Ryder System, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Ryder provides fleet leasing and rental, supply-chain logistics, and dedicated transportation services. Results reflect the COVID-19 pandemic and changes in used-vehicle residual value estimates.
Financial performance
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenue | $2.151bn | $2.224bn | $6.207bn | $6.649bn |
| Operating revenue (non-GAAP) | $1.790bn | $1.796bn | $5.185bn | $5.350bn |
| Continuing-operations EBT | $54.8m | $(91.3)m | $(153.6)m | $80.0m |
| Continuing-operations diluted EPS | $0.85 | $(1.75) | $(2.64) | $0.56 |
| Net earnings (loss) | $35.8m | $(91.5)m | $(147.9)m | $29.1m |
Q3 lease and related maintenance/rental gross margin was 19%, versus 8% a year earlier; services gross margin was 17%, versus 15%. For the first nine months, the respective margins were 14% (20% in 2019) and 16% (15%).
- Segments, Q3: FMS revenue fell 7% to $1.297bn, but EBT improved to $16.2m from a $108.6m loss. SCS revenue rose 11% to $685.4m and EBT rose 67% to $57.8m. DTS revenue fell 17% to $299.7m; EBT increased 34% to $24.7m.
- Segments, 9M: FMS revenue fell 7% to $3.836bn and recorded a $202.2m EBT loss. SCS revenue fell 4% to $1.833bn, while EBT rose 12% to $125.8m. DTS revenue fell 13% to $928.5m and EBT fell 8% to $58.1m.
Cash flow, debt and liquidity
- For the nine months, operating cash flow was $1.697bn, compared with $1.589bn in 2019. Free cash flow, a non-GAAP measure, was $1.218bn versus negative $964.6m, mainly reflecting substantially lower capital spending.
- Cash and cash equivalents were $684.2m at September 30, 2020, compared with $73.6m at year-end 2019. Total debt was $7.437bn, including $1.133bn classified as current and $6.303bn long-term.
- Available funding included $1.248bn under the global revolving credit facility and $300m under the trade receivables program. The company reported a 218% ratio under the revolving-facility net-worth covenant, against a 300% maximum; debt-to-equity was 346%.
- Capital expenditures paid were $879.4m for the nine months, down from $2.957bn. The quarterly dividend was $0.56 per share. The company said it expected adequate funding for foreseeable needs, while noting capital-market access risks.
Material changes and unusual items
- Q3 revenue declined 3%; nine-month revenue declined 7%. Lower fuel revenue was a major factor in the quarter. Excluding fuel, subcontracted transportation and ChoiceLease insurance revenue, operating revenue was flat in Q3 and down 3% year to date.
- Results improved sharply in Q3 versus the prior-year loss, principally due to a reduced year-over-year impact from prior residual-value estimate changes, $108m of improved used-vehicle sales results, better lease results and stronger SCS performance. Nine-month EBT fell to a loss, with higher depreciation from earlier residual-value changes a key factor.
- Residual-value estimate changes made in the first half of 2020 reduced earnings by $30m, or $0.58 per diluted share, in Q3 and by $125m, or $2.39 per diluted share, for the nine months. Total effects of prior residual-value estimate changes were $100m in Q3 and $405m year to date. Ryder made no further residual-value estimate changes in Q3.
- Non-GAAP comparable continuing-operations diluted EPS was $1.21 in Q3 versus $(1.49) in 2019, and $(1.11) for nine months versus $1.03. These measures exclude specified pension, restructuring, ERP, property-sale and tax items and are not GAAP results.
- Q3 discontinued operations included a $9m accrual, primarily for Brazil transportation-payment litigation. The company recorded a $6m pension curtailment loss following a planned freeze for certain U.S. and Canadian pension participants; the related remeasurement reduced funded status by $95m.
Outlook, management commentary and risks
- Management reported a steady Q3 recovery in commercial rental demand and used-vehicle conditions compared with Q2. Automotive customers in SCS had generally resumed operations above pre-pandemic levels by quarter-end. Management also noted lower sales growth opportunities across its businesses.
- Management expected free cash flow to increase through the remainder of 2020, citing lower capital expenditures and anticipated improved operating cash flow. It expected some postponed vehicle orders to be delivered late in 2020 and in 2021. The filing does not provide a clear numerical full-year earnings or revenue forecast.
- In October, Ryder announced an approximately $30m one-time frontline employee recognition and retention bonus, to be recognized in Q4. It also intended to resume its temporarily suspended share-repurchase program in Q4.
- COVID-19-related risks include renewed demand or production declines, customer payment delays or insolvencies, weaker rental utilization, and further deterioration in used-vehicle prices. A hypothetical additional 10% reduction in policy residual values would increase depreciation over the remaining lives of the fleet by approximately $280m. FMS North America goodwill fair value exceeded carrying value by only about 5% in the March test; further adverse developments could trigger impairment testing and a non-cash charge.
- Ryder disclosed securities class-action and derivative litigation concerning historical depreciation policy and residual-value estimates; it said it considers the claims without merit and intends to defend them. Other ordinary-course claims were not expected by management to have a material financial-statement effect, except for the Brazil accrual described above.
Important facts for investors to verify
- Whether used-vehicle pricing, residual-value assumptions and rental utilization recover as management expects, and whether additional depreciation or impairment charges arise.
- Whether COVID-19 affects customer credit quality, collections, SCS/DTS volumes or the ability to meet credit-facility covenants.
- How sustainable the Q3 segment improvements are, particularly FMS’s return to quarterly profitability and SCS’s higher margins.
- Whether the projected cash generation and lower capital spending persist, and how debt maturities, funding access and pension contributions evolve.
- Developments in the residual-value securities litigation, Brazil-related claims, and the timing and cost of the announced employee bonus and pension-plan changes.