Business context and reporting period
Ryder System, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2015. Its businesses are Fleet Management Solutions (FMS), Dedicated Transportation Solutions (DTS), and Supply Chain Solutions (SCS). Comparisons are against the three and nine months ended September 30, 2014. Segment presentation was recast for a 2015 management change; consolidated results were unaffected.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $1.669 billion | $1.687 billion | $4.899 billion | $4.982 billion |
| Operating revenue (non-GAAP) | $1.426 billion | $1.344 billion | $4.119 billion | $3.903 billion |
| Continuing-operations pretax earnings | $139.9 million | $129.6 million | $357.5 million | $324.7 million |
| Continuing-operations earnings | $90.8 million | $83.9 million | $230.1 million | $208.7 million |
| Diluted continuing-operations EPS | $1.70 | $1.58 | $4.31 | $3.92 |
| Net earnings | $90.6 million | $83.6 million | $228.6 million | $207.3 million |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1.071 billion | $981.0 million |
Operating revenue excludes fuel and subcontracted transportation, which Ryder describes as largely pass-through items; it is a non-GAAP measure and should be considered alongside GAAP revenue. Lease and rental gross margin was 31% in Q3 and 31% year to date (30% in the prior-year year-to-date period). Services gross margin was 17% in Q3 and 17% year to date (16% prior year year to date). Fuel-services gross margin was $1.8 million in Q3 and $14.5 million year to date.
Segments and operating drivers
- Q3 segment EBT: FMS $126.4 million, up 5%; DTS $13.3 million, up 12%; SCS $26.6 million, up 9%. Nine-month segment EBT was $338.6 million (FMS, up 9%), $34.7 million (DTS, up 3%), and $70.0 million (SCS, up 27%). Segment EBT is a management measure and excludes certain corporate and other items.
- Operating revenue grew in all segments, supported by a larger lease fleet, rental demand and pricing, and new business and higher volumes in DTS and SCS. Foreign exchange adversely affected reported growth.
- Lower fuel prices reduced total revenue but largely reflected pass-through costs. Q3 used-vehicle sales gains fell 13%, mainly due to lower sales volume.
Balance sheet, cash flow and liquidity
- At September 30, 2015, cash was $75.4 million; total debt was $5.451 billion, versus $4.731 billion at year-end 2014. Debt-to-equity rose to 279% from 260%. Total assets were $10.820 billion and shareholders’ equity was $1.952 billion.
- Nine-month investing cash outflow was $1.707 billion, including $2.087 billion of purchases of property and revenue-earning equipment. Financing cash inflow was $664.8 million. Ryder’s defined non-GAAP free cash flow was negative $643.8 million, versus negative $316.8 million in 2014, reflecting higher capital spending.
- Accrual-basis capital expenditures were $2.106 billion for the nine months. Management expected full-year 2015 continuing-operations capital expenditures of $2.63 billion, funded primarily with internally generated funds and additional debt.
- Liquidity included $694.9 million available under the $1.2 billion revolving credit facility, net of commercial paper, and a $175 million trade-receivables program with no balance outstanding at quarter-end. The receivables program was due to expire in October 2015; Ryder was seeking renewal through October 2016. The revolver covenant debt-to-net-worth ratio was 215% against a 300% maximum.
- Common dividends declared were $0.41 per share in Q3 and $1.15 per share year to date. Ryder had paused anti-dilutive repurchases due to increased leverage and did not expect to resume them during the remainder of 2015.
Changes, outlook, risks and unusual items
- Management attributed stronger earnings to improved FMS lease and rental results and new business, pricing and volumes in DTS and SCS. It expected favorable full-service lease and rental revenue comparisons to continue through year-end; DTS operating-revenue comparisons were also expected to remain favorable. SCS comparisons were expected to remain favorable but at a lower growth rate. No full-year earnings or EPS guidance is stated in the provided filing text.
- Higher average debt, used to fund planned vehicle investment, increased interest expense 6% year over year in both Q3 and the first nine months. The effective interest rate was 2.9% in Q3 versus 3.1% and 3.0% year to date versus 3.1%.
- Changes to equipment residual-value and useful-life estimates increased pretax earnings by approximately $10 million in Q3 and $30 million year to date. This benefit is relevant when assessing earnings quality and future depreciation.
- Ryder revised prior-period accounting for certain sale-and-leaseback arrangements, concluding they did not qualify for deconsolidation. It said the revision was not material to previously issued statements; it increased reported equipment and debt and altered cash-flow classifications. The Q3 2014 continuing-earnings revision was approximately $0.1 million.
- Other comparability items included $3.8 million of year-to-date professional fees related to cost-savings initiatives and pension-related items. Comparable earnings and EPS are non-GAAP measures that exclude selected items, including non-operating pension costs.
- Key risks include freight and customer demand, competition and pricing, vehicle rental utilization and used-vehicle values, fuel-price volatility, foreign exchange, labor and technician availability, insurance claims, pension funding, interest rates, and access to commercial-paper markets. Ryder disclosed ordinary-course claims and proceedings; it cited a possible $5 million Brazilian tax exposure from prior years, with no reserve recorded and partial indemnification potentially available.
- Currency translation reduced other comprehensive income by $73.1 million year to date, primarily due to weaker Canadian and British currencies. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile GAAP revenue and earnings with operating revenue, comparable earnings, segment EBT and free cash flow, including the exclusions used in each non-GAAP measure.
- Assess the sustainability of the $30 million year-to-date depreciation benefit from revised residual-value and useful-life estimates.
- Track capital expenditures, fleet utilization, cash generation, debt growth and leverage against management’s $2.63 billion full-year capital-spending expectation.
- Confirm renewal and availability terms for the trade-receivables program, and monitor covenant headroom and access to commercial paper.
- Review the sale-and-leaseback accounting revision and its effect on debt, assets and cash-flow comparability; monitor pension assumptions, insurance exposures and the disclosed legal and tax contingencies.