Ryder System, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; includes fourth-quarter results. Ryder provides fleet leasing, rental and maintenance (Fleet Management Solutions, FMS), dedicated transportation (DTS), and supply-chain services (SCS). Dollar figures below are in U.S. dollars.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $7.330 billion | $6.787 billion |
| Operating revenue (non-GAAP; excludes fuel and subcontracted transportation) | $6.040 billion | $5.791 billion |
| Continuing-operations pretax earnings | $313.8 million | $406.4 million |
| GAAP net earnings | $790.6 million | $262.5 million |
| Comparable continuing-operations earnings (non-GAAP) | $240.8 million | $290.5 million |
| Diluted EPS, GAAP / comparable | $14.87 / $4.53 | $4.90 / $5.42 |
| Cash from continuing operating activities | $1.548 billion | $1.601 billion |
| Free cash flow (non-GAAP) | $189.7 million | $193.7 million |
| Capital expenditures paid | $1.860 billion | $1.905 billion |
| Total debt at year-end | $5.410 billion | $5.391 billion |
Revenue rose 8%, while operating revenue increased 4%. GAAP earnings included a $586 million net tax-reform benefit, driving the apparent surge in net income; comparable earnings fell 17% and pretax earnings fell 23%. The filing reports lease-and-rental gross margin of 27% versus 30%, services gross margin of 16% versus 17%, and fuel-services gross margin of 3% in both years.
At December 31, 2017, total assets were $11.452 billion, shareholders’ equity $2.835 billion, and cash and equivalents $78.3 million. Working capital was negative $690.5 million, including approximately $826 million of debt due within a year. Ryder reported $577 million available under its revolving credit facility and a $175 million receivables program; no receivables-program balance was outstanding. Debt-to-equity was 191%, down from 263%, largely because tax reform increased equity. The annualized dividend rate was raised 5% to $1.84 per share.
Segment performance and changes
| Segment | 2017 revenue | Change | 2017 EBT | Change |
|---|---|---|---|---|
| FMS | $4.734 billion | +4% | $312.7 million | -16% |
| DTS | $1.096 billion | +7% | $55.3 million | -13% |
| SCS | $1.970 billion | +20% | $103.1 million | -2% |
FMS operating revenue grew 2%; ChoiceLease revenue increased 4%, but commercial rental revenue declined 4%. Lower used-vehicle proceeds, higher maintenance costs and accelerated depreciation pressured FMS earnings. Used-vehicle sales recorded a $17.2 million net loss, versus a $1.0 million gain in 2016; tractor and truck proceeds per unit fell 12% each. DTS operating revenue increased 2%, while higher insurance, maintenance and driver costs reduced EBT. SCS operating revenue rose 11%, driven by new business, volumes and pricing, but two customer accounts, higher compensation and planned technology and sales spending weighed on EBT. Segment EBT as a percentage of operating revenue declined in all three segments: FMS 7.7% from 9.4%, DTS 7.0% from 8.2%, and SCS 6.8% from 7.8%.
Fourth-quarter revenue increased 12% to $1.940 billion and operating revenue rose 8% to $1.587 billion. Pretax earnings were $78.8 million, up 14%; comparable pretax earnings increased 27% to $104.5 million. GAAP continuing-operations earnings of $642.5 million, or $12.10 diluted EPS, included the tax-law benefit; comparable earnings were $72.7 million, or $1.37 per diluted share. All three segments reported revenue growth; FMS EBT rose 43%, while DTS and SCS EBT increased 1% and 5%, respectively.
Outlook, risks and unusual items
- 2018 outlook: Management forecast comparable diluted EPS of $5.40–$5.70 and GAAP continuing-operations EPS of $5.34–$5.64. The 2017 GAAP comparison includes a $10.75-per-share tax benefit. Management expected total revenue growth of about 6% and operating-revenue growth of about 8%; its reconciliation gives approximately $7.8 billion and $6.5 billion, respectively. It forecast operating cash flow of about $1.8 billion, free cash flow of negative $600 million, and capital expenditures of approximately $2.9 billion, primarily funded with additional debt.
- Management anticipated solid segment earnings growth, ChoiceLease fleet growth of 6,500 vehicles, 6% commercial rental fleet growth, and DTS/SCS revenue growth and margin expansion. Expected benefits from lower taxes and overhead reductions were partly offset by continued used-vehicle market weakness and higher maintenance costs on older vehicles. Ryder expected used-vehicle sales to remain loss-making in 2018 and was reducing residual-value estimates and accelerating depreciation on vehicles planned for sale through mid-2019.
- Significant one-time items: Tax reform produced a $586 million net benefit, including a provisional $619 million deferred-tax remeasurement benefit and a $33 million transition-tax provision. The tax accounting was incomplete for some provisions and could be adjusted during 2018. Other 2017 items included a $23 million employee bonus, $21.4 million of restructuring charges and fees, and a $24.1 million gain on property sales. Comparable earnings exclude specified pension, restructuring and other items.
- Principal risks: Ryder bears vehicle residual-value risk; further used-vehicle price deterioration could reduce earnings and trigger higher depreciation or impairments. The business is capital-intensive, cyclical and exposed to fleet utilization, customer demand, driver and technician availability, fuel and interest-rate movements, regulation, technology shifts, cyber incidents and labor disputes. SCS and DTS customer concentration is notable: the top ten customers represented 53% of SCS total revenue and 46% of DTS total revenue; automotive accounted for about 40% of SCS revenue.
- Other exposures: Pension obligations were $2.3 billion against $1.9 billion in plan assets; estimated global pension contributions were about $34 million for 2018. Self-insurance accruals were approximately $349 million. Environmental liabilities were $10 million, with 19 identified cleanup sites; management did not expect these matters, in aggregate, to materially affect financial condition or liquidity. Management likewise expected ordinary-course legal matters not to have a material aggregate impact.
Important facts for investors to verify
- Separate recurring operating performance from the $586 million tax-reform benefit; review comparable EPS alongside GAAP EPS and the stated exclusions.
- Track used-vehicle pricing, residual-value assumptions, accelerated depreciation and the expected 2018 used-vehicle loss.
- Assess whether the projected 2018 growth and margin improvements can offset higher fleet investment, maintenance costs and negative $600 million forecast free cash flow.
- Review refinancing needs, debt maturities, revolving-credit availability and leverage against management’s target range of 200%–250%; management expected leverage to rise with negative free cash flow.
- Monitor large-customer and automotive-industry concentration, pension funding, self-insurance estimates, and the final accounting for tax reform.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.