UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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þ☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20172019
OR
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¨☐ | 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)
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| Florida | | 59-0739250 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
11690 N.W. 105th105th Street Miami, Florida 33178
| | (305) | 500-3726 |
| Miami, | Florida | 33178 | |
| (Address of principal executive offices, including zip code) | | (Telephone number, including area code) |
| Securities registered pursuant to Section 12(b) of the Act: |
| Title of each class | Trading symbol(s) | Name of exchange on which registered |
| Ryder System, Inc. Common Stock ($0.50 par value) | R | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES þNO ¨Yes☑No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨NO þYes ☐No☑
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 þNO ¨Yes☑No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). YES þNO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K þYes☑No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filerþ | ☑ | Accelerated filer¨ | ☐ | Non-accelerated filer¨ | ☐ | Smaller reporting company¨ | ☐ | 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 Act). YES ¨NO þYes ☐No ☑
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant computed by reference to the price at which the common equity was sold at June 30, 20172019 was $3,774,013,558.$3,050,341,216. The number of shares of Ryder System, Inc. Common Stock ($0.50 par value per share) outstanding at January 31, 20182020 was 52,977,548.53,271,759. |
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| Documents Incorporated by Reference into this Report | | Part of Form 10-K into which Document is Incorporated |
Ryder System, Inc. 20182020 Proxy Statement | | Part III |
RYDER SYSTEM, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
OVERVIEW
Ryder System, Inc. (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 are reportingreport our financial performance based on three business segments: (1) Fleet Management Solutions (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) Supply Chain Solutions (SCS), which provides integrated logistics solutions, including distribution, management, dedicated transportation and professional services in North America; and (3) Dedicated Transportation Solutions (DTS), which provides vehicles and drivers as part of a dedicatedturnkey transportation solutionsolutions in the U.S.; that includes dedicated vehicles, drivers and (3) Supply Chain Solutions (SCS), which provides comprehensive supply chain solutions including distributionengineering and transportation services in North America and Singapore.administrative support. Dedicated transportation services provided as part of an operationally integrated, multi-service, supply chain solution to SCS customers are primarily reported in the SCS business segment.
For financial information and other information relating to each of our business segments and about our geographic areas, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this report and Note 28, "Segment Reporting," in the Notes to Consolidated Financial Statements.
MISSION AND STRATEGY
Ryder's mission is to provide innovative fleet management and supply chain solutions that are reliable, safe and efficient, enabling our customers to deliver on their promises. We seek to deliver valuable solutions that will compel customers to outsource their fleet management and supply chain needs to us. Our primary strategy is to grow our fleet management and supply chain outsourcing services by targeting private fleetsthose companies not currently outsourcing their fleet-related services (FMS and DTS),logistics services as well as companies who have outsourced to other providers and key industries (SCS) withby offering innovative solutions, operational excellence, best in class talent and information technology. This strategy is supported by:
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offering innovative products, solutions and support services that will create and strengthen customer relationships;
delivering operational excellence through continuous productivity and process improvements;
attracting, developing and retaining the best talent; and
deploying technology that will enable growth while improving operational efficiencies.
INDUSTRY AND OPERATIONS
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| Fleet Management Solutions |
Value Proposition
Through our FMS business, we provide our customers with a variety of fleet solutions that are designed to improve their competitive position. By outsourcing these services to us, our customers can focus on their core business, improve their efficiency and productivity, and lower their costs. Our FMS product offering is comprised of longer-term full service leasing as well as leasing with flexible maintenance options; shorter-term commercial truck rental; contract or transactional maintenance services; and value-added fleet support services such as insurance, vehicle administration and fuel services. In addition, we provide our customers the ability to purchase a large selection of used trucks, tractors and trailers through our used vehicle sales program. FMS also provides vehicles and maintenance, fuel and other services for all vehicles used in our SCS and DTS and SCS solutions.businesses.
Market Trends
The U.S. commercial fleet market is estimated to include 8.39 million vehicles, of which 4.35 million vehicles are with privately heldowned by companies, 1.52 million vehicles are with for-hire carriers, 0.51 million vehicles are leased from banks or other financial institutions, and 0.81 million vehicles are in the lease and rental market(1). The 4.3 million vehiclescompanies that privately owned by companiesown their own fleets generally provide all or a portion of the transportation services for themselves rather than outsourcing those services to third parties such as Ryder. Several trends have been increasing the need for outsourcing: increased demand for efficiency and reliability; increased complexity and cost of buying and maintaining vehicles including technology, diagnostics, and training; labor issues including a shortage of qualified truck drivers and mechanics; as well as increased regulation and enforcement of safety requirements. Because of these trends, we believe the privately held fleets and the for-hire carriers will increasingly decide to outsource. Ryder also targets customers who are already outsourcing with other providers.
Similar trends apply to outsourcing in Canada, and theThe Canadian commercial fleet is estimated at 500,000 vehicles, of which approximately 17,00020,000 vehicles are in the lease and rental market(2). In the U.K., the commercial rental and lease market is estimated at 229,000235,000 units(3). The total lease and rental market in Ryder’s major markets totals over 1 million units. However, due to the trends described above, combined with our success in converting owners to outsourcing, the total market potential for Ryder is significantly higher.
Over the last several years, many key trends have been reshaping the transportation industry. We strongly believe these trends increase the value of our product offering. Companies that own, maintain and manage their own fleet of vehicles have put greater emphasis on the quality of their preventive maintenance and safety programs because of increased demand for efficiency and reliability. The maintenance and operation of commercial vehicles has become more complicated and expensive, requiring companies to spend a significant amount of time and money to keep up with new technology, diagnostics, retooling and training. Companies are also faced with labor issues, including a shortage of qualified truck drivers and mechanics. Increased regulation and active enforcement efforts by federal and state governments require more stringent and costly operational processes and oversight. Fluctuating energy prices and alternative fuel technologies make it difficult for businesses to predict and manage fleet costs. There has also been a tightening of capacity with respect to the U.S. trucking market. We believe these trends increase the value of our product offering and will increasingly lead privately held fleets and the for-hire carriers to decide to outsource.
Operations
For the year ended December 31, 2017In 2019, our global FMS business accounted for 58%56% of our consolidated revenue.revenue (excluding eliminations).
U.S. United States. Ryder was founded in the U.S. in 1933. Our FMS customers in the U.S. range from small businesses to large national enterprises operating in a wide variety of industries, the most significant of which are transportation and warehousing, food and beverage, housing, business and personal services, and industrial. At December 31, 20172019, we had 533524 operating locations, excluding ancillary storage locations, in 50 states and Puerto Rico. A location consists of a maintenance facility or “shop”.and serves multiple customers. Our maintenance facilities typically include a shop for preventive maintenance and repairs, a service island for fueling, safety inspections and preliminary maintenance checks, checks, offices for sales and other personnel, and in many cases, a commercial rental vehicle counter. We also operate on-site at 172160 customer locations, which primarily provide vehicle maintenance.maintenance solely for that customer's fleet.
Canada. We have been operating in Canada for over 50 years. At December 31, 2017,2019, we had 3632 operating locations throughout 9 Canadian provinces. We also operatedoperate 14 maintenance facilities on-site at customer properties in Canada.
Europe. We began operating in the U.K. in 1971. At December 31, 2017,2019, we had 6054 operating locations, primarily throughout the U.K.U.K, including those that we manage on behalf of our customers. We also managedmanage a network of 426367 independent maintenance facilities in the U.K. to serve our customers when it is more effective than providing the service in a Ryder location. In addition to our typical FMS operations, we supply and manage vehicles, equipment and personnel for military organizations in the U.K. and Germany.
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| (1) | U.S. Fleet as of June 2017,September 2019, Class 3-8, IHS Markit Ltd. (formerly RL Polk) |
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| (2) | Canada Outsourced Fleet Market as of September 2017,2019, Class 3-8, IHS Markit Ltd. (formerly RL Polk) |
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| (3) | U.K. Lease and Rental HGV Market, Projection for December 2017,2019, Source: The Society of Motor Manufacturers & Traders (SMMT) 2010 & Ryder Internal EstimatesEstimate |
FMS Product Offerings
ChoiceLease. Our lease offering, ChoiceLease, provides customers with vehicles, maintenance services, supplies, and
related equipment necessary for operation of the vehicles while our customers furnish and supervise their own drivers and dispatch and exercise control over the vehicles. The ChoiceLease offering allows customers to select the terms of their lease alongside the level of maintenance they prefer, from full service or total bumper-to-bumper coverage to on-demand or pay-as-you-go maintenance.
