Ryder System, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Ryder provides fleet management, supply chain and dedicated transportation services through FMS, SCS and DTS. Comparisons are with Q1 2019 unless noted. Dollar amounts below are in millions, except per-share amounts.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Total revenue | $2,161.3 | $2,180.3 | Down 1% |
| Operating revenue (non-GAAP) | $1,771.2 | $1,750.5 | Up 1%; excludes fuel, subcontracted transportation and ChoiceLease liability-insurance revenue |
| Continuing-operations pretax earnings (loss) | $(113.6) | $68.2 | Turned to a loss |
| Continuing-operations net earnings (loss) | $(109.1) | $45.9 | Diluted EPS $(2.09) vs. $0.87 |
| Comparable continuing-operations loss (non-GAAP) | $(72.1) | $58.5 | Comparable diluted EPS $(1.38) vs. $1.11 |
| Operating cash flow | $438.6 | $485.3 | Lower by $46.7 |
| Capital expenditures paid | $431.0 | $1,026.7 | Substantially lower fleet investment |
| Free cash flow (non-GAAP) | $110.6 | $(437.9) | Improved mainly due to lower capital spending |
Lease, maintenance and rental gross margin fell to $109.5 million from $235.3 million, or 12% of revenue versus 26%. Services gross margin was $157.8 million, down 2%, with a 14% margin in both periods. Fuel gross margin declined to $0.9 million from $5.4 million. Interest expense rose 13% to $62.6 million, reflecting higher average debt, partly offset by lower rates. The income-tax benefit was $4.5 million; the effective tax rate was a 4.0% benefit versus a 32.7% expense in Q1 2019.
Segments
| Segment | Revenue | Segment EBT | Year-over-year context |
|---|---|---|---|
| FMS | $1,340.2 million | $(114.6) million | Revenue down 1%; EBT was $60.9 million in Q1 2019. Commercial rental demand and utilization weakened; utilization was 64.4% vs. 74.9%. |
| SCS | $628.4 million | $31.0 million | Revenue down 1%; EBT down 4%. Automotive shutdowns and lost business weighed on results. |
| DTS | $334.9 million | $12.2 million | Revenue down 4%; EBT down 30%, partly reflecting higher overhead and lower equipment contribution. |
Balance sheet, debt and liquidity
At March 31, cash and cash equivalents were $397.2 million, compared with $73.6 million at December 31, 2019. Total debt was $8.17 billion, up from $7.92 billion; shareholders’ equity was $2.24 billion, down from $2.48 billion. The reported debt-to-equity ratio was 364%, versus 320% at year-end. The filing attributes the increase partly to lower equity and notes that the unusually high cash balance added an estimated 15 percentage points.
At quarter-end, $419 million was available under the $1.4 billion revolving credit facility; the $300 million trade-receivables program was fully drawn. The facility’s debt-to-net-worth covenant limit was 300%, and the reported ratio was 242%. In April, Ryder issued $400 million of 4.625% notes due 2025 and entered a $400 million floating-rate, 364-day term loan. The receivables program was extended to April 2021. As of April 28, the company reported approximately $1 billion of U.S. cash, $565 million of revolver availability and $100 million of receivables-program availability.
Material changes, outlook and risks
- COVID-19 impacts: Ryder reported lower commercial-rental demand, weaker used-vehicle volumes and expected pricing, automotive-related SCS volume deterioration, fewer sales-growth opportunities, and higher customer-credit risk. Bad-debt expense was $19 million, including COVID-19 impacts.
- Fleet values: The company recorded $27 million of additional accelerated depreciation and $21.5 million of used-vehicle valuation adjustments tied to COVID-19 and revised residual-value expectations. It expected lower used-vehicle pricing in the second half of 2020.
- Near-term outlook: Management expected commercial-rental weakness to continue through the balance of 2020, and lower SCS/DTS customer volumes at least through Q2. Automotive customers generally expected to resume production in May, but timing was uncertain. Ryder cancelled or postponed vehicle orders where possible and expected significantly reduced 2020 capital expenditures. The filing provides no specific full-year earnings guidance.
- Lease resilience and credit risk: Management said ChoiceLease revenue and cash flows were not expected to be materially affected if customers remained solvent and paid contractual amounts; it also expected lower new-lease sales and had established additional bad-debt reserves.
- Goodwill and pension exposure: An interim FMS North America goodwill test found no impairment, but estimated fair value exceeded carrying value by only about 5%; $243 million of goodwill was associated with that unit. Continued deterioration could prompt a non-cash impairment. Pension asset-market declines could also affect funded status, equity and future contributions; approximately $37 million of 2020 contributions were expected.
- Other items: Restructuring and other items were $30.9 million versus $6.2 million, including ChoiceLease insurance-program exit costs, ERP implementation and restructuring. Share repurchases were temporarily paused; the quarterly dividend was $0.56 per share. The CARES Act was not expected to have a material effect on financial statements or liquidity, according to management. Ordinary-course claims and proceedings were not expected to have a material effect.
Important facts for investors to verify
- Whether rental demand, used-vehicle pricing and SCS/DTS volumes recovered in line with or diverged from management’s Q1 expectations.
- Future used-vehicle residual-value assumptions, depreciation charges and any further valuation adjustments or impairment testing, especially for FMS North America goodwill.
- Customer collections, bad-debt reserves, ChoiceLease customer solvency and any resulting effects on operating cash flow.
- Debt maturities, borrowing costs, availability under credit facilities and compliance with the 300% covenant limit.
- Actual 2020 capital expenditures, pension funding needs and any subsequent changes to the outlook; the filing’s full-year earnings guidance is not specified.