Ryder System, Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2018. The unaudited filing compares results with the corresponding 2017 periods. Ryder provides fleet leasing, rental and maintenance through Fleet Management Solutions (FMS), dedicated transportation through DTS, and supply-chain services through SCS.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $2.158 billion | $1.841 billion | $6.151 billion | $5.366 billion |
| Operating revenue (non-GAAP) | $1.717 billion | $1.525 billion | $4.899 billion | $4.454 billion |
| Earnings from continuing operations | $89.5 million | $59.0 million | $167.0 million | $149.0 million |
| Net earnings | $88.8 million | $58.8 million | $164.5 million | $148.0 million |
| Diluted EPS from continuing operations | $1.69 | $1.12 | $3.15 | $2.80 |
| Comparable diluted EPS (non-GAAP) | $1.64 | $1.34 | $3.97 | $3.17 |
- Q3 total revenue increased 17%; operating revenue, which excludes fuel and subcontracted transportation, rose 13%. Nine-month increases were 15% and 10%, respectively. Growth reflected new business and higher volumes across segments, with fuel pass-through and the MXD acquisition also contributing.
- Q3 earnings from continuing operations rose 52%; nine-month earnings rose 12%. Comparable diluted EPS increased 22% for the quarter and 25% year to date. Comparable measures exclude non-operating pension costs and specified other items, including tax adjustments and goodwill impairment.
- Q3 lease and rental gross margin was $245.8 million, or 27% of revenue, versus $234.6 million, or 28%. Services gross margin was $160.3 million, or 14%, versus $134.8 million, or 15%. Fuel gross margin was $3.4 million, or 2%, versus $4.5 million, or 4%. The filing does not present a single consolidated operating-margin figure.
- Q3 segment EBT: FMS $95.2 million, down 6%; DTS $13.9 million, up 1%; SCS $37.4 million, up 69%. SCS growth reflected volume, new business and improved performance; FMS results were pressured by higher depreciation and weaker used-vehicle sales results.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $1.212 billion versus $1.166 billion. Cash used in investing was $2.018 billion versus $964 million, principally reflecting higher fleet investment. Free cash flow, a company-defined non-GAAP measure, was negative $638 million versus positive $210 million.
- Cash purchases of property and revenue-earning equipment were $2.200 billion; total capital expenditures were $2.296 billion, up 67%. Management expected full-year 2018 capital expenditures of approximately $3.1 billion, funded primarily with operating cash and additional debt.
- Total debt was $6.283 billion at September 30, 2018, up from $5.410 billion at December 31, 2017. Cash and cash equivalents were $60.7 million. Debt-to-equity was 215%, compared with 191% at year-end.
- The $1.4 billion revolving credit facility had $892 million available; the company also reported $225 million available under its receivables program, with no program borrowings outstanding. The facility leverage covenant ratio was 177% against a maximum of 300%. Management said available operating cash flows and financing sources should meet foreseeable needs, while warning that capital-market disruption could impair access.
- Interest expense increased 36% in Q3 and 22% year to date, reflecting higher average debt and rising interest rates. The effective interest rate was 3.1% in Q3 versus 2.6%.
Material changes and unusual items
- Ryder acquired MXD Group, an e-commerce fulfillment and last-mile delivery provider, for approximately $118 million, and Metro Truck & Tractor Leasing for approximately $52 million. Purchase-price allocations remained preliminary. MXD goodwill was approximately $81.8 million and Metro goodwill approximately $31 million.
- A $15.5 million goodwill impairment charge was recorded in Q1 for the FMS Europe reporting unit. Nine-month restructuring and other charges totaled $19.7 million, including the impairment; Ryder also planned to shut down its Singapore operations and expected additional, non-material exit charges.
- Vehicle residual-value changes and accelerated depreciation added $13 million to Q3 costs and $33 million to nine-month costs. Used-vehicle sales, net, was a $3 million loss in Q3 and a $16 million loss year to date, despite higher proceeds per unit for trucks and tractors.
- The Q3 effective tax rate was 22.9%, compared with 37.5%, benefiting from the lower federal rate under the 2017 tax law and a $2 million state tax benefit. The nine-month rate was 36.4%; it included a $29 million increase in the provisional transition-tax estimate.
- Revenue standard Topic 606 was adopted retrospectively in 2018, with prior periods restated. Ryder expected adoption of the new lease standard in 2019 to significantly affect its financial position and potentially results of operations, but not cash flows.
Outlook, risks and other disclosures
- Management expected favorable ChoiceLease and commercial rental revenue comparisons through year-end, citing fleet growth, pricing and strong demand. It also expected favorable DTS and SCS revenue comparisons, supported by sales activity and MXD. These are forward-looking expectations, not guaranteed results.
- Key risks include economic and freight-demand weakness, customer retention and volume shifts, competition and pricing, vehicle residual values and used-vehicle demand, maintenance and insurance costs, driver and technician availability, fuel-price volatility, interest rates and access to financing, pension funding, and execution of customer start-ups and acquisitions.
- Ryder reported no material change in market-risk exposures since year-end 2017, no material change to previously disclosed risk factors, and effective disclosure controls. It said ordinary-course claims and proceedings were not expected to have a material financial effect, while noting outcomes may differ from estimates.
- The board declared a quarterly dividend of $0.54 per share in October 2018. Nine-month dividends paid were $83.5 million.
Important facts for investors to verify
- Whether projected fleet demand and segment growth convert into earnings after higher depreciation, maintenance, start-up and labor costs.
- How the $3.1 billion expected 2018 capital-spending plan, negative year-to-date free cash flow and rising debt affect leverage and funding needs.
- Used-vehicle pricing, inventory and residual-value assumptions, including the ongoing effects of depreciation changes.
- Final purchase accounting and realized performance for MXD and Metro, and costs associated with exiting Singapore.
- Final tax accounting under the 2017 tax law and the financial-statement impact of adopting the lease standard in 2019.
- Liquidity and borrowing costs under changing credit-market and interest-rate conditions; assess non-GAAP comparable earnings and free cash flow alongside their GAAP reconciliations.