Ryder System, Inc. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010; comparative periods ended September 30, 2009. Dollar amounts below are in millions unless stated otherwise. The interim statements are unaudited.
Business context and financial performance
Ryder provides Fleet Management Solutions (FMS), Supply Chain Solutions (SCS), and Dedicated Contract Carriage (DCC). The filing presents South American and European SCS operations that were discontinued in 2009 separately from continuing operations.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $1,316.9 | $1,253.9 | $3,823.0 | $3,640.3 |
| Operating revenue (non-GAAP) | $1,071.6 | $1,034.0 | $3,096.3 | $3,042.7 |
| Continuing pretax earnings | $62.0 | $44.2 | $136.7 | $112.0 |
| Continuing earnings | $39.7 | $28.4 | $83.1 | $66.4 |
| Net earnings | $38.8 | $24.0 | $81.0 | $53.7 |
| Diluted EPS | $0.74 | $0.43 | $1.53 | $0.96 |
| Continuing-operations effective tax rate | 36.0% | 35.7% | 39.2% | 40.7% |
Operating expense was $624.5 million in Q3 and $1,813.6 million for the nine months; it increased 9% and 10%, respectively, primarily due to higher fuel pass-throughs and maintenance costs. Depreciation was $209.9 million and $627.7 million, respectively. Interest expense declined 11% in Q3 and 13% year to date, to $31.9 million and $96.4 million.
- Q3 segment results: FMS revenue was $948.9 million and segment net before taxes (NBT) was $54.8 million, up 48%. SCS revenue was $322.9 million and NBT was $15.2 million, down 6%. DCC revenue was $121.4 million and NBT was $8.6 million, down 12%.
- Nine-month segment results: FMS revenue was $2,764.1 million and NBT $122.7 million, up 13%; SCS revenue was $927.2 million and NBT $34.8 million, up 45%; DCC revenue was $360.8 million and NBT $24.4 million, down 20%. NBT is management’s segment measure and excludes specified items; it is not a GAAP measure.
Cash flow, balance sheet and liquidity
- Continuing-operations operating cash flow was $804.2 million for the nine months, versus $768.7 million in 2009. Investing cash outflow was $664.4 million, compared with $377.8 million.
- Company-defined free cash flow, a non-GAAP measure, was $153.0 million versus $462.3 million, primarily reflecting increased vehicle spending. Cash and cash equivalents were $134.7 million at September 30, up from $98.5 million at year-end 2009.
- Cash paid for property and revenue-earning equipment was $860.9 million; accrual-basis capital expenditures were $894.7 million, versus $468.3 million a year earlier.
- Total debt was $2,529.8 million, compared with $2,497.7 million at year-end. Current debt and current portion of long-term debt rose to $463.5 million from $232.6 million; long-term debt was $2,066.3 million. September 30 total debt-to-equity was 180% and total obligations-to-equity was 188%.
- Current assets were $949.8 million and current liabilities $1,178.2 million. Ryder reported $730.2 million available under its $875 million revolving credit facility, net of commercial-paper support, plus a $175 million receivables-program capacity; no receivables-program balance was outstanding at quarter-end.
- Ryder issued $300 million of medium-term notes in September, maturing in March 2016. The revolving credit facility matures in April 2012; its covenant debt-to-tangible-net-worth ratio was 157%, against a maximum of 300%.
Material changes and unusual items
- Total revenue rose 5% for both Q3 and the nine-month period. Operating revenue rose 4% in Q3 and 2% year to date; reported revenue growth also reflected higher fuel pass-throughs. Q3 continuing pretax earnings rose 40%, and nine-month continuing pretax earnings rose 22%.
- FMS benefited from improved commercial rental demand, pricing, utilization and used-vehicle sales. Q3 commercial rental revenue increased 32%; utilization was 79.2%, versus 70.8% a year earlier. These gains were partly offset by lower full-service lease revenue, customer fleet downsizing, and higher maintenance costs on an older fleet.
- SCS revenue growth reflected higher freight volumes, particularly automotive, and favorable foreign exchange; Q3 segment earnings were reduced by higher self-insurance costs. DCC earnings fell amid higher driver and insurance costs and technology investment.
- Share repurchases totaled $91.9 million for the nine months, and diluted weighted-average shares declined 6% year over year. Dividends paid were $40.6 million; the quarterly dividend declared in October was $0.27 per share.
- Changed estimated residual values reduced 2010 pretax earnings by approximately $3.5 million in Q3 and $10.5 million year to date. Accelerated depreciation on selected vehicles was an additional $1.5 million and $5.0 million, respectively.
- Discontinued operations generated losses after tax of $0.8 million in Q3 and $2.1 million year to date, improved from $4.5 million and $12.8 million in 2009. 2010 losses included legal developments, professional services and administrative costs. Ryder noted that the ultimate effect of claims and assessments is uncertain, but did not expect resulting liabilities to materially adversely affect financial condition, results or liquidity.
- A disputed Brazilian tax assessment was $16.1 million, including penalties and interest; Ryder believed its position would be sustained and recorded no reserve. Gross unrecognized tax benefits were $71.6 million at quarter-end.
Outlook, risks and management commentary
- Management expected full-year 2010 free cash flow of $225–$275 million and accrual-basis capital expenditures of approximately $1.1 billion.
- Management expected favorable commercial-rental comparisons and SCS revenue comparisons to continue through year-end, while anticipating continued declines in contractual revenue comparisons based on recent sales activity. It also expected DCC revenue comparisons similar to those reported, driven largely by fuel pass-throughs.
- Management said operating cash flows and available financing should meet foreseeable needs, while warning that disruption in commercial-paper markets or ratings deterioration could limit or increase the cost of unsecured funding. Credit ratings at September 30 were Moody’s P2/Baa1, S&P A2/BBB+, and Fitch F2/A−, all with stable outlooks.
- Key risks include freight and automotive demand, customer retention and fleet downsizing, used-vehicle values and residual estimates, fuel and interest-rate volatility, insurance and self-insurance claims, pension funding, tax audits, and access to capital markets. Ryder reported no material change in market-risk exposures since year-end 2009.
- The filing states disclosure controls were effective at quarter-end and reports no materially affecting change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether rental demand, utilization and used-vehicle pricing remain strong enough to offset lower lease revenue and higher fleet maintenance costs.
- Whether planned vehicle investment supports the $225–$275 million free-cash-flow outlook and approximately $1.1 billion capital-spending plan.
- Debt maturities, refinancing needs, revolving-facility availability and compliance with covenants, including the receivables-program renewal disclosed as in process.
- Potential changes to vehicle residual values, depreciation estimates, insurance reserves, pension funding and disputed tax exposures, including the Brazilian assessment.
- The sustainability of earnings growth after accounting for fuel pass-throughs, discontinued-operation effects, share repurchases and other nonrecurring items.