Ryder System, Inc. — 2018 Form 10-K Summary
Business context and reporting period
Ryder provides fleet leasing, rental and maintenance; dedicated transportation; and supply-chain logistics services. This filing covers the fiscal year ended December 31, 2018, with fourth-quarter results for the three months ended that date. Its reportable segments are Fleet Management Solutions (FMS), Dedicated Transportation Solutions (DTS) and Supply Chain Solutions (SCS).
Financial performance and key metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $8.41 billion | $7.30 billion |
| Operating revenue (non-GAAP; excludes fuel and subcontracted transportation) | $6.69 billion | $6.04 billion |
| EBT from continuing operations | $373.9 million | $314.5 million |
| Comparable EBT (non-GAAP) | $406.5 million | $370.5 million |
| GAAP earnings from continuing operations | $275.6 million | $792.3 million |
| Comparable earnings from continuing operations (non-GAAP) | $306.2 million | $241.1 million |
| Diluted EPS from continuing operations | $5.21 | $14.90 |
| Comparable diluted EPS (non-GAAP) | $5.79 | $4.53 |
- FY revenue rose 15%; operating revenue rose 11%. Growth reflected organic price and volume gains across segments, MXD acquisition contributions, and higher fuel costs passed through to customers.
- Segment revenue increased in FMS by 11% to $5.26 billion, DTS by 22% to $1.33 billion, and SCS by 24% to $2.40 billion. Segment EBT was $324.3 million for FMS (+4%), $61.2 million for DTS (+11%) and $133.6 million for SCS (+29%).
- Gross margin rates were 27% for lease and rental, 15% for services, and 2% for fuel services. Services margin declined from 16% in 2017, reflecting business mix; lease and rental margin remained 27%.
- Fourth-quarter total revenue increased 17% to $2.26 billion and operating revenue increased 13% to $1.79 billion. EBT rose 42% to $111.3 million; comparable EBT rose 16% to $121.0 million. Comparable diluted EPS rose 33% to $1.82.
- Operating cash flow was $1.64 billion, up from $1.55 billion. Free cash flow, a non-GAAP measure, was negative $944 million versus positive $190 million, principally due to higher capital spending. Cash capital expenditures were $3.05 billion; total capital expenditures were $3.17 billion.
- At year-end, total debt was $6.62 billion, up 22%; debt-to-equity was 228%, versus 191%. Cash and cash equivalents were $68 million and working capital was negative $724 million. Ryder reported $733 million available under its $1.4 billion revolving credit facility.
- Dividend payments were $112 million, and the annualized dividend rate increased 17% to $2.16 per share during 2018. Book value per share was $54.79.
Material changes versus the prior comparable period
- GAAP earnings were substantially lower than 2017, but the comparison is distorted by the 2017 Tax Cuts and Jobs Act, which generated a large tax benefit. The 2017 effective tax rate was negative 151.9%; the 2018 rate was 26.3%. Comparable earnings and comparable EPS improved year over year.
- Capital expenditures increased sharply to support fleet growth and replacement; debt and interest expense also rose. Interest expense increased 27% to $178.6 million, reflecting higher average debt and borrowing rates.
- Used vehicle sales, net, were a $21.7 million loss, compared with a $17.2 million loss in 2017. Vehicle residual-value and useful-life changes reduced 2018 earnings by about $40 million; accelerated depreciation was also recorded.
- Ryder acquired MXD Group for approximately $118 million and Metro Truck & Tractor Leasing for approximately $52 million. MXD contributed $164 million to 2018 total revenue.
- Ryder adopted revenue recognition guidance retrospectively. The filing reports that the adjustments to previously presented 2017 and 2016 earnings were small; revenue and cost-of-services presentation was reduced for certain freight-brokerage contracts previously reported gross.
Outlook, management commentary, risks and unusual items
- For 2019, management anticipated solid earnings growth across all segments, record ChoiceLease fleet growth of 11,000 vehicles, rental revenue growth, and DTS/SCS revenue growth and margin expansion. Used-vehicle results were expected to be modestly lower.
- Management forecast approximately $2.0 billion in operating cash flow, negative $1.1 billion in free cash flow, and approximately $3.6 billion in capital expenditures for 2019, primarily to grow and refresh the lease fleet. It expected to fund capital spending primarily with additional debt.
- Ryder planned to adopt the new lease standard effective January 1, 2019. It expected a material one-time reduction in shareholders’ equity from deferred maintenance revenue and an ongoing change in the timing of revenue recognition; management stated there would be no effect on cash flow or total earnings over a lease’s life. The leverage target was revised to 250–300% from 200–250%.
- In 2018 Ryder recorded a $15.5 million goodwill impairment for FMS Europe, restructuring and other charges of $25.1 million, and a $3.1 million pension settlement charge. Ryder also committed to close its Singapore operations in 2019; additional exit charges were expected but not expected to be material.
- Key risks include economic and freight-market cyclicality; vehicle residual values and used-vehicle pricing; substantial capital needs and debt; driver and technician availability and labor costs; customer and industry concentration in SCS/DTS; contract pricing and execution assumptions; regulation, cybersecurity and technology change; and pension, insurance and environmental liabilities.
- Management said ordinary-course legal matters were not expected, in aggregate, to materially affect consolidated financial condition or liquidity. Environmental liabilities were $10 million at year-end, with cleanup exposure at 19 identified sites; ultimate costs remain uncertain.
Important facts for investors to verify
- Review the non-GAAP reconciliations and the 2017 tax benefit when assessing earnings trends; comparable measures exclude specified items and may not be comparable across companies.
- Track used-vehicle proceeds, residual-value assumptions, accelerated depreciation and fleet age, including the expected 2019 depreciation impact of about $30 million from annual residual-value and useful-life reviews.
- Assess whether fleet investment generates the forecast operating cash flow and whether negative free cash flow and higher borrowing remain manageable.
- Monitor leverage, refinancing needs, interest rates, revolving-credit availability and compliance with the credit facility covenant.
- Check the equity and earnings effects of the new lease standard against subsequent reported results, and monitor the Singapore exit and acquisition integration.
- Evaluate concentration and execution risks in major SCS/DTS accounts, along with pension funding, self-insurance reserves and environmental contingencies.