Business context and reporting period
Ryder System, Inc. filed this Form 10-K for the fiscal year ended December 31, 2019. Its businesses are Fleet Management Solutions (FMS), Supply Chain Solutions (SCS), and Dedicated Transportation Solutions (DTS). FMS provides vehicle leasing, rental, maintenance and related services; SCS provides logistics and supply-chain management; DTS provides dedicated transportation services.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $8.926 billion | $8.414 billion |
| Operating revenue (non-GAAP) | $7.224 billion | $6.698 billion |
| Continuing-operations earnings (loss) before tax | $(42.3) million | $389.5 million |
| Continuing-operations net earnings (loss) | $(23.3) million | $286.9 million |
| Diluted continuing-operations EPS | $(0.45) | $5.43 |
| Comparable diluted EPS (non-GAAP) | $1.01 | $5.95 |
| Operating cash flow from continuing operations | $2.141 billion | $1.718 billion |
| Free cash flow (non-GAAP) | $(1.077) billion | $(936.1) million |
| Total debt at year-end | $7.925 billion | $6.649 billion |
- Revenue increased 6%; operating revenue increased 8%. Growth reflected new business and higher volumes across segments, with some contribution from the 2018 MXD acquisition.
- Lease and related maintenance and rental gross margin fell to 18% from 27%, mainly due to higher vehicle depreciation. Services gross margin improved to 15% from 14%.
- FMS reported a $70.3 million segment pretax loss, compared with $340.0 million of earnings in 2018. SCS segment pretax earnings rose 11% to $145.1 million; DTS rose 33% to $81.1 million.
- Cash and equivalents were $73.6 million. Available funding included $744 million under the revolving credit facility and $225 million under the trade receivables program at year-end. The receivables program capacity was increased to $300 million in February 2020.
- Debt-to-equity rose to 320% from 262%. Separately, the company reported a 226% ratio under its credit-facility definition, against a covenant ceiling of 300%.
Material changes versus the prior year
- Used-vehicle market conditions weakened, especially in the second half of 2019. Ryder revised residual-value estimates for power vehicles, increasing 2019 depreciation by approximately $297 million pretax and reducing diluted EPS by $4.19.
- Used-vehicle sales results were a net loss of $58.7 million, compared with a $22.3 million loss in 2018. Average proceeds per unit declined 3% for tractors and 6% for trucks.
- FMS rental power-fleet utilization decreased to 75.0% from 79.2%, despite a 10% larger average rental power fleet. Vehicles held for sale increased to 9,400 from 6,900.
- Capital expenditures paid rose to $3.735 billion from $3.050 billion, largely for ChoiceLease and rental fleets. Debt rose 19%, reflecting vehicle investment.
- Interest expense increased 34% to $241.4 million, reflecting higher average debt and a higher effective interest rate. Non-operating pension costs rose to $60.4 million, including a $32 million pension settlement charge.
Outlook, management commentary, risks and unusual items
- Management’s 2020 outlook, as stated in the filing, estimated operating cash flow of about $2.13 billion, free cash flow of about $350 million, and capital expenditures of about $2.1 billion. The expected decrease in capital spending primarily reflected lower planned growth in lease and rental fleets.
- Management expected used-vehicle weakness and unfavorable rental comparisons to continue through 2020. It projected that the 2019 residual-value changes would add approximately $275 million to FMS depreciation expense in 2020, with the impact expected to decline in subsequent years.
- FMS ChoiceLease growth was expected to slow, reflecting lower OEM production, non-renewal of lower-return lease business, and anticipated lost business related to ending liability-insurance extensions for ChoiceLease customers. The program exit was expected to be completed by the second quarter of 2021.
- SCS expected operating-revenue growth to continue at a slower rate. DTS expected operating revenue to decline slightly, citing lower sales activity and fewer large deals signed in the second half of 2019.
- Ryder recorded $56.6 million of restructuring and other items, including costs associated with ERP implementation and cost-saving actions. It also recorded a $18.6 million gain on sale of property, which reduced items excluded from comparable earnings.
- FMS North America goodwill was not impaired at year-end, but its estimated fair value exceeded carrying value by only about 15%; management warned that weaker performance, a prolonged market downturn or a sustained share-price decline could lead to an impairment charge.
- Key risks include economic and freight cyclicality; used-vehicle residual values and rental demand; high capital needs and financing access; customer concentration in SCS and DTS; driver and technician shortages; labor, regulatory, environmental, cybersecurity and ERP implementation risks; and pension, insurance and litigation exposures.
- Management said ordinary-course legal matters were not expected, in aggregate, to materially affect consolidated financial condition or liquidity. Environmental liabilities were $12 million; Ryder had been identified as a potentially responsible party at 21 cleanup sites.
Important facts for investors to verify
- Track used-vehicle prices, sales mix between retail and wholesale, inventory levels, and whether actual proceeds support Ryder’s residual-value assumptions.
- Compare realized 2020 depreciation and FMS performance with management’s stated estimate of approximately $275 million of incremental FMS depreciation.
- Monitor free cash flow, vehicle capital spending, debt maturities, borrowing costs, and headroom under the credit-facility covenant.
- Assess segment growth and margins, including SCS customer concentration and DTS sales activity, alongside rental utilization and ChoiceLease fleet growth.
- Review the potential effects of ChoiceLease insurance-program discontinuation, pension funding and self-insurance claims, and the FMS North America goodwill cushion.
- Consider that comparable earnings, operating revenue and free cash flow are non-GAAP measures; reconcile them with GAAP results when evaluating performance.