Ryder System, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Ryder provides fleet leasing, maintenance, rental, transportation and supply-chain services through Fleet Management Solutions (FMS) and Supply Chain Solutions (SCS).
Financial performance
| Metric | Q2 2014 | Q2 2013 | H1 2014 | H1 2013 |
|---|---|---|---|---|
| Total revenue | $1.685bn | $1.604bn | $3.295bn | $3.167bn |
| Operating revenue (non-GAAP) | $1.393bn | $1.313bn | $2.716bn | $2.581bn |
| EBT from continuing operations | $120.0m | $97.4m | $195.0m | $159.9m |
| Continuing-operations earnings | $75.7m | $62.6m | $124.8m | $103.4m |
| Net earnings | $75.4m | $62.2m | $123.6m | $102.1m |
| Diluted EPS, continuing operations | $1.42 | $1.19 | $2.34 | $1.98 |
| Operating cash flow, continuing operations | — | $536.5m | $563.8m |
- Q2 revenue increased 5% and EBT 23%; first-half revenue rose 4% and EBT 22%. Management attributed EBT growth primarily to improved FMS performance.
- Comparable diluted EPS, excluding specified items, was $1.44 in Q2 (up 15%) and $2.36 for H1 (up 15%). These are non-GAAP measures; reported diluted EPS was $1.41 and $2.32, respectively.
- Q2 lease-and-rental gross margin was 31%, unchanged year over year. Services gross margin declined to 16% from 17%; for H1 it was 15% versus 16%. Fuel gross margin was 3% in Q2 and 2% for H1.
- FMS EBT rose 28% in Q2 and 27% in H1; SCS EBT declined 7% and 9%, respectively. SCS EBT margin on operating revenue was 5.6% in Q2 and 4.9% in H1, down 0.8 percentage points year over year in both periods.
Cash, debt and liquidity
- Cash and equivalents were $86.9m at June 30, 2014, versus $61.6m at year-end 2013. Current assets were $1.137bn and current liabilities $1.517bn.
- Six-month operating cash flow was $536.5m. Investing cash outflow was $939.8m, including $1.255bn of purchases of property and revenue-earning equipment. Free cash flow, as defined by Ryder, was negative $410.4m, compared with negative $107.3m in H1 2013.
- Total debt was $4.717bn, up $527.7m from year-end; total obligations including specified operating-lease obligations were $4.805bn. Debt-to-equity was 240%, compared with 221% at year-end. Ryder cited planned capital spending as the main driver of higher leverage.
- Ryder had $380m available under its $900m revolving facility and $175m available under its receivables program. No receivables-program borrowings were outstanding; the program was scheduled to expire October 24, 2014. The revolver covenant limit was 300% debt to defined net worth; the reported ratio was 194%.
Changes, outlook and notable items
- FMS growth reflected higher lease and rental revenue, fleet growth, pricing and stronger used-vehicle proceeds. Commercial rental revenue rose 13% in Q2; rental fleet utilization nevertheless fell 220 basis points year over year to 78.3%, partly due to winter-weather maintenance delays.
- SCS revenue grew on new business and higher volumes, particularly in industrial, retail/consumer packaged goods and high-tech. Profitability was pressured by higher-than-expected start-up costs for a new international distribution account, severe winter weather, and costs associated with lost automotive business.
- Management expected favorable full-service lease and commercial rental revenue comparisons and SCS revenue comparisons to continue during 2014. Full-year accrual-basis capital expenditure guidance increased by $150m to approximately $2.31bn, reflecting expected fleet purchases and the headquarters facility purchase. Ryder expected to fund second-half capital spending mainly with internally generated cash and a sale-leaseback transaction.
- Ryder reported $65m of pension contributions in H1 and expected approximately $75m for 2014. The U.S. plan’s 2014 contributions had been completed by June 30. A quarterly dividend of $0.37 per share was declared in July, up from $0.34.
- Equipment residual-value and useful-life estimate changes increased pre-tax earnings by approximately $6.3m in Q2 and $12.5m in H1. A New York tax-law change provided a $1.8m non-cash H1 tax benefit. H1 2013 included a $1.9m foreign-currency translation benefit.
- Other risks include economic and freight-demand weakness, customer or key-account losses, competition and pricing pressure, fuel and interest-rate volatility, vehicle residual values and maintenance costs, pension funding, weather disruption, and access to commercial-paper markets. Ryder said operating cash flow and funding access should meet foreseeable needs but cautioned that market disruption could impair borrowing access.
- Discontinued South American operations generated a $1.2m after-tax loss in H1. Ryder disclosed a $5.3m Brazilian tax assessment, for which it recorded no reserve; it believes its position is more likely than not to prevail, while acknowledging possible reversal of lower-court decisions. Management did not expect reasonably possible losses on other disclosed legal matters to materially affect consolidated financial statements.
Important facts for investors to verify
- Whether FMS growth, vehicle-sale proceeds and favorable rental pricing persist, and whether fleet utilization recovers.
- Whether SCS start-up, weather and automotive-related costs abate and segment margins improve.
- Execution and financing of the $2.31bn 2014 capital-spending plan, its effect on free cash flow and leverage, and the planned sale-leaseback.
- Availability and renewal or replacement of the receivables program before its October 2014 expiration, along with continued access to commercial paper and compliance with debt covenants.
- Exposure from pension assumptions and contributions, residual-value estimates, and outstanding legal and tax contingencies.