Our ChoiceLease customers receive the following benefits:
We are able to leverage our vehicle buying power for the benefit of our customers because we purchase a large number of vehicles from a limited number of manufacturers. Once we have signed an agreement with the customer, we acquire vehicles and components that are custom engineered to the customer’s requirements and lease the vehicles to the customer for periods generally ranging from three to seven years for trucks and tractors and typically ten years for trailers.
We offer ChoiceLease customers a complete maintenance program designed to reduce vehicle downtime through a preventive maintenance plan that is based on vehicle type and time or mileage intervals. Alternatively, we offer flexible maintenance options to our customers designed to provide them with choices on their preferred level of maintenance. Given our continued focus on improving the efficiency and effectiveness of our maintenance services, particularly in light of changing technology and increased regulation, we provide our ChoiceLease customers with a cost effective alternative to maintaining their own fleet of vehicles and the flexibility to choose the maintenance program that works for them.
Our customers have access to our extensive network of maintenance facilities and trained technicians for maintenance, vehicle repairs, 24-hour emergency roadside service, and replacement vehicles for vehicles that are temporarily out of service.
We typically retain vehicle residual risk exposure.
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| • | Customers have an opportunity to enhance their standard lease with additional fleet support services including our fuel and related services as described below; liability insurance coverage under our existing insurance policies and related insurance services; safety services including safety training, driver certification and loss prevention consulting; vehicle use and other tax reporting, permitting and licensing, and regulatory compliance (including hours of service administration); environmental services; and access to RydeSmart®, a full-featured GPS fleet location, tracking, and vehicle performance management systemsystem; and to RyderGuide®, our web-basedmobile fleet tool that provides customers with 24/7 access to key operational and maintenance management information about their fleets. In January 2020, we announced our plan to exit the extension of our liability insurance coverage for ChoiceLease customers. The exit of this program is estimated to be completed in the second quarter of 2021. |
For the year ended December 31, 2017,2019, ChoiceLease revenue accounted for 57%56% of our FMS total revenue. Prior to 2017, FMS reported this product as “full service lease.”
Commercial Rental. We targetoffer rental customers that have a need to supplement their private fleet of vehicles on a short-term basis (one day up to one year in length), either because of seasonal increases in their business or discrete projects that requirewith additional transportation resources.needs. ChoiceLease customers also utilize our commercial rental fleet to handle their peak or seasonal business needs, as substitute vehicles while their lease vehicles are undergoing maintenance, and while they are awaiting delivery of new lease vehicles. Although a portion of our commercial rental business is purely occasional in nature, we focus on building long-term relationships with customers so that we become their preferred source for commercial vehicle rentals. Our rental representatives assist in selecting a vehicle that satisfies a customer’s needs and supervise the rental process, which includes execution of a rental agreement and a vehicle inspection. In addition to vehicle rental, we may extend liability insurance coverage under our existing policies to our rental customers as well as the benefits of cost savings and convenience of our comprehensive fuel services program. For the year ended December 31, 20172019, commercial rental revenue accounted for 17%18% of our FMS total revenue.
SelectCare. Through our SelectCare product line, we provide maintenance services to customers who do not choose to lease vehicles from us. Our SelectCare customers commit to utilizing our extensive network of maintenance facilities and trained technicians to maintain the vehicles they own or lease from third parties. There are several bundles of services available to SelectCare customers including full service contract maintenance, and preventive only maintenance and on-demand maintenance. We can also customize the services to include ancillary maintenance and/or fleet support services.services as described above. Vehicles covered under this offering are typically serviced at our own facilities. However, based on the size and complexity of a customer’s fleet, we may operate an on-site maintenance facility at the customer’s location.
Additionally, our lease and contract maintenance customers periodically require additional maintenance and repair services that are not included in their lease or contract maintenance agreements. For example, additional maintenance and repair
services may arise when a customer damages a leased vehicle. In addition, because of our existing relationships with the customer,such situations, we may provide service on their owned vehicles andgenerally charge the customer on an hourly basis for work performed. By servicing all of our customers’ maintenance needs, we create stronger, long-term relationships and have greater opportunity to
provide customers with a wide range of outsourcing solutions. For the year ended December 31, 2017,2019, SelectCare revenue accounted for 10% of our FMS total revenue. Prior to 2017, FMS reported this product as “contract maintenance” and “contract-related maintenance.”
The following table provides information regarding the number of vehicles and customers by FMS product offering atas of December 31, 20172019:
| | | | U.S. | | Foreign | | Total | | U.S. | | Foreign | | Total |
| | | Vehicles | | Customers | | Vehicles | | Customers | | Vehicles | | Customers | | Vehicles | | Customers | | Vehicles | | Customers | | Vehicles | | Customers |
| ChoiceLease | | 115,200 | | 11,500 | | 23,900 | | 2,400 | | 139,100 | | 13,900 | | 136,100 | | 12,200 | | 23,700 | | 2,400 | | 159,800 | | 14,600 |
Commercial rental (1) | | 31,000 | | 30,700 | | 6,800 | | 5,700 | | 37,800 | | 36,400 | | 36,000 | | 32,200 | | 5,900 | | 5,000 | | 41,900 | | 37,200 |
SelectCare (2) | | 48,400 | | 1,700 | | 6,000 | | 400 | | 54,400 | | 2,100 | | 50,400 | | 1,800 | | 5,400 | | 300 | | 55,800 | | 2,100 |
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| (1) | Commercial rental customers include customersrepresent those who rented a vehicle for more than 3 days during the year and includes approximately 7,4007,500 ChoiceLease customers |
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| (2) | SelectCare customers include approximately 1,0201,000 ChoiceLease customers |
More recently, we have contractedWe also contract with large private fleet operators and for-hire carriers to provide maintenance on demand, particularly in geographic areas where these customers do not have their own maintenance operations. The contract for on-demand maintenance services is based on a maintenance program that is designed to meet the customers'customer's specific needs and all maintenance is performed only when and as requested by the customer. This product allows us to expand our customer base to include customers that have traditionally chosen to own and maintain their fleet of vehicles.
Fuel Services. We provide our FMS customers with access to diesel fuel at competitive prices at approximately 450460 of our maintenance facilities across the United States and Canada. We also provide fuel services such as fuel planning, fuel tax reporting, centralized billing, fuel cards and fuel monitoring. Although fuel sales do not have a significant impact on our FMS earnings, as it is largely a pass-through cost to customers, we believe allowing customers to leverage our fuel buying power is a significant and valuable benefit to our customers. For the year ended December 31, 20172019, fuel services revenue accounted for 15% of our FMS total revenue.
Used Vehicles. We primarily sell our used vehicles at oneout of our 5351 retail sales centers throughout North America (14 of which are co-located at an FMS shop), at our branch locations orand through our website at www.Usedtrucks.Ryder.com. Typically, before we offer used vehicles for sale, our technicians ensure that the vehicles are Road ReadyRyder Certified®TM, which means that they have passed a comprehensive, multi-point performance inspection based on specifications formulated through our maintenance program. Ourprogram, Ryder VerifiedTM, which are fully inspected and DOT compliant vehicles with some wear and tear, or Ryder ReclassifiedTM. Generally, our retail sales centers throughout North America allow us to leverage our maintenance expertise and strong brand reputation to realize higher sales proceeds than in the wholesale market. Given our focus on maximizing sales proceeds, we generallyprimarily sell our used vehicles through retail centers for prices in excess of book value. However, the extent to which we are able to realize a gain on the salecenters. The realized sales proceeds of used vehicles isare dependent upon various other factors, including the general state of the used vehicle market, the supply and demand for used commercial vehicles in retailwholesale and wholesaleretail markets, the age and condition of the vehicle at the time of its disposal and vehicle depreciation estimates. In recent years, the general state of the used vehicle sales market has been particularly challenging, which has required us to sell many of our used vehicles below book value and lower residual value estimates on vehicles still in operation.
FMS Business Strategy
Our FMS business strategy is to be the leading provider of fleet management outsourcing services for light, medium and heavy duty commercial highway vehicles. This strategy revolves around the following interrelated goals and priorities:
Drivedrive profitable fleet growth that maximizes our return on investment by (1) successfully implementing sales and marketing initiatives designed to compel private fleet operators and for-hire carriers to outsource all or some portion of their fleet management needs to us; (2) offering innovative products, solutions and support services that will create and strengthen new and existing customer relationships; and (3) completing targeted acquisitions;
Deliverdeliver a consistent, industry-leading and cost-effective maintenance program to our customers through continued process improvement and re-design, productivity initiatives and technology improvements;improvements allowing us to obtain new business, including from our competitors; and
Optimizeoptimize asset utilization and management, particularly with respect to our rental fleet, used vehicle operations and maintenance facility infrastructure.
