impacted by weak
market demand which drove lower utilization and reduced pricing.
FMS NBT included an unfavorable foreign exchange impact of 4%.
Supply Chain Solutions
Total revenue decreased 35% in the fourth quarter of 2008
compared with the year-earlier period. Total revenue declined
largely due to a previously announced change in reporting of a
transportation services arrangement from a gross to a net basis.
Excluding this contract change, total revenue declined 13%.
Operating revenue decreased 13% in the fourth quarter primarily
due to lower automotive volumes and
41
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
unfavorable foreign exchange rate changes. In the fourth quarter
of 2008, SCS total revenue and operating revenue included an
unfavorable foreign currency exchange impact of 8% and 7%,
respectively.
SCS NBT decreased 21% in the fourth quarter of 2008 compared
with the year-earlier period due to lower international
operating results and, to a lesser extent, the impact of lower
automotive revenue partially offset by lower compensation costs.
Dedicated Contract Carriage
Total revenue decreased 13% in the fourth quarter of 2008
compared with the year-earlier period. Operating revenue
decreased 12% compared with the year-earlier period. Revenue
decreased due to the impact of the non-renewal of customer
contracts, lower volumes as well as the pass-through of lower
fuel costs.
DCC NBT increased 4% in the fourth quarter of 2008 compared with
the year-earlier period due to better operating margins and
improved efficiencies.
Central Support Services
Unallocated CSS costs were $9 million compared to
$14 million in 2007. The improvement in CSS costs primarily
reflects lower compensation and prior year severance expense.
FINANCIAL
RESOURCES AND LIQUIDITY
Cash Flows
The following is a summary of our cash flows from operating,
financing and investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
1,255,531
|
|
|
|
1,102,939
|
|
|
|
853,587
|
|
Financing activities
|
|
|
(150,630
|
)
|
|
|
(299,203
|
)
|
|
|
488,202
|
|
Investing activities
|
|
|
(1,102,790
|
)
|
|
|
(823,219
|
)
|
|
|
(1,339,550
|
)
|
Effect of exchange rate changes on cash
|
|
|
1,735
|
|
|
|
7,303
|
|
|
|
(2,327
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
$
|
3,846
|
|
|
|
(12,180
|
)
|
|
|
(88
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A detail of the individual items contributing to the cash flow
changes is included in the Consolidated Statements of Cash Flows.
Cash provided by operating activities increased to
$1.26 billion in 2008 compared to $1.10 billion in
2007, because of higher cash-based earnings and reduced working
capital needs primarily from improved accounts receivable
collections. Cash used in financing activities was
$151 million in 2008 compared with cash used of
$299 million in 2007. The decrease in cash used in
financing activities in 2008 reflects higher borrowing needs
partially offset by higher share repurchase activity. Cash used
in investing activities increased to $1.10 billion in 2008
compared to $823 million in 2007 primarily due to
acquisition-related payments in 2008 and lower proceeds from
sales of revenue earning equipment which included proceeds of
$150 million from a sale-leaseback transaction in 2007.
This increase was partially offset by lower vehicle capital
spending.
Cash provided by operating activities increased to
$1.10 billion in 2007 compared to $854 million in
2006, because of higher cash-based earnings, reduced working
capital needs primarily from improved accounts receivable
collections, lower income tax payments of $87 million and
lower pension contributions of $70 million. Cash used in
financing activities was $299 million in 2007 compared with
cash provided of $488 million in 2006. Cash used in
financing activities in 2007 reflects lower borrowing needs and
higher share repurchase activity. Cash used in investing
activities decreased to $823 million in 2007 compared to
42
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
$1.34 billion in 2006 as a result of lower cash payments
for vehicle capital spending, a $150 million sale-leaseback
transaction completed in 2007 and higher proceeds associated
with sales of used vehicles. These items were partially offset
by higher acquisition-related payments.
Our principal sources of operating liquidity are cash from
operations and proceeds from the sale of revenue earning
equipment. We refer to the sum of operating cash flows, proceeds
from the sales of revenue earning equipment and operating
property and equipment, sale and leaseback of revenue earning
equipment, collections on direct finance leases and other cash
inflows as total cash generated. We refer to the net
amount of cash generated from operating and investing activities
(excluding changes in restricted cash and acquisitions) as
free cash flow. Although total cash generated and
free cash flow are non-GAAP financial measures, we consider them
to be important measures of comparative operating performance.
We also believe total cash generated to be an important measure
of total cash inflows generated from our ongoing business
activities. We believe free cash flow provides investors with an
important perspective on the cash available for debt service and
for shareholders after making capital investments required to
support ongoing business operations. Our calculation of free
cash flow may be different from the calculation used by other
companies and therefore comparability may be limited.
The following table shows the sources of our free cash flow
computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Net cash provided by operating activities
|
|
$
|
1,255,531
|
|
|
|
1,102,939
|
|
|
|
853,587
|
|
Sales of revenue earning equipment
|
|
|
260,598
|
|
|
|
354,767
|
|
|
|
326,079
|
|
Sales of operating property and equipment
|
|
|
4,302
|
|
|
|
18,868
|
|
|
|
6,575
|
|
Collections on direct finance leases
|
|
|
61,944
|
|
|
|
63,358
|
|
|
|
66,274
|
|
Sale and leaseback of revenue earning equipment
|
|
|
|
|
|
|
150,348
|
|
|
|
|
|
Other, net
|
|
|
395
|
|
|
|
1,588
|
|
|
|
2,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash generated
|
|
|
1,582,770
|
|
|
|
1,691,868
|
|
|
|
1,254,678
|
|
Purchases of property and revenue earning equipment
|
|
|
(1,234,065
|
)
|
|
|
(1,317,236
|
)
|
|
|
(1,695,064
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow
|
|
$
|
348,705
|
|
|
|
374,632
|
|
|
|
(440,386
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow decreased to $349 million in 2008 compared
to $375 million in 2007 because of lower proceeds from
sales of revenue earning equipment, primarily from the
$150 million sale-leaseback transaction in 2007. This was
partially offset by higher cash flows from operations and lower
cash payments for vehicle capital spending. Free cash flow
improved to $375 million in 2007 compared to negative
$440 million in 2006 because of lower cash payments for
vehicle capital spending, reduced working capital needs, the
sale-leaseback transaction completed in 2007 and lower pension
contributions during 2007. We expect free cash flow in 2009 to
increase to $365 million based on lower capital
expenditures, partially offset by higher pension contributions,
cash taxes and working capital needs.
