RYDER SYSTEM INC
10-Qs and 10-Ks
PROXIES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
þ
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
|
FOR THE QUARTERLY PERIOD ENDED
MARCH 31, 2019
OR
|
¨
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
|
FOR THE TRANSITION PERIOD FROM
TO
Commission File Number: 1-4364
RYDER SYSTEM, INC.
(Exact name of registrant as specified in its charter)
|
Florida
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59-0739250
|
|
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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11690 N.W. 105th Street
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Miami, Florida 33178
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(305) 500-3726
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(Address of principal executive offices, including zip code)
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(Registrant’s telephone number, including area code)
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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Common Stock
|
R
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New York Stock Exchange
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES
þ
NO
¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES
þ
NO
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer
þ
|
|
Accelerated filer
¨
|
|
Non-accelerated filer
¨
|
Smaller reporting company
¨
|
|
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Emerging growth company
¨
|
|
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act
¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
¨
YES
þ
NO
The number of shares of Ryder System, Inc. Common Stock ($0.50 par value per share) outstanding at
March 31, 2019
, was
53,300,205
.
RYDER SYSTEM, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
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Page No.
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Consolidated Condensed Statement of Shareholders' Equity — Three
months ended March 31, 2019 and 2018
|
||
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(unaudited)
|
|
Three months ended March 31,
|
|||||
|
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2019
|
2018
|
||||
|
|
(In thousands, except per share amounts)
|
|||||
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Lease & related maintenance and rental revenues
|
$
|
899,559
|
|
824,991
|
|
|
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Services revenue
|
1,132,048
|
|
928,144
|
|
||
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Fuel services revenue
|
148,720
|
|
151,070
|
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||
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Total revenues
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2,180,327
|
|
1,904,205
|
|
||
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Cost of lease & related maintenance and rental
|
664,289
|
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615,605
|
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||
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Cost of services
|
971,690
|
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788,771
|
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||
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Cost of fuel services
|
143,275
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146,903
|
|
||
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Other operating expenses
|
33,626
|
|
32,975
|
|
||
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Selling, general and administrative expenses
|
231,325
|
|
207,828
|
|
||
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Non-operating pension costs
|
6,462
|
|
1,222
|
|
||
|
Used vehicle sales, net
|
8,217
|
|
7,431
|
|
||
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Interest expense
|
55,336
|
|
38,160
|
|
||
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Miscellaneous income, net
|
(8,222
|
)
|
(2,510
|
)
|
||
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Restructuring and other items, net
|
6,178
|
|
15,121
|
|
||
|
2,112,176
|
|
1,851,506
|
|
|||
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Earnings from continuing operations before income taxes
|
68,151
|
|
52,699
|
|
||
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Provision for income taxes
|
22,261
|
|
|
15,386
|
|
|
|
Earnings from continuing operations
|
45,890
|
|
|
37,313
|
|
|
|
Loss from discontinued operations, net of tax
|
(574
|
)
|
(427
|
)
|
||
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Net earnings
|
$
|
45,316
|
|
36,886
|
|
|
|
Earnings (loss) per common share — Basic
|
||||||
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Continuing operations
|
$
|
0.87
|
|
0.71
|
|
|
|
Discontinued operations
|
(0.01
|
)
|
(0.01
|
)
|
||
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Net earnings
|
$
|
0.86
|
|
0.70
|
|
|
|
Earnings (loss) per common share — Diluted
|
||||||
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Continuing operations
|
$
|
0.87
|
|
0.70
|
|
|
|
Discontinued operations
|
(0.01
|
)
|
(0.01
|
)
|
||
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Net earnings
|
$
|
0.86
|
|
0.70
|
|
|
See accompanying notes to consolidated condensed financial statements.
Note: EPS amounts may not be additive due to rounding.
1
RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
|
|
Three months ended March 31,
|
|||||
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2019
|
2018
|
||||
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(In thousands)
|
|||||
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Net earnings
|
$
|
45,316
|
|
36,886
|
|
|
|
Other comprehensive income:
|
||||||
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Changes in currency translation adjustment and other
|
15,762
|
|
11,765
|
|
||
|
Amortization of pension and postretirement items
|
7,468
|
|
7,215
|
|
||
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Income tax expense related to amortization of pension and postretirement items
|
(2,014
|
)
|
(1,609
|
)
|
||
|
Amortization of pension and postretirement items, net of tax
|
5,454
|
|
5,606
|
|
||
|
Other comprehensive income, net of taxes
|
21,216
|
|
17,371
|
|
||
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Comprehensive income
|
$
|
66,532
|
|
54,257
|
|
|
See accompanying notes to consolidated condensed financial statements.
2
RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
|
March 31,
2019 |
December 31,
2018 |
|||||
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(Dollars in thousands, except
share amounts)
|
|||||
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Assets:
|
||||||
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Current assets:
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||||||
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Cash and cash equivalents
|
$
|
62,787
|
|
|
68,111
|
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Receivables, net of allowance of $17,497 and $17,182, respectively
|
1,221,769
|
|
|
1,242,058
|
|
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Inventories
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80,082
|
|
|
79,228
|
|
|
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Prepaid expenses and other current assets
|
193,147
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|
|
178,313
|
|
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Total current assets
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1,557,785
|
|
1,567,710
|
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||
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Revenue earning equipment, net
|
10,009,161
|
|
|
9,415,961
|
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Operating property and equipment, net of accumulated depreciation of $1,277,906 and $1,256,037, respectively
|
871,524
|
|
|
862,054
|
|
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Goodwill
|
474,742
|
|
|
475,206
|
|
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Intangible assets, net of accumulated amortization of $67,145 and $65,048, respectively
|
57,068
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|
|
59,075
|
|
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Sales-type leases and other assets
|
978,705
|
|
|
967,802
|
|
|
|
Total assets
|
$
|
13,948,985
|
|
|
13,347,808
|
|
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Liabilities and shareholders’ equity:
|
||||||
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Current liabilities:
|
||||||
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Short-term debt and current portion of long-term debt
|
$
|
1,117,489
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|
|
937,131
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Accounts payable
|
839,792
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|
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731,876
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|
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Accrued expenses and other current liabilities
|
797,298
|
|
|
847,739
|
|
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Total current liabilities
|
2,754,579
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|
2,516,746
|
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||
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Long-term debt
|
6,025,679
|
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|
5,712,146
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Other non-current liabilities
|
1,399,273
|
|
|
1,402,625
|
|
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Deferred income taxes
|
1,202,650
|
|
|
1,179,723
|
|
|
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Total liabilities
|
11,382,181
|
|
10,811,240
|
|
||
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Shareholders’ equity:
|
||||||
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Preferred stock, no par value per share — authorized, 3,800,917; none outstanding,
March 31, 2019 or December 31, 2018 |
—
|
|
—
|
|
||
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Common stock, $0.50 par value per share — authorized, 400,000,000; outstanding,
March 31, 2019 — 53,300,205 December 31, 2018 — 53,116,485 |
26,651
|
|
26,559
|
|
||
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Additional paid-in capital
|
1,086,714
|
|
1,084,391
|
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||
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Retained earnings
|
2,343,857
|
|
2,337,252
|
|
||
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Accumulated other comprehensive loss
|
(890,418
|
)
|
(911,634
|
)
|
||
|
Total shareholders’ equity
|
2,566,804
|
|
|
2,536,568
|
|
|
|
Total liabilities and shareholders’ equity
|
$
|
13,948,985
|
|
|
13,347,808
|
|
See accompanying notes to consolidated condensed financial statements.
3
RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
Three months ended March 31,
|
|||||
|
|
2019
|
2018
|
||||
|
|
(In thousands)
|
|||||
|
Cash flows from operating activities from continuing operations:
|
||||||
|
Net earnings
|
$
|
45,316
|
|
36,886
|
|
|
|
Less: Loss from discontinued operations, net of tax
|
(574
|
)
|
(427
|
)
|
||
|
Earnings from continuing operations
|
45,890
|
|
37,313
|
|
||
|
Depreciation expense
|
377,357
|
|
332,768
|
|
||
|
Goodwill impairment charge
|
—
|
|
15,513
|
|
||
|
Used vehicle sales, net
|
8,217
|
|
7,431
|
|
||
|
Amortization expense and other non-cash charges, net
|
48,522
|
|
32,061
|
|
||
|
Non-operating pension costs and share-based compensation expense
|
13,861
|
|
6,563
|
|
||
|
Deferred income tax expense
|
19,729
|
|
33,076
|
|
||
|
Collections on sales-type leases
|
34,017
|
|
21,580
|
|
||
|
Changes in operating assets and liabilities:
|
||||||
|
Receivables
|
26,181
|
|
22,265
|
|
||
|
Inventories
|
(756
|
)
|
(253
|
)
|
||
|
Prepaid expenses and other assets
|
(27,645
|
)
|
(46,053
|
)
|
||
|
Accounts payable
|
18,586
|
|
(30,851
|
)
|
||
|
Accrued expenses and other non-current liabilities
|
(78,629
|
)
|
(94,563
|
)
|
||
|
Net cash provided by operating activities from continuing operations
|
485,330
|
|
336,850
|
|
||
|
Cash flows from financing activities from continuing operations:
|
||||||
|
Net change in commercial paper borrowings and revolving credit facilities
|
158,258
|
|
|
237,960
|
|
|
|
Debt proceeds
|
799,300
|
|
|
446,500
|
|
|
|
Debt repaid
|
(478,411
|
)
|
|
(414,299
|
)
|
|
|
Dividends on common stock
|
(29,301
|
)
|
(27,795
|
)
|
||
|
Common stock issued
|
(332
|
)
|
1,417
|
|
||
|
Common stock repurchased
|
(14,156
|
)
|
(12,921
|
)
|
||
|
Debt issuance costs and other items
|
(1,070
|
)
|
(1,259
|
)
|
||
|
Net cash provided by financing activities from continuing operations
|
434,288
|
|
229,603
|
|
||
|
Cash flows from investing activities from continuing operations:
|
||||||
|
Purchases of property and revenue earning equipment
|
(1,026,711
|
)
|
(662,744
|
)
|
||
|
Sales of revenue earning equipment
|
101,549
|
|
89,023
|
|
||
|
Sales of operating property and equipment
|
1,918
|
|
933
|
|
||
|
Net cash used in investing activities from continuing operations
|
(923,244
|
)
|
(572,788
|
)
|
||
|
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
|
(1,551
|
)
|
3,519
|
|
||
|
Decrease in cash, cash equivalents, and restricted cash from continuing operations
|
(5,177
|
)
|
(2,816
|
)
|
||
|
Decrease in cash, cash equivalents, and restricted cash from discontinued operations
|
(147
|
)
|
(348
|
)
|
||
|
Decrease in cash, cash equivalents, and restricted cash
|
(5,324
|
)
|
(3,164
|
)
|
||
|
Cash, cash equivalents, and restricted cash at January 1
|
68,111
|
|
83,022
|
|
||
|
Cash, cash equivalents, and restricted cash at March 31
|
$
|
62,787
|
|
79,858
|
|
|
See accompanying notes to consolidated condensed financial statements.
4
RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
|
|
Preferred
Stock |
Common Stock
|
Additional
Paid-In Capital |
Retained Earnings
|
Accumulated
Other Comprehensive Loss |
|
|||||||||||||||||
|
|
Amount
|
Shares
|
Par
|
Total
|
|||||||||||||||||||
|
|
(Dollars in thousands, except share amounts)
|
||||||||||||||||||||||
|
Balance at January 1, 2019
|
$
|
—
|
|
53,116,485
|
|
$
|
26,559
|
|
1,084,391
|
|
2,337,252
|
|
(911,634
|
)
|
2,536,568
|
|
|||||||
|
Comprehensive income
|
—
|
|
—
|
|
—
|
|
—
|
|
45,316
|
|
21,216
|
|
66,532
|
|
|||||||||
|
Common stock dividends declared and paid—$0.54 per share
|
—
|
|
—
|
|
—
|
|
—
|
|
(29,207
|
)
|
—
|
|
(29,207
|
)
|
|||||||||
|
Common stock issued under employee stock option and stock purchase plans
(1)
|
—
|
|
409,294
|
|
205
|
|
(547
|
)
|
—
|
|
—
|
|
(342
|
)
|
|||||||||
|
Benefit plan stock sales
(2)
|
—
|
|
270
|
|
—
|
|
10
|
|
—
|
|
—
|
|
10
|
|
|||||||||
|
Common stock repurchases
|
—
|
|
(225,844
|
)
|
(113
|
)
|
(4,539
|
)
|
(9,504
|
)
|
—
|
|
(14,156
|
)
|
|||||||||
|
Share-based compensation
|
—
|
|
—
|
|
—
|
|
7,399
|
|
—
|
|
—
|
|
7,399
|
|
|||||||||
|
Balance at March 31, 2019
|
$
|
—
|
|
53,300,205
|
|
$
|
26,651
|
|
1,086,714
|
|
2,343,857
|
|
(890,418
|
)
|
2,566,804
|
|
|||||||
|
|
Preferred
Stock |
Common Stock
|
Additional
Paid-In Capital |
Retained Earnings
|
Accumulated
Other Comprehensive Loss |
|
|||||||||||||||||
|
|
Amount
|
Shares
|
Par
|
Total
|
|||||||||||||||||||
|
|
(Dollars in thousands, except share amounts)
|
||||||||||||||||||||||
|
Balance at January 1, 2018
|
$
|
—
|
|
52,955,314
|
|
$
|
26,478
|
|
1,051,017
|
|
2,086,918
|
|
(710,836
|
)
|
2,453,577
|
|
|||||||
|
Comprehensive income
|
—
|
|
—
|
|
—
|
|
—
|
|
36,886
|
|
17,371
|
|
54,257
|
|
|||||||||
|
Common stock dividends declared and paid—$0.52 per share
|
—
|
|
—
|
|
—
|
|
—
|
|
(27,695
|
)
|
—
|
|
(27,695
|
)
|
|||||||||
|
Common stock issued under employee stock option and stock purchase plans
(1)
|
—
|
|
310,173
|
|
155
|
|
1,195
|
|
—
|
|
—
|
|
1,350
|
|
|||||||||
|
Benefit plan stock sales
(2)
|
—
|
|
715
|
|
—
|
|
67
|
|
—
|
|
—
|
|
67
|
|
|||||||||
|
Common stock repurchases
|
—
|
|
(171,304
|
)
|
(86
|
)
|
(3,354
|
)
|
(9,482
|
)
|
—
|
|
(12,922
|
)
|
|||||||||
|
Share-based compensation
|
—
|
|
—
|
|
—
|
|
5,341
|
|
—
|
|
—
|
|
5,341
|
|
|||||||||
|
Adoption of new accounting standard
(3)
|
—
|
|
—
|
|
—
|
|
—
|
|
100,567
|
|
(100,567
|
)
|
—
|
|
|||||||||
|
Balance at March 31, 2018
|
$
|
—
|
|
53,094,898
|
|
$
|
26,547
|
|
1,054,266
|
|
2,187,194
|
|
(794,032
|
)
|
2,473,975
|
|
|||||||
__________________
|
(1)
|
Net of common shares delivered as payment for the exercise price or to satisfy the holders’ withholding tax liability upon exercise of options.
|
|
(2)
|
Represents open-market transactions of common shares by the trustee of Ryder’s deferred compensation plans.
|
|
(3)
|
Reflects the impact of adopting ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income in 2018, which resulted in a reclassification of stranded tax effects caused by the 2017 Tax Cuts and Jobs Act from accumulated other comprehensive loss to retained earnings.
|
See accompanying notes to consolidated condensed financial statements.
5
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
1.
GENERAL
Interim Financial Statements
The accompanying unaudited Consolidated Condensed Financial Statements include the accounts of Ryder System, Inc. (Ryder) and all entities in which Ryder has a controlling voting interest (subsidiaries) and variable interest entities (VIEs) required to be consolidated in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The accompanying unaudited Consolidated Condensed Financial Statements have been prepared in accordance with the accounting policies described in our
2018
Annual Report on Form 10-K and should be read in conjunction with the Consolidated Financial Statements and notes thereto except for the update to our revenue recognition and leases significant accounting policies discussed below. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included and the disclosures herein are adequate. The operating results for interim periods are unaudited and are not necessarily indicative of the results that can be expected for a full year.
Update to Significant Accounting Policies
Our significant accounting policies are detailed in "Note 1: Summary of Significant Accounting Policies" within Item 8 of our Annual Report on Form 10-K for the year ended
December 31, 2018
. As discussed in
Note 2
, "
Recent Accounting Pronouncements
," effective January 1, 2019, we adopted Accounting Standards Update (ASU) No. 2016-02,
Leases (Topic 842)
using the modified retrospective transition comparative method. We have recast all prior period amounts in this Form 10-Q to conform to the current period presentation based on our adoption of this new accounting standard. Refer to
Note 2
, "
Recent Accounting Pronouncements
," for additional information on the revised amounts. The significant changes to our accounting policies as a result of adopting Topic 842 are discussed below.
Revenue Recognition
Lease & related maintenance and rental revenues includes ChoiceLease and commercial rental revenues from our Fleet Management Solutions (FMS) business segment. We offer a full service lease as well as a lease with more flexible maintenance options under our ChoiceLease product line, which are marketed, priced and managed as bundled lease arrangements, and include equipment, service and financing components. We do not offer a stand-alone unbundled lease of new vehicles. We offer rental of vehicles under our commercial rental product line, which allows customers to supplement their fleet of vehicles on a short-term basis.
Our ChoiceLease arrangements include the lease of a vehicle (lease component) and the executory agreement for the maintenance, insurance, taxes and other services (non-lease components) related to the leased vehicles during the lease term. We generally lease new vehicles to our customers. Arrangement consideration is allocated between the lease component and non-lease component based on management's best estimate of the relative standalone selling price of each component. Our ChoiceLease arrangements provide for a fixed charge billing and a variable charge billing based on mileage or time usage. Fixed charges are typically billed at the beginning of the month and variable charges are typically billed a month in arrears. Revenue from the lease component of ChoiceLease agreements is recognized based on the classification of the arrangement, typically as either an operating or a sales-type lease. Our commercial rental arrangements include the short-term rental of a vehicle (one day up to one year in length). All of our rental arrangements are classified as operating leases and revenue is recognized on a straight-line basis.
The majority of our leases are classified as operating leases and we recognize revenue for the lease component of the product line on a straight-line basis. The non-lease component for maintenance services is accounted for in accordance with revenue guidance in
Revenue from Contracts with Customers (Topic 606)
. Maintenance services are not typically performed evenly over the life of a ChoiceLease contract as the level of maintenance provided generally increases as vehicles age. We recognize maintenance revenue using an input method, consistent with the estimated pattern of the costs to maintain the underlying vehicles. This will generally result in the recognition of a contract liability for some portion of the customer's payments allocated to the maintenance service component of the arrangement. Included in lease & related maintenance and rental revenues is non-lease revenue from maintenance services recognized in accordance with Topic 606 of
$239 million
and
$223 million
for the three months ended March 31, 2019 and 2018, respectively.
6
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
Effective with the adoption of Topic 842, we recorded an after-tax cumulative effect adjustment to decrease retained earnings as of January 1, 2017, by approximately
$315 million
primarily to recognize a contract liability (deferred revenue) related to maintenance services, and partially offset by costs capitalized related to sales commissions.
We recorded deferred revenue of approximately
$564 million
and
$566 million
as of March 31, 2019 and December 31, 2018, respectively, related to the maintenance services component of our ChoiceLease product line. Refer to
Note 3
, "
Revenue
," and
Note 5
, "
Accrued Expenses and Other Liabilities
." In addition, we recorded an asset of approximately
$92 million
and
$93 million
as of March 31, 2019 and December 31, 2018, respectively; related to incremental sales commissions paid to our sales force as a result of obtaining ChoiceLease contracts. Capitalized sales commissions includes initial direct costs of our leases in the amount of
$53 million
at March 31, 2019 and December 31, 2018, respectively, accounted for in accordance with Topic 842. Refer to
Note 3
, "
Revenue
."
Lease and rental agreements do not usually provide for scheduled rent increases or escalations. However, most lease agreements allow for rate changes based upon changes in the Consumer Price Index (CPI). ChoiceLease and rental agreements also provide for vehicle usage charges based on a time charge and/or a fixed per-mile charge. The time charge, the per-mile charge and the changes in rates attributed to changes in the CPI are considered contingent rentals and are not considered fixed or determinable until the CPI change or the equipment usage occurs. This consideration is allocated to the lease and non-lease components of the contract as it is billed to the customer based on the allocation determined at contract inception. Variable consideration allocated to the lease component is recognized in revenue on a straight-line basis for the remainder of the contract term and variable consideration allocated to the non-lease component is recognized in revenue using an input method, consistent with the estimated pattern of maintenance costs for the remainder of the contract term.
Leases not classified as operating leases are generally considered sales-type leases. We recognize revenue for sales-type leases using the effective interest method, which provides a constant periodic rate of return on the outstanding investment in the lease. We generally lease new vehicles under our sales-type lease arrangements. Therefore, there is generally not a difference between the net investment in the lease and the carrying value of the vehicles, and we do not recognize selling profit or loss at lease commencement. Revenue is recognized net of amounts collected from customers for taxes, such as sales tax, that are remitted to the applicable taxing authorities.
