Ryder System, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports fourth-quarter results. Amounts below are in U.S. dollars; “operating revenue” and “comparable” earnings are company-defined non-GAAP measures.
Business context
Ryder provides fleet leasing, rental and maintenance services; dedicated transportation; and supply-chain and logistics services. Its 2015 reporting segments were Fleet Management Solutions (FMS), Dedicated Transportation Solutions (DTS) and Supply Chain Solutions (SCS). FMS generated 63% of consolidated revenue and held 92% of consolidated assets; DTS and SCS represented 14% and 23% of revenue, respectively.
Financial performance and liquidity
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $6.572 billion | $6.639 billion | (1%) |
| Operating revenue | $5.561 billion | $5.252 billion | +6% |
| EBT from continuing operations | $469.2 million | $338.3 million | +39% |
| Comparable EBT | $506.0 million | $463.0 million | +9% |
| Earnings from continuing operations | $306.0 million | $220.2 million | +39% |
| Comparable earnings from continuing operations | $327.3 million | $296.9 million | +10% |
| Diluted EPS from continuing operations | $5.73 | $4.14 | +38% |
| Comparable diluted EPS | $6.13 | $5.58 | +10% |
| Operating cash flow | $1.442 billion | $1.383 billion | +4% |
| Free cash flow | $(728) million | $(315) million | Lower by $413 million |
| Total debt at year-end | $5.518 billion | $4.731 billion | +17% |
Lease and rental gross margin was $968 million, or 31% of revenue, versus $903 million and 31% in 2014. Services gross margin rose to $499 million, or 17% of revenue, from $464 million and 16%. FMS segment EBT increased 7% to $462 million; DTS rose 3% to $45.8 million; and SCS rose 21% to $93.8 million. Segment EBT is a company-defined measure and excludes certain items.
Capital expenditures paid were $2.668 billion, up from $2.259 billion, largely for lease and rental fleet investment. Cash and equivalents were $61 million. Year-end shareholders’ equity was $1.987 billion, and debt-to-equity was 278%, versus 260% in 2014. Working capital was negative $582 million, principally reflecting $598 million more current debt; management expected to refinance the 2016 maturities. The $1.2 billion revolving credit facility had $591 million available, and the $175 million receivables program had no balance outstanding at year-end.
In the fourth quarter, total revenue increased 1% to $1.673 billion and operating revenue rose 7% to $1.442 billion. Comparable EBT increased 1% to $130.8 million and comparable diluted EPS rose 4% to $1.66. GAAP EBT was $111.7 million versus $13.5 million in the prior-year quarter, substantially reflecting pension-related charges recorded in 2014.
Material changes and unusual items
- Revenue growth excluding fuel and subcontracted transportation reflected stronger activity across the segments, while lower fuel prices and foreign exchange reduced reported revenue. FMS full-service lease fleet growth and stronger rental demand and pricing supported results.
- Used-vehicle sales gains declined 7% to $117.8 million; sales volume fell 14%. Vehicles held for sale increased 45% to 8,000, and Ryder reported weaker used-vehicle market conditions late in 2015, particularly for tractors.
- 2014 earnings included a $97.2 million non-cash pension settlement loss. This makes the year-over-year increase in 2015 GAAP earnings substantially larger than the increase in comparable earnings.
- 2015 restructuring and other charges were $14.2 million, including workforce reductions and charges related to plans to sell Canadian Retail Shippers Association Logistics and close Ryder Container Terminals in Canada. The workforce action was expected to generate about $22 million in annual savings.
- Ryder revised prior-period accounting for certain sale-and-leaseback transactions, concluding they did not qualify for deconsolidation. The company said the adjustments were not material to previously issued statements; 2012–2014 figures were revised for presentation.
Outlook, commentary and risks
For 2016, Ryder forecast comparable diluted EPS of $6.10–$6.30, total revenue growth of 6% to about $7.0 billion, and operating revenue growth of 5% to about $5.8 billion. It expected approximately 3,500 additional lease vehicles, positive free cash flow of about $100 million, and capital expenditures of about $2.0 billion. Management planned minimal rental capital spending, anticipating weaker rental demand, and assumed tractor resale pricing could fall about 20% from the second-quarter 2015 peak. The outlook also incorporated a higher tax rate and negative foreign-exchange effects. Management expected leverage to decline and anti-dilutive repurchases to resume in the second half of 2016.
- Key exposures include economic and freight-cycle sensitivity; fleet utilization and capital-allocation risk; lower used-vehicle residual values and resale proceeds; and uncertainty in maintenance costs and vehicle depreciation estimates.
- SCS has customer and industry concentration: its top ten customers accounted for 54% of SCS revenue, and automotive represented approximately 41% of global SCS revenue. Customer losses, pricing pressure or weaker automotive production could affect results.
- Other material risks include driver and technician availability, safety and environmental regulation, cybersecurity and IT disruption, foreign-exchange movements, pension funding and self-insurance estimates, and access to capital markets.
- Defined-benefit pension obligations were $2.092 billion against plan assets of $1.647 billion at year-end, a $445 million funded deficit. Management estimated 2016 pension contributions of $80 million.
- Environmental liabilities were $10 million; Ryder had been identified as a potentially responsible party at 19 cleanup sites. Management did not expect ordinary-course legal matters, in aggregate, to materially affect consolidated financial condition or liquidity.
Management and the independent auditor reported effective internal control over financial reporting as of December 31, 2015. The auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether used-truck and tractor prices, sales volumes and the 8,000-unit held-for-sale inventory develop as assumed, and the resulting impact on gains and depreciation.
- Whether the 2016 earnings, revenue, positive free-cash-flow and leverage targets are achieved, given lower rental demand assumptions and planned fleet investment.
- Debt maturities and refinancing, available revolver capacity, covenant headroom and the effect of financing costs on liquidity.
- SCS customer concentration and automotive exposure, including retention, contract pricing and performance of large accounts.
- Pension funding requirements, self-insurance reserve development, environmental matters and the expected savings and execution of restructuring and Canadian business exits.
- The company’s non-GAAP comparable earnings and operating-revenue reconciliations, along with the stated prior-period sale-and-leaseback revision, when comparing reported performance.