Ryder System, Inc. — Q1 2016 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2016, compared with Q1 2015. Ryder provides fleet leasing and rental, dedicated transportation, and supply-chain services through Fleet Management Solutions (FMS), Dedicated Transportation Solutions (DTS), and Supply Chain Solutions (SCS).
Key financial results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $1.630 billion | $1.567 billion | +4% |
| Operating revenue (non-GAAP) | $1.406 billion | $1.300 billion | +8% |
| EBT from continuing operations | $88.7 million | $84.2 million | +5% |
| Continuing-operations earnings | $56.2 million | $53.3 million | +5% |
| Net earnings | $55.8 million | $52.8 million | +6% |
| Diluted EPS, continuing operations | $1.05 | $1.00 | +5% |
| Comparable diluted EPS (non-GAAP) | $1.12 | $1.08 | +4% |
| Cash dividends declared per share | $0.41 | $0.37 |
Services gross margin rose to $127.4 million (17% of revenue, versus 16%); lease and rental gross margin increased to $215.3 million but declined to 28% of revenue from 29%. Fuel services gross margin fell to $3.9 million from $8.1 million, reflecting fuel-price timing and pass-through effects. The filing does not report a consolidated operating margin.
Cash flow, debt, and liquidity
- Continuing-operations operating cash flow was $365.0 million, versus $283.8 million. Investing cash outflow was $429.0 million; financing cash inflow was $63.5 million. Cash declined $4.0 million during the quarter to $56.8 million.
- Capital expenditures were $497.5 million; cash paid for property and revenue-earning equipment was $575.0 million. Free cash flow, as defined by Ryder (non-GAAP), was negative $63.8 million, improved from negative $156.1 million.
- Total debt was $5.599 billion at March 31, up $96.8 million from year-end; long-term debt was $4.987 billion. Debt-to-equity was 274%, compared with 277% at December 31, 2015.
- Available funding included $488.9 million under the $1.2 billion revolving credit facility, net of commercial paper borrowings, and a $175 million receivables program with no amounts outstanding. The facility covenant debt-to-net-worth ratio was 214% against a maximum of 300%. Cash included $29.4 million held outside the U.S.
- Interest expense was $37.9 million, up 3%; the effective interest rate declined to 2.7% from 3.1%. The company issued $300 million of medium-term notes in February 2016, principally to repay maturing debt and for general corporate purposes.
Material changes and management commentary
- Operating revenue grew across all segments, driven by full-service lease fleet growth and replacement-vehicle pricing in FMS, and new business, higher volumes, and pricing in DTS and SCS. Foreign exchange reduced reported growth.
- FMS EBT declined 8% to $82.9 million. Lower used-vehicle results, higher insurance costs, weaker rental results and fuel margins outweighed lease growth. Commercial rental utilization fell 300 basis points to 70.4%.
- DTS EBT rose 59% to $14.3 million; SCS EBT rose 26% to $19.8 million. Comparable company EBT was $95.6 million versus $90.9 million; this non-GAAP measure excludes non-operating pension costs and, in 2015, professional fees.
- Used-vehicle results declined 30% to $19.1 million of net gains, mainly due to higher fair-value write-downs and lower gains on sales. Ryder cited an 8% decline in tractor proceeds per unit, partly offset by a 6% increase for trucks.
- FMS lease and rental costs benefited by approximately $9 million from residual-value and useful-life estimate changes effective January 1, 2016. The benefit was partly offset by unfavorable prior-year self-insurance developments and increased maintenance costs.
Outlook, risks, and unusual items
- Management expected 2016 capital expenditures of approximately $2.0 billion, funded primarily by internally generated cash and additional debt. Expected 2016 pension contributions were approximately $80 million; $20.2 million was contributed in Q1.
- Management expected favorable full-service lease revenue comparisons to continue through year-end, but projected weaker commercial rental demand and unfavorable rental revenue comparisons. DTS and SCS operating-revenue comparisons were expected to remain favorable, with lower growth rates.
- Ryder expected to resume its anti-dilutive share-repurchase program in Q2 2016. No program repurchases were made during Q1; the 30,552 shares reported as purchased were employee-related transactions.
- Principal risks include weaker freight or rental demand, used-vehicle pricing and residual-value changes, maintenance and insurance costs, customer concentration or losses, fuel-price volatility, labor availability, pension funding, interest-rate and currency movements, and access to capital markets. Ryder cautioned that disruption in commercial-paper markets could affect funding access.
- Ordinary-course claims and proceedings were not expected to have a material effect, according to management. A Brazilian tax assessment of approximately $5 million had a reasonable possibility of reversal against Ryder; no reserve was recorded, and potential indemnification may reduce exposure.
- Prior-period cash-flow statements were revised for sale-and-leaseback accounting presentation; management said the revision was not material to previously issued statements. Used-vehicle fair-value adjustment losses were reclassified within the income statement, with prior periods conformed. The filing also notes adoption of the debt-issuance-cost presentation standard in 2016.
- Disclosure controls were concluded effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether lease-fleet growth, DTS/SCS new business and pricing persist, and whether rental utilization and demand stabilize.
- Used-truck and tractor pricing, fair-value write-downs, fleet held for sale, and the assumptions behind residual values and useful lives.
- Progress toward the approximately $2.0 billion capital-expenditure plan, free-cash-flow generation, and associated borrowing needs.
- Insurance-claim development, maintenance costs, and pension assumptions, funding status, and contributions.
- Continued access to commercial paper and committed facilities, covenant headroom, and the October 2016 receivables-program expiry.
- Resolution and potential exposure from the Brazilian tax matter and other legal or environmental contingencies.