OREANDA-NEWS. Ryder System, Inc. (NYSE: R), a leader in commercial fleet management, dedicated transportation, and supply chain solutions, today reported fourth quarter and full-year comparable earnings and revenue growth across all business segments. Earnings and earnings per diluted share (EPS) from continuing operations for the three months ended December 31 were as follows:

(in millions) Earnings     Diluted EPS
    2015   2014   Change     2015   2014   Change
GAAP   $75.9   11.5   561%     $1.42   0.22   545%
Pension settlement costs   -   68.2         -   1.29    
Non-operating pension costs   2.8   1.4         0.05   0.03    
Restructuring costs   10.4   1.5         0.19   0.03    
Other items   (0.3)   2.1         -   0.03    
Comparable   $88.8   84.6   5%     $1.66   1.60   4%

The Company reported record fourth quarter operating revenue (revenue excluding all fuel and subcontracted transportation), reflecting higher full service lease and commercial rental revenue in Fleet Management Solutions (FMS), new business and increased volumes in Dedicated Transportation Solutions (DTS) and Supply Chain Solutions (SCS), partially offset by negative impacts from foreign exchange. Fourth quarter total revenue increased from the prior year, as higher operating revenue was partially offset by lower fuel prices passed through to customers and negative impacts from foreign exchange. Operating and total revenue for the three months ended December 31 were as follows:

(in millions)   Operating Revenue     Total Revenue
    2015   2014   Change  

Change
excl. FX

     2015   2014   Change
Total   $1,442   1,349   7%   9%     $1,673   1,656   1%
FMS   $999   931   7%   9%     $1,152   1,153   -%
DTS   $188   169   11%   11%     $232   222   5%
SCS   $322   311   4%   7%     $392   396   (1)%

Commenting on the Company’s results, Ryder Chairman and CEO Robert Sanchez said, “We delivered another year of record performance with full-year operating revenue growth of 6% and a double-digit increase in comparable earnings, in the face of a more challenging used vehicle sales environment in the second half of the year. We saw continued growth across all contractual product lines, driven by secular trends and our sales and marketing initiatives. We were especially pleased with the continued strong sales activity and fleet growth in our core full service lease product. We ended 2015 with record lease fleet growth of 6,800 vehicles, significantly exceeding our initial full-year plan of 4,000 vehicles. This represents our fourth consecutive year of organic lease fleet growth.

“Fourth quarter comparable EPS reflected used tractor pricing and rental demand that were at the low end of our forecast. Based on the weaker rental market, we made a decision to further reduce the rental fleet during the fourth quarter to position it more conservatively for 2016. These actions resulted in additional costs to prepare those vehicles for sale. Results also included $0.06 of insurance-related charges not contemplated in our forecast.

“We enter 2016 well positioned for continued growth and progress toward our strategic objective to penetrate non-outsourced markets. The strong contractual sales we continued to see through year end across all three business segments and our robust pipeline of active deals reflect the increased effectiveness of sales efforts and the ongoing benefits of secular trends that favor outsourcing.”

Fourth Quarter Business Segment Operating Results

Fleet Management Solutions

In the FMS business segment, operating revenue (revenue excluding fuel) in the fourth quarter of 2015 was $999.4 million, up 7% (or 9% excluding foreign exchange) compared with the year-earlier period. Total revenue in the fourth quarter of 2015 was $1.15 billion, comparable with the same period of 2014, as the operating revenue increase was offset by lower fuel costs passed through to customers and negative impacts from foreign exchange. Full service lease revenue increased 7% (or 9% excluding foreign exchange) due to fleet growth and higher prices on replacement vehicles. The number of full service lease vehicles (excluding U.K. trailers) increased by 6,800 from the year-earlier period and grew by 1,600 vehicles sequentially from the third quarter of 2015. Commercial rental revenue grew 6% (or 8% excluding foreign exchange) reflecting increased demand and higher pricing in the U.S. Fuel services revenue decreased 31%, reflecting lower fuel prices passed through to customers.

