RYDER SYSTEM INC annual report, FY2013

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Ryder System, Inc. — FY 2013 Form 10-K

Reporting period: Fiscal year ended December 31, 2013; fourth-quarter results are for the three months ended December 31, 2013. Ryder provides fleet leasing, rental and maintenance services through Fleet Management Solutions (FMS), and logistics and supply-chain services through Supply Chain Solutions (SCS). FMS represented 63% and SCS 37% of consolidated revenue.

Financial performance

  • FY revenue: $6.42 billion, up 3% from 2012. Operating revenue, a company-defined non-GAAP measure excluding FMS fuel and SCS subcontracted transportation, was $5.27 billion, up 4%.
  • FY earnings: Earnings from continuing operations were $243 million, up 21%; diluted continuing-operations EPS was $4.63, up 18%. Net earnings were $238 million, or $4.53 diluted EPS, versus $210 million and $4.09 in 2012. Comparable continuing-operations earnings, excluding specified items, were $257 million, up 13%, or $4.88 per diluted share, up 11%.
  • FY segment results: FMS revenue was $4.49 billion, up 2%, with EBT of $344 million, up 12%. SCS revenue was $2.38 billion, up 4%, with EBT of $130 million, up 13%. Segment EBT is a company-defined measure.
  • Margins: Lease-and-rental gross margin was 31%, versus 30% in 2012; services gross margin remained 16%; fuel-services gross margin remained 2%. Improved lease pricing, vehicle residual values and rental utilization supported lease-and-rental margin.
  • Cash flow and investment: Operating cash flow from continuing operations was $1.22 billion, compared with $1.13 billion. Free cash flow, as defined by Ryder, was negative $386 million, versus negative $384 million. Cash capital expenditures were $2.14 billion; accrual-basis capital expenditures were $2.18 billion.
  • Debt and liquidity: Total debt was $4.19 billion, up 10%; cash and equivalents were $62 million. Net working capital was negative $169 million. Ryder reported $402 million available under its $900 million revolving credit facility and a $175 million receivables program with no outstanding balance at year-end. Total obligations-to-equity was reported as 226%, down from 270%.
  • Other metrics: The annual dividend was increased 10% to $1.36 per share. Used-vehicle sales gains were $96 million, up 8%; used vehicles held for sale fell 14% to 7,900.
  • Fourth quarter: Revenue was $1.62 billion, up 2%; operating revenue was $1.34 billion, up 4%. Continuing-operations EBT rose 19% to $98 million, and continuing-operations earnings rose 20% to $66 million, or $1.24 diluted EPS. Comparable diluted EPS was $1.35, up 7%.

Changes versus prior comparable periods

Annual revenue growth was 3%, matching 2012’s rate, while operating-revenue growth moderated to 4% from 5%. Reported continuing-operations earnings increased 21%; comparable earnings increased 13%. FMS benefited from higher lease and rental pricing, improved rental utilization, used-vehicle results and a $30 million depreciation benefit from residual-value estimate changes. SCS growth reflected new business and higher volumes, particularly in dedicated services. Fourth-quarter SCS operating revenue rose 8%, while FMS operating revenue rose 3%.

Operating cash flow improved, but free cash flow remained negative as capital spending exceeded cash generated. Debt increased to fund investment. Pension funding improved: plan assets were $1.83 billion against $2.10 billion of obligations, leaving a $272 million underfunded position, compared with $594 million in 2012.

Outlook, risks and unusual items

  • 2014 guidance: Comparable continuing-operations EPS of $5.30–$5.45, up 9%–12% from $4.88 in 2013; total revenue of about $6.8 billion, up 5%; operating revenue of about $5.6 billion, up 6%. Ryder forecast free cash flow of negative $300 million and capital expenditures of about $2.2 billion.
  • Management expected growth across product lines, continued full-service lease fleet growth, improved performance in FMS and SCS, and contributions from on-demand maintenance and natural-gas vehicle offerings. It also expected lower depreciation benefits from strong used-vehicle pricing, partly offset by a higher tax rate. Ryder planned to begin anti-dilutive share repurchases under a program authorizing up to 2 million shares through 2015.
  • 2013 results included non-operating pension costs of $24 million before tax, a $3 million pension settlement charge, and a $4 million non-cash pension-obligation adjustment due to inaccurate historical census data. Restructuring and other items were a net recovery of less than $1 million. The prior year included $8 million of Superstorm Sandy vehicle losses; 2013 included a $1 million recovery. Discontinued operations generated a $5 million loss, including costs and legal matters relating to former South American operations.
  • Key risks include economic cyclicality; used-vehicle residual values and rental utilization; customer concentration in SCS (top ten customers represented 40% of SCS revenue, and automotive was about 29%); competition and contract-pricing assumptions; driver and technician availability; regulation and emissions requirements; cybersecurity and IT implementation; pension funding and multi-employer plan exposure; and fuel, interest-rate and foreign-exchange volatility.
  • Ryder disclosed environmental obligations of $13 million and potential responsibility at 19 identified cleanup sites. Management stated ordinary-course legal matters were not expected, in aggregate, to materially affect consolidated financial condition or liquidity. The auditor issued an unqualified opinion and reported effective internal control over financial reporting.

Investor verification priorities

  • Check the basis and reconciliation for comparable earnings, operating revenue, free cash flow and total-obligations leverage; these are non-GAAP measures.
  • Assess whether 2014 EPS, revenue, free-cash-flow and capital-spending guidance was achieved, and whether lease-fleet growth and rental utilization translated into sustainable margins.
  • Review vehicle residual-value assumptions: Ryder estimated that a 10% decline in expected residual values would increase 2014 depreciation expense by about $116 million.
  • Monitor debt funding needs, revolving-credit availability, negative working capital and the substantial ongoing vehicle investment program.
  • Track pension obligations, contributions and multi-employer plan exposure; verify the effect of the 2013 census-data correction and subsequent actuarial assumptions.
  • Review SCS customer and automotive concentration, environmental matters, and outstanding legal and tax contingencies, including claims linked to discontinued South American operations.