Capital expenditures are generally used to purchase revenue
earning equipment (trucks, tractors, trailers) within our FMS
segment. These expenditures primarily support the full service
lease product line and also 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 to us
typically over a three to seven year term for trucks and
tractors and up to 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
43
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Revenue earning equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Full service lease
|
|
$
|
986,333
|
|
|
|
900,028
|
|
|
|
1,492,720
|
|
Commercial rental
|
|
|
171,128
|
|
|
|
218,830
|
|
|
|
195,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,157,461
|
|
|
|
1,118,858
|
|
|
|
1,687,743
|
|
Operating property and equipment
|
|
|
111,539
|
|
|
|
75,978
|
|
|
|
71,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital
expenditures(1)
|
|
|
1,269,000
|
|
|
|
1,194,836
|
|
|
|
1,759,515
|
|
Changes in accounts payable related to purchases of revenue
earning equipment
|
|
|
(34,935
|
)
|
|
|
122,400
|
|
|
|
(64,451
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for purchases of property and revenue earning equipment
|
|
$
|
1,234,065
|
|
|
|
1,317,236
|
|
|
|
1,695,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Capital expenditures exclude
non-cash additions of approximately $1 million,
$11 million, and $2 million in 2008, 2007, and 2006,
respectively, in assets held under capital leases resulting from
the extension of existing operating leases and other
additions. |
Capital expenditures increased in 2008 as a result of higher
full service lease vehicle spending for replacement and
expansion of customer fleets and reduced spending on
transactional commercial rental vehicles to meet market demand.
Capital expenditures decreased in 2007 as a result of lower full
service lease vehicle spending for replacement and expansion of
customer fleets. We expect capital expenditures to decrease to
approximately $940 million in 2009 largely as a result of
the elimination of virtually all planned commercial rental
spending. We expect to fund 2009 capital expenditures with
both internally generated funds and additional financing.
During 2008, we completed four acquisitions related to the FMS
and SCS segment. Total consideration paid in 2008 for these
acquisitions was $246 million. In 2007, we completed the
acquisition of Pollock NationaLease in Canada. Total
consideration paid during 2007 for this acquisition was
$75 million. See Note 3, Acquisitions, in
the Notes to Consolidated Financial Statements for further
discussion. On February 2, 2009, we acquired the assets of
Edart Leasing Company LLC (Edart) which included
Edarts fleet of approximately 1,600 vehicles and more than
340 contractual customers complementing our FMS market coverage
and service network in the Northeast United States. We also
acquired approximately 525 vehicles that will be
re-marketed. We will continue to evaluate selective acquisitions
in 2009.
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.
Our net working capital (current assets less current
liabilities) was negative $160 million in 2008 compared to
$203 million in 2007. The decline in net working capital
was due to a higher amount of short-term debt outstanding under
the trade receivables program and increased current maturities
of long-term debt. The decline was also due to a decrease in
receivables from improved collections and lower fuel services
revenue. We expect to fund these debt requirements with
issuances of commercial paper.
44
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 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 significant downgrade of our
short-term debt ratings would impair our ability to issue
commercial paper. As a result, we would have to rely on
alternative funding sources. A significant downgrade would not
affect our ability to borrow amounts under our revolving credit
facility described below.
Our debt ratings are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
|
|
|
Long-term
|
|
|
Outlook(1)
|
|
Moodys Investors Service
|
|
|
P2
|
|
|
|
Baa1
|
|
|
Stable (June
2004)(2)
|
Standard & Poors Ratings Services
|
|
|
A2
|
|
|
|
BBB+
|
|
|
Negative (January 2009)
|
Fitch Ratings
|
|
|
F2
|
|
|
|
A−
|
|
|
Stable (July 2005)
|
|
|
|
(1) |
|
Month and year
attained. |
|
(2) |
|
In February 2009, Moodys
Investors Service affirmed their long-term debt rating and
outlook. |
Global capital and credit markets, including the commercial
paper markets, have recently experienced increased volatility
and disruption. Despite this volatility and disruption, we have
continued to have access to the commercial paper markets. There
is no guarantee that such markets will continue to be available
to us at 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 on contractually committed lending agreements as
described below and (or) by seeking other funding sources. We
believe that our operating cash flow, together with our
revolving credit facility and other available debt financing,
will be adequate to meet our operating, investing and financing
needs in the foreseeable future. There can be no assurance that
continued or increased volatility and disruption in the global
capital and credit markets will not impair our ability to access
these markets on terms commercially acceptable to us or at all.
We can borrow up to $870 million through a global revolving
credit facility with a syndicate of thirteen lenders. The credit
facility matures in May 2010 and is used primarily to finance
working capital and provide support for the issuance of
commercial paper in the U.S. and Canada. This facility can
also be used to issue up to $75 million in letters of
credit (there were no letters of credit outstanding against the
facility at December 31, 2008). At our option, the interest
rate on borrowings under the credit facility is based on LIBOR,
prime, federal funds or local equivalent rates. The credit
facilitys current annual facility fee is 11 basis
points, which applies to the total facility of
$870 million, and is based on Ryders current credit
ratings. The credit facility contains no provisions restricting
its availability in the event of a material adverse change to
Ryders business operations; however, the credit facility
does contain standard representations and warranties, events of
default, cross-default provisions, and certain affirmative and
negative covenants. In order to maintain availability of
funding, we must maintain a ratio of debt to consolidated
tangible net worth, as defined in the agreement, of less than or
equal to 300%. The ratio at December 31, 2008 was 181%. At
December 31, 2008, $825 million was available under
the credit facility. Foreign borrowings of $8 million were
outstanding under the facility at December 31, 2008.
In September 2008, we renewed our trade receivables purchase and
sale program, pursuant to which we sell certain of our domestic
trade accounts receivable to Ryder Receivable Funding II, L.L.C.
(RRF LLC), a bankruptcy remote, consolidated subsidiary of
Ryder, that in turn may sell, on a revolving basis, an ownership
interest in certain of these 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 costs under
the program may vary based on changes in our unsecured debt
ratings and changes in interest rates. The available proceeds
that may be received under the program are limited to
$250 million. If no event occurs which causes early
termination, the
364-day
program will expire on September 8, 2009. The program
45
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
contains provisions restricting its availability in the event of
a material adverse change to our business operations or the
collectibility of the securitized receivables. At
December 31, 2008 and 2007, $190 million and
$100 million, respectively, was outstanding under the
program and was included within Short-term debt and
current portion of long-term debt on our Consolidated
Balance Sheets.
Historically, we have established asset-backed securitization
programs whereby we sell beneficial interests in certain
long-term vehicle leases and related vehicle residuals to a
bankruptcy-remote special purpose entity that in turn transfers
the beneficial interest to a special purpose securitization
trust in exchange for cash. The securitization trust funds the
cash requirement with the issuance of asset-backed securities,
secured or otherwise collateralized by the beneficial interest
in the long-term vehicle leases and the residual value of the
vehicles. The securitization provides us with further liquidity
and access to new capital markets based on market conditions. On
June 18, 2008, Ryder Funding II LP, a special purpose
bankruptcy-remote subsidiary wholly-owned by Ryder, filed a
registration statement on
Form S-3
with the Securities and Exchange Commission for the registration
of $600 million in asset-backed notes. The registration
statement became effective on November 6, 2008 and allows
us to access the public asset-backed securities market for three
years, subject to market conditions. Based on current market
conditions, we do not expect to utilize this program in the near
term.
