TMCnet News
RYDER SYSTEM INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) OVERVIEW The following discussion should be read in conjunction with the unaudited Consolidated Condensed Financial Statements and notes thereto included under Item 1. In addition, reference should be made to our audited Consolidated Financial Statements and notes thereto and related Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2013 Annual Report on Form 10-K. Ryder System, Inc. (Ryder) is a global leader in transportation and supply chain management solutions. Our operating segments are aggregated into reportable business segments based upon similar economic characteristics, products, services, customers and delivery methods. We operate in two reportable business segments: (1) FMS, which provides full service leasing, contract maintenance, contract-related maintenance and commercial rental of trucks, tractors and trailers to customers, principally in the U.S., Canada and the U.K.; and (2) SCS, which provides comprehensive supply chain management solutions including distribution and transportation services in North America and Asia. The SCS segment also provides dedicated services, which includes vehicles and drivers as part of a dedicated transportation solution in the U.S. We operate in highly competitive markets. Our customers select us based on numerous factors including service quality, price, 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, industrial, food and beverage service, consumer packaged goods, transportation and warehousing, hi-tech and electronics, retail, housing, business and personal services, and paper and publishing. Total revenue increased 3% in the first quarter of 2014 to $1.61 billion. Operating revenue (revenue excluding FMS fuel and all subcontracted transportation) increased 4% in the first quarter of 2014 to $1.32 billion. The increase in total and operating revenue for both periods was driven by growth in both the FMS and SCS business segments. See "Consolidated Results" for further discussion of operating revenue, a non-GAAP financial measure. Earnings from continuing operations before taxes (EBT) increased 20% in the first quarter of 2014 to $75.0 million. The increase in EBT in the first quarter of 2014 reflects improved performance in the FMS business segment. 23-------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) EBT, earnings and EPS from continuing operations in the first quarter of 2014 and 2013 included certain items we do not consider indicative of our ongoing operations and have been excluded from our comparable EBT, earnings and EPS measures. The following discussion provides a summary of these items, which are discussed in more detail throughout our MD&A and within the Notes to Consolidated Condensed Financial Statements: EBT Earnings Diluted EPS 2014 2013 2014 2013 2014 2013 Three months ended March 31 (In thousands, except per share amounts) EBT/Earnings/EPS $ 75,004 62,508 $ 49,098 40,802 $ 0.92 0.79 Non-operating pension costs (1) 3,314 5,244 1,888 3,081 0.03 0.06 Foreign currency translation benefit (2) - (1,904 ) - (1,904 ) - (0.04 ) Benefit from tax law change (3) - - (1,776 ) - (0.03 ) - Comparable (4) $ 78,318 65,848 $ 49,210 41,979 $ 0.92 0.81 __________________(1) Includes the amortization of actuarial loss, interest cost and expected return on plan assets components of pension and postretirement costs, which are tied to financial market performance. We consider these costs to be outside the operational performance of the business. (2) See Note (P), "Other Items Impacting Comparability," for additional information. (3) See Note (I), "Income Taxes," for additional information. (4) Non-GAAP financial measure. We believe comparable EBT, comparable earnings and comparable earnings per diluted common share all from continuing operations measures provide useful information to investors because they exclude non-operating pension costs, which we consider to be those impacted by financial market performance and outside the operational performance of the business, and other significant items that are unrelated to our ongoing business operations. Excluding the special items listed above, comparable earnings and comparable EPS from continuing operations in the first quarter of 2014 increased 17% to $49.2 million and increased 14% to $0.92 per diluted common share, respectively. EBT growth exceeded the EPS growth during the first quarter of 2014 because the average number of shares outstanding has increased 3% over prior year reflecting the impact of stock issuances under employee stock option and stock purchase plans. In the first quarter of 2014, net earnings and EPS increased 21% to $48.2 million and 17% to $0.90 per diluted common share, respectively. Net earnings in the first quarter of 2014 and 2013 were negatively impacted by losses from discontinued operations of $0.9 million, or $0.02 per diluted share in both periods. 