RYDER SYSTEM INC annual report, FY2010

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Business Context and Reporting Period

Ryder System, Inc. filed this Form 10-K for the fiscal year ended December 31, 2010. Ryder provides transportation and supply-chain services through Fleet Management Solutions (FMS), Supply Chain Solutions (SCS), and Dedicated Contract Carriage (DCC). The filing also reports fourth-quarter results for the three months ended December 31, 2010.

Financial Results and Key Metrics

  • Revenue: Full-year revenue was $5.136 billion, up 5% from $4.887 billion in 2009. Operating revenue, a non-GAAP measure excluding certain largely pass-through fuel and subcontracted transportation amounts, rose 2% to $4.158 billion.
  • Earnings: Earnings from continuing operations were $124.6 million, versus $90.1 million; diluted EPS from continuing operations was $2.37, versus $1.62. Net earnings were $118.2 million ($2.25 diluted EPS), compared with $61.9 million ($1.11) in 2009. Comparable continuing-operations earnings, a non-GAAP measure, were $117.0 million ($2.22 per diluted share), up 24% and 31%, respectively.
  • Fourth quarter: Revenue increased 5% to $1.313 billion; earnings from continuing operations increased 75% to $41.5 million and diluted EPS to $0.80 from $0.43. Net earnings were $37.1 million, up from $8.2 million.
  • Segments: FMS revenue was $3.712 billion and segment net-before-tax (NBT) was $172.2 million; SCS revenue was $1.252 billion and NBT $47.1 million; DCC revenue was $482.6 million and NBT $31.0 million. FMS and SCS NBT improved 23% and 32%; DCC NBT declined 18%.
  • Costs and margins: Operating expense was 48% of revenue versus 46% in 2009, primarily reflecting higher fuel and fleet-maintenance costs. Continuing-operations pre-tax earnings were $186.3 million. The reported effective tax rate was 33.1%, benefiting from tax-audit settlements and expired statutes of limitation.
  • Cash flow and investment: Cash from continuing operating activities was $1.028 billion, up from $985.0 million. Free cash flow, a non-GAAP measure, fell to $257.6 million from $614.1 million, mainly due to higher capital spending. Cash paid for property and revenue-earning equipment was $1.070 billion; accrual-basis capital expenditures were $1.088 billion.
  • Debt and liquidity: Total debt was $2.747 billion, up from $2.498 billion; long-term debt was $2.327 billion. Debt-to-equity rose to 196% from 175% (total obligations-to-equity: 203% versus 183%). Cash and equivalents were $213.1 million. Working capital was negative $108.2 million, chiefly due to a $188 million increase in current debt. At year-end, $506 million remained available under the revolving credit facility and the receivables program could provide up to $175 million.
  • Shareholder returns: Ryder repurchased approximately 3.0 million shares for $123 million during 2010 and raised its annual dividend 8%, to $1.08 per share.

Material Changes Versus Prior Period

  • The recovery from the 2009 freight recession supported higher commercial-rental demand and pricing, stronger used-vehicle sale proceeds, increased fleet miles, and improved SCS freight volumes. Used-vehicle gains rose to $28.7 million from $12.3 million.
  • FMS full-service lease revenue fell 3% as customer fleet reductions continued and aging vehicles increased maintenance costs; commercial-rental revenue rose 22%. Global rental utilization improved to 76.1% from 68.0%.
  • SCS revenue rose 10%, including higher subcontracted transportation, while operating revenue increased 5%. DCC revenue rose 2%, but segment NBT declined, partly due to driver costs, technology investments, and unfavorable prior-year insurance-claim development.
  • Ryder acquired Total Logistic Control (TLC) on December 31, 2010 for a purchase price of $209 million; $205 million was paid in 2010. The acquisition expanded SCS warehousing, packaging, and consumer packaged goods capabilities. Results included $4 million of acquisition costs. Carmenita Leasing and Scully acquisitions closed in January 2011.
  • Capital spending increased sharply to refresh and grow the rental fleet. Debt rose with acquisitions and vehicle investment, while free cash flow decreased.

Outlook, Commentary, Risks, and Unusual Items

  • 2011 outlook: Management forecast revenue of $5.73 billion, up 12%. Forecast revenue growth was 2% for FMS contractual leasing and maintenance, 19% for commercial rental, 25% for SCS (including acquisitions), and 14% for DCC (including Scully). Management expected continued rental and used-vehicle strength and benefits from acquisitions, productivity, and prior share repurchases, partly offset by higher maintenance costs from an aging fleet.
  • Management expected 2011 capital expenditures of approximately $1.75 billion and negative free cash flow of approximately $265 million, funded through internally generated cash and additional financing. Expected 2011 pension contributions were $15 million; estimated global contributions over five years were approximately $396 million, subject to assumptions and requirements.
  • Special items affected comparability. 2010 comparable earnings exclude a $10.8 million after-tax tax benefit, a $0.9 million gain on an international asset sale, and $4.1 million of acquisition costs. 2009 comparability was affected by restructuring charges, tax benefits, and an international asset impairment. Discontinued operations generated a $6.4 million after-tax loss in 2010, mainly related to exit costs and legal developments.
  • Key risks include economic and freight-volume uncertainty; customer fleet downsizing and reluctance to enter long-term leases; used-vehicle residual-value declines; aging-fleet maintenance costs; SCS customer and automotive-industry concentration (the top ten SCS customers contributed 65% of SCS revenue, and automotive approximately 43%); driver availability and labor disruption; fuel, interest-rate, and currency fluctuations; regulatory and environmental compliance; and pension funding and self-insurance estimate volatility.
  • Management reported effective disclosure controls and internal control over financial reporting; the independent auditor issued an unqualified opinion on the financial statements and internal controls. Management stated that ordinary-course litigation, in aggregate, was not expected to materially affect consolidated financial condition or liquidity. Environmental liabilities were $14 million; Ryder noted ultimate remediation costs remain uncertain.

Important Facts for Investors to Verify

  • Whether 2011 revenue, segment growth, rental pricing, and acquisition-related expectations were achieved, and how much growth came from acquisitions versus existing operations.
  • Whether forecast capital spending and negative free cash flow translated into higher borrowing, and the company’s ability to maintain liquidity and meet debt maturities.
  • Whether used-vehicle prices and residual-value assumptions remain supportive; a 10% reduction in expected vehicle residual values was estimated to add about $100 million to 2011 depreciation expense.
  • Whether fleet aging, customer downsizing, and maintenance costs affect FMS margins, and whether DCC driver and insurance costs improve.
  • Updates to pension funding, multi-employer plan exposure, self-insurance reserves, tax uncertainties, environmental matters, and SCS customer concentration.
  • Final TLC purchase-price allocation and post-closing adjustments, as well as integration and performance of TLC and the January 2011 acquisitions.