Successfully driving our fleet growth strategy will require significant capital investments in lease and commercial rental vehicles. As a result, during periods of significant growth, our free cash flow may be negative due to capital outlay upfront to purchase vehicles which are leased over 3 to 10 year periods.
Competition
As an alternative to using our fleet management services, companies may choose to provide these services for themselves or to obtain similar or alternative services from other third-party vendors.
Our FMS business segment competes with companies that provide and manage maintenance services themselves and those providing similar services on a national, regional and local level. Many regional and local competitors provide services on a national level through their participation in various cooperative programs. Competitive factors include price, equipment, maintenance, service and geographic coverage. We compete with finance lessors, truck and trailer manufacturers and independent dealers who provide full service lease products, finance leases, extended warranty maintenance, rental and other transportation services. With the growth of our on-demandWe compete with other companies based on factors such as price, geographic coverage, equipment, maintenance, product, weand service. We also face competition from managed maintenance providers who are hired to coordinate and manage the maintenance of large fleets of vehicles through a network of third-party maintenance providers. Value-added differentiation of the ChoiceLease, SelectCare and commercial rental services, as well as continued commitment to offer innovative products and solutions, such as natural gas and electric vehicles, have been and will continue to be our emphasis.
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Dedicated Transportation Solutions |
Value Proposition
Through our DTS business segment, we combine equipment, maintenance, drivers, administrative services and additional services to provide customers with a dedicated transportation solution that is designed to increase their competitive position, improve risk management and integrate their transportation needs with their overall supply chain. Such additional services include routing and scheduling, fleet sizing, safety, regulatory compliance, risk management, technology and communication systems support, including on-board computers and other technical support. These additional services allow us to address, on behalf of our customers, labor challenges associated with maintaining a private fleet of vehicles, such as driver recruitment and retention, government regulation, including electronic logging devices and hours of service regulations, Department of Transportation (DOT) audits and workers’ compensation. Our DTS solution offers a high degree of specialization to meet the needs of customers with sophisticated service requirements such as tight delivery windows, high-value or time-sensitive freight, closed-loop distribution, multi-stop shipments, specialized equipment and integrated transportation needs.
Market Trends
The U.S. dedicated contract carriage market is estimated to be $14 billion(1). This market is affected by many of the same trends that impact our FMS business, including the tightening of capacity in the current U.S. trucking market. The administrative requirements relating to regulations issued by the DOT regarding driver screening, training and testing, as well as record keeping and other costs associated with the hours of service requirements, make our DTS product an attractive alternative to private fleet and driver management. With the changes in the regulatory environment, including the electronic logging device mandate that became effective in late 2017, there continues to be increased pressure on the availability of qualified truck drivers, whose supply continues to tighten, and shippers are seeking dedicated capacity from quality transportation and logistics providers. In addition, market demand for just-in-time delivery creates a need for well-defined routing and scheduling plans that are based on comprehensive asset utilization analysis and fleet rationalization studies offered as part of our DTS services.
Operations/Product Offerings
For the year ended December 31, 2017, our global DTS business accounted for 15% of our consolidated revenue. At December 31, 2017, we had 184 DTS customer accounts in the U.S. Because it is highly customized, our DTS product is particularly attractive to companies that operate in industries that have time-sensitive deliveries or special handling requirements, as well as companies who require specialized equipment. Because DTS accounts typically operate in a limited geographic area, most of the drivers assigned to these accounts are short haul drivers, meaning they return home at the end of each work day. Although a significant portion of our DTS operations are located at customer facilities, our DTS business also utilizes and benefits from our extensive network of FMS facilities, including the FMS maintenance network which services all vehicles used in DTS solutions.
In order to customize an appropriate DTS transportation solution for our customers, our DTS logistics specialists perform a transportation analysis using advanced logistics planning and operating tools. Based on this analysis, they formulate a logistics design that includes the routing and scheduling of vehicles, the efficient use of vehicle capacity and overall asset utilization. The goal of each customized plan is to create a distribution system that optimizes freight flow while meeting a customer’s service goals. A team of DTS transportation specialists can then implement the plan by leveraging the resources, expertise and technological capabilities of both our FMS and SCS businesses.
(1) Armstrong & Associates - Third-Party Logistics Market Results and Trends for 2017, June 2017
To the extent a distribution plan includes multiple modes of transportation (air, rail, sea and highway), our DTS team, in conjunction with our SCS transportation specialists, selects appropriate transportation modes and carriers, places the freight, monitors carrier performance and audits billing. In addition, through our SCS business, we can reduce costs and add value to a DTS customer’s distribution system by aggregating orders into loads, looking for shipment consolidation opportunities and organizing loads for vehicles that are returning from their destination point back to their point of origin (backhaul).
DTS Business Strategy
Our DTS business strategy is to focus on customers who need specialized equipment, specialized handling or integrated services. This strategy revolves around the following interrelated goals and priorities:
•Increase market share with customers in the energy and utility, metals and mining, retail, construction, healthcare, and food and beverage industries;
•Leverage the support and talent of the FMS sales team to compel private fleet operators to outsource all or some of their transportation needs to us;
•Align the DTS business with other SCS product lines to create revenue opportunities and improve operating efficiencies in both segments; and
•Improve competitiveness in the non-specialized and non-integrated customer segments.
Competition
Our DTS business segment competes with truckload carriers and other dedicated providers servicing on a national, regional and local level. Competitive factors include price, equipment, maintenance, service and geographic coverage, driver availability and operations expertise. We are able to differentiate the DTS product offering by leveraging FMS and integrating the DTS services with those of SCS to create a more comprehensive transportation solution for our customers. Our strong safety record and focus on customer service enable us to uniquely meet the needs of customers with high-value products that require specialized handling in a manner that differentiates us from truckload carriers.
focus.
Value Proposition
Through our SCS business, we offer a broad range of innovative logistics management services that are designed to optimize customers' supply chain and address customers' key business requirements. The organizationbusiness is alignedorganized by industry verticals (Automotive, Technology and Healthcare, Consumer Packaged Goods and Retail, and Industrial)Industrial and other) to enable our teams to focus on the specific needs of their customers. Our SCS product offerings are organized into four categories: dedicated services, distribution management, transportation management and professional services. These offerings are supported by a variety of information technology and engineering solutions that are an integral part of our SCS services. These product offeringsand can be provided independently or as an integrated solution to optimize supply chain effectiveness. A key aspect of our value proposition is our operational execution, which is an important differentiator in the marketplace.
Market Trends
Global logistics is an approximately $8.5$10 trillion market, of which approximately $826$995 billion is outsourced.outsourced(1). Logistics spending in the markets we are targeting in North America and Singapore equates to approximately $2.0$2 trillion, of which $209$266 billion is outsourced(1). Outsourced logistics is a market with significant growth opportunity. More sophisticated supply chain practices are required as supply chains expand and become more complex product needs continue to proliferate and companies look for lower cost supply chain alternatives. In addition, disruptions from unexpected events such as natural disasters have caused companies to focus on risk management of their supply chains. The more complicated the supply chain or the product requirements, the greater the need for companies to utilize the expertise of supply chain solution providers.
(1) Armstrong & Associates - Third-Party Logistics Market Results and Trends for 2017, June 2017
Operations
For the year ended December 31, 2017,2019, our global SCS business accounted for 27%29% of our consolidated revenue.
U.S. At December 31, 2017,2019, we had 294188 SCS customer accounts in the U.S., most of which are large enterprises that maintain large, complex supply chains. Most of our core SCS business operations are geographically located to maximize efficiencies and reduce costs. At December 31, 2017,2019, managed warehouse space totaled approximately 4450 million square feet for the U.S. feet.
We also concentrate certain logistics expertise in locations not associated with specific customer sites. For example, our carrier procurement, contract management, freight bill audit and payment services, and transportation optimization and execution groups operate out of our logistics centers in Novi, Michigan and Fort Worth, Texas.
Mexico. At December 31, 2017,2019, we had 120131 SCS customer accounts and managed warehouse space totaling approximately 4.74 million square feet. Our Mexico operations offer a full range of SCS services and manage approximately 17,90021,500 border crossings each month between Mexico and the U.S. and Canada, often highly integrated with our distribution and transportation operations.
Canada. At December 31, 2017,2019, we had 4338 SCS customer accounts and managed warehouse space totaling approximately 1.22.4 million square feet. Given the proximity of this market to our U.S. and Mexico operations, the Canadian operations are highly coordinated with their U.S. and Mexico counterparts, managing cross-border transportationapproximately 9,900 border crossings each month.
