Ryder System, Inc. — Q2 2013 Form 10-Q
Business context and reporting period. Ryder provides fleet management and supply chain services through Fleet Management Solutions (FMS) and Supply Chain Solutions (SCS). This unaudited report covers the quarter and six months ended June 30, 2013, compared with the same 2012 periods. Financial amounts below are in U.S. dollars; “operating revenue” is a company-defined non-GAAP measure that excludes specified pass-through fuel and subcontracted transportation revenue.
Key financial results
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Total revenue | $1.604 billion | $1.564 billion | $3.167 billion | $3.100 billion |
| Operating revenue | $1.313 billion | $1.267 billion | $2.581 billion | $2.496 billion |
| Pre-tax earnings from continuing operations | $97.4 million | $73.8 million | $159.9 million | $121.5 million |
| Net earnings | $62.2 million | $46.7 million | $102.1 million | $81.0 million |
| Diluted EPS, continuing operations | $1.19 | $0.91 | $1.98 | $1.59 |
| Cash from continuing operations | Not presented for quarter | Not presented for quarter | $563.8 million | $472.0 million |
- Revenue and profit: Q2 total revenue rose 3%, operating revenue 4%, pre-tax earnings 32%, and net earnings 33% year over year. First-half increases were 2%, 3%, 32%, and 26%, respectively. Comparable diluted EPS, excluding specified items, was $1.25 in Q2 versus $1.09, and $2.06 for the first half versus $1.78.
- Margins and segments: Lease and rental gross margin was 31% in Q2 and 30% in the first half, up from 30% and 29%. Services gross margin held at 16%; fuel services gross margin was 2%. Q2 FMS EBT was $88.7 million, up 16%, with EBT equal to 10.4% of operating revenue versus 9.2%. SCS EBT was $32.7 million, up 8%; its operating-revenue EBT margin was 6.3%, unchanged.
- Cash flow and investment: First-half operating cash flow increased to $563.8 million. Investing cash outflow was $687.6 million; capital expenditure cash payments were $948.1 million. Company-defined free cash flow was negative $107.3 million, improved from negative $369.9 million.
- Debt and liquidity: Total debt was $3.914 billion at June 30, up from $3.821 billion at year-end 2012. Cash was $73.4 million. Current assets were $1.062 billion and current liabilities $1.197 billion. The company reported $361 million available under its $900 million revolving facility and a $175 million receivables program with no amount outstanding. Its debt-to-net-worth covenant ratio was 179%, against a 300% maximum.
- Other measures: The effective tax rate was 35.7% in Q2 (36.6% prior year) and 35.3% for the first half (32.8% prior year). Quarterly dividends declared increased to $0.31 per share from $0.29.
Material changes versus prior period
- Growth reflected new SCS business and FMS full-service lease growth. SCS operating revenue rose 6% in Q2; FMS operating revenue rose 3%.
- FMS benefited from higher per-vehicle pricing, improved rental utilization, and a January 2013 change in estimated residual values. That estimate change increased pre-tax earnings by approximately $7.4 million in Q2 and $14.9 million in the first half.
- Q2 earnings comparisons also benefited from the absence of 2012 restructuring charges ($7.1 million pre-tax) and lower non-operating pension costs. First-half 2013 included a $1.9 million currency-translation benefit; first-half 2012 included a $5.0 million tax benefit from resolution of a prior-year tax item.
- First-half capital spending was lower, mainly because of reduced commercial rental investment. The company paused its anti-dilutive share repurchase program in 2013 to manage leverage and preserve near-term flexibility.
- Other comprehensive loss was $42.8 million for the first half, primarily reflecting a $50.0 million currency translation loss attributed to weaker British pound and Canadian dollar exchange rates.
Outlook, commentary, risks and contingencies
- Management expected 2013 accrual-basis capital expenditures at the high end of its prior $1.8–$1.9 billion forecast. It said full-year free cash flow was expected to be closer to $190 million than the prior forecast range, stated in the filing as “negative $130 million to $190 million.”
- Management expected favorable full-service lease comparisons to continue, supported by replacement-vehicle pricing and the lease replacement cycle; it also expected near-term rental comparisons to benefit from pricing and SCS revenue comparisons from new business.
- Management believed operating cash flows and access to debt financing would meet foreseeable needs, but warned that commercial-paper market disruption or credit-rating downgrades could raise borrowing costs or limit unsecured funding. Ratings were stable at quarter-end.
- Key operating risks include economic and freight-demand weakness, rental demand (including in the U.K.), used-vehicle prices and residual values, competition and pricing pressure, customer losses, fuel-price volatility, maintenance costs, labor availability, and execution of cost and technology initiatives. Pension funding, interest and currency rates, tax audits, insurance claims, and legal proceedings also create uncertainty.
- Ryder continued to face claims related to discontinued South American operations. It disclosed unreserved Brazilian tax assessments of $4.2 million and $4.7 million, each described as reasonably possible, while stating it believed its positions were more likely than not to be sustained. It also reported ongoing ordinary-course litigation and contingencies; management said other reasonably possible losses were not expected to materially affect the consolidated statements.
- The company reinstated its like-kind exchange program in Q1 2013; restricted cash increased by $15.1 million as a result. Pension contributions were $24.1 million in the first half, with approximately $66 million expected for full-year 2013.
Most important facts for investors to verify
- Whether full-year capital expenditure and free-cash-flow expectations remain achievable, given negative first-half free cash flow and substantial fleet investment.
- How much earnings growth depends on the residual-value estimate change, vehicle pricing, utilization, and nonrecurring comparison items; reconcile GAAP and comparable results.
- Debt and liquidity trends, including commercial-paper access, revolving-facility availability, upcoming maturities, and the October 2013 receivables-program expiration.
- Whether SCS new-business growth and FMS lease and rental performance continue, particularly amid U.K. rental weakness and a smaller overall fleet.
- Developments in used-vehicle resale values, pension funding, tax audits, and South American legal and tax contingencies.