Ryder System, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Ryder provides fleet leasing and rental, dedicated transportation, and supply-chain services. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $1,703.7 | $1,662.9 | $3,333.4 | $3,230.1 |
| Operating revenue (non-GAAP) | $1,449.7 | $1,392.6 | $2,855.7 | $2,692.9 |
| Continuing-operations earnings | $74.0 | $85.9 | $130.2 | $139.2 |
| Diluted continuing-operations EPS | $1.38 | $1.61 | $2.43 | $2.61 |
| EBT | $116.8 | $133.4 | $205.5 | $217.6 |
| Comparable diluted EPS (non-GAAP) | $1.56 | $1.65 | $2.68 | $2.72 |
- Q2 total revenue rose 2% and operating revenue rose 4%; first-half growth was 3% and 6%, respectively. Lower fuel passed through to customers and foreign exchange weighed on reported revenue.
- Q2 services revenue increased 7%, with gross margin of $139.7 million and an 18% margin, unchanged year over year. Lease-and-rental revenue grew 2%, but gross margin fell 2% to $243.1 million and margin narrowed to 30% from 32%. Fuel-services revenue declined 19%; its gross margin was $4.1 million.
- Q2 EBT fell 12%; comparable EBT fell 6%. Management attributed the pressure mainly to weaker commercial rental and used-vehicle results, non-operating pension costs, a pension-related charge, and foreign exchange. DTS EBT increased 32% and SCS EBT 2%; FMS EBT declined 9%.
- Six-month operating cash flow from continuing operations was $762.7 million, versus $658.7 million. Capital expenditures were $1,014.7 million; cash paid for property and revenue-earning equipment was $1,120.2 million. Free cash flow, a company-defined non-GAAP measure, was negative $61.6 million, compared with negative $424.8 million.
- At June 30, cash was $66.0 million; total debt was $5.634 billion, up from $5.503 billion at year-end. Current liabilities were $2.018 billion and current assets $1.126 billion. The company reported $424.7 million available on its $1.2 billion revolver and $175 million available under its receivables program. Its credit-facility debt-to-net-worth covenant ratio was 214%, against a 300% maximum; debt-to-equity was 275%.
- Q2 declared dividends were $0.41 per share; first-half dividends were $0.82 per share. First-half share repurchases totaled $21.9 million.
Changes versus the prior period
- Despite higher revenue, reported continuing-operations earnings decreased 14% in Q2 and 6% in the first half; diluted continuing-operations EPS declined 14% and 7%, respectively. Comparable diluted EPS declined 5% and 1%.
- Used-vehicle gains, net, fell to $12.0 million in Q2 from $30.0 million and to $31.1 million in the first half from $57.2 million. Management cited lower sale proceeds and increased fair-value write-downs; used-vehicle inventory was higher.
- Commercial rental utilization fell 340 basis points to 74.7% in Q2. In contrast, the average full-service lease fleet was 5% larger year over year, and DTS and SCS benefited from new business, volumes, and pricing.
- Operating cash flow improved, while capital spending and investing cash outflow declined year over year. Total debt increased by $131.4 million in the first half.
Outlook, commentary, and risks
- Management expected 2016 capital expenditures of approximately $2 billion, primarily funded by internally generated cash and additional debt financing. Expected 2016 pension contributions were approximately $80 million; $42.3 million had been contributed through June.
- Management expected favorable full-service lease revenue comparisons through year-end, but continued weaker commercial-rental comparisons. DTS operating-revenue comparisons were expected to remain favorable at a lower growth rate; SCS operating-revenue comparisons were expected to remain favorable. No consolidated earnings or EPS guidance is stated in the provided filing text.
- A one-time, non-cash $7.7 million pension charge was recorded in Q2 for benefit improvements made in 2009 that had not been fully reflected in the pension obligation. The filing also reports a $12.8 million pre-tax increase to accumulated other comprehensive loss relating to the correction.
- Lease-and-rental costs benefited by approximately $9 million in Q2 and $17 million in the first half from residual-value estimate changes effective January 1, 2016. Used-vehicle sale prices and write-downs remain sensitive to market conditions.
- Principal stated risks include economic and freight-demand changes, commercial-rental utilization and used-vehicle values, customer concentration or loss, competition and pricing, fuel-price volatility, labor availability and costs, pension funding, insurance claims, foreign exchange, and continued access to commercial-paper and other debt markets.
- Ordinary-course claims and proceedings were not expected by management to have a material effect. A Brazil tax assessment of approximately $5 million remains subject to possible reversal on appeal; Ryder stated that no reserve was recorded and that partial indemnification may apply.
- The receivables program was scheduled to expire October 21, 2016 absent early termination. Management believed available operating cash flows and financing would meet foreseeable needs, while noting that market disruption could limit access to commercial paper.
Most important facts to verify
- Reconcile GAAP and comparable earnings, including the pension charge and non-operating pension adjustments.
- Monitor used-vehicle sale prices, fair-value write-downs, held-for-sale inventory, and commercial-rental utilization.
- Compare actual capital expenditures and pension contributions with management’s 2016 expectations, and assess resulting debt and free-cash-flow needs.
- Confirm ongoing revolver covenant headroom, refinancing requirements, commercial-paper access, and renewal or replacement of the receivables program.
- Track whether segment growth and pricing offset lower rental demand, fuel-related revenue, and foreign-exchange effects.