Business context and reporting period
Ryder System, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2020. Its businesses are Fleet Management Solutions (FMS), Supply Chain Solutions (SCS), and Dedicated Transportation Solutions (DTS). The filing describes material effects from the COVID-19 downturn, notably weaker commercial rental demand, used-vehicle conditions, and automotive supply-chain activity.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $1.895 billion | $2.245 billion | $4.057 billion | $4.425 billion |
| Continuing-operations pretax earnings (loss) | $(94.8) million | $103.1 million | $(208.4) million | $171.2 million |
| Continuing-operations net earnings (loss) | $(73.7) million | $75.5 million | $(182.8) million | $121.3 million |
| Diluted continuing-operations EPS | $(1.41) | $1.43 | $(3.50) | $2.30 |
| Operating cash flow | Not presented separately for Q2 | $1.099 billion | $1.045 billion | |
| Free cash flow (non-GAAP) | Not presented separately for Q2 | $612 million | $(909) million |
Q2 revenue fell 16% year over year (operating revenue, a non-GAAP measure, fell 10%); first-half revenue fell 8% (operating revenue fell 5%). Q2 lease and related maintenance/rental gross margin declined to 11% from 26%; services gross margin was 16%, unchanged, while fuel gross margin was 8% versus 2%. The continuing-operations effective tax rate was a 22.2% benefit in Q2 and a 12.3% benefit for the first half.
Liquidity, debt, and capital
At June 30, 2020, cash and cash equivalents were $831 million, versus $74 million at year-end 2019. Total debt was $8.148 billion, up from $7.925 billion at year-end; shareholders’ equity was $2.159 billion, down from $2.476 billion. The reported debt-to-equity ratio was 377%, compared with 320% at year-end. The company attributed the increase to lower equity—partly from non-cash depreciation charges—and higher debt; it noted that the elevated cash balance also increased the ratio.
Available funding included $1.204 billion under the global revolver and $93 million under the trade receivables program. The revolving-credit covenant ratio was 235% against a maximum of 300%; the company amended covenant definitions in Q2 to provide additional flexibility. Current liabilities were $2.756 billion and current assets were $2.133 billion. First-half capital expenditures paid were $705 million, down from $2.211 billion, and financing cash flow was $155 million. The company temporarily suspended share repurchases; its board declared a $0.56-per-share Q2 dividend.
Material changes and segment performance
- FMS: Q2 revenue declined 14% to $1.198 billion and segment pretax results swung to a $104 million loss from $58 million of earnings. Commercial rental revenue fell 33%; rental fleet utilization was 55.9%, down from 75.3%. ChoiceLease revenue grew 1%.
- SCS: Q2 revenue fell 20% to $519 million and pretax earnings declined 19% to $37 million. Automotive revenue fell 40%, reflecting production shutdowns; consumer packaged goods and retail revenue rose 6%.
- DTS: Q2 revenue declined 19% to $294 million and pretax earnings declined 22% to $21 million, with operating revenue down 8%.
- First-half operating cash flow increased modestly, while free cash flow improved principally because vehicle and other capital spending was sharply lower. Cash rose substantially amid reduced investment and financing activity, including debt issuance and repayment.
Outlook, risks, contingencies, and unusual items
- COVID-19-related revisions to fleet residual values drove additional depreciation of $154 million in Q2 and $305 million in the first half; the filing estimates year-over-year earnings impacts of $119 million and $247 million, respectively. Management expects elevated depreciation to weigh on FMS results, particularly for the remainder of 2020 and 2021, with the impact declining thereafter. Further residual-value reductions could materially hurt earnings and liquidity.
- Management expected commercial rental demand to remain weak through the balance of 2020, planned to reduce the rental fleet, and anticipated lower ChoiceLease sales activity in the second half. Automotive customer production had restarted in Q2; management expected volumes to continue recovering, subject to customer schedules and broader economic conditions. The company expected free cash flow to increase through the rest of 2020, supported by lower capital expenditures and improved operating cash flow. No numerical full-year earnings guidance is provided in the filing text.
- COVID-19 also contributed to additional credit-loss reserves, extended payment terms for certain customers, temporary furloughs, reduced discretionary spending and capital expenditures, and planned workforce reductions. Severance actions were expected to generate about $12 million in quarterly savings. Management warned that pandemic duration, customer solvency, used-vehicle prices, rental utilization, and access to credit could further affect results and liquidity.
- FMS North America goodwill was not impaired in a Q1 test, but estimated fair value exceeded carrying value by only about 5%; further deterioration could trigger a non-cash impairment. The filing also identifies potential pension funding and deferred-tax impacts.
- A securities class action and a related shareholder derivative action were filed in May and June 2020 concerning historical vehicle depreciation policy and residual-value estimates. Ryder said it considers the claims without merit and intends to defend them. Other proceedings were described as routine, except as noted.
- Other comparability items included restructuring and other charges, ERP implementation costs, and higher bad-debt expense. The company discontinued its ChoiceLease liability-insurance extension program, with exit expected to be completed in Q2 2021. The first ERP human-resources module went live in July 2020.
Important facts for investors to verify
- Whether used-vehicle pricing and residual-value assumptions support management’s depreciation estimates, and whether further charges or goodwill impairment arise.
- How commercial rental demand and utilization, ChoiceLease sales, and customer payment performance develop as pandemic effects continue.
- Whether cash generation, reduced capital expenditures, debt maturities, and covenant compliance remain adequate under weaker operating conditions.
- Actual timing and savings from workforce reductions, and the costs of restructuring, ERP implementation, and the insurance-program exit.
- Developments in the securities and derivative litigation, pension funding, and the company’s access to commercial paper and other unsecured financing.