Ryder System, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; filed October 25, 2011. Ryder provides Fleet Management Solutions (FMS), Supply Chain Solutions (SCS), and Dedicated Contract Carriage (DCC). Financial statements are unaudited.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $1,570.7 million | $1,316.9 million | $4,509.4 million | $3,823.0 million |
| Operating revenue (non-GAAP) | $1,256.5 million | $1,071.6 million | $3,577.6 million | $3,096.3 million |
| Pre-tax earnings from continuing operations | $87.7 million | $62.0 million | $206.3 million | $136.7 million |
| Earnings from continuing operations | $56.9 million | $39.7 million | $123.7 million | $83.1 million |
| Net earnings | $56.5 million | $38.8 million | $121.7 million | $81.0 million |
| Diluted EPS, continuing operations | $1.10 | $0.76 | $2.39 | $1.57 |
| Diluted EPS, net earnings | $1.10 | $0.74 | $2.35 | $1.53 |
- Revenue rose 19% in Q3 and 18% year to date; operating revenue increased 17% and 16%, respectively. Acquisitions contributed 11% of Q3 and 9% of year-to-date total revenue growth; organic growth, including price and volume, contributed 3% and 4%.
- Pre-tax earnings from continuing operations increased 41% in Q3 and 51% year to date. Management attributed improvement primarily to stronger commercial rental performance and used-vehicle sale results. Acquisitions accounted for 27% of Q3 and 22% of year-to-date pre-tax earnings growth.
- Q3 effective tax rate was 35.0%, versus 36.0%; the year-to-date rate was 40.0%, versus 39.2%. Michigan and Illinois tax-law changes reduced nine-month earnings by $5.4 million and $1.2 million, respectively.
- Q3 operating expense was $758.7 million, up 21%; salaries and employee-related costs were $383.9 million, up 22%. Maintenance costs rose, in part due to an older lease fleet. Gains on vehicle sales were $18.3 million in Q3 and $46.3 million year to date.
Segments and margins
- FMS: Q3 revenue was $1,099.0 million, up 16%; segment net before taxes (NBT) was $74.2 million, up 35%. NBT was 6.7% of total revenue and 9.0% of operating revenue. Commercial rental revenue increased 40%; rental power-fleet utilization was 79.3%, essentially flat year over year.
- SCS: Q3 revenue was $406.1 million, up 26%; NBT was $22.4 million, up 47%. NBT was 5.5% of total revenue and 6.9% of operating revenue. TLC acquisition effects were a major contributor to growth.
- DCC: Q3 revenue was $158.9 million, up 31%; NBT was $8.4 million, down 3%. NBT was 5.3% of total revenue and 5.6% of operating revenue. Higher compensation expense and legal claims partly offset improved operations.
Cash flow, debt and liquidity
- Nine-month operating cash flow from continuing operations was $782.3 million, compared with $804.2 million a year earlier. Cash used in investing was $1,254.4 million, including $362.2 million for acquisitions; cash from financing was $372.1 million. Cash and equivalents declined to $115.8 million from $213.1 million at year-end 2010.
- Free cash flow, a company-defined non-GAAP measure, was negative $112.8 million, versus positive $153.0 million. Management maintained its full-year 2011 free-cash-flow forecast of negative $215 million and accrual-basis capital-expenditure forecast of $1.75 billion. Nine-month capital expenditures were $1,249.1 million on an accrual basis.
- Total debt was $3,198.6 million at September 30, up $451.6 million from year-end; total obligations including specified operating-lease commitments were $3,263.1 million. Debt to equity was 220%, versus 196% at year-end.
- A new $900 million revolving credit facility matures in June 2016; $631.1 million was available at quarter-end. The separate receivables program provided up to $175 million, with no borrowings outstanding; renewal through October 2012 was in process. The filing reported a 214% covenant ratio against a maximum of 300%.
Changes, outlook and notable items
- 2011 acquisitions included U.K.-based Hill Hire, TLC (acquired at the end of 2010), Scully, BIT and Carmenita. The acquisitions expanded fleet, customer and service coverage; acquired businesses contributed $338.8 million revenue and $18.9 million net earnings for the nine months, according to the filing.
- Management expected favorable FMS full-service lease and commercial rental comparisons through year-end, supported by acquisitions, rental demand and pricing. It expected favorable SCS comparisons from TLC, freight volumes and new business, and favorable DCC comparisons from Scully. These are directional outlook statements; no full-year earnings or EPS guidance is stated in the provided text.
- Q3 had no restructuring charge. Year-to-date charges were $0.8 million, and acquisition transaction costs were $2.2 million. Vehicle residual-value estimate changes increased pre-tax earnings by approximately $4.1 million year to date.
- Discontinued South American operations generated a $2.0 million after-tax loss year to date, including legal developments and professional and administrative costs, partly offset by recoveries. A Brazilian tax assessment of $15.7 million remained under review; Ryder recorded no reserve, stating it believed its position would be sustained.
- Ryder disclosed wage-and-hour class-action lawsuits for which it could not estimate a reasonably possible loss range, alongside ordinary-course litigation, environmental, insurance and tax matters. Management stated that an unfavorable resolution could affect results in a particular period, but did not expect resulting liabilities to materially affect consolidated financial position.
- Management cited market demand, freight volumes, used-vehicle prices and residual values, fuel costs, acquisition integration, labor availability, credit-market access, interest and currency rates, pensions, and claims as risks to results and outlook.
Key facts for investors to verify
- How much reported growth and profit improvement is sustainable organically versus acquisition-driven, particularly as acquisition comparisons change.
- Whether rental pricing and utilization, used-vehicle sale gains, and vehicle residual values remain supportive of FMS earnings.
- Whether capital spending, working-capital needs and acquisition integration keep full-year free cash flow near management’s negative $215 million forecast.
- Debt growth, revolving-facility availability, receivables-program renewal and covenant headroom.
- Developments in the Brazilian tax matter, wage-and-hour litigation, insurance claims and pension funding assumptions.