Ryder System, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. Figures are in U.S. dollars; financial statement amounts below are rounded to millions unless otherwise noted.
Business context and financial performance
Ryder provides fleet leasing, rental and maintenance services, dedicated transportation, and supply-chain solutions through Fleet Management Solutions (FMS), Dedicated Transportation Solutions (DTS), and Supply Chain Solutions (SCS).
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $1,848.5 | $1,724.4 | $5,389.9 | $5,057.8 |
| Operating revenue, excluding fuel and subcontracted transportation (non-GAAP) | $1,525.5 | $1,468.3 | $4,453.8 | $4,324.0 |
| Earnings from continuing operations before taxes | $94.3 | $131.7 | $235.0 | $337.2 |
| Earnings from continuing operations | $58.9 | $85.1 | $148.5 | $215.4 |
| Net earnings | $58.6 | $84.8 | $147.6 | $214.3 |
| Diluted EPS from continuing operations | $1.11 | $1.59 | $2.79 | $4.02 |
Revenue increased 7% in both periods; operating revenue rose 4% in Q3 and 3% year to date. GAAP pretax earnings fell 28% in Q3 and 30% year to date. Company-defined comparable diluted EPS, excluding specified pension and other items, was $1.33 versus $1.67 in Q3 and $3.16 versus $4.35 year to date.
- Revenue mix and gross margin: Q3 lease and rental revenue grew 3%, but gross margin declined 4% to $234.6 million and margin rate fell to 28% from 31%. Services revenue rose 12%, while gross margin fell 5% to $134.8 million and margin rate declined to 15% from 18%. Fuel-services revenue rose 7%; its gross margin was $4.5 million.
- Segment performance: Q3 segment EBT declined 11% in FMS, 22% in DTS, and 29% in SCS. SCS revenue grew 19% (9% excluding fuel and subcontracted transportation), but two customer accounts—including a difficult start-up—reduced profitability.
- Cash flow and investment: Nine-month operating cash flow was $1,166.2 million versus $1,185.1 million. Company-defined free cash flow was $209.5 million versus $72.3 million; this measure includes proceeds from equipment and property sales and direct-finance-lease collections, less equipment purchases. Cash purchases of property and revenue-earning equipment were $1,312.8 million.
- Liquidity and debt: Cash was $65.3 million at September 30. Total debt was $5,349.2 million, down from $5,391.3 million at year-end 2016; shareholders’ equity was $2,175.1 million. The company reported $664 million available under its $1.2 billion revolving facility and $175 million available under its receivables program. Its covenant debt-to-net-worth ratio was 192%, against a 300% maximum; debt-to-equity was 246%.
- Other metrics: Q3 interest expense decreased 7% to $34.9 million. The effective tax rate was 37.6%, compared with 35.4%. Dividends declared were $0.46 per share in Q3.
Material changes versus the prior comparable period
- Revenue growth did not translate into higher earnings, as costs and weaker segment performance weighed on profitability. Nine-month revenue-earning equipment depreciation increased to $932.8 million from $878.2 million.
- Used-vehicle results shifted to an $11.8 million loss for the first nine months, from a $33.0 million gain a year earlier. Management cited weaker used tractor and truck values; proceeds per unit fell 17% for tractors and 16% for trucks year to date.
- Capital spending was lower on a cash-paid basis than in the prior-year period. Debt declined modestly, while cash increased to $65.3 million from $58.8 million at December 31, 2016.
- FMS revenue growth reflected ChoiceLease fleet growth and replacement-vehicle pricing; lower commercial rental demand weighed on year-to-date results. DTS and SCS revenue benefited from new business and higher volumes, while their margins were pressured by maintenance, insurance, start-up, and account costs.
Outlook, commentary, risks, and unusual items
- Management expected full-year 2017 capital expenditures of approximately $1.9 billion, funded primarily through internally generated cash and additional debt. It stated that cash flows and available financing should meet foreseeable needs, while warning that market disruption could limit access to debt or commercial-paper markets.
- Management expected favorable ChoiceLease revenue comparisons through year-end, improved commercial rental comparisons in Q4 based on then-current demand, and favorable SCS revenue comparisons through year-end. DTS revenue comparisons were expected to be consistent with the prior year, with operating-revenue comparisons remaining favorable.
- Q3 included a $5.5 million estimated pension settlement charge and $4.3 million in cost-savings-program consulting fees. Other year-to-date comparability items included a $2.2 million operating-tax adjustment and a $2.6 million restructuring credit. The Illinois tax-law change increased Q3 tax expense by $1.8 million.
- Accelerated depreciation on vehicles expected to be made available for sale through June 2018 was $4 million in Q3 and $21 million year to date. Hurricane-related rental demand increases were offset by property losses, leaving a neutral net Q3 impact.
- Key risks include used-vehicle prices and residual values, fleet demand and utilization, customer concentration and contract start-up performance, maintenance and insurance costs, labor and driver availability, pension funding and multi-employer-plan withdrawal liability, severe weather, and the availability and cost of financing. The filing states ordinary-course claims and proceedings are not expected to have a material effect, but actual outcomes may differ from estimates.
- Ryder expected the new lease standard, effective for the company in 2019, to have a significant impact on its consolidated financial position, primarily relating to ChoiceLease maintenance-service revenue; it continued to assess effects on results of operations. The filing also notes that 2018 adoption of the revenue standard would affect ChoiceLease service components beginning in 2019.
Most important facts for investors to verify
- Whether SCS start-up and customer-account challenges improve, and whether revenue growth converts into segment earnings.
- Used-vehicle market prices, residual-value assumptions, accelerated depreciation, and the resulting FMS margins.
- Progress against the $1.9 billion full-year capital-expenditure outlook and the sustainability of cash generation after fleet investment.
- Debt-market access, refinancing needs, covenant headroom, and the company’s ability to maintain liquidity if financing conditions weaken.
- The eventual financial-statement effects of the lease and revenue accounting standards, pension obligations, and outstanding claims and contingencies.