Ryder System, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Ryder provides fleet leasing and rental, dedicated transportation, and supply chain services. Comparisons are with Q1 2014 unless noted. The company reorganized its supply chain reporting into Fleet Management Solutions (FMS), Dedicated Transportation Solutions (DTS), and Supply Chain Solutions (SCS), and recast prior-period segment figures; this did not affect consolidated results.
Financial results and key metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $1.567 billion | $1.611 billion | Down 3% |
| Operating revenue (non-GAAP) | $1.300 billion | $1.243 billion | Up 5% |
| Continuing-operations pretax earnings | $84.4 million | $75.0 million | Up 12% |
| Continuing-operations earnings | $53.5 million | $49.1 million | Up 9% |
| Net earnings | $52.9 million | $48.2 million | Up 10% |
| Diluted EPS, continuing operations | $1.00 | $0.92 | Up 9% |
| Comparable diluted EPS (non-GAAP) | $1.08 | $0.92 | Up 17% |
| Operating cash flow, continuing operations | $277.9 million | $237.7 million | Up |
| Free cash flow (non-GAAP) | $(162.0) million | $(198.5) million | Improved |
Lower fuel prices passed through to customers and foreign exchange reduced reported total revenue. Operating revenue excludes fuel and subcontracted transportation and grew on organic business growth, partly offset by currency effects. Comparable earnings exclude non-operating pension costs and other specified items; they are non-GAAP measures and should be read alongside GAAP results.
Margins: Lease and rental gross margin was $209.9 million, 29% of revenue, versus $196.6 million and 29%. Services gross margin was $111.4 million, or 16%, versus $103.5 million and 15%. Fuel services gross margin was $8.1 million, or 6%, versus $4.2 million and 2%; the quarter benefited from rapid fuel-price declines and purchasing/pricing timing.
Segments: FMS EBT rose 17% to $89.9 million; operating revenue rose 5% to $899.2 million. DTS EBT rose 3% to $9.0 million; operating revenue rose 6% to $165.8 million. SCS EBT rose 20% to $15.7 million; operating revenue rose 4% to $295.4 million. Management attributed improvements principally to stronger FMS rental and lease performance and better SCS operating results. Segment EBT is a company-defined measure that includes allocated support costs and excludes specified items.
Balance sheet and liquidity at March 31, 2015: Cash was $72.2 million; total assets $9.907 billion; total debt $4.704 billion, compared with $4.512 billion at year-end 2014; and shareholders’ equity $1.812 billion. On-balance-sheet debt was 260% of equity and total obligations, including specified vehicle operating-lease obligations, were $4.890 billion, or 270% of equity. The $1.2 billion revolving credit facility had $695 million available after commercial paper borrowings; the separate $175 million receivables program had no borrowings outstanding. The company reported a 197% debt-to-net-worth covenant ratio against a 300% limit. A $400 million medium-term note issuance in February was used to repay maturing debt and for general corporate purposes.
Cash flow and investment: Capital expenditures paid were $553.2 million; accrual-basis capital expenditures were $653.2 million. Free cash flow remained negative because vehicle investment exceeded cash generated. Operating cash flow improved, which management linked to higher earnings and lower working-capital needs from improved collections. Cash increased from $50.1 million at year-end to $72.2 million.
Material changes versus the prior period
- Fuel services revenue fell 32% to $144.4 million as fuel prices declined; total revenue fell even as operating revenue increased.
- SG&A rose 8% to $206.6 million, reflecting higher compensation and pension expense. Interest expense increased 2% to $35.8 million as higher average debt offset a lower effective rate.
- Gains on vehicle sales increased 3% to $29.6 million, with higher average proceeds per unit partly offset by 23% lower sales volume.
- Debt and leverage increased, primarily to fund planned vehicle capital spending and partly due to foreign exchange. The company paused anti-dilutive share repurchases for the first half of 2015.
- Other comprehensive loss was $52.8 million, principally from $57.4 million of currency translation losses related mainly to the weaker Canadian dollar and British pound. Comprehensive income was $0.2 million.
Outlook, commentary, risks, and unusual items
- Management expected 2015 accrual-basis capital expenditures of $2.63 billion, up from its previous $2.55 billion expectation, to support stronger rental demand. Funding was expected from internal cash generation, debt, and sale-leaseback transactions.
- Management expected favorable full-year comparisons for FMS full-service lease and commercial rental revenue, and favorable DTS operating-revenue comparisons. SCS operating-revenue comparisons were expected to remain favorable but at a lower growth rate.
- Management believed operating cash flow and access to commercial paper and other financing would meet foreseeable needs, while warning that market disruption or a downgrade could impair unsecured funding access. Pension contributions were expected to total approximately $39 million in 2015; $3.9 million had been contributed in Q1.
- A change in equipment residual-value and useful-life estimates effective January 1, 2015 increased Q1 pretax earnings by approximately $10.0 million. The filing notes that future residual values and used-vehicle markets remain uncertain.
- Q1 comparable results exclude $4.9 million of non-operating pension costs and $1.8 million of professional fees for cost-saving initiatives. Q1 2014 included a $1.8 million tax benefit from a New York tax-law change. Discontinued South American operations recorded a $0.5 million loss in Q1 2015.
- Risks highlighted include economic and freight-demand changes, competition and pricing pressure, customer concentration or losses, fuel-price volatility, labor and driver/technician availability, maintenance costs, vehicle residual values, pension funding, insurance claims, currency and interest-rate movements, and access to credit.
- Ryder disclosed ordinary-course claims and proceedings and said other reasonably possible losses were not expected to materially affect consolidated results. A Brazil tax dispute involving $5 million of assessments has a reasonable possibility of an adverse reversal; no reserve was recorded, and partial indemnification may be available.
Important facts for investors to verify
- Whether operating-revenue and comparable-earnings growth persists, and how non-GAAP reconciliations compare with GAAP results.
- How much of Q1 earnings growth depended on the $10 million residual-value estimate benefit and favorable fuel-price timing.
- Whether projected $2.63 billion capital expenditures, negative free cash flow, and higher leverage remain consistent with liquidity and covenant headroom.
- Whether rental demand, fleet utilization, used-vehicle proceeds, and residual values support management’s outlook.
- Developments in pension funding, insurance exposures, the Brazil tax matter, and access to commercial paper and the receivables program.