Ryder System, Inc. — Q2 2015 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2015. Ryder reports Fleet Management Solutions (FMS), Dedicated Transportation Solutions (DTS), and Supply Chain Solutions (SCS). Segment presentation was reorganized in 2015; prior-period segment figures were recast without changing consolidated results.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $1.663 billion | $1.685 billion | $3.230 billion | $3.295 billion |
| Operating revenue (non-GAAP) | $1.393 billion | $1.316 billion | $2.693 billion | $2.558 billion |
| EBT from continuing operations | $133.4 million | $120.1 million | $217.6 million | $195.1 million |
| Continuing-operations earnings | $85.9 million | $75.7 million | $139.2 million | $124.8 million |
| Net earnings | $85.2 million | $75.4 million | $137.9 million | $123.6 million |
| Diluted EPS, continuing operations | $1.61 | $1.42 | $2.61 | $2.34 |
Total revenue fell 1% in Q2 and 2% year to date, principally because lower fuel prices reduced pass-through fuel revenue and foreign exchange was unfavorable. Operating revenue rose 6% and 5%, respectively, reflecting growth across the segments. EBT increased 11% in Q2 and 12% year to date; comparable EBT, a non-GAAP measure excluding specified items, rose 15% in both periods.
Margins and segments: Lease-and-rental gross margin was $247.7 million, or 32% of revenue, in Q2 (31% in 2014); first-half margin was $458.3 million, or 30% (30%). Services gross margin was $133.7 million, or 18%, in Q2 and $245.1 million, or 17%, year to date, with improvement attributed mainly to SCS. Fuel services margin was $4.5 million in Q2 and $12.7 million year to date. Q2 segment EBT was FMS $122.5 million (+8%), DTS $12.4 million (-4%), and SCS $27.7 million (+56%).
Cash flow and investment: First-half operating cash flow from continuing operations was $658.7 million, versus $542.9 million. Investing cash outflow was $1.079 billion, versus $939.8 million; financing cash inflow was $445.5 million, versus $423.6 million. Free cash flow (non-GAAP) was negative $424.8 million, compared with negative $404.1 million. Cash at June 30 was $73.4 million. Cash capital expenditures were $1.329 billion; accrual-basis capital expenditures were $1.454 billion.
Debt and liquidity: Total debt was $5.217 billion at June 30, up from $4.731 billion at year-end 2014. The reported debt-to-equity ratio was 273%, versus 260%. Ryder had $848 million available under its $1.2 billion revolving facility, plus a $175 million receivables program with no balance outstanding; that program was scheduled to expire in October 2015 absent early termination. The revolving facility’s debt-to-net-worth covenant ratio was 209% against a 300% maximum. A $300 million five-year note issuance and $156.4 million equipment-backed financing were completed during the quarter.
Material changes and unusual items
- Ryder revised the accounting for current and prior sale-leaseback transactions: they are treated as financing arrangements rather than off-balance-sheet operating leases. The revision was described as not material to previously issued statements, but increased reported assets and debt. The April 2015 transaction generated $156.4 million in proceeds.
- Changes to estimated equipment residual values and useful lives effective January 1, 2015 increased pre-tax earnings by about $10 million in Q2 and $20 million in the first half.
- Q2 and first-half comparable results exclude non-operating pension costs and professional fees for cost-savings initiatives; Q2 earnings also reflect a $1.9 million tax benefit from state and city tax-law changes. The filing reports $3.8 million of initiative-related professional fees for the first half.
- Discontinued South American operations generated losses of $0.8 million in Q2 and $1.3 million year to date, including legal and administrative costs.
- Foreign-exchange translation reduced first-half other comprehensive income by $30.3 million, primarily from weaker Canadian and British currencies.
Outlook, commentary, and risks
- Management projected 2015 accrual-basis capital expenditures of $2.63 billion and full-year free cash flow of approximately negative $600 million, revised from a prior estimate of negative $380 million. The negative outlook reflects investment in full-service lease and commercial rental fleets; management expects to fund capital spending with internal cash and additional debt.
- Management expected favorable full-service lease and commercial rental revenue comparisons to continue through year-end, and favorable DTS operating-revenue comparisons to continue. SCS operating-revenue comparisons were expected to remain favorable, but at a lower growth rate.
- Management said operating cash flow and access to commercial paper and other financing should meet foreseeable needs, while noting that market disruption or ratings downgrades could impair access or increase borrowing costs. Leverage rose to fund planned fleet investment. Share repurchases were temporarily paused because of increased leverage; resumption timing was under evaluation. The July 2015 quarterly dividend was raised to $0.41 per share from $0.37.
- Key exposures include fuel-price volatility, economic and freight demand, competition, customer and labor risks, vehicle residual values and maintenance costs, insurance and self-insured claims, pension funding, interest and foreign-exchange rates, and access to credit. Ryder reported ordinary-course claims and proceedings; it identified a reasonable possibility that $5 million of Brazilian tax assessments could be reinstated, while stating it believed its position would ultimately be sustained. No reserve was recorded, and partial indemnification may apply.
Important facts for investors to verify
- Reconcile the revised sale-leaseback accounting and its effects on historical debt, assets, leverage, cash flows, and free cash flow.
- Track fleet capital spending, debt growth, liquidity availability, covenant headroom, and the October 2015 receivables-program renewal or replacement.
- Assess how much earnings growth depends on the $20 million first-half benefit from revised equipment residual-value and useful-life estimates.
- Monitor FMS fleet growth and rental utilization, DTS insurance developments, and whether SCS margin improvement is sustainable.
- Review the status of Brazilian tax matters, discontinued South American proceedings, pension funding, and self-insurance exposures.