R

Ryder System, Inc. Q3 2008 10-Q Summary

Business Context and Reporting Period

This filing covers the quarterly period ended September 30, 2008. Ryder System, Inc. operates in three primary segments: Fleet Management Solutions (FMS), Supply Chain Solutions (SCS), and Dedicated Contract Carriage (DCC). The company provides transportation and supply chain management services globally. The financial statements are unaudited.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 1% year-over-year for both the quarter and nine-month period. This was primarily due to a change in revenue recognition for a significant customer contract (General Motors) from gross to net reporting, effective January 1, 2008. This accounting change reduced reported revenue by $152.6M in Q3 and $506.7M for the nine months but did not impact net earnings.
• Profitability Growth: Despite lower reported revenue, Net Earnings increased 7% in Q3 and 4% for the nine months. Earnings per share (EPS) grew 13% in Q3 and 10% for the nine months, driven by share repurchases and improved operating performance in the FMS segment.
• Segment Performance:
  • FMS: Revenue increased 11% (Q3) and 13% (9M) due to higher fuel services revenue and contractual growth. Net Before Taxes (NBT) increased 12% (Q3) and 15% (9M).
  • SCS: Revenue decreased 22% (Q3) and 25% (9M) due to the net reporting change mentioned above. Operating revenue (non-GAAP) grew 6%. NBT declined 27% (Q3) and 37% (9M) due to lower results in Brazil and higher overhead costs.
  • DCC: Revenue was relatively flat. NBT increased 7% (Q3) and 5% (9M) due to improved operating performance.
• Acquisitions: Ryder completed acquisitions of Gordon Truck Leasing, Gator Leasing, and Lily Transportation in 2008, contributing to FMS growth.

Guidance, Outlook, and Risks

• Capital Expenditures: Management forecasts full-year 2008 accrual basis capital expenditures to be approximately $1.28 billion, a reduction of $160 million from the original plan, primarily due to lower lease spending.
• Share Repurchases: The company temporarily paused share repurchases under its $300 million discretionary program and anti-dilutive program towards the end of Q3 due to market conditions. Total repurchases for the nine months ended Sep 30, 2008, were approximately $256 million.
• Dividends: Quarterly cash dividend increased to $0.23 per share (from $0.21 in 2007).
• Brazil Operations: A $6.5 million pre-tax charge was recorded in Q2 2008 related to prior years' adjustments in Brazil. Management is continuing a review of Brazilian operations but does not expect material further adjustments.
• Pension Plans: The company froze its U.S. pension plans (effective Dec 31, 2007) and its Canadian defined benefit plan (effective Jan 1, 2010). Pension expense decreased significantly in 2008, but management expects pension contributions to increase significantly in 2009 due to negative asset returns in 2008.
• Liquidity: Ryder maintains a $870 million revolving credit facility with $669.2 million available as of September 30, 2008. The company notes volatility in global credit markets but believes current resources are adequate.

Investor Verification Checklist

• Revenue Recognition Impact: Verify the long-term impact of the shift from gross to net revenue reporting for the General Motors contract on future revenue comparisons.
• Brazil Exposure: Monitor the ongoing review of Brazilian operations for potential additional charges or operational disruptions.
• Pension Funding: Assess the projected increase in 2009 pension contributions and the impact of market volatility on pension asset returns.
• Commercial Rental Market: Review trends in the commercial rental segment, which saw revenue declines due to weak demand in the U.S. and U.K.
• Capital Markets Access: Evaluate the company's ability to access commercial paper and unsecured debt markets given the noted volatility in global credit markets.