Ryder System, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Unaudited results; comparisons are with the corresponding 2012 periods unless stated otherwise. Amounts below are in U.S. dollars; financial figures are rounded to millions.
Business context and results
Ryder provides fleet leasing, rental and maintenance through Fleet Management Solutions (FMS), and supply-chain and dedicated transportation services through Supply Chain Solutions (SCS). Third-quarter growth was driven primarily by new business and higher volumes in SCS and full-service lease growth in FMS.
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenue | $1,634.5m | $1,573.3m | $4,801.6m | $4,673.4m |
| Operating revenue (non-GAAP) | $1,344.9m | $1,283.2m | $3,925.8m | $3,778.8m |
| Continuing-operations pretax earnings | $111.4m | $99.8m | $271.3m | $221.3m |
| Continuing-operations earnings | $73.9m | $64.3m | $177.3m | $146.0m |
| Net earnings | $71.1m | $75.1m | $173.2m | $156.1m |
| Diluted EPS, continuing operations | $1.40 | $1.26 | $3.39 | $2.84 |
| Diluted EPS, net earnings | $1.35 | $1.47 | $3.31 | $3.04 |
Margins, segments and material changes
- Revenue rose 4% in Q3 and 3% for the first nine months; non-GAAP operating revenue rose 5% and 4%, respectively. Management attributes growth to SCS new business and volume, and FMS full-service lease growth.
- Q3 lease-and-rental gross margin increased 5% to $222.8m, with margin at 31%; nine-month margin increased 6% to $627.0m, also 30%. Services gross margin rose 10% to $120.4m in Q3, with margin improving to 17% from 16%; nine-month margin was $339.9m and 16%. Fuel-services margin fell 11% to $3.8m in Q3 and 9% to $11.1m year to date; margin remained 2% in both comparisons.
- Q3 segment EBT was $96.4m for FMS, up 2%, and $38.5m for SCS, up 21%. Nine-month EBT was $245.8m for FMS, up 11%, and $95.0m for SCS, up 13%. SCS margin on operating revenue improved to 7.3% in Q3 from 6.6% and to 6.2% year to date from 5.8%.
- Reported Q3 continuing-operations diluted EPS increased 11%; comparable diluted EPS, a company-defined non-GAAP measure excluding specified items, increased 7% to $1.46. Nine-month comparable diluted EPS rose 12% to $3.53.
- Q3 net earnings and diluted EPS declined 5% and 8%, respectively, mainly because 2012 discontinued operations included an $11.3m tax benefit from a statute-of-limitations expiration. Continuing-operations earnings increased in both periods.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow from continuing operations was $890.0m, versus $767.5m. Cash used in investing was $1,112.8m, versus $1,188.1m; financing provided $226.4m, versus $412.8m.
- Company-defined free cash flow was negative $206.2m, improved from negative $436.1m. Cash purchases of property and revenue-earning equipment were $1,495.8m. Cash and equivalents at September 30 were $74.9m.
- Total debt was $4,037.0m, up from $3,820.8m at December 31, 2012; total obligations, including specified vehicle operating-lease obligations, were $4,155.2m. On-balance-sheet debt to equity was 244%; total obligations to equity was 251%.
- Current assets were $1,099.5m and current liabilities $1,274.3m. The company reported $256.9m available under its $900m revolving credit facility, net of commercial paper borrowings, and a $175m receivables program with no amount outstanding at quarter-end.
- On October 18, 2013, Ryder extended the revolving facility maturity to October 2018. The receivables program was due to expire October 25, 2013; Ryder said it was working to renew it through October 2014.
Outlook, commentary and risks
- Ryder raised expected full-year 2013 capital expenditures to approximately $2.1bn from a prior $1.8bn–$1.9bn, citing more vehicles needed for full-service lease sales and higher lease sales than forecast. Expected full-year free cash flow was revised to approximately negative $350m from negative $190m, primarily due to higher full-service lease vehicle spending.
- Management expected favorable year-over-year FMS full-service lease and rental revenue comparisons through year-end, and favorable SCS revenue comparisons from new sales activity. These are expectations, not guarantees; the filing does not provide a clear full-year earnings guidance figure.
- Q3 results benefited from a change in vehicle residual-value estimates that reduced depreciation by $7.4m; the nine-month benefit was $22.3m. Management also cited improved utilization, pricing and vehicle residual values. FMS faced weaker U.K. demand and unusually high bad debt; planned investments in product development and customer-facing information technology increased costs.
- Other comparability items included a $1.3m pension settlement charge, a $0.6m Superstorm Sandy recovery benefit, and a $1.9m nine-month foreign-currency translation benefit. Ryder paid $2.3m to settle Brazilian state operating-tax-credit assessments after an adverse ruling. A separate $4.8m Brazilian federal tax assessment remained a reasonably possible exposure, which Ryder said it believed was more likely than not to be overturned on appeal; no reserve was recorded.
- Key risks include freight and customer demand, competition and pricing, used-vehicle resale values, fuel-price volatility, costs and residual values of fleet vehicles, driver and labor availability, pension funding, access to commercial-paper markets, interest and currency movements, and legal and tax outcomes. Ryder reported no material change in market-risk exposures since year-end.
Important facts for investors to verify
- Whether the higher capital-spending outlook and revised negative free-cash-flow expectation were realized, and how vehicle purchases affected debt.
- How much of earnings growth depends on the $22.3m year-to-date depreciation benefit from revised vehicle residual values.
- Whether FMS demand, U.K. bad debt and rental utilization improved, and whether SCS growth and margins were sustained.
- Whether the receivables program was renewed and what liquidity remained available under committed facilities.
- Developments in Brazilian tax matters, pension funding and other legal contingencies.