Significant Judgments and Estimates
Allocating consideration between lease and non-lease components in our ChoiceLease arrangements requires significant judgment. We do not sell the components of our ChoiceLease product offering on a stand-alone basis. Judgment is required to determine the standalone selling prices of the lease and non-lease components in order to allocate the consideration on a relative standalone selling price basis.
We determine the standalone price of the lease component using the projected cash flows of the lease assuming a certain targeted return. We consider a number of factors to determine the targeted return, including the net present value of the projected cash flows in a ChoiceLease arrangement discounted at our weighted average cost of capital.
Our ChoiceLease arrangements include maintenance as a non-lease component of the contract. We determine the standalone price of the maintenance component using an expected cost plus margin approach. The expected costs are based on our historical costs of providing maintenance services in our ChoiceLease arrangements. The margin is based on historical margin percentages for our full service maintenance contracts in the SelectCare product line, as the maintenance performance obligation in those contracts is similar to maintenance in our ChoiceLease arrangements. Full service maintenance arrangements in SelectCare are priced based on targeted margin percentages for new and used vehicles by type of vehicle (trucks, tractors, and trailers), considering the fixed and variable costs of providing maintenance services. Certain ChoiceLease arrangements include liability and/or physical damage insurance coverage to our customers. We charge a separate fixed monthly rate for these insurance offerings, which represents the standalone selling price.
We allocate the contract consideration (excluding insurance) between the lease and maintenance components based on the relative standalone selling prices of each of those services and allocate contract consideration for insurance based on the price of insurance, which is priced separately. If the lessee elects to obtain insurance coverage from us, the consideration for the fixed monthly rate is allocated to the insurance performance obligations.
Variable consideration, such as billings for mileage and from changes in CPI, is excluded from the allocation of consideration at the inception of the contract. Revenues associated with licensing and operating taxes that are billed as incurred
7
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
based on the contract arrangement are also excluded from the allocation of consideration at contract inception and allocated as earned. The variable consideration and licensing and operating tax revenues are allocated to the lease and maintenance components based on the same allocation percentages at contract inception (or the most recent contract modification) when earned.
Contract Balances
We do not have material contract assets as we generally invoice customers as we perform services. Contract receivables are recorded in “Receivables, net” in the Consolidated Condensed Balance Sheets. Payment terms vary by contract type, although terms generally include a requirement of payment within
15
to
90
days. As a practical expedient, we do not assess whether a contract has a significant financing component as the period between the receipt of customer payment and the transfer of service to the customer is less than a year.
Our contract liabilities consist of deferred revenue related to maintenance services. We record deferred revenues when cash payments are received or due in advance of our performance, including amounts that are refundable. We classify deferred revenue for performance obligations we expect to perform within 12 months as current liabilities and for performance obligations to be performed later than 12 months as other non-current liabilities. Revenue is recognized upon satisfaction of the performance obligation.
As practical expedients, 1) we do not disclose information about remaining performance obligations that are part of a contract that has an original expected duration of one year or less, and 2) we do not disclose information about remaining performance obligations when we have the right to invoice the customer and the revenue recognized corresponds directly with the value to the customer of our performance completed to date.
Leases
Leases as Lessor
We lease revenue earning equipment to customers for periods ranging from three to seven years for trucks and tractors and up to ten years for trailers. We determine if an arrangement is or contains a lease at inception. The standard lease agreement for revenue earning equipment provides both parties the right to terminate; therefore, we evaluate whether the lessee is reasonably certain to exercise the termination option in order to determine the appropriate lease term. If we terminate, the customer has the right (but not obligation) to purchase the vehicle. If the customer terminates, we have the option to require the customer to purchase the vehicle or pay a termination penalty. Our leases generally do not provide either party an option to renew the lease. We also rent revenue earning equipment to customers on a short-term basis, from one day up to one year in length. From time to time, we may also lease facilities to third parties. The majority of our leases are classified as operating leases. However, some of our revenue earning equipment leases are classified as sales-type leases.
Our determination of the residual values (i.e., the price at which we ultimately expect to dispose of revenue earning equipment) is established with a long-term view considering historical market price changes, current and expected future market price trends, expected lives of vehicles and extent of alternative uses. Factors that could cause actual results to materially differ from estimates include, but are not limited to, unforeseen changes in technology innovations, sudden changes in supply and demand, and competitor pricing. We have developed disciplines related to the management and maintenance of our leased vehicles designed to manage the risk associated with the residual values of our revenue earning equipment. In addition, we also monitor market trends throughout the year and assess residual values of vehicles expected to be sold in the near term and may adjust residual values for these vehicles.
Leases as Lessee
We lease facilities, revenue earning equipment, material handling equipment, automated washing machines, vehicles and office equipment. We determine if an arrangement is or contains a lease at inception. Effective with the adoption of Topic 842, we have established right-of-use (ROU) assets, which represent our right to use an underlying asset for the lease term and lease liabilities, which represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate of return, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. Operating lease ROU assets also exclude lease incentives received. We pay variable lease charges related
8
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
to property taxes, insurance and maintenance as well as changes in CPI for leased facilities; equipment usage for revenue earning equipment, automated washing machines, vehicles and office equipment; and hours of operation for material handling equipment. For leases with a term of 12 months or less, with the exception of our real estate leases, we recognize lease payments in our income statement on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred.
Lease terms for the facilities are generally
three
to
five years
with one or more
five
-year renewal options and the lease terms for revenue earning equipment, material handling equipment, automated washing machines and vehicles typically range from three to seven years typically with no extension options. For purposes of calculating ROU assets and operating lease liabilities, lease terms may be deemed to include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Macroeconomic conditions is the primary factor used to estimate whether an option to extend a lease term will be exercised or not. None of our leasing arrangements contain restrictive financial covenants. Certain of our material handling equipment leases have residual value guarantees. We recorded operating lease ROU assets and finance lease assets totaling approximately
$235 million
and
$245 million
as of March 31, 2019 and December 31, 2018, respectively, related to leases as lessee. Refer to
Note 6
, "
Leases
".
9
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
2.
RECENT ACCOUNTING PRONOUNCEMENTS
Cloud Computing Arrangements
In August 2018, the FASB issued ASU No. 2018-15,
Intangibles - Goodwill and Other - Internal Use Software (Topic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,
which amends ASC 350-40 to address a customer’s accounting for implementation costs incurred in a cloud computing arrangement (CCA) that is a service contract. ASU 2018-15 aligns the accounting for costs incurred to implement a CCA that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. The standard is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. Entities are permitted to apply either a retrospective or prospective approach to adopt the guidance. We are currently evaluating the impact of the adoption of this update on our consolidated financial position, results of operations, and cash flows.
Derivatives and Hedging
In August 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.
2017-12,
Derivatives and Hedging (Topic 815)
, which simplifies and clarifies the accounting and disclosure for hedging
activities by more closely aligning the results of cash flow and fair value hedge accounting with the risk management activities of an entity. The amendments in this update are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. We adopted this standard during the first quarter of 2018 and it did not impact our consolidated financial position, results of operations or cash flows.
Leases
In February 2016, the FASB issued Topic 842, which sets out the principles for the identification, measurement, recognition, presentation and disclosure of leases. The FASB issued a number of subsequent updates to the standard. Topic 842 impacts the accounting for both lessors and lessees. We have adopted the standard effective January 1, 2019, using the modified retrospective transition method and initial application date of January 1, 2017. For all our facilities and equipment that we lease, we have elected the practical expedient to combine lease and non-lease components. For our existing operating and finance leases that commenced before the date of initial application, we have made an accounting policy election, as lessee, to use the incremental borrowing rate for our leases considering the remaining lease term and remaining minimum rental payments. After lease commencement of our operating leases as lessee, unless the ROU assets are impaired, we have made an accounting policy election to subsequently measure operating lease ROU assets by amortizing the ROU assets calculated as the difference between the straight line cost for the period (including amortization of initial direct costs) and the periodic accretion of the lease liability using the effective interest method. In calculating the change in ROU assets from a lease modification that decreases our rights as lessee to use one or more underlying assets, we have made an accounting policy election of remeasuring the ROU asset based on how much of the original right of use remains after modification.
The new standard requires lessors to identify and evaluate the lease and non-lease components in arrangements containing a lease, provides clarification on the scope of non-lease components and provides more guidance on how to identify and separate the components. From a lessor perspective, the adoption of the new lease standard primarily impacts our ChoiceLease product line, which includes a vehicle lease as well as maintenance and other services.
The standard requires lessees to classify leases as either finance or operating leases. This classification determines whether the related expense is recognized based on asset amortization and interest on the obligation (finance leases) or on a straight-line basis over the term of the lease (operating lease). We recorded a ROU asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. We have elected the practical expedient in Topic 842 to not apply these recognition requirements to leases with a term of 12 months or less with the exception of our real estate leases. Instead we recognize the lease payments in profit or loss on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred.
10
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
Adoption of the new lease standard impacted our previously reported Consolidated Condensed Statements of Earnings and Comprehensive Income results as follows (in millions, except per share amounts):
|
Three months ended March 31, 2018
|
||||||||||||
|
|
||||||||||||
|
As Previously
|
Lessor
|
Lessee and Other
|
||||||||||
|
Reported
|
Adjustments
(1)
|
Adjustments
(1)
|
As Revised
|
|||||||||
|
Lease & related maintenance and rental revenues
|
$
|
824.3
|
|
0.5
|
|
0.3
|
|
825.0
|
|
|||
|
Total revenues
|
1,903.5
|
|
0.5
|
|
0.3
|
|
1,904.2
|
|
||||
|
Cost of lease & related maintenance and rental
|
619.2
|
|
(3.6
|
)
|
—
|
|
615.6
|
|
||||
|
Cost of services
(2)
|
787.2
|
|
—
|
|
1.5
|
|
788.8
|
|
||||
|
Other operating expenses
|
33.5
|
|
—
|
|
(0.5
|
)
|
33.0
|
|
||||
|
Selling, general and administrative expenses
(2)
|
208.6
|
|
(0.4
|
)
|
(0.4
|
)
|
207.8
|
|
||||
|
Interest expense
|
37.8
|
|
—
|
|
0.4
|
|
38.2
|
|
||||
|
Restructuring and other items, net
(2)
|
16.0
|
|
—
|
|
(0.9
|
)
|
15.1
|
|
||||
|
Earnings from continuing operations before income taxes
|
48.1
|
|
4.5
|
|
0.1
|
|
52.7
|
|
||||
|
Provision for income taxes
|
14.2
|
|
1.2
|
|
—
|
|
15.4
|
|
||||
|
Earnings from continuing operations
|
33.9
|
|
3.3
|
|
0.1
|
|
37.3
|
|
||||
|
Net earnings
|
33.5
|
|
3.3
|
|
0.1
|
|
36.9
|
|
||||
|
Comprehensive income
|
51.0
|
|
3.4
|
|
—
|
|
54.3
|
|
||||
|
Earnings per common share - Basic
|
||||||||||||
|
Continuing operations
|
$
|
0.65
|
|
0.06
|
|
—
|
|
0.71
|
|
|||
|
Net earnings
|
$
|
0.64
|
|
0.06
|
|
—
|
|
0.70
|
|
|||
|
Earnings per common share - Diluted
|
||||||||||||
|
Continuing operations
|
$
|
0.64
|
|
0.06
|
|
—
|
|
0.70
|
|
|||
|
Net earnings
|
$
|
0.63
|
|
0.06
|
|
—
|
|
0.70
|
|
|||
————————————
|
(1)
|
Amounts include the correction of a prior period error. The primary components of the error correction are a reduction of "Lease & related maintenance and rental revenues" of approximately
$4.7 million
and an offsetting reduction in depreciation expense (included in "Cost of lease & related maintenance and rental") of approximately
$4.7 million
. We determined certain lessor arrangements of revenue earning equipment historically accounted for as operating leases should have been accounted for as direct financing leases. Additionally, we evaluated our leases for classification and determined that certain lessee arrangements, primarily real estate leases, historically accounted for as operating leases should have been accounted for as capital leases. We concluded these errors were not material to any of our previously issued consolidated financial statements.
|
|
(2)
|
Adjustments primarily reflects the reclassification of our Singapore operations into "Restructuring and other items, net," that we will shut down during 2019.
|
Note: Amounts may not be additive due to rounding.
11
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
Adoption of the new lease standard impacted our previously reported Consolidated Condensed Balance Sheet as follows (in millions):
|
December 31, 2018
|
|||||||||||||||
|
|
|||||||||||||||
|
As Previously
|
Lessor
|
Lessee
|
|||||||||||||
|
Reported
|
Adjustments
(1)
|
Adjustments
(1)
|
As Revised
|
||||||||||||
|
Receivables, net
|
$
|
1,219.4
|
|
22.6
|
|
—
|
|
1,242.1
|
|
||||||
|
Prepaid expenses and other current assets
|
201.6
|
|
(23.3
|
)
|
—
|
|
178.3
|
|
|||||||
|
Total current assets
|
1,568.4
|
|
(0.7
|
)
|
—
|
|
1,567.7
|
|
|||||||
|
Revenue earning equipment, net
|
9,498.0
|
|
(84.2
|
)
|
2.2
|
|
9,416.0
|
|
|||||||
|
Operating property and equipment, net
|
843.8
|
|
—
|
|
18.2
|
|
862.1
|
|
|||||||
|
Sales-type leases and other assets
|
606.6
|
|
156.8
|
|
204.3
|
|
967.8
|
|
|||||||
|
Total assets
|
13,051.1
|
|
72.0
|
|
224.7
|
|
13,347.8
|
|
|||||||
|
Short-term debt and current portion of long term-debt
|
930.0
|
|
—
|
|
7.2
|
|
937.1
|
|
|||||||
|
Accrued expenses and other current liabilities
|
630.5
|
|
145.1
|
|
72.2
|
|
847.7
|
|
|||||||
|
Total current liabilities
|
2,292.3
|
|
145.1
|
|
79.3
|
|
2,516.7
|
|
|||||||
|
Long-term debt
|
5,693.6
|
|
—
|
|
18.5
|
|
5,712.1
|
|
|||||||
|
Other non-current liabilities
|
849.9
|
|
421.2
|
|
131.5
|
|
1,402.6
|
|
|||||||
|
Deferred income taxes
|
1,304.8
|
|
(124.6
|
)
|
(0.5
|
)
|
1,179.7
|
|
|||||||
|
Total liabilities
|
10,140.8
|
|
441.7
|
|
228.8
|
|
10,811.2
|
|
|||||||
|
Retained earnings
|
2,710.7
|
|
(369.6
|
)
|
(3.8
|
)
|
2,337.3
|
|
|||||||
|
Accumulated other comprehensive loss
|
(911.3
|
)
|
(0.1
|
)
|
(0.2
|
)
|
(911.6
|
)
|
|||||||
|
Total shareholders' equity
|
2,910.3
|
|
(369.7
|
)
|
(4.1
|
)
|
2,536.6
|
|
|||||||
|
Total liabilities and shareholders' equity
|
13,051.1
|
|
72.0
|
|
224.7
|
|
13,347.8
|
|
|||||||
————————————
|
(1)
|
Amounts include the correction of a prior period error. The primary components of the error correction are an increase in "Receivables, net" of approximately
$24 million
, an increase in sales-type leases and other assets of approximately
$65 million
and a reduction in "Revenue earning equipment, net" of
$83 million
. We determined certain lessor arrangements of revenue earning equipment historically accounted for as operating leases should have been accounted for as direct financing leases. Additionally, we evaluated our leases for classification and determined that certain lessee arrangements, primarily real estate leases, historically accounted for as operating leases should have been accounted for as capital leases. We concluded these errors were not material to any of our previously issued consolidated financial statements.
|
Note: Amounts may not be additive due to rounding.
12
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
Adoption of the new lease standard impacted our previously reported Consolidated Condensed Statements of Cash Flows as follows (in millions):
|
|
Three months ended March 31, 2018
|
|||||||
|
|
As Previously Reported
|
New Lease Standard Adjustments
|
As Revised
|
|||||
|
Net earnings
|
33.5
|
|
3.4
|
|
36.9
|
|
||
|
Earnings from continuing operations
|
33.9
|
|
3.4
|
|
37.3
|
|
||
|
Depreciation expense
|
336.7
|
|
(3.9
|
)
|
332.8
|
|
||
|
Amortization expense and other non-cash charges, net
|
13.6
|
|
18.5
|
|
32.1
|
|
||
|
Deferred income tax expense
|
31.9
|
|
1.2
|
|
33.1
|
|
||
|
Collections on sales-type leases and other items
|
—
|
|
21.6
|
|
21.6
|
|
||
|
Changes in operating assets and liabilities:
|
|
|
||||||
|
Prepaid expenses and other assets
|
(26.0
|
)
|
(20.1
|
)
|
(46.1
|
)
|
||
|
Accrued expenses and other non-current liabilities
|
(95.9
|
)
|
1.3
|
|
(94.6
|
)
|
||
|
Net cash provided by operating activities from continuing operations
|
314.9
|
|
22.0
|
|
336.9
|
|
||
|
Debt repaid
|
(412.1
|
)
|
(2.2
|
)
|
(414.3
|
)
|
||
|
Net cash provided by financing activities from continuing operations
|
231.8
|
|
(2.2
|
)
|
229.6
|
|
||
|
Collections on direct finance leases and other items
|
19.7
|
|
(19.7
|
)
|
—
|
|
||
|
Net cash used in investing activities from continuing operations
|
(553.0
|
)
|
(19.7
|
)
|
(572.8
|
)
|
||
Note: Amounts may not be additive due to rounding.
13
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
3
.
REVENUE
Disaggregation of Revenue
The following tables disaggregate our revenue by primary geographical market, major product/service lines, and industry. During 2019, we adopted Topic 842 and have retrospectively adjusted 2018 for the impact of this new standard.
Primary Geographical Markets
|
Three months ended March 31, 2019
|
|||||||||||||||
|
FMS
|
DTS
|
SCS
|
Eliminations
|
Total
|
|||||||||||
|
(In thousands)
|
|||||||||||||||
|
United States
|
$
|
1,198,943
|
|
349,621
|
|
529,393
|
|
(151,163
|
)
|
1,926,794
|
|
||||
|
Canada
|
74,014
|
|
—
|
|
49,708
|
|
(5,401
|
)
|
118,321
|
|
|||||
|
Europe
|
78,642
|
|
—
|
|
—
|
|
—
|
|
78,642
|
|
|||||
|
Mexico
|
—
|
|
—
|
|
53,277
|
|
—
|
|
53,277
|
|
|||||
|
Singapore
|
—
|
|
—
|
|
3,293
|
|
—
|
|
3,293
|
|
|||||
|
Total revenue
|
$
|
1,351,599
|
|
349,621
|
|
635,671
|
|
(156,564
|
)
|
2,180,327
|
|
||||
|
Three months ended March 31, 2018
|
||||||||||||||
|
FMS
|
DTS
|
SCS
|
Eliminations
|
Total
|
||||||||||
|
(In thousands)
|
||||||||||||||
|
United States
(1)
|
1,085,446
|
|
298,970
|
|
401,883
|
|
(127,716
|
)
|
1,658,583
|
|
||||
|
Canada
|
74,808
|
|
—
|
|
43,093
|
|
(4,806
|
)
|
113,095
|
|
||||
|
Europe
|
82,796
|
|
—
|
|
—
|
|
—
|
|
82,796
|
|
||||
|
Mexico
(1)
|
—
|
|
—
|
|
44,032
|
|
—
|
|
44,032
|
|
||||
|
Singapore
|
—
|
|
—
|
|
5,699
|
|
—
|
|
5,699
|
|
||||
|
Total revenue
|
1,243,050
|
|
298,970
|
|
494,707
|
|
(132,522
|
)
|
1,904,205
|
|
||||
————————————
(1) 2018 SCS total revenue amounts for the United States and Mexico include reclassifications to conform to the current period presentation.