On February 27, 2007, Ryder filed an automatic shelf
registration statement on
Form S-3
with the Securities and Exchange Commission. The registration is
for an indeterminate number of securities and is effective for
three years. Under this universal shelf registration statement,
we have the capacity to offer and sell from time to time various
types of securities, including common stock, preferred stock and
debt securities, subject to market demand and ratings status. In
August 2008, we issued $300 million of unsecured
medium-term notes maturing in September 2015. The proceeds from
the notes were used for general corporate purposes. If the notes
are downgraded following, and as a result of, a change of
control, the note holder can require us to repurchase all or a
portion of the notes at a purchase price equal to 101% of the
principal amount plus accrued and unpaid interest. Our other
outstanding unsecured U.S. notes are not subject to change
of control repurchase obligations. See Note 15,
Debt, for other issuances under this registration
statement.
At December 31, 2008, we had the following amounts
available to fund operations under the aforementioned facilities:
|
|
|
|
|
|
|
(In millions)
|
|
|
Global revolving credit facility
|
|
|
825
|
|
Trade receivables program
|
|
|
60
|
|
46
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
The following table shows the movements in our debt balance:
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Debt balance at January 1
|
|
$
|
2,776,129
|
|
|
|
2,816,943
|
|
|
|
|
|
|
|
|
|
|
Cash-related changes in debt:
|
|
|
|
|
|
|
|
|
Net change in commercial paper borrowings
|
|
|
(522,312
|
)
|
|
|
(159,771
|
)
|
Proceeds from issuance of medium-term notes
|
|
|
550,000
|
|
|
|
250,000
|
|
Proceeds from issuance of other debt instruments
|
|
|
207,077
|
|
|
|
263,021
|
|
Retirement of medium-term notes and debentures
|
|
|
(90,000
|
)
|
|
|
(263,021
|
)
|
Other debt repaid, including capital lease obligations
|
|
|
(48,209
|
)
|
|
|
(175,979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
96,556
|
|
|
|
(85,750
|
)
|
Non-cash changes in debt:
|
|
|
|
|
|
|
|
|
Fair market value adjustment on notes subject to hedging
|
|
|
18,391
|
|
|
|
(96
|
)
|
Addition of capital lease obligations
|
|
|
1,430
|
|
|
|
10,920
|
|
Changes in foreign currency exchange rates and other non-cash
items
|
|
|
(29,707
|
)
|
|
|
34,112
|
|
|
|
|
|
|
|
|
|
|
Total changes in debt
|
|
|
86,670
|
|
|
|
(40,814
|
)
|
|
|
|
|
|
|
|
|
|
Debt balance at December 31
|
|
$
|
2,862,799
|
|
|
|
2,776,129
|
|
|
|
|
|
|
|
|
|
|
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 26% at December 31,
2008 and 31% at December 31, 2007.
Ryders leverage ratios and a reconciliation of on-balance
sheet debt to total obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
%
|
|
December 31,
|
|
|
%
|
|
|
2008
|
|
|
of Equity
|
|
2007
|
|
|
of Equity
|
|
|
(Dollars in thousands)
|
|
On-balance sheet debt
|
|
$
|
2,862,799
|
|
|
213%
|
|
$
|
2,776,129
|
|
|
147%
|
Off-balance sheet debt PV of minimum lease payments
and guaranteed residual values under operating leases for
vehicles(1)
|
|
|
163,039
|
|
|
|
|
|
177,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total obligations
|
|
$
|
3,025,838
|
|
|
225%
|
|
$
|
2,954,121
|
|
|
157%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 2008 is driven by the decline in equity
caused by unrecognized losses on our pension plans, share
repurchases, foreign currency translation adjustments and
acquisitions.
47
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Off-Balance Sheet Arrangements
Sale and leaseback transactions. We
periodically enter into sale and leaseback transactions in order
to lower the total cost of funding our operations, to diversify
our funding among different classes of investors (e.g., regional
banks, pension plans, insurance companies, etc.) and to
diversify our funding among different types of funding
instruments. These sale-leaseback transactions are often
executed with third-party financial institutions that are not
deemed to be variable interest entities (VIEs). In general,
these sale-leaseback transactions result in a reduction in
revenue earning equipment and debt on the balance sheet, as
proceeds from the sale of revenue earning equipment are
primarily used to repay debt. Accordingly, sale-leaseback
transactions will result in reduced depreciation and interest
expense and increased equipment rental expense.
Our sale-leaseback transactions contain limited guarantees by us
of the residual values of the leased vehicles (residual value
guarantees) that are conditioned upon disposal of the leased
vehicles prior to the end of their lease term. The amount of
future payments for residual value guarantees will depend on the
market for used vehicles and the condition of the vehicles at
time of disposal. See Note 18, Guarantees, in
the Notes to Consolidated Financial Statements for additional
information. In May 2007, we completed a sale-leaseback
transaction of revenue earning equipment with a third party not
deemed to be a VIE and this transaction qualified for
off-balance sheet operating lease treatment. Proceeds from the
sale-leaseback transaction totaled $150 million. We did not
enter into any sale-leaseback transactions during 2008 and 2006.
Guarantees. We executed various agreements
with third parties that contain standard indemnifications that
may require us to indemnify a third party against losses arising
from a variety of matters such as lease obligations, financing
agreements, environmental matters, and agreements to sell
business assets. In each of these instances, payment by us is
contingent on the other party bringing about a claim under the
procedures outlined in the specific agreement. Normally, these
procedures allow us to dispute the other partys claim.
Additionally, our obligations under these agreements may be
limited in terms of the amount and (or) timing of any claim. We
have entered into individual indemnification agreements with
each of our independent directors, through which we will
indemnify such director acting in good faith against any and all
losses, expenses and liabilities arising out of such
directors service as a director of Ryder. The maximum
amount of potential future payments under these agreements is
generally unlimited.
We cannot predict the maximum potential amount of future
payments under certain of these agreements, including the
indemnification agreements, due to the contingent nature of the
potential obligations and the distinctive provisions that are
involved in each individual agreement. Historically, no such
payments made by Ryder have had a material adverse effect on our
business. We believe that if a loss were incurred in any of
these matters, the loss would not result in a material adverse
impact on our consolidated results of operations or financial
position. The total amount of maximum exposure determinable
under these types of provisions at December 31, 2008 and
2007 was $14 million and $16 million, respectively, and we
accrued $1 million in 2008 and $2 million in 2007, as
a corresponding liability. See Note 18,
Guarantees, in the Notes to Consolidated Financial
Statements for further discussion.
