Business context and reporting period
Ryder System, Inc. filed this Form 10-K for the fiscal year ended December 31, 2014. Ryder provides commercial fleet management and supply-chain services through Fleet Management Solutions (FMS) and Supply Chain Solutions (SCS). FMS generated 63% of consolidated revenue and SCS 37% in 2014.
Financial performance and liquidity
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenue | $6.639 billion | $6.419 billion | +3% |
| Operating revenue, a non-GAAP measure | $5.547 billion | $5.270 billion | +5% |
| Continuing-operations earnings | $220.5 million | $243.2 million | -9% |
| Comparable continuing-operations earnings, non-GAAP | $297.1 million | $256.6 million | +16% |
| Diluted continuing-operations EPS | $4.14 | $4.63 | -11% |
| Comparable diluted EPS, non-GAAP | $5.58 | $4.88 | +14% |
| Operating cash flow from continuing operations | $1.370 billion | $1.223 billion | +12% |
| Free cash flow, non-GAAP | -$202 million | -$386 million | Improved |
| Total debt at year-end | $4.512 billion | $4.189 billion | +8% |
Lease and rental gross margin was $900 million, or 31% of related revenue, versus $841 million and 30% in 2013. Services gross margin was $464 million, or 16%, versus $460 million and 16%. Cash and equivalents were $50 million; working capital was negative $17 million, improved from negative $169 million. The debt-to-equity ratio rose to 248% from 221%, and total obligations-to-equity rose to 259% from 226%.
Capital expenditures were $2.259 billion cash-paid ($2.298 billion accrual basis). Ryder paid $75 million in common dividends and repurchased approximately 1.3 million shares for $106 million during 2014. It reported $612 million available under its $900 million revolving credit facility and $115 million available under its receivables program. In January 2015, the revolver was extended to January 2020 and increased to $1.2 billion.
Material changes versus comparable periods
- FMS revenue grew 4% to $4.656 billion and segment EBT rose 26% to $434 million, led by rental performance, higher used-vehicle proceeds and stronger full-service lease results.
- SCS revenue increased 3% to $2.461 billion, but segment EBT declined 6% to $122 million. Lost automotive business, start-up costs on an international account, severe-winter disruption and comparison with favorable prior-year insurance developments weighed on earnings.
- Used-vehicle sales gains rose 32% to $127 million despite 11% lower sales volume; average proceeds per unit increased 13%.
- Fuel-services revenue fell 5% to $788 million, mainly because lower fuel prices were passed through to customers.
- 2014 GAAP earnings included a $97 million non-cash pension lump-sum settlement loss and $13 million of multi-employer pension settlement charges. The fourth quarter recorded $109 million of pension settlement charges; comparable results exclude these and other specified items.
- Year-end pension funded status weakened: obligations were $2.221 billion against plan assets of $1.775 billion, for a $446 million deficit, compared with a $272 million deficit in 2013.
Fourth-quarter results
For the three months ended December 31, 2014, revenue was $1.656 billion (+2%) and operating revenue was $1.415 billion (+5%). Continuing-operations earnings were $11.7 million and diluted EPS was $0.22, down from $65.9 million and $1.24 in Q4 2013, principally due to pension settlement charges. Comparable EBT increased 20% to $129 million; comparable earnings rose 18% to $84.9 million and comparable diluted EPS rose 19% to $1.60. FMS EBT increased 25% to $123 million; SCS EBT increased 2% to $34 million.
Guidance, commentary and principal risks
Management forecast 2015 comparable diluted EPS of $6.25–$6.40, total revenue of approximately $6.8 billion (+3%) and operating revenue growth of 7%, assuming moderate economic growth. It expected FMS strength and faster full-service lease growth, dedicated-services growth and recovery in SCS earnings, partly offset by a higher tax rate and adverse foreign exchange. Ryder expected 2015 capital expenditures of $2.6 billion and free cash flow of negative $300 million, while forecasting higher operating cash flow.
Key risks include economic and transportation-market cyclicality; used-vehicle residual values and rental utilization; customer concentration in SCS (top ten customers represented 39% of SCS total revenue, and automotive approximately 27%); competitive pricing and contract assumptions; driver and technician availability and labor matters; dependence on a limited number of vehicle manufacturers and suppliers; regulatory, emissions and compliance costs; information-system outages and cybersecurity; foreign-exchange and interest-rate exposure; and pension, self-insurance, environmental and legal contingencies. Pension assumptions are particularly sensitive: management estimated that a 10% decline in vehicle residual values could increase 2015 depreciation expense or reduce vehicle-sale gains by approximately $119 million. Environmental liabilities were $12 million, with potential cleanup costs at 19 identified sites; management said the ultimate cost could not be projected with certainty. Management believed ordinary-course claims, in aggregate, would not materially affect consolidated financial condition or liquidity.
Important facts for investors to verify
- Reconcile GAAP and comparable earnings, including the $97 million pension settlement loss and other adjustments excluded from non-GAAP measures.
- Assess whether FMS growth and the anticipated SCS earnings recovery materialized, particularly given automotive exposure and customer concentration.
- Test the assumptions underlying used-vehicle residual values, fleet depreciation and rental utilization.
- Evaluate the funding plan for projected 2015 capital spending and negative free cash flow, alongside rising debt and leverage.
- Monitor pension funded status, future contributions, multi-employer plan exposure, and the stated 2015 earnings guidance and foreign-exchange impact.