Ryder System, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; unaudited results compared with Q1 2010. Ryder provides fleet management, supply chain and dedicated transportation services.
Financial results and liquidity
Unless otherwise noted, amounts are in millions of dollars. Revenue includes fuel and other pass-through amounts; Ryder also reports operating revenue, a non-GAAP measure that excludes specified pass-throughs.
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $1,425.4 | $1,219.9 | +17% |
| Operating revenue (non-GAAP) | $1,129.1 | $987.6 | +14% |
| Continuing pretax earnings | $43.6 | $22.5 | +94% |
| Continuing earnings | $25.9 | $12.9 | +101% |
| Net earnings | $25.1 | $12.4 | +103% |
| Diluted EPS, continuing operations | $0.50 | $0.24 | +108% |
| Diluted EPS, net earnings | $0.48 | $0.23 | +109% |
| Operating cash flow, continuing operations | $217.6 | $271.5 | Down |
| Free cash flow (non-GAAP) | $(9.6) | $135.9 | Down $145.6 |
| Total debt at March 31, 2011 | $2,809.1 | $2,747.0 at Dec. 31, 2010 | Up $62.1 |
Continuing pretax margin was approximately 3.1%, versus 1.8% a year earlier. The effective tax rate declined to 40.7% from 42.8%. Cash and cash equivalents were $155.6 at March 31, down from $213.1 at year-end. Total assets were $6,982.2 and shareholders’ equity was $1,440.3.
Cash used in investing activities was $311.3, chiefly reflecting higher vehicle spending and acquisition payments; financing activities provided $37.0, compared with $114.9 used in Q1 2010. Accrual-basis capital expenditures rose 62% to $448.0. The $875 million revolving facility had $796.6 available, net of commercial-paper support; the company also reported $175 million available under its receivables program. The revolver matures in April 2012. Debt-to-equity was 195%; total obligations, including specified operating-lease obligations, were $2,907.9, or 202% of equity.
Material changes and segment performance
- Revenue growth reflected acquisitions, higher fuel pass-throughs and organic growth. Operating revenue increased 14%; foreign exchange contributed about 1 percentage point.
- FMS: Revenue rose 11% to $980.1 and segment net before taxes (NBT) increased 78% to $38.6. Commercial rental revenue rose 34%, supported by improved demand, higher pricing and a larger fleet. Higher maintenance costs on a comparatively older full-service lease fleet and increased compensation partly offset gains.
- SCS: Revenue rose 36% to $401.0 and NBT increased 72% to $12.1, principally from the Total Logistic Control acquisition, higher freight volumes and better operating performance.
- DCC: Revenue rose 16% to $134.7, while NBT was essentially unchanged at $7.4. Scully acquisition benefits were offset by customer-location closure costs and higher driver costs.
- Operating cash flow fell $53.9, mainly due to greater working-capital needs. Receivables used $51.1 of cash, versus $0.4 in the prior-year quarter.
Outlook, commentary, risks and unusual items
- Management reiterated 2011 expectations for approximately $1.75 billion of accrual-basis capital expenditures and negative free cash flow of approximately $265 million, as lease-equipment capital spending was expected to rise through the year.
- Ryder expected favorable full-year revenue comparisons in commercial rental, SCS and DCC. It expected commercial rental gains from demand and pricing, and SCS growth from TLC, freight volumes and new business.
- The Japan earthquake and tsunami had no significant Q1 impact. Ryder estimated automotive customer production cuts could reduce diluted EPS by $0.04–$0.05 in Q2 and $0.10–$0.15 for full-year 2011; management expected production to ramp up in the second half, subject to changing conditions.
- Q1 included a $1.2 million non-cash Illinois tax-law charge, or $0.02 per diluted share; $0.8 million of restructuring and other charges, including workforce and Scully-related contract costs; and a $1.4 million pretax benefit, or $0.02 per diluted share, from revised vehicle residual-value estimates. FMS also benefited from a $2.4 million facility-sale gain. Discontinued operations generated a $0.7 million after-tax loss, including costs related to adverse legal developments and administration of former South American operations.
- Acquisitions included Scully ($90.7 million purchase price, including $14.4 million contingent consideration), Carmenita ($9.0 million), and TLC (acquired December 31, 2010, for $208.0 million). Purchase accounting remained preliminary for certain transactions. An additional BIT Leasing asset purchase agreement for $13.8 million was signed April 1, 2011.
- Risks highlighted include freight and automotive demand, fuel and used-vehicle price changes, competition and pricing, acquisition integration, labor and driver availability, pension funding, insurance claims, tax audits, and access to credit. Ryder said it expected operating cash flows and available financing to meet foreseeable needs, while noting that market disruption or credit-rating downgrades could constrain funding. The $17.0 million Brazilian tax assessment was dismissed by an administrative court, but the appeal period had not closed; no reserve was recorded.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether projected 2011 capital spending and negative free cash flow translate into higher borrowing and how vehicle investment affects liquidity.
- Whether the forecast Japan-related SCS earnings impact and anticipated second-half automotive recovery materialize.
- How much segment growth reflects organic demand versus TLC, Scully and Carmenita acquisitions, and whether preliminary purchase accounting changes.
- Whether FMS maintenance costs, used-vehicle prices and rental utilization support continued margin improvement.
- Debt maturities and refinancing capacity, including the April 2012 revolver renewal, covenant headroom and the status of tax and discontinued-operation contingencies.