48
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, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010 - 2011
|
|
|
2012 - 2013
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Debt
|
|
$
|
381,752
|
|
|
|
827,700
|
|
|
|
620,157
|
|
|
|
1,021,349
|
|
|
|
2,850,958
|
|
Capital lease obligations
|
|
|
2,510
|
|
|
|
3,071
|
|
|
|
2,827
|
|
|
|
3,433
|
|
|
|
11,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt, including capital
leases(1)
|
|
|
384,262
|
|
|
|
830,771
|
|
|
|
622,984
|
|
|
|
1,024,782
|
|
|
|
2,862,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on
debt(2)
|
|
|
147,535
|
|
|
|
239,874
|
|
|
|
164,517
|
|
|
|
238,678
|
|
|
|
790,604
|
|
Operating
leases(3)
|
|
|
112,734
|
|
|
|
187,248
|
|
|
|
72,101
|
|
|
|
68,090
|
|
|
|
440,173
|
|
Purchase
obligations(4)
|
|
|
293,918
|
|
|
|
7,643
|
|
|
|
2,415
|
|
|
|
10
|
|
|
|
303,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
|
554,187
|
|
|
|
434,765
|
|
|
|
239,033
|
|
|
|
306,778
|
|
|
|
1,534,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
obligations(5)
|
|
|
109,167
|
|
|
|
92,722
|
|
|
|
38,034
|
|
|
|
33,616
|
|
|
|
273,539
|
|
Other long-term
liabilities(6),(7),(8)
|
|
|
36,953
|
|
|
|
4,223
|
|
|
|
1,260
|
|
|
|
45,686
|
|
|
|
88,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,084,569
|
|
|
|
1,362,481
|
|
|
|
901,311
|
|
|
|
1,410,862
|
|
|
|
4,759,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, 2008. Amounts are
based on existing debt obligations, including capital leases,
and do not consider potential refinancings 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. |
|
(5) |
|
Insurance obligations are
primarily comprised of self-insurance accruals. |
|
(6) |
|
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. |
|
(7) |
|
The amounts exclude our
estimated pension contributions. For 2009, our pension
contributions, including our minimum funding requirements as set
forth by ERISA and international regulatory bodies, are expected
to be $100 million. Our minimum funding requirements after
2009 are dependent on several factors. However, we estimate that
the present value of required global contributions over the next
five years is approximately $571 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 23, Employee Benefit Plans, in the Notes
to Consolidated Financial Statements for further
discussion. |
|
(8) |
|
The amounts exclude
$56 million of liabilities under FASB Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes, as we are unable to reasonably estimate the
ultimate amount or timing of settlement. See Note 13,
Income Taxes, in the Notes to Consolidated Financial
Statements for further discussion. |
49
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Pension Information
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. As a result, these
employees will cease accruing further benefits under the defined
benefit plan after January 1, 2010 and will begin receiving
an enhanced benefit under the defined contribution portion of
the plan. All retirement benefits earned as of January 1,
2010 will be fully preserved and will be paid in accordance with
the plan and legal requirements. Employees hired after
January 1, 2009 will not be eligible to participate in the
Canadian defined benefit plan. The freeze of the Canadian
defined benefit plan created a curtailment gain of
$4 million (pre-tax).
In January 2007, our Board of Directors approved an amendment to
freeze U.S. pension plans effective December 31, 2007
for current participants who did not meet certain grandfathering
criteria. As a result, these employees ceased accruing further
benefits after December 31, 2007 and began participating in
an enhanced 401(k) plan. Those participants that met the
grandfathering criteria were given the option to either continue
to earn benefits in the U.S. pension plans or transition
into an enhanced 401(k) plan. All retirement benefits earned as
of December 31, 2007 were fully preserved and will be paid
in accordance with the plan and legal requirements. Employees
hired after January 1, 2007 are not eligible to participate
in the pension plan.
We had an accumulated net pension equity charge (after-tax) of
$480 million and $148 million at December 31,
2008 and 2007, respectively. The higher equity charge in 2008
reflects the decline in our funded status as a result of
significant negative asset returns during 2008. Total asset
returns for our U.S. qualified pension plan (our primary
plan) were negative 31% in 2008.
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 2008, total pension contributions,
including our international plans, were $21 million
compared to $60 million in 2007. We estimate 2009 pension
contributions, including our international plans, will be
$100 million of which approximately $73 million
represents voluntary contributions for the U.S. pension
plan. After considering the 2008 contributions and asset
performance, the projected present value of estimated global
pension contributions that would be required over the next
5 years totals approximately $571 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 underfunded 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 23, Employee Benefit Plans, in the Notes
to Consolidated Financial Statements for additional information.
Share Repurchase Programs and Cash Dividends
As discussed in Note 19, Shareholders
Equity, in the Notes to Consolidated Financial Statements,
in December 2007, our Board of Directors authorized a
$300 million discretionary share repurchase program over a
period not to exceed two years. Additionally, our Board of
Directors authorized a separate two-year anti-dilutive
repurchase program. For the year ended December 31, 2008,
we repurchased and retired 2,615,000 shares under the
$300 million program at an aggregate cost of
$170 million. For the year ended December 31, 2008, we
repurchased and retired 1,363,436 shares under the
anti-dilutive repurchase program at an aggregate cost of
$86 million. The timing and amount of repurchase
transactions is determined based on managements evaluation
of market conditions, share price and other factors. Towards the
end of the third quarter of 2008, we temporarily paused
purchases under both programs given current market conditions.
We will continue to monitor financial conditions and will resume
repurchases when we believe it is prudent to do so.
Cash dividend payments to shareholders of common stock were
$52 million in 2008, $50 million in 2007 and
$44 million in 2006. During 2008, we increased our annual
dividend to $0.92 per share of common stock. In February 2009,
our Board of Directors declared a quarterly cash dividend of
$0.23 per share of common stock.
50
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
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 17, Financial Instruments and Risk
Management, in the Notes to Consolidated Financial
Statements for further discussion on interest rate swap
agreements.
At December 31, 2008, we had $2.18 billion of
fixed-rate debt outstanding (excluding capital leases) with a
weighted-average interest rate of 5.5% and a fair value of
$1.88 billion. A hypothetical 10% decrease or increase in
the December 31, 2008 market interest rates would impact
the fair value of our fixed-rate debt by approximately
$11 million.
At December 31, 2008, we had $673 million of
variable-rate debt, including the impact of interest rate swaps,
which effectively changed $250 million of fixed-rate debt
instruments with an interest rate of 6.0% to LIBOR-based
floating-rate debt with an interest rate of 5.25%. 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 agreement at December 31, 2008 was recorded as an
asset totaling $18 million. A hypothetical 10% increase in
market interest rates would impact 2008 pre-tax earnings by
approximately $3 million.
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, Brazilian real 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 of approximately
$6 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. However, we had a
$78 million cross-currency swap in place to hedge our net
investment in a foreign subsidiary which matured in 2007. As of
December 31, 2008, the accumulated derivative net loss in
Accumulated other comprehensive loss was
$17 million, net of tax, and will be recognized in earnings
upon sale or repatriation of our net investment. At
December 31, 2008 and 2007, we also had forward foreign
currency exchange contracts with an aggregate fair value of
negative $0.6 million and negative $0.1 million,
respectively, used to hedge the variability of foreign currency
equivalent cash flows. The potential loss in fair value of our
forward foreign currency exchange contracts from a hypothetical
10% adverse change in quoted foreign currency exchange rates was
not material at December 31, 2008. We estimated the fair
values of derivatives based on dealer quotations.