24-------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) CONSOLIDATED RESULTS Three months ended March 31, Change 2014 2013 2014/2013 (In thousands, except per share amounts) Total revenue $ 1,610,737 1,563,017 3% Operating revenue (1) 1,322,478 1,267,521 4% EBT $ 75,004 62,508 20% Earnings from continuing operations 49,098 40,802 20% Net earnings 48,232 39,924 21% Earnings per common share - Diluted Continuing operations $ 0.92 0.79 16% Net earnings 0.90 0.77 17% ------------(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, 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 rapid changes 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 is deducted from total revenue to arrive at operating revenue as subcontracted transportation is typically a pass-through to our customers. We realize minimal changes in profitability as a result of fluctuations in subcontracted transportation. Refer to the section titled "Non-GAAP Financial Measures" for a reconciliation of total revenue to operating revenue. Revenue and Cost of Revenue by Source Total revenue increased 3% in the first quarter of 2014 to $1.61 billion. Operating revenue increased 4% in the first quarter of 2014 to $1.32 billion. The increase in total and operating revenue reflects growth in both FMS and SCS. The FMS growth was primarily driven by higher lease and commercial rental revenue and the SCS growth was driven by new business and higher volumes. Lease and Rental Three months ended March 31, Change 2014 2013 2014/2013 (Dollars in thousands) Lease and rental revenues $ 689,682 659,708 5% Cost of lease and rental 493,043 473,077 4% Gross margin 196,639 186,631 5% Gross margin % 29 % 28 % Lease and rental revenues represent full service lease and commercial rental product offerings within our FMS business segment. Revenues increased 5% in the first quarter of 2014 to $689.7 million driven by full service lease fleet growth, higher prices on full service lease vehicles and increased commercial rental revenue. Commercial rental revenue increased due to higher rental pricing (up 5% in the first quarter of 2014) and North American demand. Cost of lease and rental represents the direct costs related to lease and rental revenues. These costs are comprised of depreciation of revenue earning equipment, maintenance costs (primarily repair parts and labor), and other fixed costs such as licenses, insurance and operating taxes. Cost of lease and rental excludes interest costs from vehicle financing. Cost of lease and rental grew 4% to $493.0 million in the first quarter of 2014 due to depreciation from increased lease vehicle investments and higher maintenance costs on a larger average lease fleet. Cost of lease and rental benefited by $6.3 million in the first quarter of 2014 from changes in the residual value policy effective January 1, 2014. 25-------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) Lease and rental gross margin increased 5% in the first quarter of 2014 to $196.6 million and lease and rental gross margin as a percentage of revenue increased to 29% in the first quarter of 2014. The increase was due to higher rental pricing and demand as well as benefits from depreciation policy changes. Services Three months ended March 31, Change 2014 2013 2014/2013 (Dollars in thousands) Services revenue $ 709,699 689,461 3% Cost of services 606,229 583,589 4% Gross margin 103,470 105,872 (2)% Gross margin % 15 % 15 % Services revenue represents all the revenues associated with our SCS business segment as well as contract maintenance, contract-related maintenance and fleet support services associated with our FMS business segment. Services revenue increased 3% in the first quarter of 2014 to $709.7 million primarily due to higher volumes and new business in our SCS business segment, especially in our dedicated services. Cost of services represents the direct costs related to services revenue and is primarily comprised of salaries and employee-related costs, SCS subcontracted transportation (purchased transportation from third parties) and maintenance costs. Cost of services increased 4% in the first quarter of 2014 to $606.2 million primarily due to higher revenue and, to a lesser extent, downtime and other costs related to severe winter weather in our SCS business segment. Services gross margin decreased 2% to $103.5 million in the first quarter of 2014 primarily due to the impact of severe winter weather-related downtime and associated costs in SCS. Services gross margin as a percentage of revenue remained at 15% in the first quarter of 2014. Fuel Three months ended March 31, Change 2014 2013 2014/2013 (Dollars in thousands) Fuel services revenue $ 211,356 213,848 (1)% Cost of fuel services 207,205 210,293 (1)% Gross margin 4,151 3,555 17% Gross margin % 2 % 2 % Fuel services revenue decreased 1% in the first quarter of 2014 to $211.4 million due to lower fuel prices passed through to customers. Cost of fuel services includes the direct costs associated with providing our customers with fuel. These costs include fuel, salaries and employee-related costs of fuel island attendants and depreciation of our fueling facilities and equipment. Cost of fuel decreased 1% in the first quarter of 2014 to $207.2 million due to lower fuel services revenue. Fuel services gross margin increased 17% to $4.2 million in the first quarter of 2014. Fuel is largely a pass-through to customers for which we realize minimal changes in margin during periods of steady market fuel prices. However, fuel services margin is impacted by sudden increases or decreases in market fuel prices during a short period of time as customer pricing for fuel is established based on market fuel costs. Fuel service margin as a percent of revenue was unchanged in the first quarter of 2014. 