Ryder System, Inc. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010; filed July 23, 2010. Ryder provides fleet management, supply-chain and dedicated contract carriage services. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Revenue | $1,286.1 | $1,212.0 | $2,506.1 | $2,386.4 |
| Operating revenue (non-GAAP) | $1,037.1 | $1,017.8 | $2,024.7 | $2,008.7 |
| Continuing operations pretax earnings | $52.2 | $45.3 | $74.7 | $67.8 |
| Continuing operations earnings | $30.6 | $27.1 | $43.5 | $38.0 |
| Net earnings | $29.8 | $22.9 | $42.2 | $29.7 |
| Diluted EPS | $0.56 | $0.41 | $0.79 | $0.53 |
| Interest expense | $31.2 | $36.6 | $64.5 | $74.7 |
Q2 revenue rose 6% and first-half revenue 5%; operating revenue rose 2% and 1%, respectively. Revenue growth included higher fuel pass-throughs. Net earnings increased 30% in Q2 and 42% year to date; improved results from discontinued operations also contributed to the comparisons. Diluted EPS growth additionally benefited from share repurchases.
Segments and operating trends
- Fleet Management Solutions (FMS): Q2 revenue was $931.2 million, up 4%, and segment net before taxes (NBT) was $46.2 million, up 12%. Commercial rental improved, with revenue up 20%; full-service lease revenue fell 4% amid customer fleet downsizing and higher maintenance costs. First-half NBT declined 5% to $67.9 million.
- Supply Chain Solutions (SCS): Q2 revenue increased 12% to $310.1 million and NBT increased 101% to $12.6 million, primarily on stronger automotive volumes and operating performance. First-half NBT was $19.6 million, up 152% from a low prior-year base that included restructuring and impairment charges.
- Dedicated Contract Carriage (DCC): Q2 revenue rose 6% to $123.0 million, while NBT fell 21% to $8.4 million. Higher self-insurance costs, compensation and technology investment offset higher customer volumes.
Operating expense increased 12% in Q2 and 10% in the first half, largely reflecting higher fuel pass-throughs and maintenance costs. Operating expense was 48% of revenue in Q2 versus 45% a year earlier, and 47% versus 45% for the first half. Vehicle-sale gains rose to $6.6 million in Q2 and $11.1 million for the first half.
Cash flow, debt and liquidity
- First-half cash from continuing operations was $531.2 million, compared with $512.3 million. Cash purchases of property and revenue-earning equipment were $544.4 million; reported free cash flow, a non-GAAP measure, was $123.1 million versus $257.4 million.
- June 30 cash was $108.4 million. Total debt was $2.472 billion, down from $2.498 billion at December 31, 2009. Current debt and current maturities increased to $380.9 million from $232.6 million; long-term debt was $2.091 billion.
- The $875 million revolving facility had $482.3 million available after commercial-paper support. The receivables program could provide up to $175 million; no amount was outstanding, and the program was scheduled to expire October 29, 2010 absent early termination.
- The facility covenant debt-to-tangible-net-worth ratio was 159%, against a maximum of 300%. Total obligations, including specified operating-lease commitments, were $2.585 billion, or 188% of equity.
Outlook, risks and unusual items
- Management expected 2010 free cash flow of approximately $225–$275 million and accrual-basis capital expenditures of approximately $1.10 billion. First-half accrual-basis capital expenditures were $630.4 million, up 84%, mainly due to commercial-rental fleet investment.
- Management expected commercial-rental comparisons to remain favorable through the year, but anticipated continued near-term declines in contractual lease revenue and less favorable SCS revenue comparisons. It also expected higher no-longer-earning vehicles as rental units are taken out of service.
- Revised residual-value estimates for certain vehicles reduced pretax earnings by approximately $3.5 million in Q2 and $7.0 million in the first half. Self-insurance reserve development produced a $2.2 million Q2 charge and a $2.4 million first-half charge, versus benefits in the comparable 2009 periods.
- Discontinued South American and European operations generated after-tax losses of $0.8 million in Q2 and $1.3 million in the first half, compared with $4.2 million and $8.3 million in 2009. 2010 costs included legal developments and professional and administrative expenses related to South American operations.
- Gross unrecognized tax benefits were $71.7 million. Ryder disclosed a $14.9 million Brazilian tax assessment related to a 2001 business sale, for which it recorded no reserve because it believes its position is more likely than not to be sustained. Tax-audit outcomes remain uncertain.
- Ryder repurchased 1.442 million shares for $57.7 million in the first half under its programs. The quarterly dividend was $0.25 per share; in July the board declared a $0.27 dividend.
- Management said operating cash flows and financing access should meet foreseeable needs, while noting risks from credit-market disruption, ratings changes, demand and freight volumes, fuel and currency movements, used-vehicle values, pension funding and insurance claims. S&P’s long-term outlook was negative; Moody’s and Fitch outlooks were stable. Management reported no material change in market-risk exposure and concluded disclosure controls were effective.
Key facts for investors to verify
- Whether commercial-rental strength and improved utilization offset continued full-service lease fleet reductions and maintenance costs.
- Whether used-vehicle pricing and residual-value assumptions support reported gains and depreciation estimates.
- Whether capital spending and fleet investment remain consistent with the $1.10 billion forecast and free-cash-flow guidance.
- Near-term debt maturities, commercial-paper access, revolving-facility availability and renewal or replacement of the receivables program.
- Developments in the Brazilian tax assessment, other tax audits, self-insurance claims and pension funding requirements.