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
51
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
adjust for increases in fuel prices. At December 31, 2008,
we also had various fuel purchase arrangements in place to
ensure delivery of fuel at market rates in the event of fuel
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 24, 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 periodically review the
development, selection and disclosure of these critical
accounting estimates with Ryders Audit Committee.
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.
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. At the end of 2008, we completed our
annual review of the residual values and useful lives of revenue
earning equipment. In connection with this review, we reduced
the residual values of certain vehicle classes and increased the
useful lives of certain vehicle classes. Based on the results of
our analysis, the adjustment to the residual values and useful
lives of revenue earning equipment on January 1, 2009 was
not significant. Based on the mix of revenue earning equipment
at December 31, 2008, a 10% decrease in expected vehicle
residual values would increase depreciation expense in 2009 by
approximately $94 million.
52
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
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, 2008, total liabilities for residual value
guarantees of $2 million were included in Accrued
expenses and other current liabilities (for those payable
in less than one year) and in Other non-current
liabilities. While we believe that the amounts are
adequate, changes to managements estimates of residual
value guarantees may occur due to changes in the market for used
vehicles, the condition of the vehicles at the end of the lease
and inherent limitations in the estimation process. Based on the
existing mix of vehicles under operating lease agreements at
December 31, 2008, a 10% decrease in expected vehicle
residual values would increase rent expense in 2009 by
approximately $1 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 2008, we adjusted our long-term expected rate of
return assumption for our primary U.S. plan down to 8.4%
from 8.5% based on the factors reviewed. The composition of our
pension assets was 67% equity securities and 33% 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.
The rate of increase in compensation levels is reviewed based
upon actual experience. Retirement rates are based primarily on
actual plan experience. For purposes of estimating mortality in
the measurement of our pension obligation, as of
December 31, 2007, we began using the Retirement Plans 2000
Table of Combined Healthy Lives (RP 2000 Table), projected seven
years. The rates in the table were adjusted to reflect our
historical experience over the past 5 years and to reflect
future mortality improvements. Previously, we used the 1994
Uninsured Pensioners Mortality Tables (UP-94). The impact of
this change to our benefit obligation at December 31, 2007
was not material.
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 $754 million
at the end of 2008 compared to a loss of $238 million at
the end of 2007. The increase in the net actuarial loss in 2008
resulted primarily from 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
service life of active participants or the remaining life
expectancy of inactive participants if all or almost all of a
plans participants are inactive. Prior to 2008, our
amortization period was historically based on the average
remaining service period of active employees expected to receive
benefits (8 years). However, due to the freeze of the
qualified U.S. pension plan, almost all of the plans
participants became inactive beginning on January 1, 2008.
Consequently, by rule, the amortization period for actuarial
losses on the qualified U.S. pension plan was changed to
the average remaining life expectancy of plan participants
53
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
(28 years) resulting in an extended amortization period.
The amount of the actuarial loss subject to amortization in 2009
and future years will be $606 million. The effect on years
beyond 2009 will depend substantially upon the actual experience
of our plans.
Disclosure of the significant assumptions used in arriving at
the 2008 net pension expense is presented in Note 23,
Employee Benefit Plans, in the Notes to Consolidated
Financial Statements. A sensitivity analysis of projected
2009 net pension expense to changes in key underlying
assumptions for our primary plan, the U.S. pension plan, is
presented below.
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Effect on
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Impact on 2009 Net
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December 31, 2008
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Assumed Rate
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Change
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Pension Expense
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Projected Benefit Obligation
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Discount rate increase
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6.35%
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+ 0.25%
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− $0.5 million
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− $35 million
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Discount rate decrease
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6.35%
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− 0.25%
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+ $0.3 million
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+ $35 million
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Expected long-term rate of return on assets
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8.40%
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+/− 0.25%
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−/+ $2.0 million
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Self-Insurance Accruals. Self-insurance
accruals were $256 million and $278 million as of
December 31, 2008 and 2007, 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 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. While we believe
that self-insurance accruals are adequate, there can be no
assurance that changes to our estimates may not occur.
In recent years, our actual claim development has been favorable
compared with historical selected loss development factors
because of improved safety performance, payment patterns and
settlement patterns. During 2008, 2007, and 2006, we recorded a
benefit of $23 million, $24 million, and
$12 million, respectively, to reduce estimated prior
years self-insured loss reserves. Based on self-insurance
accruals at December 31, 2008, a 5% adverse change in
actuarial claim loss estimates would increase operating expense
in 2009 by approximately $12 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. 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 flow 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
54
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
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, 2008,
did not result in any impairment of goodwill. Based on market
conditions in the fourth quarter and our decision to exit
certain contracts in SCS Europe, we updated our annual
impairment test as of December 31, 2008. Based on our
analysis, current market conditions and business expectations
relating to our European FMS and SCS business units, we recorded
an impairment charge of $21 million for all goodwill in the
U.K. as of December 31, 2008. At December 31, 2008,
goodwill totaled $198 million.
Revenue Recognition. In the normal course of
business, we may act as or use an agent in executing
transactions with our customers. The accounting issue
encountered in these arrangements is 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. To the extent revenues are recorded on a gross
basis, any payments to third parties are recorded as expenses so
that the net amount is reflected in net earnings. Accordingly,
the impact on net earnings is the same whether we record revenue
on a gross or net basis.
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.
In transportation management arrangements where we act as
principal, revenue is reported on a gross basis for
subcontracted transportation billed to our customers. 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. Effective
January 1, 2008, our contractual relationship for certain
transportation management services changed, and we determined,
after a formal review of the terms and conditions of the
services, that we were acting as an agent in the arrangement. As
a result, total revenue and subcontracted transportation expense
decreased in 2008 due to the reporting of revenue net of
subcontracted transportation expense. During 2007 and 2006,
revenue associated with this portion of the contract was
$640 million and $565 million, respectively.
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.
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 $399 million
and $207 million at December 31, 2008 and 2007,
respectively. We record a valuation allowance for deferred tax
assets to reduce such assets to amounts expected to be realized.
At December 31, 2008 and 2007, the deferred tax valuation
allowance, principally attributed to foreign tax loss
carryforwards in the SCS business segment, was $28 million
and $15 million, respectively. In determining the required
level of valuation allowance, we
55
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
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.
RECENT
ACCOUNTING PRONOUNCEMENTS
Refer to Note 1, Summary of Significant Accounting
Policies Recent Accounting Pronouncements, in
the Notes to Consolidated Financial Statements for discussion of
recent accounting pronouncements. See Note 2,
Accounting Changes, in the Notes to Consolidated
Financial Statements for additional discussion surrounding the
adoption of accounting standards.
