Ryder System, Inc. — Q3 2021 Form 10-Q
Business context and period: This unaudited quarterly report covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. Ryder operates Fleet Management Solutions (FMS), Supply Chain Solutions (SCS), and Dedicated Transportation Solutions (DTS). Amounts below are in U.S. dollars.
Financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $2.459 billion | $2.151 billion | $7.063 billion | $6.207 billion |
| Operating revenue (non-GAAP) | $1.983 billion | $1.790 billion | $5.723 billion | $5.185 billion |
| Continuing-operations EBT | $183 million | $55 million | $457 million | $(154) million |
| Continuing-operations earnings | $139 million | $45 million | $340 million | $(138) million |
| Net earnings (loss) | $138 million | $36 million | $338 million | $(148) million |
| Diluted EPS, continuing operations | $2.58 | $0.85 | $6.33 | $(2.64) |
| Comparable EBITDA (non-GAAP) | $612 million | $625 million | $1.803 billion | $1.691 billion |
Operating revenue excludes fuel, subcontracted transportation and, where applicable, ChoiceLease liability-insurance revenue. Comparable EBITDA is a company-defined non-GAAP measure; Q3 declined 2% while nine-month EBITDA increased 7%.
Margins and segment performance
- Lease, maintenance and rental: Q3 revenue rose 9% to $1.014 billion; gross margin increased to 28% from 19%. Nine-month gross margin was 26%, versus 14%.
- Services: Q3 revenue rose 18% to $1.321 billion, but gross margin fell 16% to $157 million and margin rate declined to 12% from 17%. Nine-month margin was $507 million, up 3%, with margin rate down to 13% from 16%.
- Fuel services: Q3 revenue increased 29% to $124 million; gross margin was $8 million, or 6% of revenue, versus 3% a year earlier. Fuel revenue largely reflects costs passed through to customers.
- FMS: Q3 revenue rose 11% to $1.436 billion; EBT was $186 million versus $16 million. Commercial rental revenue rose 37%; rental power-fleet utilization was 82.8%, versus 70.8%.
- SCS: Q3 revenue rose 17% to $802 million, but EBT fell 62% to $22 million. Automotive revenue declined 8% amid production disruptions; higher labor costs also pressured results.
- DTS: Q3 revenue rose 27% to $380 million, while EBT fell 54% to $11 million, primarily due to labor, subcontracted transportation and insurance costs, and strategic investment.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $1.685 billion, approximately flat year over year. Free cash flow, a non-GAAP measure, declined to $829 million from $1.218 billion, mainly because cash capital spending increased.
- Cash capital expenditures were $1.428 billion, compared with $879 million in 2020; gross capital expenditures were $1.496 billion, including $1.390 billion for revenue-earning equipment.
- Cash and equivalents were $203 million at September 30, 2021. Total debt was $5.987 billion, down from $6.610 billion at December 31, 2020; debt-to-equity was 238%, compared with 293% at year-end.
- Ryder reported $1.218 billion available under its global revolving credit facility and $300 million available under its trade receivables financing program. Its credit-facility debt-to-net-worth covenant ratio was 165%, against a maximum of 300%.
- Interest expense declined 14% in Q3 to $54 million and 16% for the nine months to $163 million, reflecting lower average debt. The company redeemed $300 million of notes in August 2021.
Changes, outlook and material matters
- Management attributed improved earnings chiefly to higher used-vehicle sale gains and a lower year-over-year impact from prior residual-value estimate changes, alongside stronger rental performance and ChoiceLease results. Used-vehicle sales produced a $69 million gain in Q3 and a $150 million gain for the nine months; tractor and truck proceeds per unit rose sharply year over year.
- Global vehicle and parts supply constraints supported rental and used-vehicle demand and pricing, but may constrain fleet growth and vehicle sales volumes. Semiconductor shortages reduced automotive-customer activity in SCS; management expected that disruption to continue through Q4 2021.
- Labor shortages and higher labor and subcontracted transportation costs pressured SCS and DTS. Management expected labor-shortage impacts to continue through Q4 2021. The filing gives no specific earnings or revenue guidance for future periods.
- A Q2 2021 fleet review adjusted residual-value estimates and useful lives for vehicle classes representing about 15% of the fleet. Management estimated approximately $18 million of additional 2021 depreciation, about 1% of expected annual depreciation; the Q3 impact was not material.
- In October 2021, the board authorized discretionary repurchases of up to 2.0 million shares and anti-dilutive repurchases of up to 2.5 million shares, each through October 2023. A quarterly dividend of $0.58 per share was declared in October.
- On October 27, 2021, Ryder agreed to acquire Midwest Warehouse & Distribution System for approximately $275 million, with completion expected in early November 2021.
- Pending securities class and shareholder derivative actions relate to historical vehicle depreciation and residual-value estimates. Ryder said it believes the claims are without merit and intends to defend them; the class-action dismissal motion was awaiting a court decision. The company stated it did not expect ordinary-course claims and proceedings to have a material financial-statement effect.
- Management cited continuing COVID-19 and supply-chain effects, labor availability and cost, vehicle residual values, used-vehicle pricing, customer demand, inflation, interest rates, insurance costs, and access to capital markets among relevant uncertainties. Disclosure controls were assessed as effective, with no material change in internal control reported for the quarter.
Important facts for investors to verify
- Whether elevated used-vehicle prices and gains persist, and how vehicle supply affects rental demand, fleet growth and replacement spending.
- Whether labor and subcontracted transportation costs continue to erode SCS and DTS profitability, and whether SCS automotive activity recovers from production constraints.
- How much of the earnings rebound reflects durable operating improvement versus vehicle-sale gains and reduced effects of earlier depreciation charges.
- Whether operating cash flow can support the higher fleet investment, debt obligations, shareholder distributions and the Midwest acquisition while maintaining covenant and funding access.
- Developments in the residual-value-related securities and derivative litigation, and the acquisition’s closing, purchase price and subsequent financial impact.