Singapore. In the second quarter of 2019, we ceased our Singapore business operations.
(1) Armstrong & Associates - Third-Party Logistics Market Results and freight movements.
Singapore. At December 31, 2017, we had 82 SCS customer accounts and managed warehouse space totaling approximately 363,000 square feet.Trends for 2019, June 2019
SCS Product Offerings
Distribution Management. Our SCS business offers a wide range of services relating to a customer’s distribution operations, from designing a customer’s distribution network, to managing distribution facilities. Services within the facilities, generally include managing the flow of goodsto an e-commerce service designed specifically for high-volume from the receiving function to the shipping function, coordinating warehousing and transportation for inbound and outbound material flows, handling import and export for international shipments, coordinating just-in-time replenishment of component parts to manufacturing and final assembly, and providing shipments to customer distribution centers or end customer delivery points, including support for e-commerce networks. Additional value-added services such as light assembly of components into defined units (kitting), packaging and refurbishment aremay also be provided. For the year ended December 31, 2017,2019, distribution management solutions accounted for 47%39% of our SCS revenue.
Dedicated Services. Dedicated services are offered as part of an integrated supply chain solution to our customers. We fulfill transportation needs for our customers with a combination of outside carriers and dedicated services. The dedicated services offering combines the equipment, maintenance, drivers and additional services to provide a customer with a dedicated transportation solution whichthat, combined with outside transportation, is designed to increase their competitive position, improve risk management and integrate their transportation needs with their overall supply chain. Such additional services include routing and scheduling, fleet sizing, safety, regulatory compliance, risk management, technology and communication systems support including on-board computer and other technical support. These additional services allow us to address,mitigate, on behalf of our customers, labor challenges associated with maintaining a private fleet of vehicles, such as driver recruitment and turnover, and government regulation, (includingincluding hours of service regulations), DOTregulations, Department of Transportation (DOT) audits and workers' compensation. Our dedicated services solution offers a high degree of specialization to meet the needs of customers with sophisticated service requirements such as tight delivery windows, high value or time-sensitive freight,distribution, closed-loop distribution, multi-stop shipments, specialized equipment and integrated transportation needs. Dedicated services operations are located at our customer facilities, and our dedicated offering utilizes and benefits from our extensive network of FMS facilities, which provides maintenance for all Ryder vehicles used in SCS solutions. For the year ended December 31, 2017,2019, approximately 34% of our SCS revenue was related to dedicated services.
Transportation Management. Our SCS business offers services relating to all aspects of a customer’s transportation network. Our team of transportation specialists provides shipment planning and execution, which includes shipment optimization, load scheduling and delivery confirmation through a series of technological and web-based solutions. Our transportation consultants including our freight brokerage department, focus on carrier procurement of all modes of transportation with an emphasis on truck-based transportation, rate negotiation, and freight bill audit and payment services. In addition, our SCS business provides customers with capacity management services that are designed to meetmaximize backhaul opportunities and minimize excess miles. For the year ended December 31, 2017,2019, we purchased and/or executed $5.2approximately $7 billion in freight moves on our customers' behalf. For the year ended December 31, 2017,2019, transportation management solutions accounted for 14% of our SCS revenue.
Last Mile. Our Ryder Last Mile offering consists of a network of over 120 locations strategically located throughout the U.S. that receive, assemble, and prepare big and bulky items ranging from furniture to exercise equipment for in home or office delivery. We offer tiered levels of delivery services to meet consumer’s needs including placing the newly delivered item in the location of a customer’s choosing, minor installation and disposal of the replaced item. We use proprietary scheduling software to provide customers with the appointment times they need and optimize routes for maximum efficiency. Finally, as an extension of our customer’s brand, we track and report the satisfaction of each delivery experience. For the year ended December 31, 2019, Ryder Last Mile accounted for 8% of our SCS revenue.
Professional Services. In conjunction with providing the SCS core services described previously, our SCS business offers a variety of knowledge-based professional services that support every aspect of a customer’s supply chain. Our SCS professionals are available to evaluate a customer’s existing supply chain to identify inefficiencies as well as opportunities for integration and improvement. Once the assessment is complete, we work with the customer to develop a supply chain strategy that will create the most value for the customer and their target clients. Once a customer has adopted a supply chain strategy, our SCS logistics team, supported by functional experts and representatives from our information technology, real estate and finance groups, work together to design a strategically focused supply chain solution. The solution may include both a network design that sets forth the number, location and function of key components of the network and a transportation solution that optimizes the mode or modes of transportation and route selection. In addition to providing the distribution and transportation expertise necessary to implement the supply chain solution, our SCS representatives can coordinate and manage all aspects of the customer’s supply chain provider network to assure consistency, efficiency and flexibility. For the year ended December 31, 2017,2019, knowledge-based professional services accounted for 5% of our SCS revenue.
SCS Business Strategy
Our SCS business strategy is to offer our customers differentiated, functional execution and proactive solutions from deepour expertise in key industry verticals. The strategy revolves around the following interrelated goals and priorities:
Provide
provide customers with best in class execution and quality through reliable and flexible supply chain solutions;
Developdevelop innovative solutions and capabilities that drive value for our customercustomers within our targeted industry verticals;
Createcreate a culture of innovation and collaboration to share capabilities and solutions to meet our client’sclients' needs;
Consistent focus consistently on network optimization and continuous improvement; and
Successfully execute on targeted sales and marketing growth strategies.
Competition
As an alternative to using our services, most companies may choose to internally manage their own supply chains and logistics operations, although some choose toor obtain similar or alternative services from other third-party vendors.
In the SCS business segment, we compete with a large number of companies providing similar services, each of which has a different set of core competencies. We compete with a handful of large, multi-service companies across all of our service offerings and industries. We also compete against other companies on specific service offerings (for example, in transportation management, distribution management or dedicated services) or with companies specializing in a specific industry. We face different competitors in each country or region where they may have a greater operational presence. CompetitiveWe compete based on factors includesuch as price, service offerings, market knowledge, expertise in logistics-related technology and overall performance (e.g. timeliness, accuracy, and flexibility).
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| Dedicated Transportation Solutions |
Value Proposition
Through our DTS business segment, we combine equipment, maintenance, drivers, administrative services and additional services to provide customers with a dedicated transportation solution that is designed to increase their competitive position, improve risk management and integrate their transportation needs with their overall supply chain. Such additional services include routing and scheduling, fleet sizing, safety, regulatory compliance, risk management, technology and communication systems support, including on-board computers and other technical support. These additional services allow us to mitigate, on behalf of our customers, labor challenges associated with maintaining a private fleet of vehicles, such as driver recruitment and retention, and government regulation, including electronic logging devices and hours of service regulations, DOT audits and workers’ compensation. Our DTS solution offers a high degree of specialization to meet the needs of customers with sophisticated service requirements such as tight delivery windows, high-value or time-sensitive freight distribution, closed-loop distribution, multi-stop shipments, specialized equipment and integrated transportation needs.
Market Trends
The U.S. dedicated contract carriage market is estimated to be $18 billion(1) from an addressable market of approximately $400 billion(2). This market is affected by many of the same trends that impact our FMS business, including the tightening of capacity in the current U.S. trucking market. The administrative requirements relating to regulations issued by the DOT regarding driver screening, training and testing, as well as record keeping and other costs associated with the hours of service requirements, make our DTS product an attractive alternative to private fleet and driver management. With the changes in the regulatory environment, including the electronic logging device mandate that became effective in late 2017, there continues to be significant pressure on the availability of qualified truck drivers, whose supply remains tight, and shippers continue to seek dedicated capacity from quality transportation and logistics providers. In addition, market demand for just-in-time delivery creates a need for well-defined routing and scheduling plans that are based on comprehensive asset utilization analysis and fleet rationalization studies offered as part of our DTS services.
Operations/Product Offerings
For the year ended December 31, 2019, our global DTS business accounted for 15% of our consolidated revenue. At December 31, 2019, we had 186 DTS customer accounts in the U.S. Because it is highly customized, our DTS product is particularly attractive to companies that operate in industries that have time-sensitive deliveries or special handling requirements, as well as companies who require specialized equipment. DTS accounts typically operate in a limited geographic area, and, therefore, most of the drivers assigned to these accounts are short haul drivers, meaning they return home at the end of each work day, which helps with driver recruiting and retention. Although a significant portion of our DTS operations are located at customer facilities, our DTS business also utilizes and benefits from our extensive network of FMS facilities, including the FMS maintenance network that services all vehicles used in DTS solutions.