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 capital, operating revenue,
salaries and employee-related costs as a percentage of operating
revenue, FMS operating revenue, FMS NBT as a% of operating
revenue, SCS operating revenue, SCS NBT as a % of operating
revenue, DCC operating revenue, DCC NBT as a % of operating
revenue, total cash generated, free cash flow, total
obligations, total obligations to equity, and comparable
earnings from continuing operations and comparable earnings per
diluted common share from continuing operations. We believe that
the 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. 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.
56
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
The following table provides a numerical reconciliation of
earnings before income taxes to comparable earnings before
income taxes for the years ended December 31, 2008, 2007
and 2006 which was not provided within the MD&A discussion:
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Years ended December 31
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2008
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2007
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2006
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(In thousands)
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Earnings before income taxes
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$
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349,922
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405,464
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392,973
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Net restructuring charges
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58,435
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11,578
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Brazil charges
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6,498
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International impairment and write-offs
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5,548
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Gain on sale of property
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(10,110
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)
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Pension accounting charge
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5,872
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Comparable earnings before income taxes
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$
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420,403
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406,932
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398,845
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The following table provides a numerical reconciliation of
earnings from continuing operations and earnings per diluted
common share from continuing operations to comparable earnings
from continuing operations and comparable earnings per diluted
common share from continuing operations for the years ended
December 31, 2008, 2007, 2006, 2005 and 2004 which was not
provided within the MD&A discussion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Earnings from continuing operations
|
|
$
|
199,881
|
|
|
|
253,861
|
|
|
|
248,959
|
|
|
|
227,628
|
|
|
|
215,609
|
|
Net restructuring charges
|
|
|
53,159
|
|
|
|
7,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax accrual reversals
|
|
|
(7,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax law changes
|
|
|
(1,614
|
)
|
|
|
(3,333
|
)
|
|
|
(6,796
|
)
|
|
|
(7,627
|
)
|
|
|
(9,221
|
)
|
Brazil charges
|
|
|
6,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International impairment and write-offs
|
|
|
4,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension accounting charge
|
|
|
|
|
|
|
|
|
|
|
3,720
|
|
|
|
|
|
|
|
|
|
Gain on sale of property
|
|
|
|
|
|
|
(6,154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of headquarter complex
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,409
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable earnings from continuing operations
|
|
$
|
254,753
|
|
|
|
251,910
|
|
|
|
245,883
|
|
|
|
220,001
|
|
|
|
190,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per diluted common share from continuing operations
|
|
$
|
3.52
|
|
|
|
4.24
|
|
|
|
4.04
|
|
|
|
3.53
|
|
|
|
3.28
|
|
Net restructuring charges
|
|
|
0.94
|
|
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax accruals reversals
|
|
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax law changes
|
|
|
(0.03
|
)
|
|
|
(0.06
|
)
|
|
|
(0.11
|
)
|
|
|
(0.12
|
)
|
|
|
(0.14
|
)
|
Brazil charges
|
|
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International impairment and write-offs
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension accounting charge
|
|
|
|
|
|
|
|
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
Gain on sale of property
|
|
|
|
|
|
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of headquarter complex
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable earnings per diluted common share from continuing
operations
|
|
$
|
4.49
|
|
|
|
4.21
|
|
|
|
3.99
|
|
|
|
3.41
|
|
|
|
2.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
The following table provides a numerical reconciliation of total
revenue to operating revenue for the years ended
December 31, 2008, 2007 and 2006 which was not provided
within the MD&A discussion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Total revenue
|
|
$
|
6,203,743
|
|
|
|
6,565,995
|
|
|
|
6,306,643
|
|
Fuel services and subcontracted transportation revenue
|
|
|
(1,738,710
|
)
|
|
|
(2,133,728
|
)
|
|
|
(2,040,459
|
)
|
Fuel eliminations
|
|
|
239,473
|
|
|
|
204,290
|
|
|
|
188,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
4,704,506
|
|
|
|
4,636,557
|
|
|
|
4,454,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a numerical reconciliation of net
earnings to adjusted net earnings and average total debt to
adjusted average total capital for the years ended
December 31, 2008, 2007, 2006, 2005 and 2004 which was not
provided within the MD&A discussion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Net earnings
|
|
$
|
199,881
|
|
|
|
253,861
|
|
|
|
248,959
|
|
|
|
226,929
|
|
|
|
215,609
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,741
|
)
|
|
|
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,440
|
|
|
|
|
|
Restructuring and other charges (recoveries), net and other
items(1)
|
|
|
70,447
|
|
|
|
1,467
|
|
|
|
|
|
|
|
|
|
|
|
(24,308
|
)
|
Income taxes
|
|
|
150,075
|
|
|
|
151,603
|
|
|
|
144,014
|
|
|
|
129,460
|
|
|
|
115,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net earnings before income taxes
|
|
|
420,403
|
|
|
|
406,931
|
|
|
|
392,973
|
|
|
|
357,088
|
|
|
|
306,814
|
|
Adjusted interest
expense(2)
|
|
|
164,975
|
|
|
|
169,060
|
|
|
|
146,565
|
|
|
|
127,072
|
|
|
|
106,100
|
|
Adjusted income
taxes(3)
|
|
|
(230,456
|
)
|
|
|
(219,971
|
)
|
|
|
(207,183
|
)
|
|
|
(185,917
|
)
|
|
|
(155,545
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net earnings
|
|
$
|
354,922
|
|
|
|
356,020
|
|
|
|
332,355
|
|
|
|
298,243
|
|
|
|
257,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average total debt
|
|
$
|
2,881,931
|
|
|
|
2,847,692
|
|
|
|
2,480,314
|
|
|
|
2,147,836
|
|
|
|
1,811,502
|
|
Average off-balance sheet debt
|
|
|
170,694
|
|
|
|
150,124
|
|
|
|
98,767
|
|
|
|
147,855
|
|
|
|
151,804
|
|
Average adjusted total shareholders
equity(4)
|
|
|
1,788,097
|
|
|
|
1,791,669
|
|
|
|
1,605,214
|
|
|
|
1,550,038
|
|
|
|
1,395,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted average total capital
|
|
$
|
4,840,722
|
|
|
|
4,789,485
|
|
|
|
4,184,295
|
|
|
|
3,845,729
|
|
|
|
3,358,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted return on capital (%)
|
|
|
7.3
|
|
|
|
7.4
|
