Ryder System, Inc. — Q3 2014 Form 10-Q
Period: Three and nine months ended September 30, 2014. Unaudited results; amounts below are in U.S. dollars.
Business context and performance
Ryder provides fleet leasing, rental and maintenance through Fleet Management Solutions (FMS), and supply-chain and transportation services through Supply Chain Solutions (SCS). Q3 growth was led by FMS; SCS revenue grew modestly but segment earnings declined.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $1.687bn | $1.635bn | $4.982bn | $4.802bn |
| Operating revenue (non-GAAP) | $1.416bn | $1.345bn | $4.131bn | $3.926bn |
| Continuing-operations pretax earnings | $129.7m | $111.4m | $324.8m | $271.3m |
| Continuing-operations earnings | $84.0m | $73.9m | $208.8m | $177.3m |
| Net earnings | $83.7m | $71.1m | $207.3m | $173.2m |
| Diluted EPS, continuing operations | $1.58 | $1.40 | $3.92 | $3.39 |
| Operating cash flow, continuing operations | Not presented for quarter | Not presented for quarter | $974.7m | $890.0m |
Q3 total revenue rose 3%, pretax earnings 16%, and diluted continuing-operations EPS 13%. For the first nine months, those measures increased 4%, 20%, and 16%, respectively. Comparable diluted EPS, a non-GAAP measure excluding specified items, was $1.63 for Q3 and $3.98 year to date.
Margins, segments, cash flow and liquidity
- FMS: Q3 revenue was $1.187bn, up 4%; segment EBT was $121.0m, up 25%. EBT margin on total revenue improved to 10.2% from 8.5%. Results benefited from stronger used-vehicle proceeds, rental pricing and demand, lease fleet growth, and lower depreciation expense from revised residual-value estimates.
- SCS: Q3 revenue was $617.8m, up 1%; operating revenue excluding subcontracted transportation was $545.0m, up 3%. Segment EBT fell 9% to $36.2m; EBT margin on operating revenue declined to 6.6% from 7.5%. Lost business, shutdown costs and start-up costs on an international account weighed on earnings.
- Gross margins: Lease and rental gross margin was 31% of revenue in Q3 and 30% year to date, unchanged year over year. Services gross margin was 17% in Q3 and 16% year to date, also unchanged; year-to-date margin dollars were slightly lower. Fuel services margin was approximately 2% in both periods.
- Cash generation and investment: Nine-month free cash flow, as defined by Ryder (non-GAAP), was negative $197.4m versus negative $206.2m. Cash purchases of property and revenue-earning equipment were $1.741bn, compared with $1.496bn. Cash and equivalents were $75.0m at September 30, 2014.
- Debt and liquidity: Total debt was $4.508bn, up from $4.189bn at year-end 2013; total obligations including specified vehicle operating-lease commitments were $4.707bn. Current assets were $1.122bn and current liabilities $1.476bn. Ryder reported $564m available under its $900m revolving facility and $175m available under its receivables program. The debt-to-net-worth covenant ratio was 184%, against a maximum of 300%.
Material changes and notable items
- Nine-month debt increased by $318.1m, principally reflecting vehicle investment; the company issued $750m of medium-term notes in February and May, using proceeds to reduce commercial paper and for general purposes.
- Higher vehicle capital spending was partly offset by increased used-vehicle sale proceeds and a Q3 sale-leaseback that generated $125.8m. Ryder expects 2014 capital expenditures of approximately $2.31bn.
- Revised residual values and useful lives for certain vehicles increased pretax earnings by approximately $6.3m in Q3 and $18.8m year to date.
- Ryder repurchased 1.17m shares for $92.3m in the first nine months under its anti-dilution program. Dividends declared were $1.05 per share year to date; the October 2014 quarterly dividend was $0.37 per share.
- Ryder acquired U.K. trailer repair and maintenance company Bullwell Trailer Solutions in August for approximately $14.6m, including contingent consideration; the acquisition was not material to consolidated results.
- Discontinued operations produced losses of $0.3m in Q3 and $1.5m year to date, primarily related to legal developments and costs associated with former South American operations.
Outlook, risks and contingencies
- Management expected favorable FMS full-service lease and commercial rental revenue comparisons to continue through year-end, based on sales activity, fleet growth, rental pricing and North American demand. Ryder expected SCS revenue comparisons to remain favorable, but at a slightly lower growth rate.
- Management expected to fund fourth-quarter capital expenditures primarily with internally generated funds and considered operating cash flow and available financing adequate for foreseeable needs. It cautioned that disruption in commercial-paper markets could restrict access to funding.
- In October, Ryder offered approximately 11,000 former employees a lump-sum pension benefit distribution. It expected a Q4 settlement charge of $0.75–$1.00 per diluted share, assuming 40%–50% acceptance; the final amount depends on acceptance. The offer covered deferred vested benefits of approximately $370m, and distributions were to come from existing plan assets.
- The receivables program, with a $175m limit, was due to expire October 24, 2014, absent early termination; Ryder was seeking renewal through October 2015. Its availability may be restricted under specified adverse conditions.
- Risks identified include economic and freight-demand weakness, customer losses and volume volatility, competition and pricing pressure, fuel and vehicle-cost changes, labor and driver availability, severe weather, pension funding and interest-rate exposure, access to credit, residual-value estimates, and legal and insurance claims. Management stated that reasonably possible losses from continuing-operation claims were not expected to have a material effect, while noting actual outcomes may differ from estimates.
- A $4.8m Brazilian tax assessment related to 1997–1998 remained subject to possible reversal of favorable lower-court rulings. Ryder reported no reserve, believed its position more likely than not to be sustained on appeal, and cited partial indemnification rights.
Key facts for investors to verify
- Whether FMS growth and used-vehicle proceeds remain strong, and whether rental utilization and pricing trends improve or weaken.
- Whether SCS profitability recovers as lost-business shutdown costs and international-account start-up costs run off.
- Actual 2014 capital expenditures, free cash flow, debt levels and refinancing needs, including renewal of the receivables program.
- The final Q4 pension settlement charge and acceptance rate, and subsequent pension funding assumptions.
- The ongoing effect of the residual-value and useful-life estimate changes on depreciation and earnings.
- Developments in the Brazilian tax assessment and other legal, insurance and discontinued-operation contingencies.