Ryder System, Inc. — Q1 2014 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2014, compared with Q1 2013. Ryder provides fleet leasing, rental and maintenance services through Fleet Management Solutions (FMS), and supply-chain and transportation services through Supply Chain Solutions (SCS).
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $1.611 billion | $1.563 billion | +3% |
| Operating revenue (non-GAAP) | $1.322 billion | $1.268 billion | +4% |
| Continuing-operations pretax earnings (EBT) | $75.0 million | $62.5 million | +20% |
| Continuing-operations earnings | $49.1 million | $40.8 million | +20% |
| Net earnings | $48.2 million | $39.9 million | +21% |
| Diluted EPS, continuing operations | $0.92 | $0.79 | +16% |
| Diluted EPS, net earnings | $0.90 | $0.77 | +17% |
| Operating cash flow, continuing operations | $237.7 million | $248.9 million | Down |
| Free cash flow (non-GAAP) | $(198.5) million | $(26.6) million | Lower |
Lease and rental gross margin rose 5% to $196.6 million, with margin increasing to 29% from 28%. Services gross margin fell 2% to $103.5 million, while its margin held at 15%. Fuel services gross margin was $4.2 million, up 17%, with margin around 2%. The effective tax rate was 34.5%, versus 34.7%.
Segments and material changes
- FMS: Revenue increased 3% to $1.135 billion; segment EBT rose 27% to $77.0 million. Growth reflected higher full-service lease and rental revenue, stronger used-vehicle sale proceeds and improved rental pricing and demand. EBT benefited by $6.3 million from revised vehicle residual-value estimates.
- SCS: Revenue increased 4% to $597.3 million, but segment EBT declined 11% to $21.8 million. New business and higher volumes supported revenue; severe winter weather and start-up costs on a new account pressured earnings.
- Reported continuing-operations EBT included $3.3 million of non-operating pension costs in 2014; Q1 2013 included $5.2 million of such costs and a $1.9 million foreign-currency translation benefit. Ryder’s comparable, non-GAAP diluted EPS was $0.92 in 2014 versus $0.81 in 2013.
- Net earnings included discontinued-operations losses of $0.9 million in each period, associated with legal developments and related professional and administrative costs from former South American operations.
Cash, debt and liquidity
- Cash and equivalents were $72.8 million at March 31, 2014. Current assets were $1.117 billion and current liabilities $1.373 billion (derived current ratio approximately 0.81).
- Total debt was $4.447 billion, up from $4.189 billion at year-end 2013. Debt to equity was 234%; total obligations, including specified vehicle operating-lease obligations, were $4.542 billion, or 239% of equity.
- Cash used in investing activities was $441.8 million, primarily reflecting higher vehicle investment. Cash financing activities provided $215.2 million, largely to fund investing. Cash flow from operations was lower mainly because of increased working-capital needs, including receivables.
- Accrual-basis capital expenditures were $595.6 million for the quarter. The company expected approximately $2.2 billion of full-year 2014 capital expenditures, funded with internally generated cash and additional debt. Available funding included $243 million under the $900 million revolving facility and a $175 million receivables program; no receivables-program balance was outstanding at quarter-end.
- The revolving-facility debt-to-net-worth covenant limit was 300%; the reported ratio was 188%. Ryder issued $350 million of medium-term notes in February, due June 2019. The declared quarterly dividend was $0.34 per share; the company repurchased 562,683 shares for $40.4 million under its anti-dilutive program.
Outlook, risks and unusual items
- Management expected favorable full-service lease and commercial rental comparisons to continue through 2014, citing sales activity, pricing and demand. It also expected favorable SCS revenue comparisons from new business. No specific earnings or EPS guidance is provided in the filing.
- Management said FMS maintenance costs benefited from service work deferred by severe winter weather and expected those costs to be incurred in Q2. Weather also reduced SCS profitability and customer activity.
- Ryder expected approximately $75 million of pension contributions in 2014; $4.3 million had been contributed in Q1. Pension funding and expense remain sensitive to investment returns and interest rates.
- The $6.3 million residual-value estimate change increased Q1 pretax earnings. A New York tax-law change produced a separate $1.8 million noncash deferred-tax benefit.
- Key disclosed risks include weaker economic or freight demand, customer and pricing pressures, competition, fuel and interest-rate volatility, severe weather, vehicle residual-value changes, labor and driver availability, pension funding, access to commercial-paper markets, and legal or tax contingencies. Management stated that reasonably possible losses from disclosed legal matters were not expected to materially affect the consolidated financial statements.
Important facts for investors to verify
- Whether FMS growth and rental pricing persist, and whether the one-time residual-value benefit is distinguished from ongoing performance.
- Whether SCS margins recover as weather impacts and new-account start-up costs ease.
- Whether planned 2014 fleet investment, negative free cash flow and higher borrowing leave adequate liquidity and covenant headroom.
- How receivables, vehicle resale values, pension assumptions and the former South American legal and tax matters develop.
- Whether management’s outlook assumptions—including full-year capital expenditure of about $2.2 billion—remain current; the filing supplies no numerical earnings guidance.