Major Products/Service Lines
|
Three months ended March 31, 2019
|
|||||||||||||||
|
FMS
|
DTS
|
SCS
|
Eliminations
|
Total
|
|||||||||||
|
(In thousands)
|
|||||||||||||||
|
ChoiceLease
|
$
|
748,579
|
|
—
|
|
—
|
|
(68,191
|
)
|
680,388
|
|
||||
|
SelectCare
|
135,779
|
|
—
|
|
—
|
|
(12,250
|
)
|
123,529
|
|
|||||
|
Commercial rental
|
236,148
|
|
—
|
|
—
|
|
(16,977
|
)
|
219,171
|
|
|||||
|
Fuel
|
207,866
|
|
—
|
|
—
|
|
(59,146
|
)
|
148,720
|
|
|||||
|
Other
|
23,227
|
|
—
|
|
—
|
|
—
|
|
23,227
|
|
|||||
|
DTS
|
—
|
|
349,621
|
|
—
|
|
—
|
|
349,621
|
|
|||||
|
SCS
|
—
|
|
—
|
|
635,671
|
|
—
|
|
635,671
|
|
|||||
|
Total revenue
|
$
|
1,351,599
|
|
349,621
|
|
635,671
|
|
(156,564
|
)
|
2,180,327
|
|
||||
14
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
|
Three months ended March 31, 2018
|
||||||||||||||
|
FMS
|
DTS
|
SCS
|
Eliminations
|
Total
|
||||||||||
|
(In thousands)
|
||||||||||||||
|
ChoiceLease
|
690,902
|
|
—
|
|
—
|
|
(60,377
|
)
|
630,525
|
|
||||
|
SelectCare
|
121,873
|
|
—
|
|
—
|
|
(9,344
|
)
|
112,529
|
|
||||
|
Commercial rental
|
204,530
|
|
—
|
|
—
|
|
(10,064
|
)
|
194,466
|
|
||||
|
Fuel
|
203,807
|
|
—
|
|
—
|
|
(52,737
|
)
|
151,070
|
|
||||
|
Other
|
21,938
|
|
—
|
|
—
|
|
—
|
|
21,938
|
|
||||
|
DTS
|
—
|
|
298,970
|
|
—
|
|
—
|
|
298,970
|
|
||||
|
SCS
|
—
|
|
—
|
|
494,707
|
|
—
|
|
494,707
|
|
||||
|
Total revenue
|
1,243,050
|
|
298,970
|
|
494,707
|
|
(132,522
|
)
|
1,904,205
|
|
||||
Industry
Our SCS business segment includes revenue from the below industries:
|
Three months ended March 31,
|
||||||
|
2019
|
2018
|
|||||
|
(In thousands)
|
||||||
|
Automotive
|
$
|
253,679
|
|
207,792
|
|
|
|
Technology and healthcare
|
113,668
|
|
103,097
|
|
||
|
CPG and retail
|
217,098
|
|
135,358
|
|
||
|
Industrial and other
|
51,226
|
|
48,460
|
|
||
|
Total revenue
|
$
|
635,671
|
|
494,707
|
|
|
Contract Balances
We record a receivable related to revenue recognized when we have an unconditional right to invoice. There were
no
material contract assets as of
March 31, 2019
or
December 31, 2018
. Trade receivables were
$1.06 billion
and
$1.09 billion
at
March 31, 2019
and
December 31, 2018
, respectively. Impairment losses on receivables were not material during the first quarters of 2019 and 2018.
Contract liabilities relate to payments received in advance of performance under the contract. Changes in contract liabilities are due to our performance under the contract. The amount of revenue recognized during the
three months ended March 31, 2019
, that was included within deferred revenue at January 1, 2019, was
$58 million
. In addition, we deferred
$57 million
of revenue during the
first quarter of 2019
. Refer to
Note 5
, "
Accrued Expenses and Other Liabilities
," for additional information on deferred revenue.
Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized (“contracted not recognized revenue”). Contracted not recognized revenue includes deferred revenue and amounts for full service ChoiceLease maintenance revenue that will be invoiced and recognized as revenue in future periods as we provide maintenance services to our customers. Contracted not recognized revenue excludes variable revenue as it is not included in the transaction price consideration allocated at contract inception. Contracted not recognized revenue was
$2.7 billion
as of March 31, 2019. As a practical expedient, revenue related to our insurance performance obligations is excluded from contracted not recognized revenue since insurance coverage is provided over time, and we recognize revenue in the amount we have the right to bill the customer, which corresponds directly with the value to the customer of our performance completed to date.
15
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
Costs to Obtain and Fullfill a Contract
We capitalize incremental sales commissions paid to our sales force as a result of obtaining ChoiceLease, DTS and SCS service contracts as contract costs. We recorded capitalized sales commissions of
$106 million
and
$107 million
at March 31, 2019 and December 31, 2018, respectively. Capitalized sales commissions includes initial direct costs of our leases in the amount of
$53 million
at March 31, 2019 and December 31, 2018, respectively, accounted for in accordance with Topic 842. Capitalized sales commissions are presented in “Prepaid expenses and other current assets” and “Sales-type leases and other assets” in our Consolidated Condensed Balance Sheets.
Capitalized sales commissions related to our ChoiceLease product are amortized based on the same pattern that the revenue is recognized for the underlying lease or non-lease components of the contract. Incremental sales commissions capitalized in connection with our ChoiceLease contracts relate to the lease component and non-lease maintenance components of our contracts. We allocate the ChoiceLease commissions to the lease and non-lease components based on the same allocation of the contract consideration. The portion of capitalized commissions related to the lease component is amortized on a straight-line basis and the portion of the capitalized commissions related to the maintenance portion is amortized consistent with the estimated pattern of maintenance costs. The amortization period aligns with the term of our contract, which typically ranges from three to seven years, and amortization expense is included in “Selling, general and administrative expenses” in our Consolidated Condensed Statements of Earnings.
Capitalized commissions related to our DTS and SCS service contracts are amortized based on the same patten that the revenue is recognized for the underlying contracts. This generally results in a straight-line amortization as the amount of revenue billed to the customer under DTS and SCS contracts corresponds directly with the value to the customer of our performance completed to date. The amortization period aligns with the term of the contract, which typically ranges from three to five years, and amortization expense is included in “Selling, general and administrative expenses” in our Consolidated Condensed Statement of Earnings.
For the three months ended March 31, 2019 and 2018, the amount of amortization was
$11 million
and
$6 million
, respectively. As a practical expedient, we recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that we otherwise would have recognized is one year or less.
16
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
4
.
REVENUE EARNING EQUIPMENT, NET
|
|
March 31, 2019
|
December 31, 2018
|
||||||||||||||||
|
|
Cost
|
Accumulated
Depreciation
|
Net Book
Value
(1)
|
Cost
|
Accumulated
Depreciation
|
Net Book
Value
(1)
|
||||||||||||
|
|
(In thousands)
|
|||||||||||||||||
|
Held for use:
|
||||||||||||||||||
|
ChoiceLease
|
$
|
11,331,946
|
|
(3,743,391
|
)
|
7,588,555
|
|
10,824,989
|
|
(3,645,655
|
)
|
7,179,334
|
|
|||||
|
Commercial rental
|
3,315,660
|
|
(1,047,437
|
)
|
2,268,223
|
|
3,152,908
|
|
(1,047,346
|
)
|
2,105,562
|
|
||||||
|
Held for sale
|
537,173
|
|
(384,790
|
)
|
152,383
|
|
467,093
|
|
(336,028
|
)
|
131,065
|
|
||||||
|
Total
|
$
|
15,184,779
|
|
(5,175,618
|
)
|
10,009,161
|
|
14,444,990
|
|
(5,029,029
|
)
|
9,415,961
|
|
|||||
————————————
|
(1)
|
Revenue earning equipment, net includes vehicles under finance leases of
$12 million
, less accumulated depreciation of
$6 million
, at
March 31, 2019
, and
$23 million
, less accumulated depreciation of
$13 million
, at
December 31, 2018
.
|
Revenue earning equipment held for sale is stated at the lower of carrying amount or fair value less costs to sell. Losses on vehicles held for sale for which carrying values exceeded fair value are recognized at the time they arrive at our used truck sales centers and are presented within “Used vehicle sales, net” in the Consolidated Condensed Statements of Earnings. For revenue earning equipment held for sale, we stratify our fleet by vehicle type (trucks, tractors and trailers), weight class, age and other relevant characteristics and create classes of similar assets for analysis purposes. For a certain population of our revenue earning equipment held for sale, fair value was determined based upon recent market prices obtained from our own sales experience for sales of each class of similar assets and vehicle condition. Expected declines in market prices were also considered when valuing the vehicles held for sale. These vehicles held for sale were classified within Level 3 of the fair value hierarchy.
The following table presents our assets held for sale that are measured at fair value on a nonrecurring basis and considered a Level 3 fair value measurement:
|
Total Losses
(2)
|
|||||||||||||
|
|
March 31,
|
December 31,
|
Three months ended March 31,
|
||||||||||
|
2019
|
2018
|
2019
|
2018
|
||||||||||
|
|
(In thousands)
|
||||||||||||
|
Assets held for sale:
|
|||||||||||||
|
Revenue earning equipment
(1)
:
|
|||||||||||||
|
Trucks
|
$
|
41,813
|
|
44,325
|
|
$
|
11,546
|
|
8,601
|
|
|||
|
Tractors
|
43,269
|
|
35,397
|
|
4,968
|
|
3,377
|
|
|||||
|
Trailers
|
1,547
|
|
1,507
|
|
180
|
|
1,593
|
|
|||||
|
Total assets at fair value
|
$
|
86,629
|
|
81,229
|
|
$
|
16,694
|
|
13,571
|
|
|||
————————————
|
(1)
|
Assets held for sale in the above table only include the portion of revenue earning equipment held for sale where net book values exceeded fair values and fair value adjustments were recorded. The net book value of assets held for sale that were less than fair value was
$66 million
and
$50 million
as of
March 31, 2019
and December 31,
2018
, respectively.
|
|
(2)
|
Total losses represent fair value adjustments for all vehicles reclassified to held for sale throughout the period for which fair value was less than net book value.
|
17
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
The components of used vehicle sales, net were as follows:
|
|
Three months ended March 31,
|
|||||
|
2019
|
2018
|
|||||
|
|
(In thousands)
|
|||||
|
Gains on vehicle sales, net
|
$
|
(8,477
|
)
|
(6,140
|
)
|
|
|
Losses from fair value adjustments
|
16,694
|
|
13,571
|
|
||
|
Used vehicle sales, net
|
$
|
8,217
|
|
7,431
|
|
|
We own the majority of our revenue earning equipment. Revenue earning equipment that we lease as a lessee are immaterial, and are therefore not separately disclosed from owned revenue earning equipment.
18
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
5
.
ACCRUED EXPENSES AND OTHER LIABILITIES
|
|
March 31, 2019
|
December 31, 2018
|
||||||||||||||||
|
|
Accrued
Expenses
|
Non-Current
Liabilities
|
Total
|
Accrued
Expenses
|
Non-Current
Liabilities
|
Total
|
||||||||||||
|
|
(In thousands)
|
|||||||||||||||||
|
Salaries and wages
|
$
|
93,355
|
|
—
|
|
93,355
|
|
149,629
|
|
—
|
|
149,629
|
|
|||||
|
Deferred compensation
|
5,730
|
|
57,876
|
|
63,606
|
|
4,524
|
|
55,279
|
|
59,803
|
|
||||||
|
Pension benefits
|
3,764
|
|
455,989
|
|
459,753
|
|
3,754
|
|
456,979
|
|
460,733
|
|
||||||
|
Other postretirement benefits
|
1,391
|
|
18,114
|
|
19,505
|
|
1,387
|
|
18,097
|
|
19,484
|
|
||||||
|
Other employee benefits
|
7,728
|
|
—
|
|
7,728
|
|
28,370
|
|
—
|
|
28,370
|
|
||||||
|
Insurance obligations
(1)
|
149,946
|
|
254,270
|
|
404,216
|
|
139,314
|
|
247,552
|
|
386,866
|
|
||||||
|
Operating taxes
|
108,343
|
|
—
|
|
108,343
|
|
100,399
|
|
—
|
|
100,399
|
|
||||||
|
Income taxes
|
2,872
|
|
19,655
|
|
22,527
|
|
3,491
|
|
18,477
|
|
21,968
|
|
||||||
|
Interest
|
40,373
|
|
—
|
|
40,373
|
|
39,522
|
|
—
|
|
39,522
|
|
||||||
|
Deposits, mainly from customers
|
81,930
|
|
3,460
|
|
85,390
|
|
80,401
|
|
3,390
|
|
83,791
|
|
||||||
|
Operating lease liabilities
|
71,992
|
|
134,784
|
|
206,776
|
|
73,422
|
|
137,384
|
|
210,806
|
|
||||||
|
Deferred revenue
(2)
|
168,271
|
|
415,166
|
|
583,437
|
|
160,902
|
|
421,176
|
|
582,078
|
|
||||||
|
Restructuring liabilities
(3)
|
4,566
|
|
—
|
|
4,566
|
|
7,595
|
|
—
|
|
7,595
|
|
||||||
|
Other
|
57,037
|
|
39,959
|
|
96,996
|
|
55,029
|
|
44,291
|
|
99,320
|
|
||||||
|
Total
|
$
|
797,298
|
|
1,399,273
|
|
2,196,571
|
|
847,739
|
|
1,402,625
|
|
2,250,364
|
|
|||||
————————————
|
(1)
|
Insurance obligations are primarily comprised of self-insured claim liabilities.
|
|
(2)
|
Deferred revenue is primarily related to the non-lease maintenance services component of our ChoiceLease product line.
|
|
(3)
|
The reduction in restructuring liabilities from
December 31, 2018
, principally represents cash payments for employee termination costs. The majority of the balance remaining in restructuring liabilities is expected to be paid by the end of 2019.
|
19
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
6
.
LEASES
Leases as Lessor
The components of lease income were as follows:
|
Three months ended March 31,
|
||||||
|
|
2019
|
2018
|
||||
|
|
(In thousands)
|
|||||
|
Operating leases
|
||||||
|
Lease income related to lease payments
|
$
|
360,309
|
|
334,367
|
|
|
|
Lease income related to commercial rental
(1)
|
219,171
|
|
194,466
|
|
||
|
Sales type leases
|
||||||
|
Interest income related to net investment in leases
|
11,456
|
|
9,797
|
|
||
|
Variable lease income excluding commercial rental
(1)
|
55,439
|
|
52,227
|
|
||
————————————
|
(1)
|
Lease income related to commercial rental includes both fixed and variable lease income. Variable lease income is approximately 15% to 25% of total commercial rental income based on management's internal estimates.
|
The components of net investment in sales-type leases were as follows:
|
March 31, 2019
|
December 31, 2018
|
|||||
|
|
(In thousands)
|
|||||
|
Net investment in the lease — lease payment receivable
|
$
|
514,531
|
|
505,057
|
|
|
|
Net investment in the lease — unguaranteed residual assets
|
46,828
|
|
46,209
|
|
||
|
$
|
561,359
|
|
551,266
|
|
||
————————————
Note: The net investment in the sales-type lease shown above are included in "Accounts receivables, net" and "Sales-type leases and other assets" in the Consolidated Condensed Balance Sheets.
Maturities of sales-type lease receivables were as follows:
|
March 31, 2019
|
December 31, 2018
|
|||||
|
|
(In thousands)
|
|||||
|
2019 (excluding three months ended March 31, 2019)
|
$
|
103,957
|
|
133,557
|
|
|
|
2020
|
143,811
|
|
136,924
|
|
||
|
2021
|
121,433
|
|
114,983
|
|
||
|
2022
|
92,028
|
|
85,146
|
|
||
|
2023
|
58,175
|
|
52,161
|
|
||
|
Thereafter
|
91,033
|
|
78,935
|
|
||
|
Total undiscounted cash flows
|
610,437
|
|
601,706
|
|
||
|
Present value of lease payments (recognized as lease receivables)
|
(514,531
|
)
|
(505,057
|
)
|
||
|
Difference between undiscounted cash flows and discounted cash flows
|
95,906
|
|
96,649
|
|
||
20
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
Maturities of operating lease payments were as follows:
|
March 31, 2019
|
December 31, 2018
|
|||||
|
|
(In thousands)
|
|||||
|
2019 (excluding three months ended March 31, 2019)
|
$
|
936,560
|
|
1,159,851
|
|
|
|
2020
|
1,008,773
|
|
892,721
|
|
||
|
2021
|
756,134
|
|
646,008
|
|
||
|
2022
|
507,429
|
|
421,050
|
|
||
|
2023
|
319,320
|
|
249,255
|
|
||
|
Thereafter
|
291,636
|
|
203,632
|
|
||
|
Total undiscounted cash flows
|
$
|
3,819,852
|
|
3,572,517
|
|
|
Leases as Lessee
The components of lease expense were as follows:
|
|
Three months ended March 31,
|
|||||||
|
|
Classification
|
2019
|
2018
|
|||||
|
|
(In thousands)
|
|||||||
|
Finance lease cost
|
||||||||
|
Amortization of right-of-use assets
|
Other operating expenses, SG&A
|
$
|
7,788
|
|
5,143
|
|
||
|
Interest on lease liabilities
|
Interest expense
|
643
|
|
597
|
|
|||
|
Operating lease cost
|
Other operating expenses, SG&A
|
23,218
|
|
19,687
|
|
|||
|
Short-term lease and other
|
Other operating expenses, SG&A
|
1,124
|
|
982
|
|
|||
|
Variable lease cost
|
Other operating expenses, SG&A
|
3,016
|
|
2,353
|
|
|||
|
Sublease income
|
Cost of lease & related maintenance and rental, cost of services
|
(5,824
|
)
|
(6,364
|
)
|
|||
|
Total lease cost
|
$
|
29,965
|
|
22,398
|
|
|||
Supplemental cash flow information related to leases was as follows:
|
Three months ended March 31,
|
||||||
|
|
2019
|
2018
|
||||
|
|
(In thousands)
|
|||||
|
Cash paid for amounts included in measurement of liabilities
|
||||||
|
Operating cash flows from finance leases
|
$
|
643
|
|
597
|
|
|
|
Operating cash flows from operating leases
|
22,974
|
|
19,303
|
|
||
|
Financing cash flows from finance leases
|
7,466
|
|
5,039
|
|
||
|
Right-of-use assets obtained in exchange for lease obligations:
|
||||||
|
Finance leases
|
2,418
|
|
2,006
|
|
||
|
Operating leases
|
16,605
|
|
16,908
|
|
||
21
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
Supplemental balance sheet information relates to leases was as follows:
|
|
Classification
|
March 31, 2019
|
December 31, 2018
|
|||||
|
|
(In thousands)
|
|||||||
|
Assets
|
||||||||
|
Operating lease right-of-use assets
|
Sales-type leases and other assets
|
$
|
199,048
|
|
203,834
|
|
||
|
Finance lease assets
|
Operating property and equipment, net and revenue earning equipment, net
|
36,007
|
|
41,647
|
|
|||
|
Total leased assets
|
$
|
235,055
|
|
245,481
|
|
|||
|
Liabilities
|
||||||||
|
Current
|
||||||||
|
Operating
|
Accrued expenses and other current liabilities
|
$
|
71,992
|
|
73,422
|
|
||
|
Finance
|
Short-term debt and current portion of long-term debt
|
11,256
|
|
14,543
|
|
|||
|
Noncurrent
|
||||||||
|
Operating
|
Other non-current liabilities
|
134,784
|
|
137,384
|
|
|||
|
Finance
|
Long-term debt
|
32,446
|
|
32,909
|
|
|||
|
Total lease liabilities
|
$
|
250,478
|
|
258,258
|
|
|||
|
March 31, 2019
|
December 31, 2018
|
||||
|
|
(In thousands)
|
||||
|
Weighted-average remaining lease term
|
|||||
|
Operating
|
4 years
|
|
4 years
|
|
|
|
Finance
|
7 years
|
|
7 years
|
|
|
|
Weighted-average discount rate
|
|||||
|
Operating
|
3.7
|
%
|
3.7
|
%
|
|
|
Finance
|
8.3
|
%
|
8.0
|
%
|
|
22
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
Maturities of lease liabilities were as follows:
|
|
Operating
Leases
|
Finance Leases
|
Total
|
||||||
|
|
(In thousands)
|
||||||||
|
2019 (excluding three months ended March 31, 2019)
|
$
|
61,234
|
|
10,527
|
|
71,761
|
|
||
|
2020
|
58,772
|
|
10,523
|
|
69,295
|
|
|||
|
2021
|
39,367
|
|
8,790
|
|
48,157
|
|
|||
|
2022
|
29,231
|
|
6,112
|
|
35,343
|
|
|||
|
2023
|
14,302
|
|
3,786
|
|
18,088
|
|
|||
|
Thereafter
|
20,022
|
|
13,688
|
|
33,710
|
|
|||
|
Total lease payments
|
222,928
|
|
53,426
|
|
276,354
|
|
|||
|
Less: Imputed Interest
|
(16,152
|
)
|
(9,724
|
)
|
(25,876
|
)
|
|||
|
Present value of lease liabilities
|
$
|
206,776
|
|
43,702
|
|
250,478
|
|
||
As of March 31, 2019, we have additional facility operating leases that have not yet commenced of
$8 million
. The operating leases will commence in 2019 with lease terms of
3
to
5 years
.
23
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
7
.