(1) Armstrong & Associates - Third-Party Logistics Market Results and Trends for 2019, June 2019
(2) Addressable market as of December 2019, Class 3-8, IHS Markit Ltd. (formerly RL Polk) & Ryder Internal Estimates
In order to customize an appropriate DTS transportation solution for our customers, our DTS logistics specialists perform a transportation analysis using advanced logistics planning and operating tools. Based on this analysis, they formulate a logistics design that includes the routing and scheduling of vehicles, the efficient use of vehicle capacity and overall asset utilization. The goal of each customized plan is to create a distribution system that optimizes freight flow while meeting a customer’s service goals. A team of DTS transportation specialists can then implement the plan by leveraging the resources, expertise and technological capabilities of both our FMS and SCS businesses.
To the extent a distribution plan includes multiple modes of transportation (air, rail, sea and highway), our DTS team, in conjunction with our SCS transportation specialists, selects appropriate transportation modes and carriers, places the freight, monitors carrier performance and audits billing. In addition, through our SCS business, we can reduce costs and add value to a DTS customer’s distribution system by aggregating orders into loads, looking for shipment consolidation opportunities and organizing loads for vehicles that are returning from their destination point back to their point of origin (backhaul).
DTS Business Strategy
Our DTS business strategy is to offer services to customers who need specialized equipment, specialized handling or integrated services. This strategy revolves around the following interrelated goals and priorities:
increase market share with customers in the energy and utility, metals and mining, specialty retail, construction, and food and beverage industries;
leverage the support and talent of the FMS sales team to compel private fleet operators to outsource all or some of their transportation needs to us;
align the DTS business with other SCS product lines to create revenue opportunities and improve operating efficiencies in both segments; and
improve competitiveness in the non-specialized and non-integrated customer segments.
Competition
Our DTS business segment competes with other dedicated providers and truckload carriers servicing on a national, regional and local level. We compete with these companies based on a number of factors, including price, equipment options and features, maintenance, service and geographic coverage, driver availability and operations expertise. We are able to differentiate the DTS product offering by leveraging FMS and integrating the DTS services with those of SCS to create a more comprehensive transportation solution for our customers. Our strong safety record and focus on customer service also enables us to uniquely meet the needs of customers with high-value products that require specialized handling in a manner that differentiates us from truckload carriers.
ACQUISITIONS
In addition to our continued focus on organic growth, acquisitions play an important role in enhancing our growth strategy. In assessing potential acquisition targets in our FMS business segment, we look for companies that would create value through operating synergies, leveraging our existing facility infrastructure, improving our geographic coverage and diversifying our customer base. In our DTS business segment, we are focusing on strategies for growth, including acquisitions that enhance our technology capabilities, and expand our capabilitiesgeographic density and vertical market sector. In our SCS business segment, we focus on adding capabilities and product offerings, potentially expanding into new industries, diversifying our customer base within our current industries, and improving our competitive position.
CYCLICALITY
Ryder's business is impacted by economic and market conditions. In a strong economic cycle, there is generally more demand for our fleet management, dedicated transportation and supply chain services. In a weak or volatile economy, demand for our services decreases and is inconsistent and considerably more unpredictable. Because of these factors, we have continued to focus on increasing the diversity of our customer base and strengthening our long-term business partnerships with our customers. Although we believe these efforts help mitigate the immediate impact of an economic downturn, during a protracted or severe economic downturn, customers are often unwilling to commit to a full-service lease or long-term supply chain contract.and dedicated contracts. Because commercial rental and used vehicle sales are transactional, they are more cyclical in nature and are also heavily dependent on economic and market conditions, and results can vary significantly in both the short- and long-term. In 2019, we began to experience softening in used vehicle and commercial rental market conditions, which we expect to continue throughout 2020. We mitigate some of the potential impact of an economic downturn through a disciplined and centralized approach to asset management. This approach allows us to manage the size, mix and location of our operating fleet and used vehicle inventories to try and maximize asset utilization and used vehicle proceeds in both strong and weak market conditions.
ADMINISTRATION
Our financial administrative functions for the U.S. and Canada, including credit, billing and collections, are consolidated into our Shared Services Center, a centralized processing center located in Alpharetta, Georgia. Our Shared Services Center also manages contracted third parties providing administrative, finance and support services outside of the U.S. in order to reduce ongoing operating expenses and maximize our technology resources.capabilities. This centralization results in more efficient and consistent centralized processing of selected administrative operations. Certain administrative functions are also performed at the Shared Services Center for our customers. The Shared Services Center’s main objectives are to enhance customer service through process standardization, create an organizational structure that will improve market flexibility and allow future reengineering efforts to be attained more easily at lower implementation costs.standardization.
REGULATION
Our business is subject to regulation by various federal, state, local and foreign governmental entities. The DOT and various federal and state agencies exercise broad powers over certain aspects of our business, generally governing such activities as authorization to engage in motor carrier operations, safety and financial reporting.operations. The Federal Motor Carrier Safety Administration (FMCSA), under the DOT, manages a compliance and enforcementCompliance, Safety, Accountability initiative (known as "CSA"), partnering with state agencies designed to monitor and improve commercial vehicle motor safety, which uses roadside inspections and violations to measure motor carriers and drivers. In 2017, theThe FMCSA also has regulations mandating electronic logging devices in commercial motor vehicles went into effect forthat impact various aspects of our dedicated, supply chain and rental businesses.
We are also subject to a variety of requirements oflaws and regulations promulgated by national, state, provincial and local governments, including the U.S. Environmental Protection Agency (EPA) and the Occupational Safety and Health Administration (OSHA), which regulate safety, the management of hazardous materials, water discharges, and air emissions, solid waste disposal and the release and cleanup of regulated substances. We must comply with licensing and other requirements imposed by the U.S. Department of Homeland Security and the U.S. Customs Service as a result of increased focus on homeland security and our Customs-Trade Partnership Against Terrorism certification. We may also become subject to new or more restrictive regulations imposed by these agencies or other authorities relating to carbon controls and reporting, engine exhaust emissions, drivers’ hours of service, wage and hour requirements, security including data privacy and cyber security and ergonomics.
ENVIRONMENTAL
We have a long-standing commitment to sound environmental practices that reduce risk and build value for us and our customers. We have a history of adopting “green” designs and processes because they are efficient, cost-effective transportation solutions that improve our bottom line and bring value to our customers. We have maintained an environmental policy since 1991 and have updated it periodically as regulatory and customer needs have changed. Our environmental policy reflects our commitment to supporting the goals of sustainable development, environmental protection, and pollution prevention in our business. We have adopted proactive environmental strategies that have advanced business growth and continued to improve our performance in ways that reduce emission outputs and environmental impact. Our environmental team works with operating employees to develop and administer programs in support of our environmental policy and to help ensure that environmental considerations are integrated into all business processes and decisions.
In establishing appropriate environmental objectives and targets for our wide range of business activities around the world, we focus on (1) the needs of our customers; (2) the communities in which we provide services; and (3) relevant laws and regulations. We regularly review and update our environmental management procedures, and information regarding our environmental activities is routinely disseminated throughout Ryder. In 2016, we published our 2014/2015We publish a Corporate Sustainability Report, Supplement, which includes new metrics related to our environmental and safety performance for the years 2014 and 2015.performance. The report is publicly available on the company website at www.ryder.com by clicking on About Us and then selecting Sustainability.www.rydercsr.com. In addition, we have voluntarily respondedsubmitted an annual report to the Carbon Disclosure Project (CDP) since 2008,, disclosing direct and indirect emissions resulting from our operations, and earned leadership status for the quality of our disclosure report submitted in 2017 for the 2016 performance year.
reporting.
SAFETY
Our safety culture is founded upon a core commitment to the safety, health and well-being of our employees, customers and the community, a commitment that has made us a long-standing industry leader in safety. Safety is an integral part of our business strategy because preventing injuries and collisions improves employee quality of life, eliminates service disruptions to our customers, increases operational efficiency, and improves customer satisfaction. As a core value, our focus on safety is embedded in our day-to-day operations, reinforced by many safety programs and continuous operational improvement and supported by a talented and dedicated safety organization.
