Business context and reporting period
Ryder System, Inc. (NYSE: R) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. Its three operating segments are Fleet Management Solutions (FMS), Dedicated Transportation Solutions (DTS), and Supply Chain Solutions (SCS). Prior-period comparisons were recast for adoption of the new lease accounting standard.
Financial performance and position
Third quarter 2019: Revenue was $2.224 billion, up 3% from $2.160 billion. Operating revenue, a non-GAAP measure excluding fuel and subcontracted transportation, was $1.805 billion, up 5%. Ryder reported a continuing-operations loss of $91.5 million, or $1.75 per diluted share, versus earnings of $91.6 million, or $1.73 per diluted share, a year earlier. Pretax results were a loss of $91.3 million versus income of $118.9 million.
Nine months ended September 30: Revenue was $6.649 billion, up 8%; operating revenue was $5.376 billion, up 10%. Continuing-operations earnings were $29.8 million, or $0.56 per diluted share, down from $175.1 million, or $3.31 per diluted share. Pretax earnings fell to $80.0 million from $273.5 million.
Margins and segments: Lease, maintenance and rental gross margin fell to $81.4 million (8% of revenue) from $250.1 million (28%) in Q3. Services gross margin was $172.8 million (15%), compared with $158.2 million (14%). FMS reported a Q3 segment loss before tax of $108.6 million, versus earnings of $97.8 million; DTS EBT increased 33% to $18.5 million, while SCS EBT decreased 5% to $34.6 million. These segment measures exclude specified items and are not equivalent to consolidated GAAP earnings.
Cash flow and investment: Nine-month operating cash flow from continuing operations was $1.589 billion, compared with $1.276 billion. Cash purchases of property and revenue-earning equipment were $2.957 billion, and reported free cash flow, a non-GAAP measure, was negative $964.6 million versus negative $632.8 million. Capital expenditures were approximately $3.0 billion, up 31%.
Debt and liquidity at September 30, 2019: Cash and equivalents were $75.9 million. Total debt was $7.747 billion, up from $6.649 billion at December 31, 2018; the debt-to-equity ratio was 313%, versus 262%. Ryder reported $546 million available under its $1.4 billion revolving credit facility and $225 million available under its trade receivables program. Its facility covenant debt-to-net-worth ratio was 219%, against a maximum of 300%.
Material changes versus the prior comparable period
- The dominant earnings driver was a third-quarter revision to vehicle residual-value estimates amid weakening used-vehicle conditions. The resulting additional depreciation reduced pretax income by approximately $177 million, net income by approximately $158 million, and diluted EPS by $3.01 in both the quarter and year-to-date results.
- Used-vehicle market softness intensified during Q3; used-vehicle sales, net, were a loss of $22.7 million for the quarter and $49.1 million for the nine months, compared with losses of $3.2 million and $16.2 million, respectively.
- Interest expense rose 31% in Q3 and 39% year to date, reflecting higher average debt and a higher effective interest rate. Total debt increased with planned fleet investment.
- Revenue growth was led by FMS and DTS. Q3 SCS revenue declined 2%, with management citing lost business; nine-month SCS revenue rose 10%, including growth from the 2018 MXD acquisition.
Outlook, commentary, risks and unusual items
- Management expected used-vehicle market conditions to remain soft through 2020. The filing estimates further depreciation from the Q3 residual-value change of $112 million in Q4 2019, $250 million in 2020, and $305 million over 2021–2025, based on the fleet then in service. A hypothetical further 10% reduction in policy residual values would add about $135 million of 2020 depreciation and $269 million thereafter.
- Management expected 2019 capital expenditures of approximately $3.7 billion, primarily funded with internally generated cash and additional debt. It stated that cash flows and access to debt markets were expected to meet foreseeable needs, while warning that market disruption or credit-rating downgrades could impair funding access or raise costs.
- Management expected favorable ChoiceLease revenue comparisons through year-end, but not favorable commercial-rental revenue comparisons given slowing demand. It anticipated favorable DTS revenue comparisons and negative SCS revenue growth in Q4 due to the timing of lost business. The filing does not provide a clear consolidated earnings or EPS outlook.
- FMS North America goodwill was not impaired in the Q3 test, but estimated fair value exceeded carrying value by only about 5%; a 50-basis-point adverse change in either the long-term growth or discount-rate assumption could cause at least partial impairment. FMS NA goodwill was approximately $244 million.
- Other comparability items included $13.6 million of year-to-date ERP implementation costs, restructuring and other charges, and an $18.6 million gain on sale of SCS properties. The filing reports no material change in market-risk exposures and no material expected effect from ordinary-course legal claims and proceedings.
- Disclosure controls were assessed as effective. Management reported no material changes to internal control over financial reporting other than implementation of lease-accounting systems, processes and controls.
Important facts for investors to verify
- Whether used-vehicle prices, fleet disposal volumes and residual-value assumptions stabilize, and how actual depreciation compares with management’s disclosed estimates.
- Whether FMS North America’s operating performance and goodwill valuation retain adequate headroom as used-vehicle conditions evolve.
- Whether planned capital spending, negative free cash flow and rising debt remain manageable alongside interest costs, refinancing needs and credit-market access.
- Whether commercial-rental utilization and demand recover, and whether anticipated DTS growth offsets expected Q4 SCS revenue declines.
- How much of reported results and cash generation reflects non-GAAP adjustments, asset-sale proceeds, prior-period accounting recasts and unusual items.