DEBT
|
|
Weighted-Average
Interest Rate
|
|
|
|
||||||||
|
|
March 31,
2019 |
December 31,
2018 |
Maturities
|
March 31,
2019 |
December 31,
2018 |
|||||||
|
|
|
|
|
(In thousands)
|
||||||||
|
Short-term debt and current portion of long-term debt:
|
||||||||||||
|
Short-term debt
|
1.46%
|
2.69%
|
|
$
|
210,185
|
|
81,522
|
|
||||
|
Current portion of long-term debt, including finance leases
|
907,304
|
|
855,609
|
|
||||||||
|
Total short-term debt and current portion of long-term debt
|
1,117,489
|
|
937,131
|
|
||||||||
|
Long-term debt:
|
||||||||||||
|
U.S. commercial paper
(1)
|
2.76%
|
2.78%
|
2023
|
695,272
|
|
454,397
|
|
|||||
|
Canadian commercial paper
(1)
|
1.99%
|
2.28%
|
2023
|
105,169
|
|
123,491
|
|
|||||
|
Trade receivables program
|
—%
|
3.15%
|
2019
|
—
|
|
200,000
|
|
|||||
|
Global revolving credit facility
|
2.28%
|
2.25%
|
2023
|
13,224
|
|
12,581
|
|
|||||
|
Unsecured U.S. notes — Medium-term notes
(1)(2)
|
3.30%
|
3.22%
|
2019-2025
|
5,207,369
|
|
4,853,496
|
|
|||||
|
Unsecured U.S. obligations
|
3.49%
|
3.50%
|
2019-2024
|
250,000
|
|
50,000
|
|
|||||
|
Unsecured foreign obligations
|
2.67%
|
1.61%
|
2020-2021
|
33,710
|
|
216,719
|
|
|||||
|
Asset-backed U.S. obligations
(3)
|
2.36%
|
2.37%
|
2019-2025
|
605,634
|
|
627,707
|
|
|||||
|
Finance lease obligations
|
8.32%
|
7.97%
|
2019-2073
|
43,702
|
|
47,452
|
|
|||||
|
Total long-term debt
|
6,954,080
|
|
6,585,843
|
|
||||||||
|
Debt issuance costs
|
(21,097
|
)
|
(18,088
|
)
|
||||||||
|
6,932,983
|
|
6,567,755
|
|
|||||||||
|
Current portion of long-term debt, including finance leases
|
(907,304
|
)
|
(855,609
|
)
|
||||||||
|
Long-term debt
|
6,025,679
|
|
5,712,146
|
|
||||||||
|
Total debt
|
$
|
7,143,168
|
|
6,649,277
|
|
|||||||
————————————
|
(1)
|
Amounts are net of unamortized original issue discounts of
$7 million
at
March 31, 2019
and
December 31, 2018
, respectively.
|
|
(2)
|
Amounts are inclusive of fair market value adjustments on notes subject to hedging of
$6 million
and
$10 million
at
March 31, 2019
and
December 31, 2018
, respectively. The notional amount of the executed interest rate swaps designated as fair value hedges was
$725 million
at
March 31, 2019
and
December 31, 2018
. Refer to
Note 8
, "
Derivatives
," for additional information.
|
|
(3)
|
Asset-backed U.S. obligations are related to financing transactions backed by a portion of our revenue earning equipment.
|
We maintain a
$1.4 billion
global revolving credit facility with a syndicate of
twelve
lending institutions led by Bank of America N.A., BNP Paribas, Lloyds Bank Plc, Mizuho Bank, Ltd., MUFG Bank, Ltd., Royal Bank of Canada, U.S. Bank N.A. and Wells Fargo Bank, N.A. The facility matures in September 2023. The agreement provides for annual facility fees that range from
7.5 basis points
to
20 basis points
based on Ryder's long-term credit ratings. The annual facility fee is currently
10 basis points
, which applies to the total facility size of
$1.4 billion
.
The credit facility is primarily used to finance working capital but can also be used to issue up to
$75 million
in letters of credit (there were
no
letters of credit outstanding against the facility at
March 31, 2019
). At our option, the interest rate on borrowings under the credit facility is based on LIBOR, prime, federal funds or local equivalent rates. The credit facility contains no provisions limiting its availability in the event of a material adverse change to Ryder’s business operations; however, the credit facility does contain standard representations and warranties, events of default, cross-default provisions and certain affirmative and negative covenants.
In order to maintain availability of funding, we must maintain a ratio of debt to consolidated net worth of less than or equal to
300%
. Net worth, as defined in the credit facility, represents shareholders' equity excluding any accumulated other comprehensive income or loss associated with our pension and other postretirement plans. The ratio at
March 31, 2019
, was
197%
. At
March 31, 2019
, there was
$572 million
available under the credit facility.
24
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
Our global revolving credit facility enables us to refinance short-term obligations on a long-term basis. Short-term commercial paper obligations not required for working capital needs are classified as long-term as we have both the intent and ability to refinance on a long-term basis. In addition, we have the intent and ability to refinance the current portion of certain long-term debt on a long-term basis. At
March 31, 2019
, we classified
$800 million
of short-term commercial paper,
$350 million
of the current portion of long-term debt and
$69 million
of short-term debt as long-term debt. At
December 31, 2018
, we classified
$578 million
of short-term commercial paper,
$200 million
of trade receivables borrowings,
$250 million
of the current portion of long-term debt and
$50 million
of short-term debt as long-term debt.
In February 2019, we issued
$600 million
of unsecured medium-term notes maturing in March 2024. The proceeds from these notes were used to pay off maturing debt and for general corporate purposes. If these notes are downgraded below investment grade following, and as a result of, a change in control, the note holders can require us to repurchase all or a portion of the notes at a purchase price equal to
101%
of principal value plus accrued and unpaid interest.
In the first quarter of 2019, we executed two
$100 million
bank term loans maturing in February and March 2024, respectively. The proceeds from these loans were used to pay off maturing debt and for general corporate purposes.
We have a trade receivables purchase and sale program, pursuant to which we sell certain of our domestic trade accounts receivable to a bankruptcy remote, consolidated subsidiary of Ryder, that in turn sells, on a revolving basis, an ownership interest in certain of these accounts receivable to a committed purchaser. The subsidiary is considered a VIE and is consolidated based on our control of the entity’s activities. We use this program to provide additional liquidity to fund our operations, particularly when it is cost effective to do so. The costs under the program may vary based on changes in interest rates. The available proceeds that may be received under the program are limited to
$225 million
. If no event occurs that causes early termination, the
364
-day program will expire on June 12, 2019. The program contains provisions restricting its availability in the event of a material adverse change to our business operations or the collectibility of the collateralized receivables. Sales of receivables under this program are accounted for as secured borrowings based on our continuing involvement in the transferred assets.
No
amounts were outstanding under the program at
March 31, 2019
. At
December 31, 2018
,
$200 million
was outstanding under the program.
At
March 31, 2019
and
December 31, 2018
, we had letters of credit and surety bonds outstanding totaling
$373 million
and
$375 million
, respectively, which primarily guarantee the payment of insurance claims.
The fair value of total debt (excluding capital lease and asset-backed U.S. obligations) at
March 31, 2019
and
December 31, 2018
, was approximately
$6.57 billion
and
$5.97 billion
, respectively. For publicly-traded debt, estimates of fair value were based on market prices. For other debt, fair value was estimated based on a model-driven approach using rates currently available to us for debt with similar terms and remaining maturities. The fair value measurements of our publicly-traded debt and other debt were classified within Level 2 of the fair value hierarchy. The carrying amounts reported in the Consolidated Condensed Balance Sheets for “Cash and cash equivalents,” “Receivables, net” and “Accounts payable” approximate fair value because of the immediate or short-term maturities of these financial instruments.
25
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
8
.
DERIVATIVES
From time to time, we enter into interest rate derivatives to manage our fixed and variable interest rate exposure and to better match the repricing of debt instruments to that of our portfolio of assets. We assess the risk that changes in interest rates will have either on the fair value of debt obligations or on the amount of future interest payments by monitoring changes in interest rate exposures and by evaluating hedging opportunities. We regularly monitor interest rate risk attributable to both our outstanding or forecasted debt obligations as well as any offsetting hedge positions. This risk management process involves the use of analytical techniques, including cash flow sensitivity analyses, to estimate the expected impact of changes in interest rates on our future cash flows.
As of
March 31, 2019
, we had interest rate swaps outstanding that are designated as fair value hedges for certain debt obligations, with a total notional value of
$725 million
and maturities through
2022
. Interest rate swaps are measured at fair value on a recurring basis using Level 2 fair value inputs. The fair value of these interest rate swaps was a liability of
$6 million
and
$10 million
as of
March 31, 2019
and
December 31, 2018
, respectively. The amounts are presented in "Accrued expenses and other current liabilities" and "Other non-current liabilities" in our Consolidated Condensed Balance Sheets. Changes in the fair value of our interest rate swaps were offset by changes in the fair value of the hedged debt instruments. Accordingly, there was no ineffectiveness related to the interest rate swaps.
As of
March 31, 2019
, we had interest rate swaps outstanding that are designated as cash flow hedges for a certain debt obligations, with a total notional value of
$215 million
and maturities through
2024
. The interest rate swaps are measured at fair value on a recurring basis using Level 2 fair value inputs. The fair value of these interest rate swaps was a liability of
$2 million
as of March 31, 2019. The fair value of these interest rate swaps was not material as of December 31, 2018. The amounts are presented in "Other non-current liabilities" in our Consolidated Condensed Balance Sheets. The effective portion of the change in the fair value of the hedging instrument is reported in other comprehensive income. The amounts accumulated in other comprehensive income are reclassified to earnings when the related interest payments affect earnings. There was no ineffectiveness related to the interest rate swap.
9
.
SHARE REPURCHASE PROGRAMS
In December 2017, our Board of Directors authorized a share repurchase program intended to mitigate the dilutive impact of shares issued under our employee stock plans (the program). Under the program, management is authorized to repurchase up to
1.5 million
shares of common stock, the sum of which will not exceed the number of shares issued to employees under the Company’s employee stock plans from December 31, 2017 to December 13, 2019. Share repurchases of common stock are made periodically in open-market transactions and are subject to market conditions, legal requirements and other factors. Management may establish prearranged written plans for the Company under Rule 10b5-1 of the Securities Exchange Act of 1934 as part of the program, which allow for share repurchases during Ryder’s quarterly blackout periods as set forth in the trading plan.
During the
three months ended March 31, 2019
and
March 31, 2018
, we repurchased approximately
226,000
shares for
$14 million
and
171,000
shares for
$13 million
, respectively.
26
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
10
.
ACCUMULATED OTHER COMPREHENSIVE LOSS
The following summary sets forth the components of accumulated other comprehensive loss, net of tax:
|
Currency
Translation
Adjustments and Other
|
Net Actuarial
Loss
(1)
|
Prior Service (Cost)/
Credit
(1)
|
Accumulated
Other
Comprehensive
Loss
|
||||||||||
|
|
(In thousands)
|
||||||||||||
|
December 31, 2018
|
$
|
(199,713
|
)
|
(700,384
|
)
|
(11,537
|
)
|
(911,634
|
)
|
||||
|
Amortization
|
—
|
|
5,307
|
|
147
|
|
5,454
|
|
|||||
|
Other current period change
|
15,762
|
|
—
|
|
—
|
|
15,762
|
|
|||||
|
March 31, 2019
|
(183,951
|
)
|
(695,077
|
)
|
(11,390
|
)
|
(890,418
|
)
|
|||||
|
Currency
Translation
Adjustments and Other
|
Net Actuarial
Loss
(1)
|
Prior Service
Credit
(1)
|
Accumulated
Other
Comprehensive
Loss
|
|||||||||
|
|
(In thousands)
|
|||||||||||
|
December 31, 2017
|
(143,773
|
)
|
(560,153
|
)
|
(6,910
|
)
|
(710,836
|
)
|
||||
|
Amortization
|
—
|
|
5,517
|
|
89
|
|
5,606
|
|
||||
|
Other current period change
|
11,765
|
|
—
|
|
—
|
|
11,765
|
|
||||
|
Adoption of new accounting standard
(2)
|
—
|
|
(98,987
|
)
|
(1,580
|
)
|
(100,567
|
)
|
||||
|
March 31, 2018
|
(132,008
|
)
|
(653,623
|
)
|
(8,401
|
)
|
(794,032
|
)
|
||||
_______________________
|
(1)
|
These amounts are included in the computation of net pension expense. See
Note 13
, "
Employee Benefit Plans
," for additional information.
|
|
(2)
|
Reflects the impact of adopting ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income in 2018, which resulted in a reclassification of stranded tax effects caused by the 2017 Tax Cuts and Jobs Act from accumulated other comprehensive loss to retained earnings in the Consolidated Condensed Balance Sheet.
|
The gain from currency translation adjustments in the
three months ended March 31, 2019
, of
$16 million
was primarily due to the strengthening of the British Pound and Canadian Dollar against the U.S. Dollar. The gain from currency translation adjustments in the
three months ended March 31, 2018
, of
$12 million
was primarily due to the strengthening of the British Pound against the U.S. Dollar, partially offset by the weakening of the Canadian Dollar against the U.S. Dollar.
27
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
11
.
EARNINGS PER SHARE
The following table presents the calculation of basic and diluted earnings per common share from continuing operations:
|
|
Three months ended March 31,
|
|||||
|
2019
|
2018
|
|||||
|
|
(In thousands, except per share amounts)
|
|||||
|
Earnings per share — Basic:
|
||||||
|
Earnings from continuing operations
|
$
|
45,890
|
|
37,313
|
|
|
|
Less: Distributed and undistributed earnings allocated to unvested stock
|
(177
|
)
|
(130
|
)
|
||
|
Earnings from continuing operations available to common shareholders — Basic
|
$
|
45,713
|
|
37,183
|
|
|
|
Weighted average common shares outstanding — Basic
|
52,418
|
|
52,405
|
|
||
|
Earnings from continuing operations per common share — Basic
|
$
|
0.87
|
|
0.71
|
|
|
|
Earnings per share — Diluted:
|
||||||
|
Earnings from continuing operations
|
$
|
45,890
|
|
37,313
|
|
|
|
Less: Distributed and undistributed earnings allocated to unvested stock
|
(177
|
)
|
(130
|
)
|
||
|
Earnings from continuing operations available to common shareholders — Diluted
|
$
|
45,713
|
|
37,183
|
|
|
|
Weighted average common shares outstanding — Basic
|
52,418
|
|
52,405
|
|
||
|
Effect of dilutive equity awards
|
223
|
|
608
|
|
||
|
Weighted average common shares outstanding — Diluted
|
52,641
|
|
53,013
|
|
||
|
Earnings from continuing operations per common share — Diluted
|
$
|
0.87
|
|
0.70
|
|
|
|
Anti-dilutive equity awards not included above
|
1,682
|
|
1,046
|
|
||
28
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
12
.
SHARE-BASED COMPENSATION PLANS
Share-based incentive awards are provided to employees under the terms of various share-based compensation plans (collectively, the “Plans”). The Plans are administered by the Compensation Committee of the Board of Directors. Awards under the plan principally include at-the-money stock options, unvested stock and cash awards. Unvested stock awards include grants of market-based, performance-based and time-vested restricted stock rights. Under the terms of our Plans, dividends on unvested stock are not paid unless the stock award vests. Upon vesting, the amount of the dividends paid is equal to the aggregate dividends declared on common shares during the period from the grant date of the award until the date the shares underlying the award are delivered.
The following table provides information on share-based compensation expense and income tax benefits recognized during the periods:
|
|
Three months ended March 31,
|
|||||
|
|
2019
|
2018
|
||||
|
|
(In thousands)
|
|||||
|
Stock option and stock purchase plans
|
$
|
1,819
|
|
1,875
|
|
|
|
Unvested stock
|
5,580
|
|
3,466
|
|
||
|
Share-based compensation expense
|
7,399
|
|
5,341
|
|
||
|
Income tax benefit
|
(1,160
|
)
|
(1,161
|
)
|
||
|
Share-based compensation expense, net of tax
|
$
|
6,239
|
|
4,180
|
|
|
During the
three months ended March 31, 2019
and
2018
, approximately
182,000
and
347,000
stock options, respectively, were granted under the Plans. These awards generally vest in equal annual installments over a
three
year period beginning on the date of grant. The stock options have contractual terms of
ten years
. The fair value of each option award at the date of grant was estimated using a Black-Scholes-Merton option-pricing valuation model. Share-based compensation expense is recognized on a straight-line basis over the vesting period. The weighted-average fair value per option granted during the
three months ended March 31, 2019
and
2018
was
$11.74
and
$15.89
, respectively.
During the
three months ended March 31, 2019
, there were no awards with a return on capital (ROC) performance-based vesting condition granted under the Plans. During the three months ended March 31, 2018, there were approximately
95,000
awards granted with a return on capital (ROC) performance-based vesting condition. The awards are segmented into
three
one
-year performance periods. For these awards, up to
150%
of the awards may be earned based on Ryder's one-year adjusted return on capital (ROC) measured against an annual ROC target. If earned, employees will receive the grant of stock three years after the grant date, provided they continue to be employed with Ryder, subject to Compensation Committee approval. For accounting purposes, these awards are not considered granted until the Compensation Committee approves the annual ROC target. During the
three months ended March 31, 2019
and
2018
, approximately
79,000
and
98,000
PBRSRs, respectively, were considered granted for accounting purposes. The fair value of the PBRSRs is determined and fixed on the grant date based on Ryder's stock price on the date of grant. Share-based compensation expense is recognized on a straight-line basis over the vesting period, based upon the probability that the performance target will be met. The weighted-average fair value per PBRSR granted during the
three months ended March 31, 2019
and
2018
was
$57.92
and
$74.72
, respectively.
During the
three months ended March 31, 2019
, and
2018
, approximately
75,000
and
51,000
performance-based restricted stock rights (PBRSRs), respectively, were awarded under the Plans. For these awards, up to
200%
of the awards may be earned based on the spread between Ryder's adjusted return on capital and the cost of capital (ROC/COC) measured against a three-year ROC/COC target. The majority of these awards include a TSR modifier. Ryder's TSR will be compared against the TSR of each of the companies in a custom peer group to determine Ryder's TSR percentile rank versus this custom peer group. The number of ROC/COC PBRSRs will then be adjusted based on Ryder's relative TSR percentile rank. The fair value of these PBRSRs is estimated using a lattice-based option-pricing valuation model that incorporates a Monte-Carlo simulation. Share-based compensation expense is recognized on a straight-line basis over the vesting period, based upon the probability that the performance target will be met. The weighted-average fair value per PBRSR granted during the
three months ended March 31, 2019
and
2018
was
$61.22
and
$72.93
, respectively.
29
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
During the
three months ended March 31, 2019
, and
2018
, approximately
75,000
and
51,000
performance-based restricted stock rights (PBRSRs), respectively, were awarded under the Plans. For these awards, up to
200%
of the awards may be earned based on Ryder's strategic revenue growth (SRG) measured against a three-year SRG target. The majority of these awards include a TSR modifier. Ryder's TSR will be compared against the TSR of each of the companies in a custom peer group to determine Ryder's TSR percentile rank versus this custom peer group. The number of SRG PBRSRs will then be adjusted based on Ryder's relative TSR percentile rank. The fair value of these PBRSRs is estimated using a lattice-based option-pricing valuation model that incorporates a Monte-Carlo simulation. Share-based compensation expense is recognized on a straight-line basis over the vesting period, based upon the probability that the performance target will be met. The weighted-average fair value per PBRSR granted during the
three months ended March 31, 2019
and
2018
was
$61.22
and
$72.93
, respectively.
During the
three months ended March 31, 2019
and
2018
, approximately
298,000
and
132,000
time-vested restricted stock rights, respectively, were granted under the Plans. The time-vested restricted stock rights entitle the holder to shares of common stock when the awards vest. The 2019 awards primarily vest in equal annual installments over a
three
-year period beginning on the date of grant. In 2018,
104,000
of the awards granted vest in equal annual installments over a
three
-year period beginning on the date of grant. The remaining awards granted in 2018 vest at the end of the
three
-year period. The fair value of the time-vested awards is determined and fixed based on Ryder’s stock price on the date of grant. Share-based compensation expense is recognized on a straight-line basis over the vesting period. The weighted-average fair value per time-vested restricted stock right granted during the
three months ended March 31, 2019
and
2018
was
$57.92
and
$76.69
, respectively.
Certain employees were granted cash awards prior to 2016 as part of our long-term incentive compensation program. The cash awards are accounted for as liability awards under the share-based compensation accounting guidance as the awards are based upon the performance of our common stock and are settled in cash. As a result, the liability is adjusted to reflect fair value at the end of each reporting period. The fair value of the cash awards was estimated using a lattice-based option-pricing valuation model that incorporates a Monte-Carlo simulation. Share-based compensation expense is recognized on a straight-line basis over the vesting period. There was no compensation expense associated with cash awards during the
three months ended March 31, 2019
. The compensation expense associated with cash awards was not material for the three months ended March 31, 2018.
Total unrecognized pre-tax compensation expense related to all share-based compensation arrangements at
March 31, 2019
, was
$53 million
and is expected to be recognized over a weighted-average period of
2.1
years.
30
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
13
.
EMPLOYEE BENEFIT PLANS
Components of net pension expense were as follows:
|
Three months ended March 31,
|
||||||
|
|
2019
|
2018
|
||||
|
|
(In thousands)
|
|||||
|
Pension Benefits
|
||||||
|
Company-administered plans:
|
||||||
|
Service cost
|
$
|
3,032
|
|
3,201
|
|
|
|
Interest cost
|
21,469
|
|
19,752
|
|
||
|
Expected return on plan assets
|
(22,676
|
)
|
(25,834
|
)
|
||
|
Amortization of:
|
||||||
|
Net actuarial loss
|
7,610
|
|
7,372
|
|
||
|
Prior service cost
|
179
|
|
145
|
|
||
|
9,614
|
|
4,636
|
|
|||
|
Union-administered plans
|
2,457
|
|
2,346
|
|
||
|
Net pension expense
|
$
|
12,071
|
|
6,982
|
|
|
|
Company-administered plans:
|
||||||
|
U.S.
|
$
|
11,473
|
|
7,357
|
|
|
|
Non-U.S.
|
(1,859
|
)
|
(2,721
|
)
|
||
|
9,614
|
|
4,636
|
|
|||
|
Union-administered plans
|
2,457
|
|
2,346
|
|
||
|
Net pension expense
|
$
|
12,071
|
|
6,982
|
|
|
During the
three months ended March 31, 2019
, we contributed
$8 million
to our pension plans. In
2019
, the expected total contributions to our pension plans are approximately
$34 million
. We also maintain other postretirement benefit plans that are not reflected in the above table. The amount of postretirement benefit expense was not material for the
three months ended March 31, 2019
and 2018.