|
|
|
7.9
|
|
|
|
7.8
|
|
|
|
7.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For 2008, see Note 4,
Restructuring and Other Charges and Note 25,
Other Items Impacting Comparability, in the Notes to
Consolidated Financial Statements; 2007 includes restructuring
and other charges (recoveries) of $11 million in the second
half of 2007 and a gain of $10 million related to the sale
of property in the third quarter; 2004 includes a gain on sale
of headquarter complex of $24 million. Restructuring and
other charges (recoveries), net and other items not presented in
this reconciliation were not significant in the respective
periods. |
|
(2) |
|
Includes interest on off-balance
sheet vehicle obligations. |
|
(3) |
|
Calculated using the effective
income tax rate for the period exclusive of benefits from tax
law changes. |
|
(4) |
|
Represents shareholders
equity adjusted for cumulative effect of accounting changes and
tax benefits in the respective periods. |
58
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Forward-looking statements (within the meaning of the Federal
Private Securities Litigation Reform Act of 1995) are
statements that relate to expectations, beliefs, projections,
future plans and strategies, anticipated events or trends
concerning matters that are not historical facts. These
statements are often preceded by or include the words
believe, expect, intend,
estimate, anticipate, will,
may, could, should or
similar expressions. This Annual Report contains forward-looking
statements including, but not limited to, statements regarding:
|
|
|
|
|
the status of our unrecognized tax benefits for 2008 related to
the U.S. federal, state and foreign tax positions and the
impact of recent state tax law changes;
|
|
|
|
our expectations as to anticipated revenue and earnings trends
and future economic conditions specifically, earnings per share,
operating revenue, used vehicle sales results, contract revenue
growth and commercial rental declines;
|
|
|
|
the economic and business impact of continuing supply chain
operations in the U.S., Canada, Mexico, U.K. and Asia markets
and workforce reductions;
|
|
|
|
the anticipated pre-tax annual cost savings from our global cost
savings initiatives;
|
|
|
|
our ability to successfully achieve the operational goals that
are the basis of our business strategies, including offering
competitive pricing, diversifying our customer base, optimizing
asset utilization, leveraging the expertise of our various
business segments, serving our customers global needs and
expanding our support services;
|
|
|
|
impact of losses from conditional obligations arising from
guarantees;
|
|
|
|
our expectations as to the future level of vehicle wholesaling
activity;
|
|
|
|
number of NLE vehicles in inventory, and the size of our
commercial rental fleet, for the remainder of the year;
|
|
|
|
estimates of free cash flow and, capital expenditures for 2009;
|
|
|
|
the adequacy of our accounting estimates and reserves for
pension expense, depreciation and residual value guarantees,
self-insurance reserves, goodwill impairment, accounting changes
and income taxes;
|
|
|
|
our ability to fund all of our operations for the foreseeable
future through internally generated funds and outside funding
sources;
|
|
|
|
the anticipated impact of fuel price fluctuations;
|
|
|
|
our expectations as to future pension expense and contributions,
the impact of pension legislation, as well as the effect of the
freeze of the U.S. and Canadian pension plan on our benefit
funding requirements;
|
|
|
|
the anticipated deferral of tax gains on disposal of eligible
revenue earning equipment pursuant to our vehicle like-kind
exchange program;
|
|
|
|
our expectations as to the future effect of amendments to our
contractual relationship with GM; and
|
|
|
|
our expectations regarding the effect of the adoption of recent
accounting pronouncements.
|
These statements, as well as other forward-looking statements
contained in this Annual Report, are based on our current plans
and expectations and are subject to risks, uncertainties and
assumptions. We caution readers that certain important factors
could cause actual results and events to differ significantly
from those expressed in any forward-looking statements. For a
detailed description of certain of these risk factors, please
see Item 1A. Risk Factors of this Annual Report.
59
ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
The risks included in the Annual Report are not exhaustive. New
risk factors emerge from time to time and it is not possible for
management to predict all such risk factors or to assess the
impact of such risk factors on our business. As a result, no
assurance can be given as to our future results or achievements.
You should not place undue reliance on the forward-looking
statements contained herein, which speak only as of the date of
this Annual Report. We do not intend, or assume any obligation,
to update or revise any forward-looking statements contained in
this Annual Report, whether as a result of new information,
future events or otherwise.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The information required by ITEM 7A is included in
ITEM 7 (page 51) of PART II of this report.
60
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL
STATEMENTS
|
|
|
|
|
|
|
Page No.
|
|
|
|
|
62
|
|
|
|
|
63
|
|
|
|
|
64
|
|
|
|
|
65
|
|
|
|
|
66
|
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
68
|
|
|
|
|
76
|
|
|
|
|
78
|
|
|
|
|
80
|
|
|
|
|
82
|
|
|
|
|
83
|
|
|
|
|
83
|
|
|
|
|
84
|
|
|
|
|
84
|
|
|
|
|
85
|
|
|
|
|
85
|
|
|
|
|
86
|
|
|
|
|
87
|
|
|
|
|
90
|
|
|
|
|
93
|
|
|
|
|
95
|
|
|
|
|
96
|
|
|
|
|
98
|
|
|
|
|
100
|
|
|
|
|
101
|
|
|
|
|
101
|
|
|
|
|
102
|
|
|
|
|
106
|
|
|
|
|
113
|
|
|
|
|
114
|
|
|
|
|
116
|
|
|
|
|
116
|
|
|
|
|
120
|
|
|
|
|
121
|
|
All other schedules are omitted because they are not applicable
or the required information is shown in the consolidated
financial statements or notes thereto.
61
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
TO THE
SHAREHOLDERS OF RYDER SYSTEM, INC.:
Management of Ryder System, Inc., together with its consolidated
subsidiaries (Ryder), is responsible for establishing and
maintaining adequate internal control over financial reporting
as defined in
Rules 13a-
15(f) and
15d-15(f)
under the Securities Exchange Act of 1934. Ryders internal
control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of the consolidated financial
statements for external purposes in accordance with accounting
principles generally accepted in the United States of America.
Ryders internal control over financial reporting includes
those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the
assets of Ryder; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures
are being made only in accordance with authorizations of
Ryders management and directors; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of Ryders
assets that could have a material effect on the consolidated
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Ryders internal
control over financial reporting as of December 31, 2008.
In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control
Integrated Framework. Based on our assessment and those
criteria, management determined that Ryder maintained effective
internal control over financial reporting as of
December 31, 2008.
Ryders independent registered certified public accounting
firm has audited the effectiveness of Ryders internal
control over financial reporting. Their report appears on
page 63.
62
REPORT OF
INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING
FIRM
TO THE BOARD
OF DIRECTORS AND SHAREHOLDERS OF
RYDER SYSTEM, INC.:
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of earnings,
shareholders equity, and cash flows present fairly, in all
material respects, the financial position of Ryder System, Inc.
