Business context and reporting period
Ryder System, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2011. Its businesses are Fleet Management Solutions (FMS), Supply Chain Solutions (SCS), and Dedicated Contract Carriage (DCC). Unless otherwise noted, amounts below are in U.S. dollars.
Results include the Hill Hire acquisition from June 8, 2011, and 2011 acquisitions of B.I.T. Leasing, Scully, and Carmenita from their respective acquisition dates. The prior-year comparison also reflects Total Logistic Control (TLC), acquired at the end of 2010.
Financial results and key metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $1.513 billion | $1.286 billion | $2.939 billion | $2.506 billion |
| Operating revenue (non-GAAP) | $1.192 billion | $1.037 billion | $2.321 billion | $2.025 billion |
| Pre-tax earnings from continuing operations | $75.0 million | $52.2 million | $118.6 million | $74.7 million |
| Earnings from continuing operations | $40.9 million | $30.6 million | $66.8 million | $43.5 million |
| Net earnings | $40.0 million | $29.8 million | $65.2 million | $42.2 million |
| Diluted EPS, continuing operations | $0.79 | $0.58 | $1.29 | $0.82 |
| Diluted EPS, net earnings | $0.77 | $0.56 | $1.26 | $0.79 |
- Total revenue grew 18% in Q2 and 17% for the first half; operating revenue grew 15% in both periods. Management attributed growth to acquisitions, organic activity and, for total revenue, higher fuel and subcontracted-transportation pass-throughs.
- Operating expenses were 49% of revenue in Q2 versus 48% a year earlier, and 49% versus 47% for the first half. Operating expenses rose 21% in both periods, including higher fuel, maintenance, salaries and subcontracted transportation.
- Segment NBT, Ryder’s stated segment performance measure, rose 42% to $88.0 million in Q2 and 51% to $141.1 million for the first half. Q2 segment NBT: FMS $67.5 million, SCS $17.2 million, DCC $9.8 million, and eliminations $(6.5) million.
- Continuing-operations effective tax rates were 45.5% in Q2 and 43.7% for the first half, up from 41.4% and 41.8%. State tax-law changes increased tax expense by $5.4 million in Q2 and $6.6 million year to date.
- Cash from continuing operations was $472.8 million for the first half, versus $531.2 million. Management-defined free cash flow was negative $171.8 million, versus positive $123.1 million, chiefly because of increased vehicle spending. Cash at June 30 was $130.2 million, down from $213.1 million at year-end.
- Cash paid for vehicle and property purchases was $817.4 million in the first half; accrual-basis capital expenditures were $880.2 million, up 40%. Vehicle purchases and acquisitions drove investing cash outflow of $990.5 million.
- Total debt was $3.242 billion at June 30, up from $2.747 billion at December 31, 2010. Total obligations, including specified operating-lease commitments, were $3.327 billion; total obligations-to-equity was 228%, versus 203% at year-end.
- Liquidity included $366.1 million available on the new $900 million revolving facility, net of commercial-paper support, and a $175 million receivables program with no balance outstanding. The receivables program was scheduled to expire October 28, 2011 absent early termination.
- Quarterly dividends were $0.27 per share; the board declared a $0.29 dividend in July. The company repurchased 820,000 shares for $41.9 million during the first half.
Material changes and management commentary
- FMS revenue increased 14% in Q2 and segment NBT increased 46%. Commercial rental improved with higher demand, pricing and a larger fleet; used-vehicle sales gains also strengthened. In contrast, full-service lease performance weakened amid higher maintenance costs on an older fleet.
- SCS revenue rose 26% in Q2 and segment NBT rose 37%, including a substantial contribution from TLC. Management cited freight volumes, new business and lower self-insurance costs, partly offset by reduced automotive production following the Japan earthquake. It expected that disruption to continue into Q3.
- DCC revenue increased 22% in Q2 and segment NBT increased 16%. Organic revenue declined, with growth largely reflecting the Scully acquisition and fuel pass-throughs; segment margin as a percentage of operating revenue was lower year over year.
- Management reported comparable Q2 continuing-operations earnings of $47.8 million and diluted EPS of $0.92, excluding the Michigan tax charge and Hill Hire transaction costs. First-half comparable earnings were $74.2 million and diluted EPS $1.43, also excluding restructuring charges. These are non-GAAP measures.
- Four 2011 acquisitions expanded fleet and customer coverage. Hill Hire, acquired for $251.5 million net of cash acquired, added a U.K. fleet of approximately 13,700 vehicles. The acquisition accounting remained preliminary; Scully also includes up to $14.4 million of contingent consideration tied to customer retention.
Outlook, risks and unusual items
- Management forecast full-year 2011 free cash flow of approximately negative $215 million, improved from its previous forecast of negative $265 million, citing higher earnings and used-vehicle sale proceeds. Full-year accrual-basis capital expenditures were expected to remain approximately $1.75 billion.
- Management expected favorable commercial-rental revenue comparisons through the year, supported by demand, pricing, fleet growth and acquisitions; it also expected favorable SCS and DCC revenue comparisons from acquisitions, freight volumes and new business.
- Q2 results included a $5.4 million non-cash tax charge from Michigan tax-law changes and Hill Hire transaction costs of approximately $1.7 million. First-half restructuring and other charges were $0.8 million; acquisition-related transaction costs brought the total excluded from segment NBT to $2.5 million.
- Risks identified include economic and freight-demand weakness, competitive pricing, customer concentration or retention, acquisition integration, the Japan earthquake’s effects, fuel and interest-rate volatility, used-vehicle values, pension funding, insurance claims, access to credit and tax audits.
- A Brazilian tax assessment related to a 2001 business sale totaled $17.8 million including interest and penalties. The tax authority sought review after an administrative court dismissed it; Ryder recorded no reserve, believing its position more likely than not to be sustained. Ryder also noted that ultimate exposure from claims and assessments tied to discontinued operations cannot be fully determined, though it did not expect a material adverse effect.
- Management stated that disclosure controls were effective and that no material changes in internal control over financial reporting occurred during the quarter. It reported no material change in market-risk exposures since year-end 2010.
Important facts for investors to verify
- Whether commercial-rental demand, pricing and used-vehicle sale prices can sustain the FMS earnings improvement, and whether older-fleet maintenance costs ease.
- How much reported growth and earnings depend on acquisitions, particularly Hill Hire and TLC, and whether preliminary purchase accounting, integration and customer-retention assumptions change.
- Whether the negative free-cash-flow outlook and $1.75 billion capital-spending plan are achieved, and the resulting effect on debt and liquidity.
- Whether the Japan earthquake continues to reduce SCS automotive volumes beyond Q2, and whether the stated Q3 impact materializes.
- Developments in the $17.8 million Brazilian tax dispute, other discontinued-operation claims, and the $63.1 million of gross unrecognized tax benefits.
- Compliance with the revolving-credit covenant (reported debt-to-tangible-net-worth ratio: 218%, against a 300% limit), available borrowing capacity, and renewal or replacement of the receivables program due to expire in October 2011.