31
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
14
.
OTHER ITEMS IMPACTING COMPARABILITY
Our primary measure of segment performance as shown in
Note 17
, "
Segment Reporting
," excludes certain items we do not believe are representative of the ongoing operations of the segment. Excluding these items from our segment measure of performance allows for better year over year comparison:
|
|
Three months ended March 31,
|
|||||
|
|
2019
|
2018
|
||||
|
|
(In thousands)
|
|||||
|
Restructuring and other, net
|
$
|
2,588
|
|
(392
|
)
|
|
|
ERP implementation
|
3,590
|
|
—
|
|
||
|
Goodwill impairment
|
—
|
|
15,513
|
|
||
|
Restructuring and other items, net
|
$
|
6,178
|
|
15,121
|
|
|
During the three months ended March 31, 2019 and 2018, the below items were recorded in "Restructuring and other, net":
|
•
|
In the first quarter of 2019, we recorded
$2.6 million
of net charges primarily related to consulting fees related to cost savings initiatives, professional fees related to the pursuit of a commercial claim, and income from our Singapore operations that will be shut down in the second quarter of 2019. These items were reflected within "Restructuring and other items, net" in our Consolidated Condensed Statements of Earnings.
|
|
•
|
In the first quarter of 2018, we recorded
$0.4 million
of net benefit primarily related to an adjustment to the one-time Tax Reform-related employee bonus accrued as of December 31, 2017, income from our Singapore operations that will be shut down in the second quarter of 2019, offset by charges related to professional fees, adjustments to the restructuring accrual recorded as of December 31, 2017 and acquisition transaction costs. These items were reflected within "Restructuring and other items, net" in our Consolidated Condensed Statements of Earnings.
|
During the first quarter of 2019, we recorded
$3.6 million
of charges related to the implementation of an Enterprise Resource Planning (ERP) system. This item was reflected within "Restructuring and other items, net" in our Consolidated Condensed Statements of Earnings.
During the first quarter of 2018, we recorded an impairment charge of
$15.5 million
for all goodwill in the FMS Europe reporting unit. This item was reflected within "Restructuring and other items, net" in our Consolidated Condensed Statements of Earnings.
32
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
15
.
OTHER MATTERS
We are a party to various claims, complaints and proceedings arising in the ordinary course of our continuing business operations including, but not limited to, those relating to commercial and employment claims, environmental matters, risk management matters (e.g., vehicle liability, workers’ compensation, etc.) and administrative assessments primarily associated with operating taxes. We have established loss provisions for matters in which losses are probable and can be reasonably estimated. We believe that the resolution of these claims, complaints and legal proceedings will not have a material effect on our consolidated condensed financial statements.
Our estimates regarding potential losses and materiality are based on our judgment and assessment of the claims utilizing currently available information. Although we will continue to reassess our reserves and estimates based on future developments, our objective assessment of the legal merits of such claims may not always be predictive of the outcome and actual results may vary from our current estimates.
16
.
SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information was as follows:
|
|
Three months ended March 31,
|
|||||
|
|
2019
|
2018
|
||||
|
|
(In thousands)
|
|||||
|
Interest paid
|
$
|
52,490
|
|
40,165
|
|
|
|
Income taxes paid
|
3,611
|
|
8,187
|
|
||
|
Changes in accounts payable related to purchases of revenue earning equipment
|
87,053
|
|
48,176
|
|
||
|
Operating and revenue earning equipment acquired under finance leases
|
2,026
|
|
257
|
|
||
33
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
17
.
SEGMENT REPORTING
Ryder is a global leader in transportation and supply chain management solutions. Our operating segments are aggregated into reportable business segments based upon similar economic characteristics, products, services, customers and delivery methods. We report our financial performance in
three
business segments: (1) FMS, which provides full service leasing and leasing with flexible maintenance options, commercial rental and contract or transactional maintenance services of trucks, tractors and trailers to customers principally in the U.S., Canada and the U.K.; (2) DTS, which provides turnkey transportation solutions in the U.S. that includes dedicated vehicles, drivers and engineering and administrative support; and (3) SCS, which provides integrated logistics solutions, including distribution, management, dedicated transportation and professional services primarily in North America. Dedicated transportation services provided as part of an integrated, multi-service, supply chain solution to SCS customers are reported in the SCS business segment.
Our primary measurement of segment financial performance, defined as segment “Earnings Before Tax” (EBT) from continuing operations, includes an allocation of Central Support Services (CSS) and excludes non-operating pension costs and the restructuring and other items, net discussed in
Note 14
, "
Other Items Impacting Comparability
." CSS represents those costs incurred to support all business segments, including human resources, finance and procurement, corporate services, public affairs, information technology, health and safety, legal, marketing and corporate communications. The objective of the EBT measurement is to provide clarity on the profitability of each business segment and, ultimately, to hold leadership of each segment accountable for their allocated share of CSS costs. Certain costs are considered to be overhead not attributable to any segment and remain unallocated in CSS. Included among the unallocated overhead remaining within CSS are the costs for investor relations, public affairs and certain executive compensation. CSS costs attributable to the business segments are predominantly allocated to FMS, DTS and SCS as follows:
•
Finance, corporate services, and health and safety
— allocated based upon estimated and planned resource utilization;
•
Human resources
— individual costs within this category are allocated under various methods, including allocation based on estimated utilization and number of personnel supported;
•
Information technology
— principally allocated based upon utilization-related metrics such as number of users or minutes of CPU time. Customer-related project costs and expenses are allocated to the business segment responsible for the project; and
•
Other
— represents legal and other centralized costs and expenses including certain share-based incentive compensation costs. Expenses, where allocated, are based primarily on the number of personnel supported.
Our FMS segment leases revenue earning equipment and provides fuel, maintenance and other ancillary services to the DTS and SCS segments. Inter-segment revenue and EBT are accounted for at rates similar to those executed with third parties. EBT related to inter-segment equipment and services billed to DTS and SCS customers (equipment contribution) are included in both FMS and the segment that served the customer and then eliminated (presented as “Eliminations”).
Segment results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented. The following tables set forth financial information for each of our segments and provide a reconciliation between segment EBT and earnings from continuing operations before income taxes for the
three months ended March 31, 2019
and
2018
. Prior period segment amounts have been revised to reflect the adoption of ASC 842.
34
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
|
FMS
|
DTS
|
SCS
|
Eliminations
|
Total
|
||||||||||||
|
|
(In thousands)
|
|||||||||||||||
|
For the three months ended March 31, 2019
|
||||||||||||||||
|
Revenue from external customers
|
$
|
1,195,035
|
|
349,621
|
|
635,671
|
|
—
|
|
2,180,327
|
|
|||||
|
Inter-segment revenue
|
156,564
|
|
—
|
|
—
|
|
(156,564
|
)
|
—
|
|
||||||
|
Total revenue
|
$
|
1,351,599
|
|
349,621
|
|
635,671
|
|
(156,564
|
)
|
2,180,327
|
|
|||||
|
Segment EBT
|
$
|
60,911
|
|
17,412
|
|
32,317
|
|
(17,302
|
)
|
93,338
|
|
|||||
|
Unallocated CSS
|
(12,547
|
)
|
||||||||||||||
|
Non-operating pension costs
(1)
|
(6,462
|
)
|
||||||||||||||
|
Restructuring and other items, net
(2)
|
(6,178
|
)
|
||||||||||||||
|
Earnings from continuing operations before income taxes
|
$
|
68,151
|
|
|||||||||||||
|
Segment capital expenditures paid
(3)
|
$
|
1,006,129
|
|
343
|
|
12,756
|
|
—
|
|
1,019,228
|
|
|||||
|
Unallocated CSS capital expenditures paid
|
7,483
|
|
||||||||||||||
|
Capital expenditures paid
|
$
|
1,026,711
|
|
|||||||||||||
|
For the three months ended March 31, 2018
|
||||||||||||||||
|
Revenue from external customers
|
1,110,528
|
|
298,970
|
|
494,707
|
|
—
|
|
1,904,205
|
|
||||||
|
Inter-segment revenue
|
132,522
|
|
—
|
|
—
|
|
(132,522
|
)
|
—
|
|
||||||
|
Total revenue
|
1,243,050
|
|
298,970
|
|
494,707
|
|
(132,522
|
)
|
1,904,205
|
|
||||||
|
Segment EBT
|
54,343
|
|
13,052
|
|
25,511
|
|
(13,272
|
)
|
79,634
|
|
||||||
|
Unallocated CSS
|
(10,592
|
)
|
||||||||||||||
|
Non-operating pension costs
(1)
|
(1,222
|
)
|
||||||||||||||
|
Restructuring and other items, net
(2)
|
(15,121
|
)
|
||||||||||||||
|
Earnings from continuing operations before income taxes
|
$
|
52,699
|
|
|||||||||||||
|
Segment capital expenditures paid
(3)
|
645,369
|
|
249
|
|
12,293
|
|
—
|
|
657,911
|
|
||||||
|
Unallocated CSS capital expenditures paid
|
4,833
|
|
||||||||||||||
|
Capital expenditures paid
|
$
|
662,744
|
|
|||||||||||||
|
(1)
|
Non-operating pension costs include the amortization of net actuarial loss and prior service costs, interest costs and expected return on plan assets.
|
|
(2)
|
See
Note 14
, "
Other Items Impacting Comparability
," for additional information.
|
|
(3)
|
Excludes revenue earning equipment acquired under finance leases.
|
35
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the unaudited Consolidated Condensed Financial Statements and notes thereto included under Item 1. As discussed in Note 2, effective January 1, 2019, we adopted Accounting Standards Update (ASU) No. 2016-02,
Leases (Topic 842)
using the modified retrospective transition comparative method. We have recast all prior period amounts in this MD&A to conform to the current period presentation based on our adoption of this new accounting standard. Refer to
Note 2
, "
Recent Accounting Pronouncements
," for additional information on the revised amounts. In addition, reference should be made to our audited Consolidated Financial Statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the
2018
Annual Report on Form 10-K.
OVERVIEW
Ryder is a global leader in transportation and supply chain management solutions. Our operating segments are aggregated into reportable business segments based upon similar economic characteristics, products, services, customers and delivery methods. We report our financial performance based on three business segments: (1) FMS, which provides full service leasing and leasing with flexible maintenance options, commercial rental, and contract or transactional maintenance services of trucks, tractors and trailers to customers principally in the U.S., Canada and the U.K.; (2) DTS, which provides turnkey transportation solutions in the U.S. that includes dedicated vehicles, drivers and engineering and administrative support; and (3) SCS, which provides integrated logistics solutions, including distribution, management, dedicated transportation and professional services primarily in North America. Dedicated transportation services provided as part of an integrated, multi-service, supply chain solution to SCS customers are reported in the SCS business segment.
We operate in highly competitive markets. Our customers select us based on numerous factors including service quality, price, technology and service offerings. As an alternative to using our services, customers may choose to provide these services for themselves, or may choose to obtain similar or alternative services from other third-party vendors. Our customer base includes enterprises operating in a variety of industries including food and beverage service, transportation and logistics, automotive, retail and consumer goods, industrial, housing, technology, and business and personal services.
In addition, our results of operations and financial condition are influenced by a number of factors including, but not limited to: customer contracting activity and retention, rental demand, used vehicle sales pricing, maintenance costs, depreciation policy changes, currency exchange rate fluctuations, customer preferences, inflation, fuel and energy prices, general economic conditions, insurance costs, interest rates, labor costs, unemployment, tax rates, changes in accounting or regulatory requirements and cybersecurity attacks.
This MD&A includes certain non-GAAP financial measures. Please refer to the “Non-GAAP Financial Measures” section of this MD&A for information on the non-GAAP measures included in the MD&A, reconciliations to the most comparable GAAP financial measure and the reasons why we believe each measure is useful to investors.
36
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Operating results were as follows:
|
|
Three months ended March 31,
|
Change
|
|||||||
|
|
2019
|
2018
|
2019/2018
|
||||||
|
|
(In thousands, except per share amounts)
|
||||||||
|
Total revenue
|
$
|
2,180,327
|
|
1,904,205
|
|
15
|
%
|
||
|
Operating revenue
(1)
|
1,759,007
|
|
1,543,667
|
|
14
|
%
|
|||
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|||||
|
EBT
|
$
|
68,151
|
|
52,699
|
|
29
|
%
|
||
|
Comparable EBT
(2)
|
80,791
|
|
69,042
|
|
17
|
%
|
|||
|
Earnings from continuing operations
|
45,890
|
|
37,313
|
|
23
|
%
|
|||
|
Comparable earnings from continuing operations
(2)
|
58,462
|
|
51,099
|
|
14
|
%
|
|||
|
Net earnings
|
45,316
|
|
36,886
|
|
23
|
%
|
|||
|
|
|
|
|||||||
|
|
|
|
|||||||
|
Earnings per common share (EPS) — Diluted
|
|
|
|||||||
|
Continuing operations
|
$
|
0.87
|
|
0.70
|
|
24
|
%
|
||
|
Comparable
(2)
|
1.11
|
|
0.96
|
|
16
|
%
|
|||
|
Net earnings
|
0.86
|
|
0.70
|
|
23
|
%
|
|||
————————————
|
(1)
|
Non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section of this MD&A for a reconciliation of total revenue to operating revenue and the reasons why management believes this measure is important to investors.
|
|
(2)
|
Non-GAAP financial measures. Refer to the “Non-GAAP Financial Measures” section for a reconciliation of EBT, net earnings and earnings per diluted common share to the comparable measures and the reasons why management believes these measures are important to investors.
|
Total revenue
increased
15%
and operating revenue (a non-GAAP measure excluding fuel and subcontracted transportation)
increased
14%
in the
first quarter of 2019
. Revenue grew in all three business segments reflecting new business and higher volumes. SCS total and operating revenue growth also reflects the acquisition of MXD Group, Inc. (MXD), re-branded as Ryder Last Mile, during the second quarter of 2018. EBT
increased
29%
in the
three months ended March 31, 2019
, reflecting revenue growth and improved operating performance.
37
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
CONSOLIDATED RESULTS
Lease & Related Maintenance and Rental
|
Three months ended March 31,
|
Change
|
||||||||
|
2019
|
2018
|
2019/2018
|
|||||||
|
(Dollars in thousands)
|
|||||||||
|
Lease & related maintenance and rental revenues
|
$
|
899,559
|
|
824,991
|
|
9
|
%
|
||
|
Cost of lease & related maintenance and rental
|
664,289
|
|
615,605
|
|
8
|
%
|
|||
|
Gross margin
|
235,270
|
|
209,386
|
|
12
|
%
|
|||
|
Gross margin %
|
26
|
%
|
25
|
%
|
|||||
Lease & related maintenance and rental revenues represent revenues from our ChoiceLease and commercial rental product offerings within our FMS business segment. Revenues increased
9%
to
$900 million
in the
first quarter of 2019
, driven by ChoiceLease fleet growth and higher prices on replacement vehicles. Lease & related maintenance and rental revenues growth also reflects higher commercial rental revenue driven by higher demand and pricing.
Cost of lease & related maintenance and rental represents the direct costs related to lease & related maintenance and rental revenues. These costs consist of depreciation of revenue earning equipment, maintenance costs (primarily repair parts and labor), and other costs such as licenses, insurance and operating taxes. Cost of lease & related maintenance and rental excludes interest costs from vehicle financing. Cost of lease & related maintenance and rental revenues
increased
8%
in the
first quarter
, primarily due to higher depreciation and maintenance costs from larger average lease and rental fleets (
8%
and
11%
higher in the
first quarter
, respectively), as well as higher liability insurance costs related to development of prior period claims, partially offset by a significant maintenance cost recovery item. Cost of lease & related maintenance and rental also increased by
$9 million
in the
first quarter of 2019
, due to higher depreciation as a result of changes in estimated vehicle residual values effective
January 1, 2019
, and, to a lesser extent, accelerated depreciation.
Lease & related maintenance and rental gross margin
increased
12%
in the
first quarter of 2019
and gross margin as a percentage of revenue
increased
to
26%
in the
first quarter of 2019
. The
increase
in gross margin dollars and gross margin as a percentage of revenue in the
first quarter of 2019
was primarily due to stronger commercial rental demand, as well as the maintenance cost recovery, partially offset by higher depreciation due to vehicle residual value changes.
Services
|
Three months ended March 31,
|
Change
|
||||||||
|
2019
|
2018
|
2019/2018
|
|||||||
|
(Dollars in thousands)
|
|
|
|||||||
|
Services revenue
|
$
|
1,132,048
|
|
928,144
|
|
22
|
%
|
||
|
Cost of services
|
971,690
|
|
788,771
|
|
23
|
%
|
|||
|
Gross margin
|
160,358
|
|
139,373
|
|
15
|
%
|
|||
|
Gross margin %
|
14
|
%
|
15
|
%
|
|||||
Services revenue represents all the revenues associated with our DTS and SCS business segments, as well as SelectCare and fleet support services associated with our FMS business segment. Services revenue
increased
22%
in the
first quarter
, primarily driven by new business and increased volumes in SCS and DTS. Services revenue also benefited from the MXD acquisition during the second quarter of 2018.
Cost of services represents the direct costs related to services revenue and is primarily comprised of salaries and employee-related costs, subcontracted transportation (purchased transportation from third parties), fuel, vehicle liability costs and maintenance costs. Cost of services
increased
23%
in the
first quarter of 2019
due to higher volumes.
Services gross margin
increased
15%
in the
first quarter of 2019
. Service gross margin as a percentage of revenue
decreased
to
14%
in the
first quarter of 2019
. The increase in gross margin dollars reflects benefits from new business and increased volumes in SCS and DTS. The decrease in gross margin as a percentage of revenue reflects a change in the mix of business.
38
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Fuel
|
Three months ended March 31,
|
Change
|
||||||||
|
2019
|
2018
|
2019/2018
|
|||||||
|
(Dollars in thousands)
|
|||||||||
|
Fuel services revenue
|
$
|
148,720
|
|
151,070
|
|
(2
|
)%
|
||
|
Cost of fuel services
|
143,275
|
|
146,903
|
|
(2
|
)%
|
|||
|
Gross margin
|
5,445
|
|
4,167
|
|
31
|
%
|
|||
|
Gross margin %
|
4
|
%
|
3
|
%
|
|||||
Fuel services revenue represents fuel services provided to our FMS customers. Fuel services revenue
decreased
2%
in the
first quarter
, primarily reflecting lower fuel costs passed through to customers, partially offset by higher gallons sold.
Cost of fuel services includes the direct costs associated with providing our customers with fuel. These costs include fuel, salaries and employee-related costs of fuel island attendants and depreciation of our fueling facilities and equipment. Cost of fuel services
decreased
2%
in the
first quarter
as a result of lower revenue.
Fuel services gross margin
increased
31%
and fuel services gross margin as a percentage of revenue increased to
4%
in the
first quarter of 2019
. Fuel is largely a pass-through to customers for which we realize minimal changes in margin during periods of steady market fuel prices. However, fuel services margin is impacted by sudden increases or decreases in market fuel prices during a short period of time, as customer pricing for fuel is established based on trailing market fuel costs. Fuel services gross margin in the
first quarter of 2019
was positively impacted by these price change dynamics as fuel prices fluctuated during the period.
|
|
Three months ended March 31,
|
Change
|
|||||||
|
|
2019
|
2018
|
2019/2018
|
||||||
|
|
(Dollars in thousands)
|
|
|
||||||
|
Other operating expenses
|
$
|
33,626
|
|
32,975
|
|
2
|
%
|
||
Other operating expenses include costs related to our owned and leased facilities within the FMS segment, such as facility depreciation, rent, purchased insurance, utilities and taxes. These facilities are utilized to provide maintenance to our ChoiceLease, commercial rental, and SelectCare customers. Other operating expenses
increased
to
$34 million
in the
first quarter
, primarily from growth and additional investments to upgrade our facilities.
|
|
Three months ended March 31,
|
Change
|
|||||||
|
|
2019
|
2018
|
2019/2018
|
||||||
|
|
(Dollars in thousands)
|
|
|
||||||
|
Selling, general and administrative expenses (SG&A)
|
$
|
231,325
|
|
207,828
|
|
11
|
%
|
||
|
Percentage of total revenue
|
11
|
%
|
11
|
%
|
|||||
SG&A expenses
increased
11%
in the
first quarter
and SG&A expenses as a percentage of total revenue
remained
at
11%
. The increase in SG&A expenses primarily reflects higher compensation-related expenses and, to a lesser extent, growth-related investments in sales, marketing and technology.
|
Three months ended March 31,
|
Change
|
|||||||
|
2019
|
2018
|
2019/2018
|
||||||
|
(Dollars in thousands)
|
||||||||
|
Non-operating pension costs
|
$
|
6,462
|
|
1,222
|
|
NM
|
||
Non-operating pension costs includes the components of our net periodic benefit cost other than service cost. These components include interest cost, expected return on plan assets, amortization of actuarial loss and prior service cost. Non-
39
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
operating pension costs
increased
$5 million
in the
first quarter
due to unfavorable asset returns in 2018, partially offset by higher interest rates.
|
Three months ended March 31,
|
Change
|
||||||||
|
2019
|
2018
|
2019/2018
|
|||||||
|
(Dollars in thousands)
|
|||||||||
|
Used vehicle sales, net
|
$
|
(8,217
|
)
|
(7,431
|
)
|
11
|
%
|
||
Used vehicle sales, net includes gains from sales of used vehicles, selling costs associated with used vehicles and write-downs of vehicles to fair market values. Used vehicle sales, net decreased to an
$8 million
loss in the
first quarter of 2019
, as increased sales of used vehicles at higher prices were offset by higher valuation adjustments on a larger inventory. Global average proceeds per unit in the
first quarter
increased from the prior year reflecting increased tractor and truck pricing and a higher number of units sold. The increase in tractor pricing was primarily due to a lower average age of vehicles sold, higher mix of retail sales and improved market pricing.