FMS earnings before tax were $123.5 million in the fourth quarter of 2015, up 1% compared with $122.3 million in the same period of 2014. Increased earnings primarily reflect higher full service lease results, and solid commercial rental performance, largely offset by lower used vehicle sales results, as well as higher maintenance costs from downsizing the rental fleet and planned initiatives to reduce out-of-service vehicles. Full service lease results benefited from fleet growth and lower depreciation associated with increased residual values. Solid commercial rental performance was driven by increased demand and higher pricing in the U.S., on a 7% larger average global fleet, partially offset by lower fleet utilization. Global rental power fleet utilization was 77.6% for the fourth quarter, down 250 basis points from the year-earlier period, reflecting unusually high utilization in the prior year, and a later start to the holiday shipping season in 2015. Used vehicle sales results decreased due to lower tractor pricing and lower volumes, particularly with power units. FMS earnings before tax as a percentage of operating revenue were 12.4% in the fourth quarter of 2015, down 70 basis points from 13.1% in the same quarter a year ago, driven by lower used vehicle sales results.

Dedicated Transportation Solutions

In the DTS business segment, fourth quarter 2015 operating revenue (revenue excluding fuel and subcontracted transportation), was $187.6 million, up 11% compared with the year-earlier period. DTS operating revenue grew as a result of new business, as well as higher volumes and pricing. Total revenue in the fourth quarter of 2015 was $232.4 million, up 5% from the year-earlier period, as increased operating revenue was partially offset by lower fuel costs passed through to customers.

DTS earnings before tax of $11.1 million increased 1% in the fourth quarter of 2015 compared with $11.0 million in 2014. DTS fourth quarter 2015 earnings results reflect the impact of operating revenue growth and overhead cost improvements, offset by $1.5 million of customer bankruptcy-related charges. DTS earnings before tax as a percentage of operating revenue were 5.9% in the fourth quarter of 2015, down 60 basis points from 6.5% in the year-earlier period.

Supply Chain Solutions

In the SCS business segment, fourth quarter 2015 operating revenue (revenue excluding fuel and subcontracted transportation) was $322.1 million, up 4% (or 7% excluding foreign exchange) compared with the year-earlier period. SCS operating revenue grew as a result of new business, higher pricing, and increased volumes. Total revenue was down 1% to $392.5 million, compared with $396.2 million the same quarter a year ago, as increased operating revenue was more than offset by negative impacts from foreign exchange, lower purchased transportation costs and lower fuel costs passed through to customers.

SCS earnings before tax of $23.8 million increased 5% in the fourth quarter of 2015 compared with $22.7 million in 2014. SCS fourth quarter 2015 earnings results reflect the impact of operating revenue growth, favorable margins, and overhead cost improvements, partially offset by a $2.2 million insurance-related charge associated with a large medical claim. SCS earnings before tax as a percentage of operating revenue were 7.4% in the fourth quarter of 2015, up 10 basis points from 7.3% in the year-earlier period.

Corporate Financial Information

Central Support Services

Central Support Services (CSS) are overhead costs incurred to support all business segments and product lines. Most CSS costs are allocated to the business segments. In the fourth quarter of 2015, unallocated CSS costs were $15.6 million, compared with $15.2 million reported in the year-earlier period. Unallocated CSS costs increased slightly due to a $2.8 million charge related to settlement of a customer-extended insurance claim offset by lower compensation-related costs and a higher allocation of marketing-related costs to the business segments.

Items Excluded from Comparable Earnings

Comparable fourth quarter 2015 results excluded pre-tax restructuring and other charges of $14.2 million ($10.4 million after tax), or $0.19 per diluted share. Restructuring charges included $0.11 per diluted share related to workforce reductions of approximately 250 employees and $0.08 per diluted share related to the pending divestiture of a small logistics operation in Canada. The Company expects the workforce reductions to produce annual savings of $0.26 per diluted share beginning early in the first quarter of 2016.

Non-operating components of pension costs are excluded from both comparable earnings and segment earnings before tax in order to more accurately reflect the operating performance of the business. Non-operating pension costs totaled $4.8 million ($2.8 million after tax) or $0.05 per diluted share in the fourth quarter of 2015, up from $2.5 million ($1.4 million after tax) or $0.03 per diluted share in the year-earlier period. This increase was due to lower expected asset returns and new mortality assumptions adopted at the end of 2014.

As previously disclosed, in the fourth quarter of 2014, the Company offered former employees a one-time option to receive a lump sum distribution of their vested pension benefits, resulting in actuarial losses of $97.2 million ($61.3 million after tax), or $1.16 per diluted share. Fourth quarter 2014 comparable results also excluded other charges of $11.3 million ($6.9 million after tax) or $0.13 per diluted share associated with multi-employer pension plan settlement charges. No such pension settlement-related charges were incurred in the fourth quarter of 2015.

