Ryder System, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Ryder provides fleet leasing and rental, dedicated transportation, and supply-chain services. Financial statements are unaudited.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $2.089bn | $1.788bn | $3.993bn | $3.525bn |
| Operating revenue* | $1.639bn | $1.483bn | $3.182bn | $2.928bn |
| Continuing-operations pretax earnings | $98.3m | $80.9m | $146.4m | $141.5m |
| Continuing-operations earnings | $43.5m | $51.4m | $77.5m | $89.9m |
| Diluted continuing-operations EPS | $0.82 | $0.97 | $1.46 | $1.69 |
| Comparable diluted EPS* | $1.42 | $1.00 | $2.33 | $1.83 |
Total revenue rose 17% in Q2 and 13% in the first half; operating revenue rose 11% and 9%, respectively. Growth reflected new business and volumes, higher fuel costs passed through to customers, and MXD’s contribution. GAAP continuing-operations earnings and EPS declined, principally reflecting higher income-tax expense. Management’s non-GAAP comparable EPS increased, but excludes specified tax and other items.
- Margins: Q2 lease-and-rental gross margin was 26% versus 27% a year earlier; services gross margin was 16% in both periods; fuel-services margin was 2% versus 3%. First-half margins were 25% for lease and rental, 15% for services, and 2% for fuel services. Higher depreciation and maintenance weighed on lease margins; first-half services margin was affected by a weaker customer account and higher DTS maintenance costs.
- Segment results: Q2 segment EBT increased 7% in FMS to $72.9m, 25% in DTS to $18.5m, and 45% in SCS to $37.7m. Six-month increases were 2%, 21%, and 18%, respectively. Segment EBT is management’s segment measure, before specified corporate and other items.
- Cash flow and investment: First-half cash from continuing operations was $820.4m, up from $731.7m. Capital spending paid was $1.421bn, versus $855.3m; management-defined free cash flow was negative $359.4m, versus positive $115.3m. Acquisition cash outflow was $169.1m.
- Liquidity and debt: Cash and cash equivalents were $73.6m at June 30. Total debt was $5.978bn, up from $5.410bn at year-end 2017; debt-to-equity was 210%, versus 191%. Ryder reported $588m available under its revolving credit facility and $225m available under its receivables program. Its revolving-facility covenant debt-to-net-worth ratio was 172%, against a 300% maximum.
*Operating revenue excludes fuel and subcontracted transportation; comparable EPS and free cash flow are non-GAAP measures and may not be comparable with similarly titled measures at other companies.
Material changes, outlook, and notable items
- Q2 2018 included an approximately $29m increase to the provisional one-time tax-reform transition-tax estimate. The effective tax rate was 55.7% in Q2 and 47.1% for the first half, versus 36.4% in both 2017 periods. This materially reduced GAAP earnings; management’s comparable results exclude specified tax-related adjustments.
- A $15.5m first-half goodwill impairment was recorded for the FMS Europe reporting unit. Restructuring and other charges were $19.4m in the first half, including Singapore shutdown costs and acquisition-related items. Ryder planned to exit Singapore; additional related charges were expected but not expected to be material.
- Ryder acquired e-commerce fulfillment provider MXD for approximately $120m in April and Metro Truck & Tractor Leasing for approximately $53m in June. Purchase accounting remained preliminary; MXD added $70.5m of goodwill and Metro approximately $30m.
- Management expected full-year 2018 capital expenditures of approximately $3.1bn, funded primarily by internally generated cash and additional debt. It cited favorable revenue comparisons through year-end for ChoiceLease, commercial rental, DTS, and SCS, based on sales activity and demand. These are expectations, not guarantees.
- Management said operating cash flows and access to debt markets should meet foreseeable funding needs, but warned that market disruption or rating downgrades could raise borrowing costs or restrict access. Other cited risks include economic and freight-demand changes, customer concentration or losses, competition, fuel-price volatility, used-vehicle pricing and residual values, vehicle maintenance, labor availability, interest and currency movements, pension funding, and legal or tax outcomes.
- Other unusual factors: vehicle depreciation increased following revised residual-value estimates, adding about $10m of Q2 and $20m of first-half expense. Interest expense rose 22% in Q2 and 15% in the first half, reflecting higher rates and debt. Revenue recognition guidance was adopted retrospectively; lease accounting guidance was expected to be adopted in 2019, with a significant balance-sheet impact expected, while cash-flow impact was not expected.
Investor verification priorities
- Reconcile GAAP earnings and EPS with management’s comparable measures, particularly the transition-tax adjustment and other exclusions.
- Track fleet investment, depreciation/residual-value assumptions, maintenance costs, utilization, and used-vehicle sale proceeds against the $3.1bn capital-spending outlook.
- Monitor debt growth, interest expense, refinancing needs, available credit, and covenant headroom.
- Assess whether segment growth and margins persist, including performance in weaker customer accounts and the integration and returns from MXD and Metro.
- Follow the Singapore exit, FMS Europe impairment implications, final acquisition purchase-price allocations, and 2019 lease-accounting adoption effects.