The following table presents the used vehicle pricing changes for the
first quarter of 2019
compared with the prior year:
|
Change
|
||
|
2019/2018
|
||
|
Tractors
|
17
|
%
|
|
Trucks
|
3
|
%
|
|
|
Three months ended March 31,
|
Change
|
|||||||
|
|
2019
|
2018
|
2019/2018
|
||||||
|
|
(Dollars in thousands)
|
||||||||
|
Interest expense
|
$
|
55,336
|
|
38,160
|
|
45
|
%
|
||
|
Effective interest rate
|
3.2
|
%
|
2.7
|
%
|
|||||
Interest expense
increased
45%
in the
first quarter of 2019
, reflecting higher average outstanding debt and a higher effective interest rate. The increase in average outstanding debt reflects higher planned vehicle capital spending. The higher effective interest rate in
2019
reflects the replacement of lower fixed interest rate debt with debt issuances at higher fixed rates as well as the impact on variable rate debt of a higher interest rate environment.
|
|
Three months ended March 31,
|
Change
|
||||||
|
|
2019
|
2018
|
2019/2018
|
|||||
|
|
(Dollars in thousands)
|
|||||||
|
Miscellaneous income, net
|
$
|
8,222
|
|
2,510
|
|
NM
|
||
Miscellaneous income, net consists of investment income on securities used to fund certain benefit plans, interest income,
gains from sales of operating property, foreign currency transaction losses and other non-operating items. Miscellaneous income, increased to
$8 million
in the
first quarter of 2019
. The
increase
is primarily driven by higher rabbi trust investment income.
|
|
Three months ended March 31,
|
Change
|
||||||
|
|
2019
|
2018
|
2019/2018
|
|||||
|
|
(Dollars in thousands)
|
|||||||
|
Restructuring and other items, net
|
$
|
6,178
|
|
15,121
|
|
NM
|
||
40
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Refer to
Note 14
, "
Other Items Impacting Comparability
," in the Notes to the Consolidated Condensed Financial Statements for a discussion of restructuring charges and fees, net.
|
|
Three months ended March 31,
|
Change
|
|||||||
|
|
2019
|
2018
|
2019/2018
|
||||||
|
|
(Dollars in thousands)
|
|
|||||||
|
Provision for income taxes
|
$
|
22,261
|
|
15,386
|
|
45
|
%
|
||
|
Effective tax rate from continuing operations
|
32.7
|
%
|
29.2
|
%
|
|||||
Provision for income taxes increased
45%
in the
first quarter
, reflecting the expiration of certain state net operating losses in 2019 and a one-time beneficial adjustment associated with uncertain tax positions in 2018. In addition, the first quarter 2019 tax rate reflects a $1 million benefit for the alternative minimum tax sequestration reversal.
41
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
OPERATING RESULTS BY BUSINESS SEGMENT
|
|
Three months ended March 31,
|
Change
|
|||||||
|
|
2019
|
2018
|
2019/2018
|
||||||
|
|
(Dollars in thousands)
|
|
|||||||
|
Total Revenue:
|
|||||||||
|
Fleet Management Solutions
|
$
|
1,351,599
|
|
1,243,050
|
|
9
|
%
|
||
|
Dedicated Transportation Solutions
|
349,621
|
|
298,970
|
|
17
|
|
|||
|
Supply Chain Solutions
|
635,671
|
|
|
494,707
|
|
28
|
|
||
|
Eliminations
|
(156,564
|
)
|
|
(132,522
|
)
|
(18
|
)
|
||
|
Total
|
$
|
2,180,327
|
|
|
1,904,205
|
|
15
|
%
|
|
|
Operating Revenue:
(1)
|
|
|
|
|
|
||||
|
Fleet Management Solutions
|
$
|
1,143,733
|
|
|
1,039,243
|
|
10
|
%
|
|
|
Dedicated Transportation Solutions
|
235,620
|
|
|
201,405
|
|
17
|
|
||
|
Supply Chain Solutions
|
477,089
|
|
|
382,806
|
|
25
|
|
||
|
Eliminations
|
(97,435
|
)
|
|
(79,787
|
)
|
(22
|
)
|
||
|
Total
|
$
|
1,759,007
|
|
|
1,543,667
|
|
14
|
%
|
|
|
EBT:
|
|||||||||
|
Fleet Management Solutions
|
$
|
60,911
|
|
|
54,343
|
|
12
|
%
|
|
|
Dedicated Transportation Solutions
|
17,412
|
|
13,052
|
|
33
|
|
|||
|
Supply Chain Solutions
|
32,317
|
|
|
25,511
|
|
27
|
|
||
|
Eliminations
|
(17,302
|
)
|
|
(13,272
|
)
|
(30
|
)
|
||
|
93,338
|
|
|
79,634
|
|
17
|
|
|||
|
Unallocated Central Support Services
|
(12,547
|
)
|
|
(10,592
|
)
|
(18
|
)
|
||
|
Non-operating pension costs
|
(6,462
|
)
|
|
(1,222
|
)
|
NM
|
|
||
|
Restructuring and other items, net
|
(6,178
|
)
|
|
(15,121
|
)
|
NM
|
|
||
|
Earnings from continuing operations before income taxes
|
$
|
68,151
|
|
|
52,699
|
|
29
|
%
|
|
————————————
|
(1)
|
Non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section of this MD&A for a reconciliation of total revenue to operating revenue, segment total revenue to segment operating revenue for FMS, DTS and SCS, as well as the reasons why management believes these measures are important to investors.
|
As part of management’s evaluation of segment operating performance, we define the primary measurement of our segment financial performance as “Earnings Before Taxes” (EBT) from continuing operations, which includes an allocation of Central Support Services (CSS), and excludes non-operating pension costs and restructuring and other items, net discussed in
Note 14
, "
Other Items Impacting Comparability
," in the Notes to Consolidated Condensed Financial Statements. CSS represents those costs
incurred to support all business segments, including human resources, finance and procurement, corporate services and public affairs, information technology, health and safety, legal, marketing and corporate communications.
The objective of the EBT measurement is to provide clarity on the profitability of each segment and, ultimately, to hold leadership of each business segment accountable for their allocated share of CSS costs. Segment results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented. Certain costs are not attributable to any segment and remain unallocated in CSS, including costs for investor relations, public affairs and certain executive compensation. See
Note 17
, "
Segment Reporting
," in the Notes to Consolidated Condensed Financial Statements for a description of the methodology for allocating the remainder of CSS costs to the business segments.
Inter-segment revenue and EBT are accounted for at rates similar to those executed with third parties. EBT related to inter-segment equipment and services billed to DTS and SCS customers (equipment contribution) are included in both FMS and the segment that served the customer and then eliminated (presented as “Eliminations” in the table above). Prior year amounts have been revised to conform to the current period presentation, which excludes EBT from our Singapore operations that will be shut down in 2019.
42
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The following table sets forth equipment contribution included in EBT for our DTS and SCS business segments:
|
Three months ended March 31,
|
Change
|
||||||||
|
2019
|
2018
|
2019/2018
|
|||||||
|
(Dollars in thousands)
|
|||||||||
|
Equipment Contribution:
|
|||||||||
|
Dedicated Transportation Solutions
|
$
|
9,660
|
|
7,491
|
|
29
|
%
|
||
|
Supply Chain Solutions
|
7,642
|
|
5,781
|
|
32
|
|
|||
|
Total
(1)
|
$
|
17,302
|
|
13,272
|
|
30
|
%
|
||
———————————
|
(1)
|
Total amount is included in FMS EBT.
|
The
increase
in DTS and SCS equipment contribution for the
first quarter of 2019
is primarily driven by new business and higher volumes.
Items excluded from our segment EBT measure and their classification within our Consolidated Condensed Statements of Earnings follow:
|
|
Three months ended March 31,
|
||||||||
|
Description
|
Classification
|
2019
|
2018
|
||||||
|
|
|
(In thousands)
|
|||||||
|
Non-operating pension costs
(1)
|
Non-operating pension costs
|
$
|
(6,462
|
)
|
(1,222
|
)
|
|||
|
ERP implementation costs
(2)
|
Restructuring and other items, net
|
(3,590
|
)
|
—
|
|
||||
|
Restructuring and other, net
(2)
|
Restructuring and other items, net
|
(2,588
|
)
|
392
|
|
||||
|
Goodwill impairment
(2)
|
Restructuring and other items, net
|
—
|
|
(15,513
|
)
|
||||
|
$
|
(12,640
|
)
|
(16,343
|
)
|
|||||
———————————
|
(1)
|
See
Note 17
, "
Segment Reporting
," in the Notes to Consolidated Condensed Financial Statements for additional information.
|
|
(2)
|
See
Note 14
, “
Other Items Impacting Comparability
,” in the Notes to Consolidated Condensed Financial Statements for a discussion of adjustments.
|
43
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Fleet Management Solutions
|
|
Three months ended March 31,
|
Change
|
|||||||
|
|
2019
|
2018
|
2019/2018
|
||||||
|
(Dollars in thousands)
|
|
|
|||||||
|
ChoiceLease
|
$
|
748,579
|
|
|
690,902
|
|
8
|
%
|
|
|
SelectCare
|
135,779
|
|
|
121,873
|
|
11
|
|
||
|
Commercial Rental
|
236,148
|
|
|
204,530
|
|
15
|
|
||
|
Other
|
23,227
|
|
|
21,938
|
|
6
|
|
||
|
Fuel services revenue
|
207,866
|
|
|
203,807
|
|
2
|
|
||
|
FMS total revenue
(1)
|
$
|
1,351,599
|
|
|
1,243,050
|
|
9
|
%
|
|
|
FMS operating revenue
(2)
|
$
|
1,143,733
|
|
|
1,039,243
|
|
10
|
%
|
|
|
FMS EBT
|
$
|
60,911
|
|
|
54,343
|
|
12
|
%
|
|
|
FMS EBT as a % of FMS total revenue
|
4.5
|
%
|
|
4.4
|
%
|
10 bps
|
|||
|
FMS EBT as a % of FMS operating revenue
(2)
|
5.3
|
%
|
|
5.2
|
%
|
10 bps
|
|||
————————————
|
(1)
|
Includes intercompany fuel sales from FMS to DTS and SCS.
|
|
(2)
|
Non-GAAP financial measures. Reconciliations of FMS total revenue to FMS operating revenue, FMS EBT as a % of FMS total revenue to FMS EBT as a % of FMS operating revenue, as well as the reasons why management believes these measures are important to investors are included in the “Non-GAAP Financial Measures” section of this MD&A.
|
The following table summarizes the components of the change in FMS revenue on a percentage basis versus the prior year:
|
|
Three months ended March 31, 2019
|
||||
|
|
Total
|
Operating
(1)
|
|||
|
Organic, including price and volume
|
9
|
%
|
11
|
%
|
|
|
Fuel
|
1
|
|
—
|
|
|
|
Foreign exchange
|
(1
|
)
|
(1
|
)
|
|
|
Net increase
|
9
|
%
|
10
|
%
|
|
————————————
|
(1)
|
Non-GAAP financial measure. A reconciliation of FMS total revenue to FMS operating revenue as well as the reasons why management believes this measure is important to investors is included in the "Non-GAAP Financial Measures" section of this MD&A.
|
FMS total revenue
increased
to
$1.35 billion
in the
first quarter
primarily due to higher operating revenue. FMS operating revenue in the
first quarter
increased
to
$1.14 billion
primarily from growth in the ChoiceLease and commercial rental product lines.
ChoiceLease revenue
increased
8%
in the
first quarter
due to a larger average fleet size and higher prices on replacement vehicles. We expect favorable ChoiceLease revenue comparisons to continue through the end of the year based on strong sales activity. Commercial rental revenue
increased
15%
in the
first quarter
due to higher demand and pricing. We expect favorable commercial rental revenue comparisons through the end of the year, however, at a declining growth rate compared to the growth we experienced in the first first quarter. SelectCare revenue
increased
11%
in the
first quarter
due to increased volumes. Fuel services revenue increased
2%
in the
first quarter
primarily reflecting higher gallons sold, partially offset by lower fuel costs passed through to customers.
44
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The following table provides commercial rental statistics on our global fleet:
|
|
Three months ended March 31,
|
Change
|
|||||||
|
|
2019
|
2018
|
2019/2018
|
||||||
|
|
(Dollars in thousands)
|
|
|||||||
|
Rental revenue from non-lease customers
|
$
|
129,548
|
|
120,700
|
|
7
|
%
|
||
|
Rental revenue from lease customers
(1)
|
$
|
106,600
|
|
83,830
|
|
27
|
%
|
||
|
Average commercial rental power fleet size — in service
(2) (3)
|
34,700
|
|
30,380
|
|
14
|
%
|
|||
|
Commercial rental utilization — power fleet
(2)
|
74.9
|
%
|
|
74.8
|
%
|
10 bps
|
|||
————————————
|
(1)
|
Represents revenue from rental vehicles provided to our existing ChoiceLease customers, generally in place of a lease vehicle.
|
|
(2)
|
Number of units rounded to nearest hundred and calculated using quarterly average unit counts.
|
|
(3)
|
Excluding trailers.
|
FMS EBT
increased
12%
in the
first quarter
, reflecting ChoiceLease growth and, to a lesser extent, commercial rental growth. Lease results benefited from fleet growth, reflecting strong outsourcing trends and our sales and marketing initiatives. Commercial rental performance improved due to stronger demand and higher pricing. Rental power fleet utilization was
74.9%
for the
first quarter
, consistent with the prior year. Both lease and rental performance benefited from a significant maintenance cost recovery item. These benefits were offset by higher depreciation of
$9 million
due to vehicle residual value changes implemented January 1, 2019, and accelerated depreciation, as well as higher liability insurance costs related to development of prior years' claims. In addition, overheads were higher, reflecting growth-related investments in sales, marketing and technology. Used vehicle results slightly declined from the prior year as increased sales of used vehicles at improved prices were offset by higher valuation adjustments on a larger inventory.
45
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Our global fleet of revenue earning equipment, SelectCare vehicles including vehicles under on-demand maintenance is summarized as follows (number of units rounded to the nearest hundred):
|
|
|
|
|
Change
|
||||||||||
|
|
March 31, 2019
|
December 31, 2018
|
March 31, 2018
|
March 2019/Dec. 2018
|
March 2019/March 2018
|
|||||||||
|
End of period vehicle count
|
||||||||||||||
|
By type:
|
||||||||||||||
|
Trucks
(1)
|
83,000
|
|
81,700
|
|
78,200
|
|
2
|
%
|
6
|
%
|
||||
|
Tractors
(2)
|
78,400
|
|
74,000
|
|
67,100
|
|
6
|
|
17
|
|
||||
|
Trailers
(3)
|
45,000
|
|
44,700
|
|
42,800
|
|
1
|
|
5
|
|
||||
|
Other
|
1,200
|
|
1,200
|
|
1,200
|
|
—
|
|
—
|
|
||||
|
Total
|
207,600
|
|
201,600
|
|
189,300
|
|
3
|
%
|
10
|
%
|
||||
|
By ownership:
|
||||||||||||||
|
Owned
|
206,200
|
|
200,200
|
|
187,900
|
|
3
|
%
|
10
|
%
|
||||
|
Leased
|
1,400
|
|
1,400
|
|
1,400
|
|
—
|
|
—
|
|
||||
|
Total
|
207,600
|
|
201,600
|
|
189,300
|
|
3
|
%
|
10
|
%
|
||||
|
By product line:
|
||||||||||||||
|
ChoiceLease
|
153,500
|
|
149,300
|
|
140,800
|
|
3
|
%
|
9
|
%
|
||||
|
Commercial rental
|
43,800
|
|
42,600
|
|
39,300
|
|
3
|
|
11
|
|
||||
|
Service vehicles and other
|
2,700
|
|
2,800
|
|
3,200
|
|
(4
|
)
|
(16
|
)
|
||||
|
Active units
|
200,000
|
|
194,700
|
|
183,300
|
|
3
|
|
9
|
|
||||
|
Held for sale
|
7,600
|
|
6,900
|
|
6,000
|
|
10
|
|
27
|
|
||||
|
Total
|
207,600
|
|
201,600
|
|
189,300
|
|
3
|
%
|
10
|
%
|
||||
|
Customer vehicles under SelectCare contracts
(4)
|
55,900
|
|
56,300
|
|
54,500
|
|
(1
|
)%
|
3
|
%
|
||||
|
Quarterly average vehicle count
|
||||||||||||||
|
By product line:
|
||||||||||||||
|
ChoiceLease
|
151,400
|
|
147,000
|
|
140,100
|
|
3
|
%
|
8
|
%
|
||||
|
Commercial rental
|
43,000
|
|
42,600
|
|
38,600
|
|
1
|
|
11
|
|
||||
|
Service vehicles and other
|
2,800
|
|
2,900
|
|
3,300
|
|
(3
|
)
|
(15
|
)
|
||||
|
Active units
|
197,200
|
|
192,500
|
|
182,000
|
|
2
|
|
8
|
|
||||
|
Held for sale
|
7,300
|
|
6,600
|
|
6,000
|
|
11
|
|
22
|
|
||||
|
Total
|
204,500
|
|
199,100
|
|
188,000
|
|
3
|
%
|
9
|
%
|
||||
|
Customer vehicles under SelectCare contracts
(4)
|
56,200
|
|
56,400
|
|
54,200
|
|
—
|
%
|
4
|
%
|
||||
|
Customer vehicles under SelectCare on-demand
(5)
|
9,000
|
|
8,600
|
|
8,100
|
|
5
|
%
|
11
|
%
|
||||
|
Total vehicles serviced
|
269,700
|
|
264,100
|
|
250,300
|
|
2
|
%
|
8
|
%
|
||||
———————————
|
(1)
|
Generally comprised of Class 1 through Class 7 type vehicles with a Gross Vehicle Weight (GVW) up to 33,000 pounds.
|
|
(2)
|
Generally comprised of over the road on highway tractors and are primarily comprised of Class 8 type vehicles with a GVW of over 33,000 pounds.
|
|
(3)
|
Generally comprised of dry, flatbed and refrigerated type trailers.
|
|
(4)
|
Excludes customer vehicles under SelectCare on-demand contracts.
|
|
(5)
|
Comprised of the number of unique vehicles serviced under on-demand maintenance agreements for the quarterly periods. This does not represent averages for the periods. Vehicles included in the count may have been serviced more than one time during the respective period.
|
Note: Quarterly and year-to-date amounts were computed using a 6-point average based on monthly information.
46
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The following table provides a breakdown of our non-revenue earning equipment included in our global fleet count (number of units rounded to nearest hundred):
|
|
|
|
|
Change
|
|||||||
|
|
March 31,
2019 |
December 31,
2018 |
March 31,
2018 |
March 2019/Dec. 2018
|
March 2019/March 2018
|
||||||
|
Not yet earning revenue (NYE)
|
5,200
|
4,500
|
3,800
|
16
|
%
|
37
|
%
|
||||
|
No longer earning revenue (NLE):
|
|||||||||||
|
Units held for sale
|
7,600
|
6,900
|
6,000
|
10
|
|
27
|
|
||||
|
Other NLE units
|
6,200
|
4,300
|
4,800
|
44
|
|
29
|
|
||||
|
Total
|
19,000
|
15,700
|
14,600
|
21
|
%
|
30
|
%
|
||||
NYE units represent new vehicles on hand that are being prepared for deployment to a lease customer or into the rental fleet. Preparations include activities such as adding lift gates, paint, decals, cargo area and refrigeration equipment. NYE units
increased
37%
compared to
March 31, 2018
, reflecting lease fleet growth. NLE units represent vehicles held for sale and vehicles for which no revenue has been earned in the previous 30 days. Accordingly, these vehicles may be temporarily out of service, being prepared for sale or awaiting redeployment. NLE units
increased
28%
compared to
March 31, 2018
, reflecting higher used vehicle inventories. We expect NLE levels to increase through the end of the year as a result of higher expected used vehicle inventories driven by the lease vehicle replacement cycle.