We deploy relevant vehicle safety systems in the vehicles we operate, including active brake assistance, lane departure warning systems, stability control, and others, to enhance safety performance. We also install aftermarket safety monitoring systems that provide effective means for our operations teams to measure and improve driver performance.performance, including in-vehicle
video event recorders. Training is also a key component of our safety program. Monthly safety training delivered by location safety committees cover specific and relevant safety topics and managers receive annual safety leadership training. In driving operations, we use certified driver trainers to on-board and train our drivers using first hand experienced certified driver trainers. Quarterly and remedial training is also delivered online to each driver through oura highly interactive Ryder Pro-TREAD comprehensive lesson platform. Regular safety behavioral observations are conducted by managers throughout the organization everyday and remedial training and coaching takes place on the spot. Our proprietary, web-based Safety Management System, RyderSafetyNetSM, delivers monthly proactive safety programs as well as safety compliance tasks tailored to every location and helps measure safety activity effectiveness across the organization. Our safety policies require that all managers, supervisors and employees incorporate safe processes in all aspects of our business. Monthly safety scorecards are tracked and reviewed by management for progress toward key safety objectives. Our proprietary web-based safety tracking system, RyderSafetyNetSM, delivers proactive safety programs tailored to every location and helps measure safety activity effectiveness across the organization.
EMPLOYEES
At December 31, 2017,2019, we had approximately 36,10039,900 full-time employees worldwide, of which 34,30038,600 were employed in North America 1,400and 1,300 in Europe and 400 in Singapore. Currently weEurope. We currently employ approximately 8,1009,500 drivers and 5,9006,300 technicians. We have approximately 23,20025,600 hourly employees in the U.S., approximately 4,1004,300 of which are organized by labor unions. Those employees organized by labor unions are principally represented by the International Brotherhood of Teamsters, the International Association of Machinists and Aerospace Workers and the United Auto Workers, and theirWorkers. Their wages and benefits are governed by 101104 separate labor agreements which are renegotiated periodically. Although we have not experienced a material work stoppage or strike, these events can potentially occur given the types of businesses in which we currently engage. We consider the relationship with our employees to be good.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS OF THE REGISTRANT
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| Name | | Age | | Position |
| Robert E. Sanchez | | 5254 | | Chair and Chief Executive Officer |
Art A. GarciaScott T. Parker | | 5652 | | Executive Vice President and Chief Financial Officer |
Dennis C. CookeJohn J. Diez | | 5349 | | President, Global Fleet Management Solutions |
John J. Diez | | 46 | | President, Dedicated Transportation Solutions |
| J. Steven Sensing | | 5052 | | President, Global Supply Chain Solutions and Dedicated Transportation Solutions |
| Robert D. Fatovic | | 5254 | | Executive Vice President, Chief Legal Officer and Corporate Secretary |
Frank LopezJohn Gleason | | 4363 | | SeniorExecutive Vice President and Chief Human ResourcesSales Officer |
| Karen M. Jones | | 5557 | | Executive Vice President and Chief Marketing Officer |
John GleasonFrank Lopez | | 6145 | | Executive Vice President and Chief SalesHuman Resources Officer |
| Tim Fiore | | 64 | | Senior Vice President and Chief Procurement Officer |
| Rajeev Ravindran | | 5254 | | Senior Vice President and Chief Information Officer |
| Frank Mullen | | 4850 | | Vice President and Controller |
Robert E. Sanchez was appointed Chair of Ryder's Board in May 2013 and promoted to Chief Executive Officer and became a Board member in January 2013. Previously, Mr. Sanchez served as President and Chief Operating Officer from February 2012 to December 2012. He served as President, Global Fleet Management Solutions from September 2010 to February 2012 and as Executive Vice President and Chief Financial Officer from October 2007 to September 2010. He also previously served as Executive Vice President of Operations, U.S. Fleet Management Solutions from October 2005 to October 2007 and as Senior Vice President and Chief Information Officer from January 2003 to October 2005. Mr. Sanchez joined Ryder in 1993 and has held various other positions of increasing responsibility, including leadership positions in all three of Ryder's business segments.
Art A. Garcia hasScott T. Parker joined Ryder in April 2019 and was appointed Executive Vice President and Chief Financial Officer. Prior to joining Ryder, Mr. Parker served as Executive Vice President and Chief Financial Officer at OneMain Financial, a leading consumer finance company, where he was responsible for overseeing all financial operations since September 2010. Previously,2015. Prior to OneMain Financial, Mr. GarciaParker served as Senior Vice PresidentChief Financial Officer for CIT Group Inc., a commercial finance company, from 2010 to 2015. He also served as Chief Financial Officer from 2006 to 2008 and ControllerChief Operating Officer from October2008 to 2010 of Cerberus Operations & Advisory Company, and spent more than 15 years in leadership roles within the industrial and financial services businesses at General Electric Company, including Chief Financial Officer of GE Capital Solutions from 2005 to August 2010, and as Vice President and Controller from February 2002 to September 2005. Mr. Garcia joined Ryder in 1997 and has held various other positions within Corporate Accounting.2006.
Dennis C. CookeJohn J. Diez has served as President, Global Fleet Management Solutions since February 2012.September 2019. Previously, Mr. Cooke served as Senior Vice President and Chief of Operations, U.S. and Canada Fleet Management Solutions from July 2011 to February 2012. Prior to joining Ryder in July 2011, Mr. Cooke held various positions with General Electric (GE) and related companies, including Vice President and General Manager of GE Healthcare’s Global MRI business from 2000 to 2005. He then served as President and Chief Executive Officer of GE Security’s Homeland Protection business from 2005 to 2009, and continued serving in those roles from 2009 to 2011 after the business was acquired by the Safran Group and became Morpho Detection, Inc.
John J. Diez has served as President of Dedicated Transportation Solutions sincefrom March 2015. Previously, Mr. Diez served2015 to August 2019, as Senior Vice President of Ryder Dedicated from March 2014 to February 2015, and as Senior Vice President of Asset Management from January 2011 to February 2014. Mr. Diez joined Ryder's Finance department in 2002 and has since held various positions within Finance
including Senior Vice President Global Field Finance and Vice President and Chief Financial Officer of Fleet Management Solutions.
J. Steven Sensing has served as President of Global Supply Chain Solutions since March 2015. In September 2019, the DTS business was consolidated under the leadership of Mr. Sensing. Previously, Mr. Sensing served as Vice President and General Manager of the Technology industry group from February 2007 to February 2015. In July 2014, he also added the Retail industry group under his leadership. Mr. Sensing joined Ryder in 1992 and has since held various positions within Dedicated Services, Transportation Management and Distribution Management.
Robert D. Fatovic has served as Executive Vice President, Chief Legal Officer and Corporate Secretary since May 2004. He previously served as Senior Vice President, U.S. Supply Chain Operations, Hi-Tech and Consumer Industries from December 2002 to May 2004. Mr. Fatovic joined Ryder’s Law department in 1994 as Assistant Division Counsel and has held various other positions within the Law department including Vice President and Deputy General Counsel.
Frank Lopez was appointed toJohn Gleason has served as Executive Vice President and Chief Human ResourcesSales Officer in February 2016.since November 2015. Previously, Mr. Lopez held the position ofGleason served as Senior Vice President of Global Human Resources Operations since July 2013. Mr. LopezFleet Management Solutions from October 2009, when he joined Ryder, in 2002to October 2015. Prior to joining Ryder, Mr. Gleason served as Chief Sales Officer for Automatic Data Processing from April 2005 to September 2009 and has since held various positions within the Human Resources, Labor Relations and Legal functions.as Senior Vice President of Sales from July 1998 to April 2005.
Karen M. Jones has served as Executive Vice President and Chief Marketing Officer since October 2014. She joined Ryder in September 2013 as Senior Vice President and Chief Marketing Officer. Prior to joining Ryder, Ms. Jones was Chief Marketing Officer for NRG/Reliant Energy, Inc from 2010 to 2013. Previously, Ms. Jones served as Senior Vice President of Marketing and Corporate Communications for DHL Express U.S. from 2006 to 2009 and as Vice President of Advertising, Brand Management and Promotion from 2004 to 2006. In addition, Ms. Jones has served in key positions responsible for worldwide brand advertising, sponsorship, and strategic alliances for Hewlett Packard.
John GleasonFrank Lopez was appointed as Executive Vice President and Chief SalesHuman Resources Officer in November 2015.February 2018. Previously, Mr. GleasonLopez served as Chief Human Resources Officer since February 2016 and Senior Vice President, of Global Fleet Management Solutions from October 2009, when heHuman Resources Operations since July 2013. Mr. Lopez joined Ryder to October 2015. Prior to joining Ryder, Mr. Gleason served as Chief Sales Officer for Automatic Data Processing (ADP) from April 2005 to September 2009in 2002 and ashas since held various positions within the Human Resources, Labor Relations and Legal functions.
