RYDER SYSTEM INC quarterly report, Q2 FY2019

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Ryder System, Inc. — Q2 2019 Form 10-Q

Business context and reporting period. Ryder provides fleet management and leasing (FMS), dedicated transportation (DTS), and supply-chain logistics (SCS). This unaudited filing covers the quarter and six months ended June 30, 2019; comparative figures are for 2018, recast for the adoption of the new lease standard where indicated. Amounts below are U.S. dollars.

Financial performance and position

  • Revenue: Q2 total revenue was $2.245 billion, up 7%; first-half revenue was $4.425 billion, up 11%. Non-GAAP operating revenue, which excludes fuel and subcontracted transportation, increased 11% in Q2 and 12% in the first half.
  • Profit and EPS: Q2 continuing-operations earnings were $75.5 million ($1.43 diluted EPS), versus $46.2 million ($0.87) a year earlier. First-half earnings were $121.3 million ($2.30 diluted EPS), versus $83.5 million ($1.58). Comparable diluted EPS, a non-GAAP measure, was $1.40 in Q2 versus $1.46, and $2.51 for the first half versus $2.42. GAAP earnings comparisons benefited from a lower tax provision versus the 2018 tax adjustment.
  • Margins and segments: Lease/rental gross margin was 26% in both periods; services gross margin was 16% in Q2 versus 15% and 15% for the first half; fuel gross margin was 2% in Q2 and 3% in the first half. Q2 segment EBT was FMS $57.7 million (down 25%), DTS $27.1 million (up 47%), and SCS $45.8 million (up 24%). FMS was pressured by used-vehicle valuation losses, higher depreciation and overhead; DTS and SCS benefited from growth and improved operations.
  • Cash flow and investment: First-half operating cash flow was $1.045 billion, compared with $865 million. Cash purchases of property and revenue-earning equipment were $2.211 billion, up from $1.421 billion; reported free cash flow (non-GAAP) was negative $909 million, versus negative $354 million. Capital spending chiefly reflected planned ChoiceLease fleet investment.
  • Debt and liquidity: Total debt was $7.672 billion at June 30, compared with $6.649 billion at year-end 2018; cash was $92.5 million. The company reported $501 million available under its $1.4 billion revolving facility and $225 million under its receivables program. Its revolving-facility debt-to-net-worth covenant ratio was 209%, against a 300% maximum; debt-to-equity was 294%.

Changes, outlook, and risks

  • Revenue grew across all three segments. FMS revenue growth reflected larger ChoiceLease and rental fleets and higher pricing; DTS and SCS growth reflected new business, customer expansions and higher volumes. Management expected ChoiceLease comparisons to remain favorable through year-end, while commercial rental growth would moderate. DTS comparisons were expected to remain favorable but at a slower rate; SCS management anticipated negative revenue growth in the second half due to the timing of lost business.
  • Management expected 2019 capital expenditures of approximately $3.7 billion, funded primarily by internally generated cash and additional debt. It anticipated lower tractor used-vehicle pricing in the second half and expected the number of vehicles no longer earning revenue to rise through year-end.
  • Unusual items included a $18.6 million gain on SCS property sales, $7.5 million of first-half ERP implementation costs, restructuring and other charges, and higher non-operating pension costs. Used-vehicle results included fair-value write-downs; tractor pricing had improved year over year through Q2, but management flagged a possible decline.
  • Ryder adopted ASC 842 lease accounting effective January 1, 2019, recording lessee right-of-use assets and liabilities and changing lessor accounting for bundled lease and maintenance arrangements. The filing also describes prior-period lease-classification errors corrected as not material to previously issued financial statements. These accounting changes affect comparability.
  • Key risks include weaker economic or freight demand, rental utilization and used-vehicle prices; customer losses or volume volatility; maintenance, labor, insurance and pension costs; interest rates and access to debt markets; and execution of technology and fleet-management initiatives. Management said it believed available operating cash flow and financing sources would meet foreseeable needs, while noting capital-market access could be disrupted. It reported no material change in market-risk exposures or previously disclosed risk factors.

Important facts for investors to verify

  1. How much of reported earnings growth reflects recurring operating performance versus the tax comparison and the property-sale gain; review comparable earnings reconciliations.
  2. Whether used-vehicle values and FMS rental utilization stabilize, given valuation losses, increased held-for-sale fleet and management’s outlook for tractor pricing.
  3. Whether the planned $3.7 billion 2019 capital program and resulting debt increase can be funded while maintaining liquidity and covenant headroom.
  4. Whether expected second-half SCS revenue weakness and slower DTS/commercial-rental growth affect segment margins and full-year results.
  5. How ASC 842, deferred ChoiceLease maintenance revenue, residual-value estimates and lease-classification corrections affect period-to-period comparability and asset valuations.