Business context and reporting period
Ryder System, Inc. is a transportation and supply-chain management company reporting through Fleet Management Solutions (FMS), Dedicated Transportation Solutions (DTS), and Supply Chain Solutions (SCS). This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods unless noted.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Total revenue | $1.793 billion | $1.704 billion | $3.541 billion | $3.333 billion |
| Operating revenue (non-GAAP) | $1.483 billion | $1.450 billion | $2.928 billion | $2.856 billion |
| Continuing-operations pretax earnings | $80.7 million | $116.8 million | $140.6 million | $205.5 million |
| Continuing-operations earnings | $51.3 million | $74.0 million | $89.6 million | $130.2 million |
| Diluted EPS, continuing operations | $0.97 | $1.38 | $1.68 | $2.43 |
| Operating cash flow | Not reported by quarter in this filing | $731.7 million | $763.0 million |
Q2 total revenue rose 5%, while operating revenue rose 2%; first-half growth was 6% and 3%, respectively. Q2 GAAP pretax earnings and continuing-operations earnings each fell 31%; first-half declines were 32% and 31%. Comparable diluted EPS, a non-GAAP measure, was $1.00 in Q2 and $1.82 for the first half, down 36% and 32%, respectively.
Q2 gross margins were 27% in lease and rental (30% in 2016), 16% in services (18%), and 3% in fuel services (3%). First-half margins were 26% (29%), 16% (17%), and 3% (4%), respectively.
- Q2 segment revenue / earnings before tax (EBT): FMS $1.164 billion / $68.1 million; DTS $272.6 million / $14.8 million; SCS $470.7 million / $25.9 million. Segment EBT fell 39% at FMS, 10% at DTS, and 9% at SCS.
- First-half revenue / EBT: FMS $2.296 billion / $120.3 million; DTS $539.3 million / $26.1 million; SCS $933.5 million / $53.3 million. SCS EBT rose 11%; FMS and DTS EBT fell 38% and 15%.
- First-half free cash flow, as defined by Ryder (non-GAAP), was $115.3 million versus negative $61.2 million. Cash purchases of property and revenue-earning equipment were $855.3 million, compared with $1.120 billion in 2016.
Balance sheet, debt, and liquidity
At June 30, 2017, cash was $55.4 million; current assets were $1.177 billion and current liabilities were $1.617 billion. Total debt was $5.385 billion, approximately flat from $5.391 billion at December 31, 2016. Debt-to-equity was 256%, versus 263% at year-end. Shareholders’ equity was $2.106 billion.
Ryder reported $339 million available under its $1.2 billion revolving credit facility and a $175 million receivables program with no amounts outstanding. The receivables program was due to expire October 23, 2017 unless renewed or otherwise extended. The credit-facility covenant limit for debt to defined consolidated net worth is 300%; the reported ratio was 198%. The company said operating cash flow and access to debt markets should meet foreseeable funding needs, while warning that market disruption could impair access. Debt ratings had stable outlooks.
Material changes and management commentary
- Revenue growth reflected new business and higher volumes, particularly in SCS and DTS, plus higher fuel costs passed through to customers. Foreign exchange adversely affected revenue growth.
- Lower used-truck and tractor values reduced gains on sales and increased fair-value write-downs. Q2 proceeds per unit fell 16% for tractors and 14% for trucks year over year; first-half declines were 16% and 17%, respectively.
- FMS results were also pressured by weak commercial rental demand, older-vehicle maintenance costs, and accelerated depreciation of $8 million in Q2 and $17 million in the first half on vehicles expected to be offered for sale through June 2018. Commercial rental revenue fell 7% in Q2 and 11% in the first half.
- DTS faced higher maintenance and insurance costs. SCS revenue increased, but Q2 EBT was affected by start-up costs and weaker performance on certain new contracts.
- Interest expense declined 6% in Q2 and 7% in the first half, reflecting lower average debt and a lower effective interest rate. The effective rate was 2.6%, versus 2.7% in 2016.
Outlook, risks, and unusual items
- Management expected ChoiceLease revenue comparisons to remain favorable and commercial rental comparisons unfavorable through year-end. DTS revenue comparisons were expected to remain favorable; SCS comparisons were also expected to remain favorable, but operating-revenue growth at a lower rate.
- Full-year 2017 capital expenditures were expected to be approximately $2 billion, funded primarily by internally generated cash and additional debt financing. No specific full-year earnings or EPS guidance is provided in the supplied filing text.
- In Q2, Ryder recorded a $2.6 million restructuring credit from sales of previously closed UK facilities. A first-quarter $2.2 million operating-tax charge related to prior periods was also recorded. Prior-year comparisons included a $7.7 million pension-related charge in Q2 2016.
- The annual goodwill test found no impairment. FMS Europe had more than 25% fair-value headroom, but management warned that weaker-than-expected performance could require an interim test and a non-cash impairment charge.
- Key risks include weaker freight and rental demand, lower used-vehicle values, customer and contract performance, maintenance, insurance and labor costs, fuel and interest-rate volatility, pension funding, access to credit, and possible impairment or changes in equipment residual values. Ryder said ordinary-course legal matters were not expected to have a material effect, while noting actual outcomes may differ from estimates.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the first half.
Most important facts for investors to verify
- Whether used-vehicle prices and commercial rental demand stabilize, and how further declines would affect earnings and fleet valuations.
- Whether maintenance and insurance costs, including those on older vehicles and new SCS contracts, improve as expected.
- Progress toward the approximately $2 billion 2017 capital-expenditure plan and resulting cash flow and debt needs.
- Renewal or replacement of the receivables program before its stated October 2017 expiration, and continued availability of other funding sources.
- FMS Europe operating performance and goodwill headroom, along with pension funding assumptions and equipment residual-value estimates.