Dedicated Transportation Solutions
|
|
Three months ended March 31,
|
Change
|
|||||||
|
|
2019
|
2018
|
2019/2018
|
||||||
|
(Dollars in thousands)
|
|
||||||||
|
DTS total revenue
|
$
|
349,621
|
|
298,970
|
|
17
|
%
|
||
|
DTS operating revenue
(1)
|
$
|
235,620
|
|
|
201,405
|
|
17
|
%
|
|
|
DTS EBT
|
$
|
17,412
|
|
13,052
|
|
33
|
%
|
||
|
DTS EBT as a % of DTS total revenue
|
5.0
|
%
|
4.4
|
%
|
60 bps
|
||||
|
DTS EBT as a % of DTS operating revenue
(1)
|
7.4
|
%
|
6.5
|
%
|
90 bps
|
||||
|
Memo:
|
|||||||||
|
Average fleet
|
9,500
|
|
8,500
|
|
12
|
%
|
|||
————————————
|
(1)
|
Non-GAAP financial measures. Reconciliations of DTS total revenue to DTS operating revenue, DTS EBT as a % of DTS total revenue to DTS EBT as a % of DTS operating revenue, as well as the reasons why management believes these measures are important to investors are included in the “Non-GAAP Financial Measures” section of this MD&A.
|
47
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The following table summarizes the components of the change in DTS revenue on a percentage basis versus the prior year:
|
|
Three months ended March 31, 2019
|
||||
|
|
Total
|
Operating
(1)
|
|||
|
Organic, including price and volume
|
16
|
%
|
17
|
%
|
|
|
Fuel
|
1
|
|
—
|
|
|
|
Net increase
|
17
|
%
|
17
|
%
|
|
————————————
|
(1)
|
Non-GAAP financial measure. A reconciliation of DTS total revenue to DTS operating revenue, as well as the reasons why management believes this measure is important to investors is included in the "Non-GAAP Financial Measures" section of this MD&A.
|
DTS total revenue and DTS operating revenue both
increased
17%
in the
first quarter
reflecting new business, customer expansions and increased volumes. We expect revenue comparisons to remain favorable through the end of the year based on strong sales activity but to a lesser extent than experienced in the first quarter. DTS EBT
increased
33%
in the
first quarter
due to revenue growth, improved operating performance and favorable insurance results related to development of prior years' claims.
Supply Chain Solutions
|
|
Three months ended March 31,
|
Change
|
|||||||
|
|
2019
|
2018
|
2019/2018
|
||||||
|
(Dollars in thousands)
|
|
||||||||
|
Automotive
|
$
|
176,525
|
|
142,980
|
|
23
|
%
|
||
|
Technology and healthcare
|
78,751
|
|
71,530
|
|
10
|
|
|||
|
CPG and Retail
|
178,472
|
|
129,310
|
|
38
|
|
|||
|
Industrial and other
|
43,341
|
|
38,986
|
|
11
|
|
|||
|
Subcontracted transportation
|
127,995
|
|
|
86,861
|
|
47
|
|
||
|
Fuel
|
30,587
|
|
|
25,040
|
|
22
|
|
||
|
SCS total revenue
|
$
|
635,671
|
|
|
494,707
|
|
28
|
%
|
|
|
SCS operating revenue
(1)
|
$
|
477,089
|
|
|
382,806
|
|
25
|
%
|
|
|
SCS EBT
|
$
|
32,317
|
|
|
25,511
|
|
27
|
%
|
|
|
SCS EBT as a % of SCS total revenue
|
5.1
|
%
|
|
5.2
|
%
|
(10) bps
|
|||
|
SCS EBT as a % of SCS operating revenue
(1)
|
6.8
|
%
|
|
6.7
|
%
|
10 bps
|
|||
|
Memo:
|
|
||||||||
|
Average fleet
|
9,700
|
|
8,400
|
|
15
|
%
|
|||
————————————
|
(1)
|
Non-GAAP financial measures. Reconciliations of SCS total revenue to SCS operating revenue, SCS EBT as a % of SCS total revenue to SCS EBT as a % of SCS operating revenue, as well as the reasons why management believes these measures are important to investors are included in the “Non-GAAP Financial Measures” section of this MD&A.
|
48
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The following table summarizes the components of the change in SCS revenue on a percentage basis versus the prior year:
|
|
Three months ended March 31, 2019
|
||||
|
|
Total
|
Operating
(1)
|
|||
|
Organic, including price and volume
|
18
|
%
|
20
|
%
|
|
|
Fuel
|
1
|
|
—
|
|
|
|
Acquisitions
|
10
|
|
6
|
|
|
|
Foreign exchange
|
(1
|
)
|
(1
|
)
|
|
|
Net increase
|
28
|
%
|
|
25
|
%
|
————————————
|
(1)
|
Non-GAAP financial measure. A reconciliation of SCS total revenue to SCS operating revenue, as well as the reasons why management believes this measure is important to investors is included in the "Non-GAAP Financial Measures" section of this MD&A.
|
SCS total revenue
increased
28%
and SCS operating revenue increased
25%
in the
first quarter
largely reflecting new business, increased volumes and higher pricing. Total and operating revenue growth also reflects the acquisition of MXD during the second quarter of 2018. We expect revenue comparisons to remain favorable through the first half of this year, with negative growth towards the second half of the year due to the timing of lost business. SCS EBT
increased
27%
in the
first quarter
driven by revenue growth.
Central Support Services
|
|
Three months ended March 31,
|
Change
|
|||||||
|
|
2019
|
2018
|
2019/2018
|
||||||
|
|
(Dollars in thousands)
|
|
|||||||
|
Human resources
|
$
|
5,280
|
|
4,991
|
|
6
|
%
|
||
|
Finance and procurement
|
18,007
|
|
17,141
|
|
5
|
|
|||
|
Corporate services and public affairs
|
2,320
|
|
2,300
|
|
1
|
|
|||
|
Information technology
|
25,638
|
|
20,766
|
|
23
|
|
|||
|
Legal and safety
|
6,947
|
|
6,286
|
|
11
|
|
|||
|
Marketing
|
4,732
|
|
4,070
|
|
16
|
|
|||
|
Other
|
9,210
|
|
6,841
|
|
35
|
|
|||
|
Total CSS
|
72,134
|
|
62,395
|
|
16
|
%
|
|||
|
Allocation of CSS to business segments
|
(59,587
|
)
|
|
(51,803
|
)
|
15
|
|
||
|
Unallocated CSS
|
$
|
12,547
|
|
|
10,592
|
|
18
|
%
|
|
Total CSS costs increased
16%
in the
first quarter
primarily reflecting investments in technology and higher compensation-related costs. Unallocated CSS
increased
to
$13 million
in the
first quarter
.
49
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
FINANCIAL RESOURCES AND LIQUIDITY
Cash Flows
The following is a summary of our cash flows from continuing operations:
|
|
Three months ended March 31,
|
|||||
|
|
2019
|
2018
|
||||
|
|
(In thousands)
|
|||||
|
Net cash provided by (used in):
|
||||||
|
Operating activities
|
$
|
485,330
|
|
336,850
|
|
|
|
Financing activities
|
434,288
|
|
229,603
|
|
||
|
Investing activities
|
(923,244
|
)
|
(572,788
|
)
|
||
|
Effect of exchange rates on cash, cash equivalents, and restricted cash
|
(1,551
|
)
|
3,519
|
|
||
|
Net change in cash, cash equivalents, and restricted cash
|
$
|
(5,177
|
)
|
(2,816
|
)
|
|
Cash provided by operating activities
increased
to
$485 million
in the
three months ended March 31, 2019
, compared with
$337 million
in
2018
, reflecting higher earnings excluding non-cash items, primarily depreciation and deferred tax expense. Cash provided by financing activities
increased
to
$434 million
in the
three months ended March 31, 2019
, compared with
$230 million
in 2018, due to higher borrowing needs. Cash used in investing activities
increased
to
$923 million
in the
three months ended March 31, 2019
, compared with
$573 million
in
2018
, primarily due to increased capital expenditures.
The following table shows our free cash flow computation:
|
|
Three months ended March 31,
|
|||||
|
|
2019
|
2018
|
||||
|
|
(In thousands)
|
|||||
|
Net cash provided by operating activities from continuing operations
|
485,330
|
|
|
336,850
|
|
|
|
Sales of revenue earning equipment
(1)
|
101,549
|
|
|
89,023
|
|
|
|
Sales of operating property and equipment
(1)
|
1,918
|
|
|
933
|
|
|
|
Total cash generated
(2)
|
588,797
|
|
|
426,806
|
|
|
|
Purchases of property and revenue earning equipment
(1)
|
(1,026,711
|
)
|
|
(662,744
|
)
|
|
|
Free cash flow
(2)
|
$
|
(437,914
|
)
|
|
(235,938
|
)
|
|
Memo:
|
||||||
|
Net cash provided by financing activities
|
$
|
434,288
|
|
229,603
|
|
|
|
Net cash used in investing activities
|
$
|
(923,244
|
)
|
(572,788
|
)
|
|
———————————
|
(1)
|
Included in cash flows from investing activities.
|
|
(2)
|
Non-GAAP financial measures. Reconciliations of net cash provided by operating activities to total cash generated and to free cash flow are set forth in this table. Refer to the “Non-GAAP Financial Measures” section of this MD&A for the reasons why management believes these measures are important to investors.
|
50
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The following table provides a summary of capital expenditures:
|
|
Three months ended March 31,
|
|||||
|
|
2019
|
2018
|
||||
|
|
(In thousands)
|
|||||
|
Revenue earning equipment:
|
||||||
|
ChoiceLease
|
$
|
817,027
|
|
418,255
|
|
|
|
Commercial rental
|
256,671
|
|
255,507
|
|
||
|
1,073,698
|
|
673,762
|
|
|||
|
Operating property and equipment
|
40,066
|
|
37,158
|
|
||
|
Total capital expenditures
|
1,113,764
|
|
|
710,920
|
|
|
|
Changes in accounts payable related to purchases of revenue earning equipment
|
(87,053
|
)
|
(48,176
|
)
|
||
|
Cash paid for purchases of property and revenue earning equipment
|
$
|
1,026,711
|
|
|
662,744
|
|
Capital expenditures
increased
57%
to
$1.11 billion
in the
three months ended March 31, 2019
, reflecting planned higher investments in the ChoiceLease fleet. We expect full-year
2019
capital expenditures to be approximately
$3.6 billion
. We expect to fund
2019
capital expenditures primarily with internally generated funds and additional debt financing.
Financing and Other Funding Transactions
We utilize external capital primarily to support working capital needs and growth in our asset-based product lines. The variety of debt financing alternatives typically available to fund our capital needs include commercial paper, long-term and medium-term public and private debt, asset-backed securities, bank term loans, leasing arrangements and bank credit facilities. Our principal sources of financing are issuances of commercial paper and medium-term notes.
Our ability to access unsecured debt in the capital markets is impacted by both our short-term and long-term debt ratings. These ratings are intended to provide guidance to investors in determining the credit risk associated with particular Ryder securities based on current information obtained by the rating agencies from us or from other sources. Lower ratings generally result in higher borrowing costs, as well as reduced access to unsecured capital markets. A significant downgrade of our short-term debt ratings would impair our ability to issue commercial paper and likely require us to rely on alternative funding sources. A significant downgrade would not affect our ability to borrow amounts under our revolving credit facility described below, assuming ongoing compliance with the terms and conditions of the credit facility.
Our debt ratings and rating outlooks at
March 31, 2019
, were as follows:
|
Rating Summary
|
|||||
|
|
Short-Term
|
Long-Term
|
Outlook
|
||
|
Fitch Ratings
|
F-2
|
A-
|
|
Stable
|
|
|
Standard & Poor’s Ratings Services
|
A-2
|
BBB+
|
|
Stable
|
|
|
Moody’s Investors Service
|
P-2
|
Baa1
|
|
Stable
|
|
|
DBRS
|
R-1 (Low)
|
A (Low)
|
Stable
|
||
Cash and cash equivalents totaled
$63 million
as of
March 31, 2019
. As of
March 31, 2019
, approximately
$15 million
was held outside the U.S. and is available to fund operations and other growth of non-U.S. subsidiaries. If we decide to repatriate cash and cash equivalents held outside the U.S., we may be subject to additional income taxes and foreign withholding taxes. However, our intent is to permanently reinvest these foreign amounts outside the U.S. and our current plans do not demonstrate a need to repatriate these foreign amounts to fund our U.S. operations.
We believe that our operating cash flows, together with our access to the public unsecured bond market, commercial paper market and other available debt financing, will be adequate to meet our operating, investing and financing needs in the foreseeable future. However, there can be no assurance that unanticipated volatility and disruption in the public unsecured debt market or the commercial paper market would not impair our ability to access these markets on terms commercially acceptable to us or at all. If we cease to have access to public bonds, commercial paper and other sources of unsecured borrowings, we
51
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
would meet our liquidity needs by drawing upon contractually committed lending agreements and/or by seeking other funding sources.
As of
March 31, 2019
, we had the following amounts available to fund operations under the following facilities:
|
|
(In millions)
|
|
Global revolving credit facility
|
$572
|
|
Trade receivables program
|
$225
|
See
Note 7
, "
Debt
", in the Notes to Consolidated Condensed Financial Statements for a discussion of these debt facilities.
The following table shows the movements in our debt balance:
|
Three months ended March 31,
|
||||||
|
2019
|
2018
|
|||||
|
(In thousands)
|
||||||
|
Debt balance at January 1
|
$
|
6,649,277
|
|
5,440,006
|
|
|
|
Cash-related changes in debt:
|
||||||
|
Net change in commercial paper borrowings and revolving credit facilities
|
158,258
|
|
237,960
|
|
||
|
Proceeds from issuance of medium-term notes
|
596,274
|
|
446,500
|
|
||
|
Proceeds from issuance of other debt instruments
|
203,026
|
|
—
|
|
||
|
Retirement of medium term notes
|
(250,000
|
)
|
(350,000
|
)
|
||
|
Other debt repaid
|
(228,411
|
)
|
(64,299
|
)
|
||
|
Debt issuance costs paid
|
(1,006
|
)
|
(999
|
)
|
||
|
478,141
|
|
269,162
|
|
|||
|
Non-cash changes in debt:
|
||||||
|
Fair value adjustment on notes subject to hedging
|
3,870
|
|
(7,364
|
)
|
||
|
Addition of finance lease obligations
|
2,026
|
|
2,259
|
|
||
|
Changes in foreign currency exchange rates and other non-cash items
|
9,855
|
|
4,256
|
|
||
|
Total changes in debt
|
493,892
|
|
268,313
|
|
||
|
Debt balance at March 31
|
$
|
7,143,169
|
|
5,708,319
|
|
|
In accordance with our funding philosophy, we attempt to align the aggregate average remaining re-pricing life of our debt with the aggregate average remaining re-pricing life of our assets. We utilize both fixed-rate and variable-rate debt to achieve this alignment and generally target a mix of 20% - 40% variable-rate debt as a percentage of total debt outstanding. The variable-rate portion of our total debt (including notional value of swap agreements) was
25%
and
28%
as of
March 31, 2019
and
December 31, 2018
.
Refer to
Note 7
, “
Debt
,” in the Notes to Consolidated Condensed Financial Statements for further discussion around the global revolving credit facility, the trade receivables program, the issuance of medium-term notes under our shelf registration statement, asset-backed financing obligations and debt maturities.
Ryder’s debt to equity ratios were
278%
and
262%
as of
March 31, 2019
and
December 31, 2018
, respectively. The debt to equity ratio represents total debt divided by total equity.
52
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Pension Information
The funded status of our pension plans is dependent upon many factors, including returns on invested assets and the level of certain market interest rates. We review pension assumptions regularly and we may, from time to time, make voluntary contributions to our pension plans, which exceed the amounts required by statute. In
2019
, the expected total contributions to our pension plans are approximately $
34 million
. During the
three months ended March 31, 2019
, we contributed
$8 million
to our pension plans. Changes in interest rates and the market value of the securities held by the plans during
2019
could materially change, positively or negatively, the funded status of the plans and affect the level of pension expense and contributions in
2019
and beyond. See
Note 13
, “
Employee Benefit Plans
,” in the Notes to Consolidated Condensed Financial Statements for additional information.
Share Repurchases and Cash Dividends
See
Note 9
, “
Share Repurchase Programs
,” in the Notes to Consolidated Condensed Financial Statements for a discussion of share repurchases.
In February
2019
and 2018, our Board of Directors declared quarterly cash dividends of
$0.54
and $0.52 per share of common stock, respectively. The dividends were paid during the first quarter of each respective year.
RECENT ACCOUNTING PRONOUNCEMENTS
See
Note 2
, “
Recent Accounting Pronouncements
," in the Notes to Consolidated Condensed Financial Statements for a discussion of recent accounting pronouncements.
53
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
NON-GAAP FINANCIAL MEASURES
This Quarterly Report on Form 10-Q includes information extracted from consolidated condensed financial information but not required by generally accepted accounting principles (GAAP) to be presented in the financial statements. Certain elements of this information are considered “non-GAAP financial measures” as defined by SEC rules. Non-GAAP financial measures should be considered in addition to, but not as a substitute for or superior to, other measures of financial performance or liquidity prepared in accordance with GAAP. Also, our non-GAAP financial measures may not be comparable to financial measures used by other companies. We provide a reconciliation of each of these non-GAAP financial measures to the most comparable GAAP measure in this non-GAAP financial measures section. We also provide the reasons why management believes each non-GAAP financial measure is useful to investors in this section.
Specifically, we refer to the following non-GAAP financial measures in this Form 10-Q:
|
Non-GAAP Financial Measure
|
Comparable GAAP Measure
|
|
Operating Revenue Measures
:
|
|
|
Operating Revenue
|
Total Revenue
|
|
FMS Operating Revenue
|
FMS Total Revenue
|
|
DTS Operating Revenue
|
DTS Total Revenue
|
|
SCS Operating Revenue
|
SCS Total Revenue
|
|
FMS EBT as a % of FMS Operating Revenue
|
FMS EBT as a % of FMS Total Revenue
|
|
DTS EBT as a % of DTS Operating Revenue
|
DTS EBT as a % of DTS Total Revenue
|
|
SCS EBT as a % of SCS Operating Revenue
|
SCS EBT as a % of SCS Total Revenue
|
|
Comparable Earnings Measures
:
|
|
|
Comparable Earnings Before Income Tax
|
Earnings Before Income Tax
|
|
Comparable Earnings
|
Earnings from Continuing Operations
|
|
Comparable EPS
|
EPS from Continuing Operations
|
|
Cash Flow Measures
:
|
|
|
Total Cash Generated and Free Cash Flow
|
Cash Provided by Operating Activities
|
54
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Set forth in the table below is an overview of each non-GAAP financial measure and why management believes that the presentation of each non-GAAP financial measure provides useful information to investors. See reconciliations for each of these measures following this table.
|
Operating Revenue Measures
:
|
|||
|
Operating Revenue
FMS Operating Revenue
DTS Operating Revenue
SCS Operating Revenue
FMS EBT as a % of FMS Operating Revenue
DTS EBT as a % of DTS Operating Revenue
SCS EBT as a % of SCS Operating Revenue
|
Operating revenue is defined as total revenue for Ryder System, Inc. or each business segment (FMS, DTS and SCS), respectively, excluding any (1) fuel and (2) subcontracted transportation. We believe operating revenue provides useful information to investors as we use it to evaluate the operating performance of our core businesses and as a measure of sales activity at the consolidated level for Ryder System, Inc., as well as for each of our business segments. We also use segment EBT as a percentage of segment operating revenue for each business segment for the same reason. Note: FMS EBT, DTS EBT and SCS EBT, our primary measures of segment performance, are not non-GAAP measures.
Fuel
: We exclude FMS, DTS and SCS fuel from the calculation of our operating revenue measures, as fuel is an ancillary service that we provide our customers, which is impacted by fluctuations in market fuel prices, and the costs are largely a pass-through to our customers, resulting in minimal changes in our profitability during periods of steady market fuel prices. However, profitability may be positively or negatively impacted by rapid changes in market fuel prices during a short period of time, as customer pricing for fuel services is established based on trailing market fuel costs.
Subcontracted transportation
: We also exclude subcontracted transportation from the calculation of our operating revenue measures, as these services are also typically a pass-through to our customers and, therefore, fluctuations result in minimal changes to our profitability. While our DTS and SCS business segments subcontract certain transportation services to third party providers, our FMS business segment does not engage in subcontracted transportation and, therefore, this item is not applicable to FMS.
|
||
|
Comparable Earnings Measures
:
|
|||
|
Comparable earnings before income tax (EBT)
Comparable earnings
Comparable earnings per diluted common share (EPS)
|
Comparable EBT, comparable earnings and comparable EPS are defined, respectively, as GAAP EBT, earnings and EPS, all from continuing operations, excluding (1) non-operating pension costs and (2) any other significant items that are not representative of our business operations. We believe these comparable earnings measures provide useful information to investors and allow for better year-over-year comparison of operating performance.
Non-Operating Pension Costs
: Our comparable earnings measures exclude non-operating pension costs, which include the amortization of net actuarial loss and prior service cost, interest cost and expected return on plan assets components of pension and postretirement benefit costs. We exclude non-operating pension costs because we consider these to be impacted by financial market performance and outside the operational performance of our business.
Other Significant Items
: Our comparable earnings measures also exclude other significant items that are not representative of our business operations as detailed in the reconciliation table below - page 57. These other significant items vary from period to period and, in some periods, there may be no such significant items.
Calculation of comparable tax rate
: The comparable provision for income taxes is computed using the same methodology as the GAAP provision for income taxes. Income tax effects of non-GAAP adjustments are calculated based on the statutory tax rates of the jurisdictions to which the non-GAAP adjustments relate.
|
||
55
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
|
Cash Flow Measures
:
|
|||
|
Total Cash Generated
Free Cash Flow
|
We consider total cash generated and free cash flow to be important measures of comparative operating performance, as our principal sources of operating liquidity are cash from operations and proceeds from the sale of revenue earning equipment.