26-------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) Three months ended March 31, Change 2014 2013 2014/2013 (In thousands) Other operating expenses $ 36,645 37,599 (3)% Other operating expenses include costs related to our owned and leased facilities within the FMS business segment such as facility depreciation, rent, insurance, utilities and taxes. These facilities are utilized to provide maintenance to our lease, rental, contract maintenance, contract-related maintenance and on-demand customers. Other operating expenses also include the costs associated with used vehicle sales such as writedowns of used vehicles to fair market value and facilities costs. Other operating expenses decreased 3% to $36.6 million in the first quarter of 2014 primarily due to a $1.0 million reduction in writedowns on vehicles held for sale and lower property insurance costs partially offset by higher maintenance costs for FMS facilities due to severe winter weather. Three months ended March 31, Change 2014 2013 2014/2013 (Dollars in thousands)Selling, general and administrative expenses (SG&A) $191,702 189,073 1% Percentage of total revenue 12% 12% Percentage of operating revenue 14% 15% SG&A expenses rose 1% to $191.7 million and as a percent of total revenue remained at 12% in the first quarter of 2014. The increase was driven by higher information technology and marketing-related costs. The increased costs in these areas were partially offset by lower pension expense. Pension expense, which primarily impacts SG&A expenses, decreased $2.5 million in the first quarter of 2014 reflecting higher than expected pension asset returns in 2013 and lower service costs. Three months ended March 31, Change 2014 2013 2014/2013 (In thousands) Gains on vehicle sales, net $28,818 23,006 25% Gains on vehicle sales, net increased 25% in the first quarter of 2014 to $28.8 million due to higher average proceeds per unit. Global average proceeds per unit increased 11% in the first quarter of 2014. Three months ended March 31, Change 2014 2013 2014/2013 (Dollars in thousands) Interest expense $35,109 34,454 2% Effective interest rate 3.3% 3.6% Interest expense increased 2% in the first quarter of 2014 to $35.1 million reflecting higher average outstanding debt partially offset by a lower effective interest rate. The lower effective interest rate in 2014 primarily reflects the replacement of higher interest rate debt with debt issuances at lower rates. The increase in average outstanding debt reflects planned higher vehicle capital spending. Three months ended March 31, 2014 2013 (In thousands) Miscellaneous income, net $ 5,382 4,570 Refer to Note (R), "Miscellaneous Income," in the Notes to Consolidated Condensed Financial Statements for a discussion of the components of miscellaneous income. 27-------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) Three months ended March 31, Change 2014 2013 2014/2013 (Dollars in thousands) Provision for income taxes $25,906 21,706 19%Effective tax rate from continuing operations 34.5% 34.7% Our effective income tax rate from continuing operations for the first quarter of 2014 was 34.5% compared with 34.7% in the same period of the prior year. The decrease in our effective tax rate in the first quarter of 2014 reflects a benefit from a tax law change in the state of New York partially offset by a higher proportionate amount of 2014 earnings in higher tax rate jurisdictions. Three months ended March 31, 2014 2013 (In thousands) Loss from discontinued operations, net of tax $ (866 ) (878 ) Refer to Note (C), "Discontinued Operations," in the Notes to Consolidated Condensed Financial Statements for a discussion of losses from discontinued operations. 28-------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) OPERATING RESULTS BY BUSINESS SEGMENT Three months ended March 31, Change 2014 2013 2014/2013 (Dollars in thousands) Revenue: Fleet Management Solutions $ 1,135,087 1,099,732 3% Supply Chain Solutions 597,341 576,479 4 Eliminations (121,691 ) (113,194 ) 8 Total $ 1,610,737 1,563,017 3% Operating Revenue: Fleet Management Solutions $ 859,916 823,988 4% Supply Chain Solutions 520,438 494,831 5 Eliminations (57,876 ) (51,298 ) 13 Total $ 1,322,478 1,267,521 4% EBT: Fleet Management Solutions $ 76,991 60,745 27% Supply Chain Solutions 21,784 24,436 (11) Eliminations (9,628 ) (7,958 ) 21 89,147 77,223 15 Unallocated Central Support Services (10,829 ) (11,375 ) (5) Non-operating pension costs (3,314 ) (5,244 ) (37) Restructuring and other charges, net and other items - 1,904 NM Earnings from continuing operations before income taxes $ 75,004 62,508 20% As part of management's evaluation of segment operating performance, we define the primary measurement of our segment financial performance as "Earnings Before Taxes" (EBT) from continuing operations, which includes an allocation of Central Support Services (CSS), and excludes non-operating pension costs, restructuring and other charges, net and the items discussed in Note (P), "Other Items Impacting Comparability," in the Notes to Consolidated Condensed Financial Statements. 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, marketing and corporate communications. The objective of the EBT measurement is to provide clarity on the profitability of each business segment and, ultimately, to hold leadership of each business segment and each operating segment within each business segment accountable for their allocated share of CSS costs. Segment results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented. Certain costs are considered to be overhead not attributable to any segment and remain unallocated in CSS. Included within the unallocated overhead remaining within CSS are the costs for investor relations, public affairs and certain executive compensation. 29-------------------------------------------------------------------------------- |