Ryder System, Inc. — 2011 Form 10-K Summary
Business context and reporting period
Fiscal year ended December 31, 2011; fourth-quarter comparisons are for the three months ended December 31. Ryder provides fleet leasing, maintenance and rental (FMS), supply-chain services (SCS), and dedicated contract carriage (DCC). FMS represented 64% of consolidated revenue, SCS 26%, and DCC 10%. The 2011 results include acquisitions completed during the year, notably Hill Hire in June; acquisition effects materially contributed to growth.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Total revenue | $6.051 billion | $5.136 billion |
| Operating revenue (non-GAAP) | $4.815 billion | $4.158 billion |
| Pre-tax earnings from continuing operations | $279 million | $186 million |
| Earnings from continuing operations | $171 million | $125 million |
| Diluted EPS from continuing operations | $3.31 | $2.37 |
| Net earnings | $170 million | $118 million |
| Operating cash flow from continuing operations | $1.042 billion | $1.028 billion |
| Free cash flow (non-GAAP) | $(257) million | $258 million |
| Capital expenditures, cash paid | $1.699 billion | $1.070 billion |
| Total debt at year-end | $3.382 billion | $2.747 billion |
| Shareholders’ equity at year-end | $1.318 billion | $1.404 billion |
Revenue increased 18%, operating revenue 16%, pre-tax earnings 50%, and continuing-operations diluted EPS 40%. Management attributed earnings improvement principally to stronger commercial rental performance and used-vehicle sales; acquisitions also contributed. Comparable continuing-operations earnings, a non-GAAP measure excluding specified items, were $181 million, or $3.49 per diluted share, up 54% and 57%, respectively.
Lease-and-rental gross margin was $808 million, 32% of revenue, versus $706 million and 31% in 2010. Services gross margin was $423 million, 16% of revenue, versus $347 million and 16%. Segment EBT rose to $250 million at FMS (8.0% of operating revenue), $69 million at SCS (5.4%), and $33 million at DCC (5.7%). DCC’s EBT margin declined from 6.6% to 5.7% despite higher revenue.
In Q4 2011, revenue was $1.541 billion (+17%), operating revenue $1.237 billion (+16%), pre-tax earnings $73 million (+47%), continuing-operations earnings $48 million (+15%), and diluted continuing-operations EPS $0.92 (+15%). Excluding specified items, comparable Q4 EPS was $0.97, up 49%; the prior-year quarter included an $11 million tax benefit.
Cash and cash equivalents were $105 million, versus $213 million. Current assets were $1.088 billion and current liabilities $1.174 billion, producing negative working capital of $86 million. The company reported $483 million available under its $900 million revolving credit facility and a $175 million receivables program with no balance outstanding. Debt-to-equity increased to 257% from 196%; total obligations-to-equity rose to 261% from 203%. Interest expense was $133 million; the effective interest rate was 4.3%, compared with 5.2%.
Material changes versus the prior comparable period
- FY revenue growth included 9 percentage points from acquisitions and 3 points from organic growth, price and volume; higher fuel and subcontracted-transportation pass-throughs also lifted reported revenue. Operating revenue excludes these largely pass-through amounts.
- FMS commercial rental revenue increased 38%; average in-service rental power fleet size increased 20%, and utilization improved to 77.6% from 76.1%. Full-service lease revenue increased 3%, but management cited higher maintenance costs on an older fleet.
- SCS operating revenue rose 28%, with the TLC acquisition accounting for a substantial part of the increase; organic growth also contributed. Automotive represented approximately 37% of SCS revenue, down from 43% in 2010.
- DCC operating revenue rose 21%, substantially reflecting the Scully acquisition, while segment EBT increased only 5% and EBT margin fell 90 basis points.
- Free cash flow shifted from positive $258 million to negative $257 million, chiefly due to higher vehicle investment. Capital expenditures increased 62% on an accrual basis, to $1.760 billion. Debt increased 23%, reflecting acquisitions and fleet spending.
Outlook, risks and unusual items
Management forecast 2012 revenue of $6.3 billion (+4%) and operating revenue of $5.1 billion (+6%). Forecasts included 5% growth in FMS contractual leasing and maintenance revenue, 17% growth in commercial rental revenue, 1% growth in total SCS revenue and 2% growth in SCS operating revenue. Management expected organic full-service lease growth, continued rental demand and higher SCS volumes, while noting elevated lease-fleet maintenance costs. No specific full-year EPS guidance is provided in the supplied filing text.
Management expected 2012 capital expenditures of $2.15 billion and negative free cash flow of approximately $430 million, with spending funded by internally generated cash and additional borrowing. Pension expense was forecast to increase about $15 million, or $0.18 per share; required 2012 pension contributions were estimated at $81 million. The filing separately estimates approximately $544 million of global pension contributions over five years in its contractual-obligations discussion; investors should reconcile this with the MD&A estimate of approximately $496 million, which uses different stated assumptions.
Material risks include economic weakness or customer fleet reductions, used-vehicle residual values and rental utilization, competitive pricing, acquisition integration, and fuel and labor costs. SCS customer concentration is significant: the top ten customers generated 55% of SCS total revenue and 51% of SCS operating revenue in 2011. Pension obligations were $1.968 billion against plan assets of $1.418 billion, a funded deficit of approximately $550 million; lower discount rates and weak asset returns contributed to a larger pension-related equity charge. Other exposures include regulatory changes, driver and technician availability, self-insurance estimates, environmental remediation, and tax and employment litigation.
Unusual or comparability items included $3.7 million of restructuring and other charges, $2.1 million of acquisition transaction costs, and a $5.4 million after-tax charge related to a Michigan tax-law change. Management’s comparable earnings measure excludes specified items and is non-GAAP. Environmental liabilities were $14 million; the company identified 18 sites where it may share cleanup costs. Management said ordinary-course legal matters were not expected in aggregate to materially affect financial condition or liquidity, while acknowledging uncertain outcomes.
Most important facts for investors to verify
- How much of reported and segment growth is organic versus acquisition-driven, and whether acquired operations deliver expected synergies.
- Whether used-vehicle prices, fleet utilization and residual-value assumptions remain supportive; a 10% decrease in expected vehicle residual values would raise 2012 depreciation expense by about $116 million.
- Whether planned 2012 fleet spending, negative free cash flow and higher debt remain manageable within borrowing capacity and credit-facility covenants.
- The evolution of pension funding, assumptions and required contributions, including reconciliation of the filing’s differing five-year contribution estimates.
- Whether SCS customer concentration, automotive exposure, self-insurance estimates, environmental matters and outstanding legal or tax contingencies change materially.
- How actual results compare with the 2012 revenue, segment-growth, capital-spending and free-cash-flow forecasts; these are forward-looking estimates, not guarantees.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management and the auditor reported effective internal controls as of December 31, 2011.