Ryder System, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018. Ryder provides fleet management, dedicated transportation and supply-chain services. The 2018 comparative figures were recast for adoption of the new lease accounting standard.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $2.180 billion | $1.904 billion | +15% |
| Operating revenue (non-GAAP) | $1.759 billion | $1.544 billion | +14% |
| Continuing-operations pretax earnings | $68.2 million | $52.7 million | +29% |
| Continuing-operations earnings | $45.9 million | $37.3 million | +23% |
| Net earnings | $45.3 million | $36.9 million | +23% |
| Diluted EPS, continuing operations | $0.87 | $0.70 | +24% |
| Comparable diluted EPS (non-GAAP) | $1.11 | $0.96 | +16% |
Comparable results exclude non-operating pension costs and selected items; they are non-GAAP measures and are not substitutes for GAAP results. Q1 2019 continuing-operations EBT included $6.2 million of restructuring and other items and $6.5 million of non-operating pension costs. Comparable EBT was $80.8 million, up 17%.
- Revenue and margins: Lease, maintenance and rental revenue rose 9%; its gross margin increased to 26% from 25%. Services revenue increased 22%, while services gross margin declined to 14% from 15%, reflecting business mix. Fuel services revenue declined 2%; gross margin rose to 4% from 3%.
- Segments: FMS revenue was $1.352 billion and EBT $60.9 million (+9% and +12%). DTS revenue was $349.6 million and EBT $17.4 million (+17% and +33%). SCS revenue was $635.7 million and EBT $32.3 million (+28% and +27%). SCS growth included the 2018 MXD acquisition.
- Cash flow and investment: Operating cash flow was $485.3 million, compared with $336.9 million. Cash purchases of property and revenue-earning equipment were $1.027 billion; free cash flow, a company-defined non-GAAP measure, was negative $437.9 million versus negative $235.9 million.
- Debt and liquidity: Total debt was $7.143 billion at March 31, up from $6.649 billion at year-end; cash was $62.8 million. Ryder reported $572 million available on its $1.4 billion revolving credit facility and $225 million of potential availability under its receivables program. Debt-to-equity was 278%, versus 262% at year-end. Interest expense rose 45% to $55.3 million.
Material changes and unusual items
- Revenue increased across all three segments, driven by new business and higher volumes; SCS also benefited from the MXD acquisition.
- Higher planned fleet investment increased capital expenditures 57% year over year. Vehicle residual-value estimate changes and accelerated depreciation increased Q1 depreciation by about $9 million.
- Q1 included $3.6 million of ERP implementation costs and $2.6 million of restructuring and other net charges. The prior-year quarter included a $15.5 million goodwill impairment in FMS Europe.
- Ryder adopted ASC 842 leases effective January 1, 2019, using a modified retrospective method and recast prior-period comparisons. The adoption included correction of certain prior lease-classification errors, which the company said were not material to previously issued statements.
Outlook, commentary and risks
- Management expected 2019 capital expenditures of approximately $3.6 billion, funded primarily through internally generated funds and additional debt.
- Management anticipated favorable ChoiceLease revenue comparisons through year-end and favorable commercial rental comparisons at a slower growth rate than Q1. DTS comparisons were expected to remain favorable, but less strongly than in Q1. SCS comparisons were expected to remain favorable in the first half, with negative growth toward the second half due to the timing of lost business.
- Ryder expected higher used-vehicle inventories through year-end as lease vehicles are replaced. It also planned to shut down its Singapore operations in Q2 2019.
- Management said cash flows and access to debt markets should meet foreseeable needs, but noted that market disruption or reduced access to commercial paper and unsecured debt could affect funding. Other cited risks include economic and freight demand, customer retention, rental utilization and pricing, used-vehicle values, fuel and interest-rate volatility, insurance claims, labor availability, pension funding, and competition.
- Net pension expense rose to $12.1 million from $7.0 million; expected 2019 pension contributions were approximately $34 million. Ordinary-course claims and proceedings were not expected by management to materially affect the financial statements. The company reported effective disclosure controls and no material change in risk factors from its 2018 Form 10-K.
Important facts for investors to verify
- Whether fleet expansion produces sufficient operating returns to offset the substantially higher capital spending, debt and interest expense.
- Whether residual-value assumptions, used-vehicle pricing and growing vehicles-held-for-sale inventory lead to further depreciation or valuation charges.
- Whether segment growth persists, particularly the expected SCS slowdown in the second half and the contribution from MXD.
- How much liquidity remains available as the receivables program approached its June 12, 2019 expiration, and whether refinancing remains accessible on acceptable terms.
- The effects of ASC 842 adoption and the disclosed prior-period lease-classification corrections when comparing reported results across periods.