Timothy (Tim) Fiore was appointed Senior Vice President and Chief Procurement Officer in March of Sales2018. He previously held the same role from July 19982002 to April 2005. Prior to his current role, Mr. Fiore was the Senior Vice President and Chief Procurement Officer of ThyssenKrupp NA, a manufacturer and supplier of automotive and industrial components and equipment, from 2012 until his retirement in 2014. In that role, he was responsible for developing and implementing ThyssenKrupp’s first consolidated North American supply management program. He also serves as Chair of the Institute for Supply Management's Manufacturing Business Survey Committee since 2017. Over the course of his career, Mr. Fiore has also held senior supply management roles at Terex Corporation, Celanese Corporation, and United Technologies Corporation.
Rajeev Ravindran joined Ryder and was appointed Senior Vice President and Chief Information Officer in January 2018. Mr. Ravindran has over 20 years of IT leadership experience and was previously the CIO and Group Vice President at JM Enterprises.Enterprises since 2012. Prior to JM, RajeevMr. Ravindran worked in IT leadership roles at various companies including Interactive Metronome, Asista.com, and AutoNation. Rajeev has a degree in Electrical & Computer Engineering from the University of Miami.
Frank Mullen joined Ryder and was appointed Vice President and Controller in September 2017. Mr. Mullen joined Ryder from Global Eagle Entertainment, a global provider of media, content, connectivity and data analytics, where he held the position of Senior Vice President and Chief Accounting Officer since 2016. From 2015 to 2016, he served as Vice President and Controller of Pinnacle Foods Inc., a manufacturer, marketer and distributor of branded food products. Prior to joining Pinnacle, Mr. Mullen held roles of increasing responsibility at Aramark, a provider of food service, facilities and uniform services, from 2000 through 2015, including Vice President and Assistant Controller from 2014 to 2015 and Associate Vice President – Corporate Accounting from 2006 to 2014. Mr. Mullen began his career in the Audit & Assurance practice of Arthur Andersen LLP. He holds a Bachelor of Science degree in accounting from Villanova University and is a Certified Public Accountant.
FURTHER INFORMATION
For further discussion concerning our business, see the information included in Items 7 and 8 of this report. Industry and market data used throughout Item 1 was obtained through a compilation of surveys and studies conducted by industry sources, consultants and analysts.
We make available free of charge through the Investor Relations page on our website at www.ryder.com our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports through the Investor Relations page on our website at www.ryder.comas soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.Commission (SEC). The SEC maintains an Internet site that contains our reports, proxy and information statements, and our other SEC filings. The address of the SEC's website is www.sec.gov.
In addition, our Corporate Governance Guidelines, Principles of Business Conduct and Board committee charters are posted on the Corporate Governance page of our website at www.ryder.comwww.investors.ryder.com. Upon request to our Investor Relations page on our website at www.ryder.com, we will provide a copy of these documents to anyone, free of charge.
ITEM 1A. RISK FACTORS
The following contains all knownis a cautionary discussion of the material risks and uncertainties that management believes affect us. Any of the following risks, as well as risks that we do not know or currently deem immaterial, could affecthave a material adverse effect on our business.business, financial condition or results of operations. Accordingly, you should carefully consider the following risk factors in conjunction with all of the other information set forth in or incorporated by reference in this Form 10-K.
UncertainDecreased customer demand for transportation services due to adverse economic conditions, competition or unfavorable economic and industry conditionsother factors could adversely impact our business and operating results.results.
Although macro-economic risk affects most industries, theThe transportation industry is particularlyhighly cyclical and highly susceptible to changestrends in economic activity. Weakness or uncertainty in economic conditions in the United States, and market conditions asto a lesser extent the other geographic markets in which we operate, could adversely impact our business and operating results. Our business relies on the strength of our customers’ businesses and the level of confidence our customers have about current and future market conditions.economic conditions and trends. Our vehicles are leased or rented to customers that transport goods commercially, so the demand for our products and services is tied directly to the production and sale of goods by our customers, and more generally, the health of the North American economy and overall levels of competition in the transportation and logistics industry. Because of this, our business may begin to slow before market slowdowns, at the point of customer uncertainty, and may recover later than market recoveries, as our customers may continue to feel uncertain about future market conditions. The long-term ChoiceLease product offering and short-term rental of commercial vehicles comprise a large portion of our business. Our vehicles are leased or rented to customers that transport goods commercially so the demand for our products is directly tied to the production and sale of goods by our customers. As a result, when fewer goods are sold by our customers, demand for our services may decrease. Also, sudden changes in fuel prices and fuel shortages may adversely impact the total vehicle miles driven by our customers. If uncertainty and lack of customer confidence around macroeconomic and transportation industry conditions increase, they may impact our future growth prospects, and our business and results of operations could be materially adversely affected.
In a weak or volatile economy,Among our services and product offerings, demand for our longer-term contractual services may decrease, waver or become less predictableis particularly susceptible to changes in economic and market conditions, as customers are often unwilling to commit to long-term lease, maintenance, dedicated services or supply chain contracts. Contractual-based services include ChoiceLease and SelectCare contracts in our FMS business segment, dedicated services in our DTS business segment and supply chain contracts in our SCS business segment.a weak or volatile economy. Accordingly, any sustained weakness in demand or a protracted economic downturn can negatively impact performance and operating results in our contractual-based service offerings. Although we experienced continued growth inlonger-term contractual services, which include ChoiceLease during 2017, our customers still remain cautious about entering into long-term leases.
Customer uncertainty may serve to increase demand for our transactional services because they do not require a long-term commitment. Transactional-based services include commercial rental and used vehicle salesSelectCare contracts in our FMS business segment. Although commercial rental demand began to stabilize in the second half of 2017, following a period of soft demandsegment, supply chain and uncertainty in the latter part of 2015 through the first half of 2017, rental demand may decline again or face more unexpected volatility in the future.
Our capital intensive business requires us to make capital decisions based upon projected customer activity levels.
We make significant investments in rental vehicles to support our rental business based on anticipated customer demand. We make commitments to purchase the vehicles months in advance. We must predict fleet requirements and make commitments based on demand projections and various other factors. Missing our projections could result in too much or too little capacitylast mile delivery contracts in our rental fleet. Overcapacity could require us to dispose of vehicles at lower than anticipated pricing levels or resultSCS business segment and dedicated services in asset write-downs and undercapacity could negatively impact our ability to reliably provide rental vehicles to our customers.DTS business segment.
We bear the residual risk on the value of our vehicles.vehicles.
Impact on Used Vehicle Sales. We generally bear the risk that we will not be able to resell our vehicles at a price equal to or above their expected residual riskvalues. If we overestimate a vehicle’s residual value this could contribute to lower gains or losses on the valuesales of our used vehicles. BeginningA decline in the latter part of 2015 and continuing through 2017, we saw a weakening of conditions in the used vehicle sales market which adversely affected used vehicle sales volume and pricing, especially for tractors. If the marketdemand for used vehicles further declines,would likely result in a reduction in our residual values. Factors that could contribute to a decline in the market demand for used vehicles include an oversupply of vehicles in the marketplace; decline in customers due to economic conditions; concerns regarding the real or there is a concern regarding theperceived quality, maintenance or condition of our vehicles, we may obtain lower sales proceeds upon the sale of used vehicles, which may impact the residual value estimates of our operating fleet.Wevehicles; foreign exchange movements; or changes in technology that render select vehicle technology obsolete or less attractive to purchasers. We sell our used vehicles through various channels, including retail sales centers, at our branch locations, through our website at www.UsedTrucks.Ryder.com, as well as through the wholesale market. Pricing and demand for used vehicles varies among selling channels, particularly between the retail and wholesale markets, as we generally obtain lower proceeds on vehicles sold through wholesale channels. If we are unable to meet our targeted fleet countssales goals and inventory levels through our projected sales mix of retail versus wholesale, sales, we may be required to sell more vehicles than planned through the wholesale market, which will impact our sales proceeds. InBeginning in the latter part of 2016,2015, which reflected an all-time high for residual values as a percent of net vehicle investment, and continuing through mid-2019, we increased wholesaling activity which contributed to lowerexperienced a weakening of conditions in the used vehicle sales resultsmarket. Beginning in 2016the second half of 2019, conditions significantly deteriorated further requiring us to sell a larger number of used vehicles through wholesale channels and 2017.adversely affected used vehicle sales volume and pricing. As a result, we lowered residual value estimates in the third quarter of 2019 for the entire fleet of power vehicles. If the market for our used vehicles declines further than those lower residual values, or there is a concern regarding the quality, maintenance or condition of our vehicles, we may obtain lower sales proceeds upon the sale of used vehicles, which would negatively impact the residual value estimates of our operating fleet and require us to further lower our residual value estimates.
