Business context and reporting period
Ryder System, Inc. filed this Form 10-K for the fiscal year ended December 31, 2016; the filing also reports fourth-quarter results. Ryder provides fleet leasing, rental and maintenance, dedicated transportation, and supply-chain services through Fleet Management Solutions (FMS), Dedicated Transportation Solutions (DTS), and Supply Chain Solutions (SCS). FMS generated 61% of consolidated revenue, DTS 15%, and SCS 24%.
Financial and operating performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Total revenue | $6.787 billion | $6.572 billion | +3% |
| Operating revenue, excluding fuel and subcontracted transportation (non-GAAP) | $5.791 billion | $5.561 billion | +4% |
| Earnings from continuing operations | $264.6 million | $306.0 million | -14% |
| Diluted continuing-operations EPS | $4.94 | $5.73 | -14% |
| Comparable diluted EPS (non-GAAP) | $5.42 | $6.13 | -12% |
| Operating cash flow from continuing operations | $1.601 billion | $1.442 billion | +$159 million |
| Free cash flow (non-GAAP) | $193.7 million | -$727.7 million | Improved |
FY 2016 earnings before tax (EBT) were $406.4 million, down 13%; comparable EBT (non-GAAP) was $448.8 million, down 11%. The effective tax rate was 34.9%. Lease and rental gross margin was $936.7 million, or 30% of revenue, versus $968.1 million and 31% in 2015. Services gross margin rose to $549.3 million from $498.9 million, with margin steady at 17%. These are revenue-category margins, not consolidated operating margins.
Segment results: FMS revenue was $4.556 billion and EBT $370.8 million, down 20% in EBT; DTS revenue was $1.021 billion and EBT $63.6 million, up 39%; SCS revenue was $1.638 billion and EBT $105.6 million, up 13%. Segment EBT is management’s performance measure and excludes specified items.
In Q4 2016, revenue increased 3% to $1.729 billion and operating revenue rose 2% to $1.467 billion. EBT fell 38% to $69.2 million; continuing-operations earnings fell 35% to $49.3 million, and diluted continuing-operations EPS was $0.92. FMS EBT declined 48% to $64.4 million, while DTS EBT rose 38% to $15.3 million and SCS EBT rose 11% to $26.4 million.
Balance sheet, liquidity and capital
At year-end, total debt was $5.391 billion, down 2% from $5.503 billion; long-term debt was $4.600 billion. Debt-to-equity declined to 263% from 277%. Cash and equivalents were $58.8 million. Current assets of $1.102 billion were below current liabilities of $1.744 billion, producing negative working capital of $642.5 million. Ryder reported $675 million available under its $1.2 billion revolving credit facility and a $175 million receivables program with no amounts outstanding under that program at year-end. Management said operating cash flow and access to debt markets were expected to meet foreseeable funding needs.
Cash capital spending was $1.905 billion, down from $2.668 billion. Reported capital expenditures were $1.763 billion before changes in equipment-related accounts payable. The annual dividend increased 7% to $1.76 per share; cash dividends paid were $91 million. Ryder repurchased approximately 0.5 million shares for $37 million.
Material changes, outlook and risks
- Revenue growth reflected full-service lease fleet expansion, higher lease replacement pricing, and stronger DTS and SCS volumes and pricing. Lower commercial rental demand, lower fuel pass-through revenue, and foreign exchange partly offset growth.
- FMS results were pressured by weak used-vehicle pricing and rental demand. Used vehicle sales, net, fell to a gain of approximately $1 million from $99.9 million in 2015; fair-value write-downs on vehicles held for sale were $67.4 million versus $18.0 million. Rental power fleet utilization fell to 74.7% from 76.5%.
- Management’s 2017 outlook called for total revenue growth of 4% to about $7 billion, operating revenue growth of 3% to about $6 billion, and lease fleet growth of 3,500 vehicles. Forecast diluted continuing-operations EPS was $4.78–$5.08; comparable EPS was $5.10–$5.40. Management expected used-vehicle pricing to decline by double digits, but anticipated improved rental performance, ongoing contractual-business growth, and cost savings from workforce reductions.
- Management forecast 2017 operating cash flow of approximately $1.7 billion, free cash flow of $250 million, and capital expenditures of approximately $2.0 billion. It expected leverage to move toward the middle of its long-term range.
- Key risks include further used-vehicle value declines and residual-value estimation, economic cyclicality and rental-fleet utilization, customer concentration (including automotive exposure in SCS), driver and technician availability, regulatory and environmental costs, cybersecurity and IT disruption, pension funding and multi-employer withdrawal liabilities, and access to credit markets. A 10% decline in estimated vehicle residual values was estimated to increase 2017 depreciation by about $125 million.
- Unusual and accounting items included $10 million of accelerated vehicle depreciation in 2016, an $8 million non-cash pension charge related to previously unrecorded benefit improvements, and $5.1 million of restructuring charges. The late-2016 workforce reduction was expected to generate about $20 million in annual savings. Environmental liabilities were $9 million; management stated resolution of identified environmental matters was not expected to materially affect financial condition or liquidity. The independent auditor gave an unqualified opinion and reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether used-vehicle pricing and disposal volumes track management’s double-digit decline assumption, and how residual-value changes affect depreciation and earnings.
- Whether rental demand and utilization recover as forecast, alongside lease-fleet growth and capital spending.
- Whether 2017 EPS, revenue, operating cash flow and free-cash-flow guidance is achieved; note that comparable measures are non-GAAP.
- Whether debt maturities, negative working capital and funding access remain manageable as capital expenditures rise.
- How pension assumptions, contributions and the $441.7 million pension-plan underfunding develop, and whether concentrated SCS/DTS customers or automotive exposure change materially.