Ryder System, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Unaudited consolidated results; comparisons are with Q1 2017 unless stated otherwise. Ryder provides fleet leasing and rental, dedicated transportation, and supply chain services.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $1.903 billion | $1.737 billion | +10% |
| Operating revenue, excluding fuel and subcontracted transportation (non-GAAP) | $1.543 billion | $1.445 billion | +7% |
| Continuing-operations pretax earnings | $48.1 million | $60.6 million | -21% |
| Continuing-operations earnings | $33.9 million | $38.5 million | -12% |
| Net earnings | $33.5 million | $38.4 million | -13% |
| Diluted EPS, continuing operations | $0.64 | $0.72 | -11% |
| Comparable diluted EPS (non-GAAP) | $0.91 | $0.83 | +10% |
| Operating cash flow | $314.9 million | $331.3 million | -5% |
| Free cash flow (non-GAAP) | $(238.2) million | $82.8 million | Decreased |
Revenue growth reflected new business, higher volumes, increased rental demand, and higher fuel costs passed through to customers. The $16 million FMS Europe goodwill impairment was the principal reported earnings drag. Comparable results exclude specified non-operating pension and other items; they are non-GAAP and should not be treated as a substitute for GAAP results.
Segments and margins
- Fleet Management Solutions (FMS): Revenue rose 10% to $1.243 billion; segment EBT fell 5% to $49.8 million. EBT was 4.0% of total revenue versus 4.6% a year earlier. Commercial rental revenue grew 18%, and rental utilization increased 7.6 percentage points to 74.8%. Lower used-vehicle results, higher depreciation and maintenance costs weighed on earnings.
- Dedicated Transportation Solutions (DTS): Revenue increased 12% to $299.0 million; EBT rose 16% to $13.1 million. Management cited new business, volume growth, operating performance and favorable prior-year insurance-claim developments.
- Supply Chain Solutions (SCS): Revenue increased 10% to $494.7 million; EBT declined 7% to $26.2 million. EBT margin on total revenue fell to 5.3% from 6.2%, reflecting lower automotive volumes and continued underperformance in one customer account, partly offset by growth in other industries and lower insurance costs.
Lease and rental gross margin remained 25%; services gross margin declined to 15% from 16%. Fuel services margin rose to 3% from 2%, partly due to timing effects from changes in fuel prices.
Cash, debt and liquidity
- Cash and cash equivalents were $73.9 million at March 31, 2018. Total cash, cash equivalents and restricted cash were $79.9 million.
- Total debt was $5.678 billion, up from $5.410 billion at December 31, 2017. Debt-to-equity was 199%, versus 191% at year-end.
- Current liabilities were $1.809 billion and current assets were $1.312 billion. The filing attributes lower operating cash flow partly to lower earnings and higher working-capital needs.
- Cash capital expenditures were $662.7 million; total capital expenditures were $710.9 million, up 63%. Investing cash outflow was $553.0 million.
- Available capacity was $341 million under the $1.2 billion revolving credit facility and $175 million under the receivables program. The credit-facility covenant debt-to-net-worth ratio was 167%, against a maximum of 300%.
- Ryder issued $450 million of five-year unsecured notes in February. It reported investment-grade ratings with stable outlooks from Fitch, S&P and Moody’s.
Material changes, outlook and notable items
- Ryder recorded a $15.5 million non-cash impairment, representing all goodwill associated with its FMS Europe reporting unit, citing market conditions and performance expectations.
- Higher depreciation—about $10 million in the quarter—followed changes to estimated vehicle residual values effective January 1, 2018.
- The effective tax rate was 29.5%, compared with 36.4%. The quarter included a $3.3 million tax benefit from reversal of uncertain-tax-position reserves. Ryder estimated an additional approximately $30 million tax provision in Q2 2018 related to the one-time transition tax under the 2017 Tax Act; the estimate remained subject to refinement.
- Ryder adopted revenue recognition standard Topic 606 retrospectively in Q1 2018. It revised 2017 comparatives; the filing says the revision included an $11 million correction for certain freight brokerage contracts previously presented gross rather than net and was not material to prior statements.
- Management expected 2018 capital expenditures of approximately $3 billion, funded primarily through internally generated funds and additional debt. It expected favorable commercial rental and ChoiceLease revenue comparisons, and favorable DTS and SCS revenue comparisons, to continue through year-end. The filing does not provide a clear full-year earnings or EPS guidance figure.
- On April 2, 2018, Ryder completed its approximately $120 million acquisition of MXD Group, an e-commerce fulfillment and last-mile provider.
- Quarterly dividend declared was $0.52 per share, up from $0.44 in Q1 2017. Ryder repurchased approximately 171,000 shares for $13 million during the quarter.
Management stated that operating cash flows and access to debt markets should meet foreseeable funding needs, while cautioning that disruption in commercial paper or unsecured debt markets could impair access. Disclosed risks include demand and pricing pressure, customer concentration or loss, used-vehicle residual values, fuel-price volatility, maintenance and labor costs, interest rates and financing access, pension funding, regulation, and legal or insurance claims. Ryder reported no material change in market-risk exposures since year-end; disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether FMS Europe performance and market conditions lead to further impairment or restructuring charges.
- Whether fleet growth and the planned roughly $3 billion of 2018 capital spending generate adequate utilization, returns and cash flow.
- Trends in used-vehicle prices, residual-value assumptions, and the resulting depreciation and disposal gains or losses.
- The final tax-reform transition-tax amount, including the anticipated Q2 provision of approximately $30 million.
- Debt growth, refinancing needs, revolving-facility availability and covenant headroom.
- SCS customer-account performance, automotive volumes, and the sustainability of DTS and rental growth.
- MXD acquisition integration, purchase-price allocation and subsequent contribution to results.