Ryder System, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Unaudited consolidated results; amounts below are in U.S. dollars. Ryder provides fleet leasing and rental, maintenance, supply-chain and dedicated transportation services. In 2012, it combined its Supply Chain Solutions and Dedicated Contract Carriage reporting segments; prior segment data were recast.
Financial performance
| Metric | Q2 2012 | First half 2012 |
|---|---|---|
| Total revenue | $1.564 billion, up 3% | $3.100 billion, up 5% |
| Operating revenue, a non-GAAP measure | $1.267 billion, up 6% | $2.496 billion, up 8% |
| Continuing-operations pretax earnings | $73.8 million, down 2% | $121.5 million, up 2% |
| Continuing-operations earnings | $46.8 million | $81.6 million |
| Net earnings | $46.7 million; diluted EPS $0.91 | $81.0 million; diluted EPS $1.58 |
| Operating cash flow from continuing operations | Not separately stated for the quarter | $472.0 million, versus $472.8 million |
| Free cash flow, a non-GAAP measure | Not separately stated for the quarter | Negative $369.9 million, versus negative $171.8 million |
Q2 diluted EPS from continuing operations was $0.91 versus $0.79 a year earlier; first-half EPS was $1.59 versus $1.29. Ryder’s adjusted comparable diluted EPS was $1.00 for Q2 (up 9%) and $1.59 for the first half (up 11%); these are non-GAAP figures that exclude specified items.
Q2 revenue growth reflected organic growth and acquisitions, partly offset by lower fuel-services revenue. First-half growth also benefited from acquisitions. Q2 pretax earnings declined despite growth in both segments, with restructuring charges and weaker commercial-rental results among the offsets. First-half pretax earnings improved on acquisition contributions, SCS organic growth and stronger used-vehicle sales.
Balance sheet, debt and liquidity
- At June 30, cash was $72.6 million; current assets were $1.059 billion and current liabilities $1.362 billion.
- Total debt was $3.746 billion, up from $3.382 billion at year-end 2011. Shareholders’ equity was $1.384 billion. Reported total obligations, including specified vehicle operating-lease commitments, were $3.925 billion, or 284% of equity.
- Ryder had $269 million available under its $900 million revolving credit facility and $175 million available under its receivables program. The revolving facility matures in June 2016; the receivables program was due to expire October 26, 2012. No receivables-program balance was outstanding at quarter-end.
- The debt-to-net-worth covenant ratio was 189%, against a maximum of 300%. Credit ratings were Moody’s Baa1/P2, S&P BBB+/A2 (long-term rating on CreditWatch Negative), and Fitch A-/F2; outlooks were stable except for S&P’s CreditWatch status.
- Capital spending paid was $1.204 billion in the first half, principally for revenue-earning equipment. A $130.2 million sale-leaseback transaction generated cash and qualified for off-balance-sheet treatment.
Business trends and material changes
- Fleet Management Solutions (FMS): Q2 revenue was $1.101 billion, up 3%; segment EBT was $76.7 million, up 7%. Higher lease pricing, fleet growth and Hill Hire supported performance. Commercial-rental utilization fell to 75.0% from 78.7%, and management cited weaker North American rental demand.
- Supply Chain Solutions (SCS): Q2 revenue was $570.3 million, up 6%; segment EBT was $30.4 million, up 9%. Automotive volumes and new business contributed to growth. High-tech revenue declined 9%; unusually high medical benefit costs partly offset improved results.
- Lease-and-rental gross margin was $200.3 million in Q2, down 3%, with margin declining to 30% from 32%. Services gross margin rose 6% to $113.1 million, holding at 17% of revenue. Fuel-services gross margin fell 28% to $3.4 million; fuel is largely passed through to customers.
- Net gains on vehicle sales rose 44% to $22.5 million in Q2 and 59% to $44.5 million for the first half, supported by higher sales volume and pricing.
Outlook, risks and unusual items
- Management forecast full-year 2012 free cash flow of negative $300 million, improved from its prior negative $430 million forecast, primarily due to the Q2 sale-leaseback. Full-year accrual-basis capital expenditures were expected to remain around $2.15 billion.
- Ryder approved a reduction of approximately 350 employees, primarily in the U.S. The Q2 pretax charge was $7.1 million; actions were expected to be substantially complete by the end of Q3 2012. Management estimated annual pretax savings of approximately $30 million, including $14 million in 2012.
- Management expected favorable full-service-lease comparisons through the year, but at a slower growth rate as the Hill Hire acquisition anniversary passed. It expected commercial-rental revenue comparisons to remain favorable but at a lower rate due to weaker demand; favorable SCS revenue comparisons were also anticipated.
- Ryder expected approximately $81 million of 2012 pension contributions, including $39.9 million contributed in the first half. Newly enacted U.S. pension-funding legislation was not expected to affect 2012 contributions and was expected to reduce contributions beginning in 2013.
- Q2 earnings benefited from lower tax rates versus Q2 2011, which included a $5.4 million Michigan tax-law charge. First-half 2012 included a $5.0 million tax benefit from favorable resolution of a prior-period tax item. A 2012 change in Ontario tax law reduced Q2 earnings by $0.7 million.
- Changes in estimated equipment residual values effective January 1, 2012 increased pretax earnings by approximately $4.5 million in Q2 and $9.0 million in the first half. The like-kind exchange program was temporarily suspended effective April 1, 2012.
- Risks highlighted include economic and freight-demand weakness, rental utilization and used-vehicle pricing, customer and industry concentration, fuel and foreign-exchange volatility, vehicle residual values, pension funding, access to capital markets, competition, labor and driver availability, and legal or tax outcomes. Ryder reported no material change in market-risk exposures since year-end. It stated disclosure controls were effective and reported no material change in internal controls.
- Discontinued operations generated a first-half net loss of $0.6 million. Ryder continued to face legacy South American legal and tax matters; it disclosed possible Brazilian tax exposures of $4.7 million and $5.6 million for which it had recorded no reserve, while stating it believed its positions were more likely than not to be sustained. The $15.7 million Brazilian tax assessment concerning a 2001 business sale was dismissed after the tax authority did not pursue a final appeal.
Most important facts for investors to verify
- Whether the expected $30 million annual savings from the workforce reduction are achieved and whether restructuring costs remain limited.
- Whether commercial-rental utilization and demand recover, and whether used-vehicle gains and residual-value assumptions prove sustainable.
- Whether high capital spending, negative free cash flow and rising debt remain consistent with management’s liquidity and leverage expectations.
- Availability and renewal terms of the receivables program, capital-market access, and compliance with the revolving-credit covenant.
- Actual pension contributions and funded-status changes, including the effects of interest rates, asset returns and legislation.
- Resolution of disclosed legal and tax contingencies, and the durability of the tax-rate benefits supporting earnings growth.