Ryder System, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Financial statements are unaudited. Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Business context and reporting period
Ryder provides fleet leasing and rental, maintenance, fuel, supply-chain and dedicated transportation services. In 2012, Ryder combined its Supply Chain Solutions (SCS) and Dedicated Contract Carriage reporting segments; prior-period segment results were recast. This reporting change did not affect consolidated results. The 2011 Hill Hire and other acquisitions contributed to year-over-year growth.
Financial results and liquidity
| Metric | Q1 2012 | Q1 2011 / prior date | Change |
|---|---|---|---|
| Total revenue | $1,536.3 million | $1,425.4 million | +8% |
| Operating revenue (non-GAAP) | $1,228.9 million | $1,129.1 million | +9% |
| Continuing-operations pretax earnings | $47.7 million | $43.6 million | +9% |
| Continuing-operations earnings | $34.9 million | $25.9 million | +35% |
| Net earnings | $34.3 million | $25.1 million | +37% |
| Diluted EPS, continuing operations | $0.68 | $0.50 | +36% |
| Diluted EPS, net earnings | $0.67 | $0.48 | +40% |
| Continuing-operations pretax margin | 3.1% | 3.1% | Broadly unchanged |
| Cash from continuing operations | $186.3 million | $217.6 million | Down |
| Free cash flow (non-GAAP) | $(175.0) million | $(9.6) million | Down $165.3 million |
| Total debt | $3,593.2 million | $3,382.1 million at Dec. 31, 2011 | Up $211.0 million |
| Cash and cash equivalents | $113.6 million | $104.6 million at Dec. 31, 2011 | Up |
Revenue growth reflected organic activity, acquisitions and fuel services. Lease and rental revenue rose 10%, services revenue 7% and fuel services revenue 3%. Lease and rental gross margin increased 7% to $182.2 million, while its margin rate held at 29%; services gross margin rose 6% to $100.4 million and held at 15%. Fuel services gross margin was $4.5 million, or 2% of revenue.
Operating cash flow fell primarily because of higher working-capital needs. Cash purchases of property and revenue-earning equipment were $471.0 million; accrual-basis capital expenditures were $787.4 million, up 76%, primarily to refresh and grow the full-service lease fleet. Current assets were $1,122.3 million and current liabilities $1,761.7 million at March 31, a working-capital deficit of about $639.4 million. Short-term debt and current maturities rose to $586.9 million from $274.4 million at year-end.
Ryder reported $3,593.2 million of on-balance-sheet debt and $3,656.4 million of total obligations, including the present value of vehicle operating-lease payments and residual guarantees. Debt-to-equity was 262%; total-obligations-to-equity was 267%. The company had $626.9 million available under its $900 million revolving credit facility and a separate $175 million receivables program, with no amounts outstanding under the receivables program.
Material changes versus the prior comparable period
- Segment EBT rose 15% to $66.1 million before unallocated corporate support costs, non-service pension costs and restructuring charges. FMS EBT increased 20% to $50.7 million; SCS EBT increased 8% to $21.9 million.
- Used-vehicle sale gains increased 78% to $22.0 million, supported by 10% higher pricing and more vehicles sold.
- SG&A increased 13% to $196.0 million; its share of revenue rose to 13% from 12%. Ryder cited higher staffing, sales commissions and pension expense.
- Interest expense increased 1% to $34.8 million. The effective interest rate declined to 4.0% from 5.0%, while average debt was higher.
- Capital spending and growth in the lease fleet increased debt and made free cash flow substantially more negative.
Outlook, commentary, risks and unusual items
- Management maintained its 2012 outlook for negative free cash flow of approximately $430 million and accrual-basis capital expenditures of approximately $2.15 billion.
- Ryder expected favorable full-service lease revenue comparisons through the year, supported by organic growth and acquisitions; favorable rental comparisons were expected to continue, driven by pricing. It also expected SCS revenue comparisons to benefit from freight volumes and new business.
- Management said operating cash flows and available financing should meet foreseeable needs, but warned that disruption in commercial-paper markets could impair access to funding. The revolving facility’s debt-to-tangible-net-worth covenant ratio was 259% at quarter-end; an April 20, 2012 amendment would have reduced the ratio to 183% using the amended definition.
- The effective tax rate was 26.9%, versus 40.7% a year earlier. Q1 2012 earnings included a $5.0 million tax benefit from favorable resolution of a prior-period tax item. Ryder’s comparable earnings measure excluded this benefit and acquisition-related restructuring charges; adjusted continuing-operations earnings were $30.6 million and diluted EPS $0.59, each up 16% as reported by management.
- A change in estimated residual values for certain vehicles increased Q1 pretax earnings by approximately $4.5 million. Restructuring and other charges were $0.9 million, primarily facility-exit costs from Hill Hire. Discontinued operations recorded a $0.6 million loss, including legal and professional costs related to discontinued South American operations.
- Key risks include weaker freight demand or customer activity, competition and pricing pressure, used-vehicle market and residual-value changes, fuel-price volatility, acquisition integration, labor and driver availability, pension funding, access to credit, tax audits and litigation. Ryder reported no material change in market-risk exposures since year-end.
- Ryder reported that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter. It also reported resolution of a $15.7 million Brazilian tax assessment in its favor.
Important facts for investors to verify
- Whether 2012 revenue and segment growth continued to translate into sustained earnings growth after the $5.0 million tax benefit and the $4.5 million residual-value estimate benefit.
- Whether fleet utilization, lease-fleet maintenance costs, used-vehicle prices and disposal volumes support management’s margin and residual-value assumptions.
- Whether planned capital spending, negative free cash flow and higher debt remain consistent with the company’s funding capacity, covenant headroom and refinancing access.
- Whether pension contributions, working-capital needs, tax contingencies, litigation and other claims develop as expected.
- How the April 20 covenant amendment affects facility availability and whether the receivables program is renewed before its October 26, 2012 expiration.