Income Taxes

The Company’s effective income tax rate from continuing operations for the fourth quarter of 2015 was 32.0% of pre-tax earnings, compared with 15.1% in the year-earlier period. The comparable effective income tax rate for the fourth quarter of 2015 was 32.1% of earnings before tax, compared with 34.4% in the year-earlier period. The fourth quarter of 2015 reflects a $2.0 million benefit arising from a favorable Canadian income tax settlement.

Capital Expenditures

Capital expenditures from continuing operations increased to $2.70 billion for 2015, compared with $2.30 billion in 2014. The increase in capital expenditures primarily reflects planned investments in the full service lease and commercial rental fleets. Net capital expenditures (including proceeds from the sale of assets) from continuing operations were $2.27 billion in 2015, up from $1.80 billion in 2014.

Cash Flow

Operating cash flow from continuing operations in 2015 was $1.44 billion, up from $1.38 billion in 2014, reflecting higher earnings. Total cash generated from continuing operations (including proceeds from used vehicle sales) in 2015 was $1.94 billion, consistent with 2014. Free cash flow from continuing operations in 2015 was negative $728 million, compared with negative $315 million in 2014, reflecting increased net capital expenditures.

Leverage

Total debt as of December 31, 2015 increased by $787.2 million compared with year-end 2014, due to investments in vehicles to fund growth. Debt to equity as of December 31, 2015 was 278% compared with 260% at year-end 2014. Debt to equity increased due to foreign exchange effects and investments to fund growth. Total debt to equity was slightly above Ryder’s long-term target range of 225% to 275%. In December 2015, the Company authorized a new share repurchase program to mitigate the dilutive impact of shares issued under the Company's employee stock plans. The program authorizes the repurchase of up to two million shares of common stock, and includes 0.5 million shares that were not repurchased under the previous program, which expired in December 2015. Based on forecasted leverage, the Company anticipates resuming anti-dilutive share repurchases in the second half of the year.

2016 Earnings Forecast

Commenting on the Company’s outlook, Mr. Sanchez said, “In 2016, we expect to deliver another year of solid revenue growth. We are forecasting stable to modestly higher earnings assuming a very weak used tractor sales market and a soft freight environment. Based on forecasted 2016 business levels, we’ve taken necessary cost actions including a cutback in discretionary spending and a modest reduction in workforce. We anticipate strong earnings growth in our contractual businesses across all three segments, as well as benefits from cost-reduction actions.

“We have assumed a further deterioration in used vehicle pricing, with tractor pricing dropping by around 20% from the peak in the second quarter 2015. Given the uncertainty around 2016 freight levels, we have also planned for lower rental demand and minimal rental capital spending, reducing our exposure in this transactional business.

“We anticipate that secular trends favoring outsourcing will drive continued growth in our contractual businesses. We plan to launch additional new products and are excited about their prospects for long-term growth. We expect significant lease fleet growth of 3,500 vehicles. While at a lower rate than 2015 due to a slower expected freight environment, this would be the Company’s second highest year of organic lease fleet growth. Our supply chain and dedicated transportation businesses are expected to deliver double-digit earnings improvement, driven by new sales activity.

“We expect positive free cash flow in 2016, demonstrating the counter-cyclical nature of our business model. Given the increase in free cash flow, we expect leverage to significantly decline during the year. This decline will provide additional balance sheet flexibility and based on forecasted leverage, we expect to resume anti-dilutive share repurchases in the second half of the year, with year-end leverage expected near the midpoint of our long-term range.”

Ryder forecasts full-year 2016 comparable earnings from continuing operations of $6.10 to $6.30 per diluted share, compared with $6.13 per diluted share in 2015. Full-year earnings comparisons exclude non-operating pension costs of $0.27 per diluted share in 2016, as well as non-operating pension, restructuring and other net charges of $0.40 in 2015. Operating revenue for the full-year 2016 is forecast to be up 5% to approximately $5.8 billion. Total revenue for the full-year 2016 is forecast to be up 6% to approximately $7.0 billion. The Company is also establishing a first quarter 2016 comparable earnings forecast of $1.03 to $1.08 per diluted share, compared with $1.08 in the first quarter of 2015. First quarter comparisons reflect significant used vehicle sales headwinds and softer rental performance in 2016, as well as an atypical fuel benefit in the prior year. First quarter earnings comparisons exclude pension costs of $0.07 per diluted share in 2016.