and its subsidiaries at December 31, 2008 and 2007, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2008 in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related
consolidated financial statements. Also in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial
statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in the accompanying
Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express opinions on these
financial statements, on the financial statement schedule and on
the Companys internal control over financial reporting
based on our integrated audits. We conducted our audits in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material
misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
As discussed in Note 2 to the consolidated financial
statements, in 2007 the Company changed its method of accounting
for uncertainty in income taxes and in 2006 the Company changed
its methods of accounting for share-based compensation and
pension and other postretirement plans.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
February 11, 2009
Miami, Florida
63
RYDER
SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenue
|
|
$
|
6,203,743
|
|
|
|
6,565,995
|
|
|
|
6,306,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense (exclusive of items shown separately)
|
|
|
3,029,673
|
|
|
|
2,776,999
|
|
|
|
2,735,752
|
|
Salaries and employee-related costs
|
|
|
1,399,121
|
|
|
|
1,410,388
|
|
|
|
1,397,391
|
|
Subcontracted transportation
|
|
|
323,382
|
|
|
|
950,500
|
|
|
|
865,475
|
|
Depreciation expense
|
|
|
843,459
|
|
|
|
815,962
|
|
|
|
743,288
|
|
Gains on vehicle sales, net
|
|
|
(39,312
|
)
|
|
|
(44,094
|
)
|
|
|
(50,766
|
)
|
Equipment rental
|
|
|
80,105
|
|
|
|
93,337
|
|
|
|
90,137
|
|
Interest expense
|
|
|
157,257
|
|
|
|
160,074
|
|
|
|
140,561
|
|
Miscellaneous expense (income), net
|
|
|
1,735
|
|
|
|
(15,904
|
)
|
|
|
(11,732
|
)
|
Restructuring and other charges, net
|
|
|
58,401
|
|
|
|
13,269
|
|
|
|
3,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,853,821
|
|
|
|
6,160,531
|
|
|
|
5,913,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
349,922
|
|
|
|
405,464
|
|
|
|
392,973
|
|
Provision for income taxes
|
|
|
150,041
|
|
|
|
151,603
|
|
|
|
144,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
199,881
|
|
|
|
253,861
|
|
|
|
248,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.56
|
|
|
|
4.28
|
|
|
|
4.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
3.52
|
|
|
|
4.24
|
|
|
|
4.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
64
RYDER
SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands, except per share amount)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
120,305
|
|
|
|
116,459
|
|
Receivables, net
|
|
|
635,376
|
|
|
|
843,662
|
|
Inventories
|
|
|
48,324
|
|
|
|
58,810
|
|
Prepaid expenses and other current assets
|
|
|
147,191
|
|
|
|
203,131
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
951,196
|
|
|
|
1,222,062
|
|
Revenue earning equipment, net of accumulated depreciation of
$2,749,654 and $2,724,565, respectively
|
|
|
4,565,224
|
|
|
|
4,501,397
|
|
Operating property and equipment, net of accumulated
depreciation of $842,427 and $811,579, respectively
|
|
|
546,816
|
|
|
|
518,728
|
|
Goodwill
|
|
|
198,253
|
|
|
|
166,570
|
|
Intangible assets
|
|
|
36,705
|
|
|
|
19,231
|
|
Direct financing leases and other assets
|
|
|
391,314
|
|
|
|
426,661
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
6,689,508
|
|
|
|
6,854,649
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity:
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Short-term debt and current portion of long-term debt
|
|
$
|
384,262
|
|
|
|
222,698
|
|
Accounts payable
|
|
|
295,083
|
|
|
|
383,808
|
|
Accrued expenses and other current liabilities
|
|
|
431,820
|
|
|
|
412,855
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,111,165
|
|
|
|
1,019,361
|
|
Long-term debt
|
|
|
2,478,537
|
|
|
|
2,553,431
|
|
Other non-current liabilities
|
|
|
837,280
|
|
|
|
409,907
|
|
Deferred income taxes
|
|
|
917,365
|
|
|
|
984,361
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
5,344,347
|
|
|
|
4,967,060
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock of no par value per share
authorized, 3,800,917; none outstanding, December 31, 2008
or 2007
|
|
|
|
|
|
|
|
|
Common stock of $0.50 par value per share
authorized, 400,000,000; outstanding, 2008
55,658,059; 2007 58,041,563
|
|
|
27,829
|
|
|
|
28,883
|
|
Additional paid-in capital
|
|
|
756,190
|
|
|
|
729,451
|
|
Retained earnings
|
|
|
1,105,369
|
|
|
|
1,160,132
|
|
Accumulated other comprehensive loss
|
|
|
(544,227
|
)
|
|
|
(30,877
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
1,345,161
|
|
|
|
1,887,589
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
6,689,508
|
|
|
|
6,854,649
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
65
RYDER
SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
199,881
|
|
|
|
253,861
|
|
|
|
248,959
|
|
Depreciation expense
|
|
|
843,459
|
|
|
|
815,962
|
|
|
|
743,288
|
|
Goodwill impairment
|
|
|
21,259
|
|
|
|
|
|
|
|
|
|
Gains on vehicle sales, net
|
|
|
(39,312
|
)
|
|
|
(44,094
|
)
|
|
|
(50,766
|
)
|
Share-based compensation expense
|
|
|
17,076
|
|
|
|
16,754
|
|
|
|
13,643
|
|
Amortization expense and other non-cash charges, net
|
|
|
25,022
|
|
|
|
15,126
|
|
|
|
14,106
|
|
Deferred income tax expense
|
|
|
128,246
|
|
|
|
64,396
|
|
|
|
76,235
|
|
Tax benefits from share-based compensation
|
|
|
1,151
|
|
|
|
1,458
|
|
|
|
5,405
|
|
Changes in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
181,024
|
|
|
|
57,969
|
|
|
|
(58,306
|
)
|
Inventories
|
|
|
10,370
|
|
|
|
1,409
|
|
|
|
513
|
|
Prepaid expenses and other assets
|
|
|
(30,992
|
)
|
|
|
6,526
|
|
|
|
(16,683
|
)
|
Accounts payable
|
|
|
(104,955
|
)
|
|
|
(18,104
|
)
|
|
|
32,640
|
|
Accrued expenses and other non-current liabilities
|
|
|
3,302
|
|
|
|
(68,324
|
)
|
|
|
(155,447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
1,255,531
|
|
|
|
1,102,939
|
|
|
|
853,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in commercial paper borrowings
|
|
|
(522,312
|
)
|
|
|
(159,771
|
)
|
|
|
328,641
|
|
Debt proceeds
|
|
|
757,077
|
|
|
|
513,021
|
|
|
|
670,568
|
|
Debt repaid, including capital lease obligations
|
|
|
(138,209
|
)
|
|
|
(439,000
|
)
|
|
|
(378,519
|
)
|
Dividends on common stock
|
|
|
(52,238
|
)
|
|
|
(50,152
|
)
|
|
|
(43,957
|
)
|
Common stock issued
|
|
|
54,713
|
|
|
|
42,340
|
|
|
|
61,593
|
|
Common stock repurchased
|
|
|
(256,132
|
)
|
|
|
(209,018
|
)
|
|
|
(159,050
|
)
|
Excess tax benefits from share-based compensation
|
|
|
6,471
|
|
|
|
3,377
|
|
|
|
8,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(150,630
|
)
|
|
|
(299,203
|
)
|
|
|
488,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and revenue earning equipment
|
|
|
(1,234,065
|
)
|
|
|
(1,317,236
|
)
|
|
|
(1,695,064
|
)
|
Sales of revenue earning equipment
|
|
|
260,598
|
|
|
|
354,767
|
|
|
|
326,079
|
|
Sales of operating property and equipment
|
|
|
4,302
|
|
|
|
18,868
|
|
|
  |