Total Cash Generated
: Total cash generated is defined as the sum of (1) net cash provided by operating activities, (2) net cash provided by the sale of revenue earning equipment, (3) net cash provided by the sale of operating property and equipment and (4) other cash inflows from investing activities. We believe total cash generated is an important measure of total cash flows generated from our ongoing business activities.
Free Cash Flow
: We refer to the net amount of cash generated from operating activities and investing activities (excluding changes in restricted cash and acquisitions) from continuing operations as “free cash flow”. We calculate free cash flow as the sum of (1) net cash provided by operating activities, (2) net cash provided by the sale of revenue earning equipment, (3) net cash provided by the sale of operating property and equipment, (4) other cash inflows from investing activities, less (5) purchases of property and revenue earning equipment. We believe free cash flow provides investors with an important perspective on the cash available for debt service and for shareholders, after making capital investments required to support ongoing business operations. Our calculation of free cash flow may be different from the calculation used by other companies and, therefore, comparability may be limited.
|
||
56
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The following table provides a reconciliation of GAAP earnings before taxes (EBT), earnings, and earnings per diluted share (EPS) from continuing operations to comparable EBT, comparable earnings and comparable EPS from continuing operations for the
three months ended March 31, 2019
and
2018
. Certain items included in EBT, earnings and diluted EPS from continuing operations have been excluded from our comparable EBT, comparable earnings and comparable diluted EPS measures. The following table lists a summary of these items, which are discussed in more detail throughout our MD&A and within the Notes to Consolidated Condensed Financial Statements:
|
EBT
|
Earnings
|
Diluted EPS
|
||||||||||||||||||
|
2019
|
2018
|
2019
|
2018
|
2019
|
2018
|
|||||||||||||||
|
Three months ended March 31,
|
(In thousands, except per share amounts)
|
|||||||||||||||||||
|
EBT/Earnings/EPS
|
$
|
68,151
|
|
52,699
|
|
$
|
45,890
|
|
37,313
|
|
$
|
0.87
|
|
0.70
|
|
|||||
|
Non-operating pension costs
|
6,462
|
|
1,222
|
|
4,562
|
|
598
|
|
0.09
|
|
0.01
|
|
||||||||
|
ERP implementation costs
(1)
|
3,590
|
|
—
|
|
2,660
|
|
—
|
|
0.05
|
|
—
|
|
||||||||
|
Restructuring and other, net
(1)
|
2,588
|
|
(392
|
)
|
1,842
|
|
(423
|
)
|
0.04
|
|
—
|
|
||||||||
|
Goodwill impairment
(1)
|
—
|
|
15,513
|
|
—
|
|
15,513
|
|
—
|
|
0.29
|
|
||||||||
|
Tax adjustments
(2)
|
—
|
|
—
|
|
3,508
|
|
(1,902
|
)
|
0.06
|
|
(0.04
|
)
|
||||||||
|
Comparable EBT/Earnings/EPS
|
$
|
80,791
|
|
69,042
|
|
$
|
58,462
|
|
51,099
|
|
$
|
1.11
|
|
0.96
|
|
|||||
(1) Refer to
Note 14
, “
Other Items Impacting Comparability
,” in the Notes to Consolidated Condensed Financial Statements for additional information.
(2) In the first quarter of 2019, we recorded a
$5 million
charge to our tax provision for income taxes due to expiring state net operating losses, never
previously benefited in the tax rate, offset by a
$1 million
benefit to our provision due to a tax law change. In the first quarter of 2018, we determined that certain uncertain tax positions should have been reversed in prior periods when the statutes of limitations expired and recorded a
$3 million
benefit to our provision for income taxes. In the first quarter of 2018, we also recorded a
$1 million
deferred tax liability adjustment related to the prior provisional estimate from Tax Reform.
The following table provides a reconciliation of the provision for income taxes to the comparable provision for income taxes:
|
Three months ended March 31,
|
||||||
|
2019
|
2018
|
|||||
|
(Dollars in thousands)
|
||||||
|
Provision for income taxes
(1)
|
$
|
(22,261
|
)
|
(15,386
|
)
|
|
|
Income tax effects of non-GAAP adjustments
(1)
|
(68
|
)
|
(2,557
|
)
|
||
|
Comparable provision for income taxes
(1)
|
$
|
(22,329
|
)
|
(17,943
|
)
|
|
————————————
|
(1)
|
The comparable provision for income taxes is computed using the same methodology as the GAAP provision of income taxes. Income tax effects of non-GAAP adjustments are calculated based on statutory tax rates of the jurisdictions to which the non-GAAP adjustments related.
|
57
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The following table provides a numerical reconciliation of net cash provided by operating activities to total cash generated and free cash flow:
|
|
Three months ended March 31,
|
|||||
|
|
2019
|
2018
|
||||
|
|
(In thousands)
|
|||||
|
Net cash provided by operating activities from continuing operations
|
$
|
485,330
|
|
336,850
|
|
|
|
Sales of revenue earning equipment
(1)
|
101,549
|
|
89,023
|
|
||
|
Sales of operating property and equipment
(1)
|
1,918
|
|
933
|
|
||
|
Total cash generated
|
588,797
|
|
426,806
|
|
||
|
Purchases of property and revenue earning equipment
(1)
|
(1,026,711
|
)
|
(662,744
|
)
|
||
|
Free cash flow
|
$
|
(437,914
|
)
|
(235,938
|
)
|
|
|
Memo:
|
||||||
|
Net cash provided by financing activities
|
$
|
434,288
|
|
229,603
|
|
|
|
Net cash used in investing activities
|
(923,244
|
)
|
(572,788
|
)
|
||
————————————
|
(1)
|
Included in cash flows from investing activities.
|
The following table provides a reconciliation of total revenue to operating revenue:
|
|
Three months ended March 31,
|
|||||
|
|
2019
|
2018
|
||||
|
|
(In thousands)
|
|||||
|
Total revenue
|
$
|
2,180,327
|
|
1,904,205
|
|
|
|
Fuel
|
(216,543
|
)
|
(209,961
|
)
|
||
|
Subcontracted transportation
|
(204,777
|
)
|
(150,577
|
)
|
||
|
Operating revenue
|
$
|
1,759,007
|
|
1,543,667
|
|
|
The following table provides a reconciliation of FMS total revenue to FMS operating revenue:
|
|
Three months ended March 31,
|
|||||
|
|
2019
|
2018
|
||||
|
|
(In thousands)
|
|||||
|
FMS total revenue
|
$
|
1,351,599
|
|
1,243,050
|
|
|
|
Fuel
(1)
|
(207,866
|
)
|
(203,807
|
)
|
||
|
FMS operating revenue
|
$
|
1,143,733
|
|
1,039,243
|
|
|
|
FMS EBT
|
$
|
60,911
|
|
54,343
|
|
|
|
FMS EBT as a % of FMS total revenue
|
4.5
|
%
|
4.4
|
%
|
||
|
FMS EBT as a % of FMS operating revenue
|
5.3
|
%
|
5.2
|
%
|
||
————————————
|
(1)
|
Includes intercompany fuel sales from FMS to DTS and SCS.
|
58
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The following table provides a reconciliation of DTS total revenue to DTS operating revenue:
|
|
Three months ended March 31,
|
|||||
|
|
2019
|
2018
|
||||
|
|
(In thousands)
|
|||||
|
DTS total revenue
|
$
|
349,621
|
|
298,970
|
|
|
|
Subcontracted transportation
|
(76,782
|
)
|
(63,716
|
)
|
||
|
Fuel
|
(37,219
|
)
|
(33,849
|
)
|
||
|
DTS operating revenue
|
$
|
235,620
|
|
201,405
|
|
|
|
DTS EBT
|
$
|
17,412
|
|
13,052
|
|
|
|
DTS EBT as a % of DTS total revenue
|
5.0
|
%
|
4.4
|
%
|
||
|
DTS EBT as a % of DTS operating revenue
|
7.4
|
%
|
6.5
|
%
|
||
The following table provides a reconciliation of SCS total revenue to SCS operating revenue:
|
|
Three months ended March 31,
|
|||||
|
|
2019
|
2018
|
||||
|
|
(In thousands)
|
|||||
|
SCS total revenue
|
$
|
635,671
|
|
494,707
|
|
|
|
Subcontracted transportation
|
(127,995
|
)
|
(86,861
|
)
|
||
|
Fuel
|
(30,587
|
)
|
(25,040
|
)
|
||
|
SCS operating revenue
|
$
|
477,089
|
|
382,806
|
|
|
|
SCS EBT
|
$
|
32,317
|
|
25,511
|
|
|
|
SCS EBT as a % of SCS total revenue
|
5.1
|
%
|
5.2
|
%
|
||
|
SCS EBT as a % of SCS operating revenue
|
6.8
|
%
|
6.7
|
%
|
||
59
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
FORWARD-LOOKING STATEMENTS
Forward-looking statements (within the meaning of the Federal Private Securities Litigation Reform Act of 1995) are statements that relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends concerning matters that are not historical facts. These statements are often preceded by or include the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will,” “may,” “could,” “should” or similar expressions. This Quarterly Report on Form 10-Q contains forward-looking statements including, but not limited to, statements regarding:
|
•
|
our expectations in our FMS business segment regarding anticipated ChoiceLease revenue and fleet growth and commercial rental revenue and demand;
|
|
•
|
our expectations in our DTS and SCS business segments regarding anticipated operating revenue trends, sales activity and growth rates;
|
|
•
|
our expectations of the long-term residual values of revenue earning equipment;
|
|
•
|
the anticipated increase in NLE vehicles in inventory through the end of the year;
|
|
•
|
the expected pricing and inventory levels for used vehicles;
|
|
•
|
our expectations of operating cash flow and capital expenditures through the end of
2019
;
|
|
•
|
the adequacy of our accounting estimates and reserves for pension expense, compensation expense and employee benefit plan obligations, depreciation and residual value guarantees and income taxes;
|
|
•
|
the anticipated timing of payment of restructuring liabilities;
|
|
•
|
the adequacy of our fair value estimates of employee incentive awards under our share-based compensation plans, publicly traded debt and other debt;
|
|
•
|
our beliefs regarding the default risk of our direct financing lease receivables;
|
|
•
|
our ability to fund all of our operating, investing and financial needs for the foreseeable future through internally generated funds and outside funding sources;
|
|
•
|
the anticipated impact of fuel price fluctuations;
|
|
•
|
our expectations as to return on pension plan assets, future pension expense and estimated contributions;
|
|
•
|
our expectations regarding the scope, anticipated outcomes and the adequacy of our loss provisions with respect to certain claims, proceedings and lawsuits;
|
|
•
|
our expectations about the need to repatriate foreign cash to the U.S.;
|
|
•
|
our ability to access commercial paper and other available debt financing in the capital markets;
|
|
•
|
our expectations regarding the future use and availability of funding sources; and
|
|
•
|
the anticipated impact of recent accounting pronouncements.
|
60
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
These statements, as well as other forward-looking statements contained in this Quarterly Report, are based on our current plans and expectations and are subject to risks, uncertainties and assumptions. We caution readers that certain important factors could cause actual results and events to differ significantly from those expressed in any forward-looking statements. These risk factors include, but are not limited to, the following:
|
•
|
Market Conditions:
|
|
|
Ÿ
|
|
Changes in general economic and financial conditions in the U.S. and worldwide leading to decreased demand for our services, lower profit margins, increased levels of bad debt and reduced access to credit and financial markets
|
|
|
Ÿ
|
|
Decreases in freight demand which would impact both our transactional and variable-based contractual business
|
|
|
Ÿ
|
|
Changes in our customers’ operations, financial condition or business environment that may limit their demand for, or ability to purchase, our services
|
|
|
Ÿ
|
|
Decreases in market demand affecting the commercial rental market and used vehicle sales as well as global economic conditions
|
|
|
Ÿ
|
|
Volatility in customer volumes and shifting customer demand in the industries serviced by our SCS business
|
|
|
Ÿ
|
|
Changes in current financial, tax or regulatory requirements that could negatively impact our financial results
|
|
•
|
Competition:
|
|
|
Ÿ
|
|
Advances in technology may impact demand for our services or may require increased investments to remain competitive, and our customers may not be willing to accept higher prices to cover the cost of these investments
|
|
|
Ÿ
|
|
Competition from other service providers, some of which have greater capital resources or lower capital costs, or from our customers, who may choose to provide services themselves
|
|
|
Ÿ
|
|
Continued consolidation in the markets in which we operate which may create large competitors with greater financial resources
|
|
|
Ÿ
|
|
Our inability to maintain current pricing levels due to economic conditions, demand for services, customer acceptance or competition
|
61
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
|
•
|
Profitability:
|
|
|
Ÿ
|
|
Our inability to obtain adequate profit margins for our services
|
|
|
Ÿ
|
|
Lower than expected sales volumes or customer retention levels
|
|
Ÿ
|
Decreases in commercial rental fleet utilization and pricing
|
||
|
|
Ÿ
|
|
Lower than expected used vehicle sales pricing levels and fluctuations in the anticipated proportion of retail versus wholesale sales
|
|
|
Ÿ
|
|
Loss of key customers in our DTS and SCS business segments
|
|
|
Ÿ
|
|
Our inability to adapt our product offerings to meet changing consumer preferences on a cost-effective basis
|
|
|
Ÿ
|
|
The inability of our legacy information technology systems to provide timely access to data
|
|
|
Ÿ
|
Sudden changes in fuel prices and fuel shortages
|
|
|
|
Ÿ
|
|
Higher prices for vehicles, diesel engines and fuel as a result of new environmental standards
|
|
Ÿ
|
Higher than expected maintenance costs and lower than expected benefits associated with our maintenance initiatives
|
||
|
|
Ÿ
|
|
Our inability to successfully execute our asset management initiatives, maintain our fleet at normalized levels and right-size our fleet in line with demand
|
|
|
Ÿ
|
|
Our inability to redeploy vehicles and prepare vehicles for sale in a cost-efficient manner
|
|
|
Ÿ
|
|
Our key assumptions and pricing structure of our DTS and SCS contracts prove to be inaccurate
|
|
|
Ÿ
|
|
Increased unionizing, labor strikes and work stoppages
|
|
|
Ÿ
|
|
Difficulties in attracting and retaining drivers and technicians due to driver and technician shortages, which may result in higher costs to procure drivers and technicians and higher turnover rates affecting our customers
|
|
|
Ÿ
|
|
Our inability to manage our cost structure
|
|
|
Ÿ
|
|
Our inability to limit our exposure for customer claims
|
|
|
Ÿ
|
|
Unfavorable or unanticipated outcomes in legal or regulatory proceedings or uncertain positions
|
|
|
Ÿ
|
|
Business interruptions or expenditures due to severe weather or natural occurrences
|
62
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
|
•
|
Financing Concerns:
|
|
|
Ÿ
|
|
Higher borrowing costs and possible decreases in available funding sources
|
|
|
Ÿ
|
|
Unanticipated interest rate and currency exchange rate fluctuations
|
|
|
Ÿ
|
|
Negative funding status of our pension plans caused by lower than expected returns on invested assets and unanticipated changes in interest rates
|
|
|
Ÿ
|
|
Withdrawal liability as a result of our participation in multi-employer plans
|
|
|
Ÿ
|
|
Instability in U.S. and worldwide credit markets, resulting in higher borrowing costs and/or reduced access to credit
|
|
•
|
Accounting Matters:
|
|
|
Ÿ
|
|
Impact of unusual items resulting from ongoing evaluations of business strategies, asset or expense valuations, acquisitions, divestitures and our organizational structure
|
|
|
Ÿ
|
|
Reductions in residual values or useful lives of revenue earning equipment and changes to depreciation policy
|
|
|
Ÿ
|
|
Increases in compensation levels, retirement rate and mortality resulting in higher pension expense; regulatory changes affecting pension estimates, accruals and expenses
|
|
|
Ÿ
|
|
Increases in health care costs resulting in higher insurance costs
|
|
|
Ÿ
|
|
Changes in accounting rules, assumptions and accruals
|
|
|
Ÿ
|
|
Impact of actual insurance claim and settlement activity compared to historical loss development factors used to project future development
|
|
•
|
Other risks detailed from time to time in our SEC filings including our 2018 Annual Report on Form 10-K.
|
New risk factors emerge from time to time and it is not possible for management to predict all such risk factors or to assess the impact of such risk factors on our business. As a result, no assurance can be given as to our future results or achievements. You should not place undue reliance on the forward-looking statements contained herein, which speak only as of the date of this Quarterly Report. We do not intend, or assume any obligation, to update or revise any forward-looking statements contained in this Quarterly Report, whether as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to Ryder’s exposures to market risks since
December 31, 2018
. Please refer to the
2018
Annual Report on Form 10-K for a complete discussion of Ryder’s exposures to market risks.
63
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the
first quarter of 2019
, we carried out an evaluation, under the supervision and with the participation of management, including Ryder’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Ryder’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of the end of the
first quarter of 2019
, Ryder’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) were effective.
Changes in Internal Controls over Financial Reporting
Beginning January 1, 2019, we adopted ASU No. 2016-02, “Leases (Topic 842)” and related amendments (collectively, the “new lease standard”). As a result of our adoption of the new lease standard, we implemented significant new lease accounting systems, processes and internal controls over lease accounting to assist us in the application of the new lease standard. During the
three months ended March 31, 2019
, there were no other changes in Ryder’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect such internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 21, 2019, contains a discussion of our risk factors. Our operations could also be affected by additional risk factors that are not presently known to us or by factors that we currently consider immaterial to our business. To our knowledge and except to the extent additional factual information disclosed in this Quarterly Report on Form 10-Q relates to such risk factors, there have been no material changes in the risk factors described in "Item 1A. Risk Factors" in our Form 10-K for the year ended December 31, 2018, filed with the SEC on February 21, 2019.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information with respect to purchases we made of our common stock during the three months ended
March 31, 2019
:
|
Total Number
of Shares
Purchased
(1)
|
Average Price
Paid per Share
|
Total Number of
Shares
Purchased as
Part of Publicly
Announced
Programs
|
Maximum
Number of
Shares That May
Yet Be
Purchased
Under the
Anti-Dilutive
Program
(2)
|
|||||||||
|
January 1 through January 31, 2019
|
502
|
|
$
|
50.02
|
|
—
|
|
1,075,181
|
|
|||
|
February 1 through February 28, 2019
|
170,574
|
|
61.83
|
|
112,922
|
|
962,259
|
|
||||
|
March 1 through March 31, 2019
|
113,100
|
|
62.16
|
|
112,922
|
|
849,337
|
|
||||
|
Total
|
284,176
|
|
$
|
61.94
|
|
225,844
|
|
|||||
————————————
|
(1)
|
During the
three months ended March 31, 2019
, we purchased an aggregate of
58,332
shares of our common stock in employee-related transactions. Employee-related transactions may include: (i) shares of common stock withheld as payment for the exercise price of options exercised or to satisfy the employees' tax withholding liability associated with our share-based compensation programs and (ii) open-market purchases by the trustee of Ryder’s deferred compensation plans relating to investments by employees in our stock, one of the investment options available under the plans.
|
|
(2)
|
In December 2017, our Board of Directors authorized a share repurchase program intended to mitigate the dilutive impact of shares issued under our employee stock plans (the program). Under the program, management is authorized to repurchase up to 1.5 million shares of common stock, the sum of which will not exceed the number of shares issued to employees under the Company’s employee stock plans from December 31, 2017 to December 13, 2019. Share repurchases of common stock are made periodically in open-market transactions and are subject to market conditions, legal requirements and other factors. Management may establish prearranged written plans for the Company under Rule 10b5-1 of the Securities Exchange Act of 1934 as part of the program, which allow for share repurchases during Ryder’s quarterly blackout periods as set forth in the trading plan.
|
64
ITEM 6. EXHIBITS
|
Exhibit Number
|
Description
|
|
|
3.1
|
|
|
|
3.2
|
||
|
10.1
|
||
|
10.2
|
|
|
|
10.3
|
||
|
10.4
|
||
|
10.5
|
||
|
10.6
|
||
|
10.7
|
||
|
10.8
|
||
|
10.9
|
||
|
31.1
|
||
|
31.2
|
||
|
32
|
||
65
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
RYDER SYSTEM, INC.
|
||
|
(Registrant)
|
||
|
Date: May 8, 2019
|
By:
|
/s/ Scott Parker
|
|
Scott Parker
|
||
|
Executive Vice President and Chief Financial Officer
|
||
|
(Principal Financial Officer)
|
||
|
Date: May 8, 2019
|
By:
|
/s/ Frank Mullen
|
|
Frank Mullen
|
||
|
Vice President and Controller
|
||
|
(Principal Accounting Officer)
|
||
66
TABLE OF CONTENTS
Part I. Financial InformationprintItem 1. Financial StatementsprintItem 2. Management S Discussion and Analysis Of Financial Conditionand Results Of OperationsprintItem 2. Management S Discussion and Analysis Of Financial ConditionprintItem 2. Management S Discussion and Analysis Of Financial Conditionand Results Of Operations - (continued)printItem 3. Quantitative and Qualitative Disclosures About Market RiskprintItem 4. Controls and ProceduresprintPart II. Other InformationprintItem 1A. Risk FactorsprintItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsprintItem 6. Exhibitsprint