Ryder System, Inc. — Q3 2012 Form 10-Q
Period: Quarter and nine months ended September 30, 2012. Unaudited interim results. Ryder provides fleet leasing, rental and maintenance services, and supply-chain and dedicated transportation solutions. In 2012, it combined its Supply Chain Solutions and Dedicated Contract Carriage reporting segments; prior segment figures were recast.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $1.573B | $1.571B | $4.673B | $4.509B |
| Operating revenue (non-GAAP) | $1.283B | $1.256B | $3.779B | $3.578B |
| Continuing-operations pretax earnings | $99.8M | $87.7M | $221.3M | $206.3M |
| Continuing-operations earnings | $64.3M | $56.9M | $146.0M | $123.7M |
| Net earnings | $75.1M | $56.5M | $156.1M | $121.7M |
| Diluted EPS, continuing operations | $1.26 | $1.10 | $2.84 | $2.39 |
| Diluted EPS, net earnings | $1.47 | $1.10 | $3.04 | $2.35 |
Q3 total revenue was essentially flat, while operating revenue rose 2%; nine-month revenue and operating revenue grew 4% and 6%, respectively. Pretax earnings from continuing operations increased 14% in Q3 and 7% year to date. Management’s comparable diluted EPS from continuing operations, a non-GAAP measure excluding identified special items, was $1.28 in Q3 (+17%) and $2.87 for nine months (+14%).
Q3 lease-and-rental gross margin was $212.7M, with margin of 31% versus 32%; services gross margin was $109.9M, with margin of 16% versus 17%. For nine months, lease-and-rental gross margin was $592.9M (30% versus 31%) and services gross margin was $323.5M (16% in both periods). FMS segment EBT rose 21% in Q3 and 15% year to date; SCS segment EBT rose 2% and 6%, respectively. Q3 SCS operating revenue increased 2%, led by automotive growth, while high-tech and retail/CPG were weaker.
Cash flow, debt and liquidity
- Nine-month operating cash flow from continuing operations was $767.5M, down from $782.3M. Cash capital expenditures were $1.695B; management’s defined free cash flow was negative $436.1M versus negative $112.8M a year earlier, primarily reflecting higher vehicle spending.
- Cash and equivalents were $95.7M at September 30, 2012, versus $104.6M at year-end 2011. Total debt was $3.888B, up from $3.382B; total obligations including specified operating-lease commitments were $4.044B. Debt growth principally reflected investment in the fleet.
- Available capacity was $483M under the $900M revolving credit facility and $175M under the receivables program. No receivables-program balance was outstanding; the program was due to expire October 26, 2012, and Ryder was seeking renewal through October 2013. The revolver covenant ceiling for debt to defined net worth was 300%; the reported ratio was 188%.
- Ryder issued $350M of medium-term notes in February and another $350M in August. S&P lowered its long-term rating from BBB+ to BBB in August; the outlook was stable. The company said operating cash flow and available financing should meet foreseeable needs, while noting capital-market access risks.
Changes, outlook and notable items
- Q3 net earnings growth exceeded continuing-operations growth partly because discontinued operations included an $11.3M tax benefit from expiration of a statute of limitations. Nine-month discontinued-operations earnings were $10.2M; this tax item should not be treated as recurring operating performance.
- A change in estimated residual values increased pretax earnings by approximately $4.5M in Q3 and $13.5M year to date. Used-vehicle sales gains rose 27% in Q3 and 46% year to date; vehicle writedowns also increased, and vehicles held for sale were up 78% year over year.
- Nine-month restructuring charges were $8.1M, including actions to eliminate approximately 350 positions. The actions were substantially completed; management estimated annual pretax savings of about $30M ($14M in 2012).
- Management expected 2012 accrual-basis capital expenditures of approximately $2.15B, consistent with its prior forecast. It expected approximately $81M of pension contributions for 2012; $77.4M had been contributed through September, with about $3.1M expected in Q4. Management said recent pension legislation was expected to reduce contributions beginning in 2013.
- Management anticipated favorable full-service lease comparisons through year-end, but weaker commercial-rental revenue comparisons due to lower demand. It expected favorable SCS revenue comparisons from customer volumes and new business. These are forward-looking expectations, not guarantees.
- Other risks include economic and freight-demand weakness, competition and pricing pressure, customer concentration or loss, used-vehicle residual values and resale demand, fuel-price volatility, pension funding, insurance claims, labor availability, tax audits and legal proceedings, and access to financing. Ryder reported that reasonably possible losses on continuing-operations claims were not expected to have a material effect; former South American operations remain subject to tax and legal matters, including Brazilian tax assessments.
The quarterly dividend was $0.31 per share; the board declared another $0.31 dividend in October. Management reported effective disclosure controls and no material change in internal control over financial reporting during the first nine months.
Investor verification priorities
- Separate recurring continuing-operations results from the discontinued-operations tax benefit and the residual-value estimate benefit; review management’s non-GAAP comparable earnings reconciliations.
- Track fleet investment, negative free cash flow, debt growth, available borrowing capacity, and renewal of the receivables program.
- Test commercial-rental utilization and demand, used-vehicle inventory and resale prices, and whether full-service lease growth and SCS new business continue.
- Assess delivery of restructuring savings and the effect of pension costs, contributions and funding assumptions.
- Review the outcome of tax audits and legal contingencies, including former South American matters, and monitor credit ratings and financing-market access.