Impact on our ChoiceLease Product Line. Changes in residual values also impact the overall competitiveness of our ChoiceLease product line, as estimated sales proceeds are a significant component of the overall price of the lease. Additionally, technology changes, and sudden changes in supply and demand, together withcompetitor pricing, and other market factors beyond our control, vary from year to year and from vehicle to vehicle, making it difficult to accurately predict residual values used in calculating and pricing our depreciation expense.ChoiceLease arrangements. Although we have developed disciplines related to the management and
maintenance of our leased vehicles designed to maintainmaximize the value of our used vehicles, there is no assurance that these practices will sufficiently reduce the residual risk.
For a detailed discussion on our accounting policies and assumptions relating to depreciation and residual values, please see the “Critical Accounting Estimates - Depreciation and Residual Value Guarantees” sectionEstimates” in Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.
Our profitability could be negatively impacted if our key operational assumptions and pricing structure prove to be invalid.
Our inabilitySubstantially all of our SCS and DTS services, as well as our ChoiceLease and SelectCare products, are provided under long-term contractual arrangements with our customers. These contractual arrangements include pricing terms that are subject to maintain appropriate commercial rental fleet utilizationa number of key operational assumptions including, but not limited to:
with respect to our SCS contracts, the scope of services, production volumes, operational efficiencies, the mix of fixed versus variable costs, productivity and other factors;
with respect to our DTS contracts, market wages, availability of labor, insurance rates and other operating costs that experience market fluctuations; and
with respect to our ChoiceLease and SelectCare contracts, residual values (ChoiceLease only) and maintenance expense.
If we are incorrect in our assumptions, or, as a result of subsequent changes in customer demand or other market forces that are outside of our control, these assumptions prove to be invalid, we could have lower margins than anticipated in a contract or segment, lose business, or be unable to offer competitive products and services. For example, our SCS and DTS services are highly customized and offer a high degree of specialization to meet the needs of our customers. We may not be able to adjust the pricing terms in some of our SCS and DTS contracts in the event any of our assumptions prove to be incorrect or invalid. As a result, if we do not accurately predict the costs to us to execute the SCS or DTS contract, it could result in a significant decrease in revenue or loss on the contract that could adversely impactaffect our profitability.operating results and financial condition. Additionally, although some of our SCS or DTS contracts provide for renegotiation upon a material change, there is no assurance that we will be successful in obtaining the necessary price adjustments or that pricing will be sufficient to cover the risk.
InOur capital intensive business requires us to make capital decisions based upon projected customer activity levels and market demand for our commercial rental product line, weline.
We make significant investments in vehicles to support our rental business based on anticipated customer demand. We make commitments to purchase the vehicles many months in advance of the expected use of the vehicle and seek to optimize the size and mix of the commercial rental fleet based upon our expectations of overall market demand.on demand projections and various other factors. As a result, we bear the risk for ensuring that we have the proper vehicles in the right conditionour business is dependent on our ability to accurately estimate future levels of rental activity and locationconsumer preferences to effectively capitalize on market demand in order to drive the highest levels of utilization and revenue per unit. Missing our projections could result in too much or too little capacity in our rental fleet. Overcapacity could require us to deploy or sell vehicles at lower than anticipated pricing levels or result in asset write-downs, and undercapacity could negatively impact our ability to reliably provide rental vehicles to our customers, each of which could result in lower revenues, higher costs and an adverse impact on profitability. We employ a sales force and operations team on a full-time basis to manage and optimize this product line; however, their efforts may not be sufficient to overcome a significant changeunforeseen changes in market demand in the rental business. In contrast, in our ChoiceLease product line, we typically do not purchase vehicles until we have an executed contract with a customer.
We operate in a highly regulated industry, and changes in existing regulations or costs of compliance with, or liability for violation of, existing or future laws or regulations could have a material adverse effect on our business.
FailureOur business is subject to executeregulation by various federal, state, local and foreign governmental agencies. In the United States, we are regulated by the DOT as well as local, state and federal agencies that exercise broad powers over our growth strategymotor carrier operations, safety and develop, marketthe generation, handling, storage, treatment and consistently deliver high-quality services that meet customer expectations, may causedisposal of waste materials. The FMCSA, under the DOT, also manages a compliance and enforcement initiative partnering with state agencies designed to monitor and improve commercial vehicle motor safety. We are also subject to other regulations relating to our revenuebusiness, employees and earnings to suffer.customers,
Our long-term strategy includes growingincluding labor and employment laws, international laws and regulations governing our outsourcing services by targeting private fleets new to outsourcingforeign operations, environmental laws and key industriesregulations, among others.
Compliance with innovative solutions, operational excellence,existing laws and best-in-class talentregulations has involved, and information technology. To successfully execute on this strategy, we mustexpect will continue to focusinvolve, significant time commitments and costs, and in recent years, we have seen an increase in proactive regulatory enforcement. In addition, new laws, rules or regulations may be adopted or interpretative changes to existing regulations could be issued at any time. Any new initiatives could further increase our costs or operating complexity and our ability to offer certain services in the jurisdictions in which we operate.
Our failure to comply with any existing or future laws, rules or regulations to which we are, or may become subject, whether actual or alleged, could have a material adverse effect on developing effective solutions that meetour business and on our ability to access the capital required to operate our business. Among other things, any such failure could expose us to reputational harm, loss of business, fines, penalties or potential litigation liabilities, including costs, settlements and judgments, as well as the loss of operating authority and restrictions on our operations. For example, the DOT periodically conducts compliance reviews to ensure compliance with its safety and other rules and regulations, and evaluates the safety rating assessed to motor carriers (“satisfactory,” “conditional” or “unsatisfactory”). The receipt of a final “conditional” or “unsatisfactory” safety rating due to deficiencies in our safety and compliance program could have a material adverse effect on our customer relationships, as some of our existing and target customers’ evolving needs. This requirescustomer contracts require a “satisfactory” DOT safety rating. Moreover, if we fail to comply with DOT regulations, including our failure to maintain a “satisfactory” DOT safety rating, the skills, experienceDOT could levy fines and efforts of our management team and continued investment in new technology, sales and marketing. Expanding our service offerings may also require us to enter into new marketscease all transportation services under our operating authority, which could have a material adverse effect on our business.
In addition, the FMCSA’s enforcement and encounter new competitive challenges,compliance programs, designed to monitor and improve commercial motor vehicle safety by measuring the safety record of both the motor carrier and the driver, may shrink the industry’s pool of drivers. This and the shortage of qualified drivers could increase the costs to attract, train and retain qualified drivers as well as increase driver turnover, decrease asset utilization, limit growth, and adversely impact our results of operations.
Other compliance issues we may face include:
companies we acquire may not have historically maintained internal controls, policies or procedures to monitor compliance with the regulatory and legal requirements consistent with our standards;
our operations in Canada, Europe and Mexico may expose us to liability for failure to comply with local laws and regulatory requirements of foreign jurisdictions, which may strainvary significantly from country to country, including local tax laws, and anti-bribery laws;
compliance with environmental laws and regulations, including regulations imposed by the EPA on exhaust emissions and increasingly stringent regulations related to climate change, which may impose restrictions on our management, capital resources, information systems and customer service.
Notwithstandingactivities or require us to take certain actions, all of which may, over time, increase our efforts, these new or changed service offerings may not meet customer demands, prove to be profitable or succeed in the long term. If we do not make the right strategic investments to respond to current customer needs and establish and develop new customer relationships, our ability to develop and maintain a competitive advantage and continue to grow could be negatively affected.
Even with the right solutions, our growth strategy depends on delivering consistent operational excellence and strong customer service. Our inability to deliver our services and solutions as promised on a consistent basis, or our customers having a negative experience or otherwise becoming dissatisfied, can impair our relationships with new or existing customerscosts and adversely affect our brandbusiness and reputation,results of operations;
compliance with health and safety laws and regulations imposed by OSHA; and
compliance with new laws or regulations that may change the employee/independent contractor classification of independent contractors doing business with us, which could in turn, adversely affect revenuecause us to incur additional exposure under federal and earnings growth.state tax and employment laws.
In addition, we are also subject to reputational risk and other detrimental business consequences associated with noncompliance by other parties with whom we engage with, such as employees, customers, agents, suppliers or other persons using our supply chain or assets to commit illegal acts, including the use of company assets for terrorist activities, or a breach of data privacy laws.
We may fail to respond adequately or in a timely manner to innovative changes in new technology in our industry. industry.
In recent years, our industry has been characterized by rapid changes in technology, leading to innovative transportation and logistics concepts that could changehave impacted or have the waypotential to significantly impact our industry does business.business model, competitive landscape and the industries of our customers and suppliers. For example, new concepts are currently under development for more advanced electric vehicles, automatic or semi-automatic self-driving vehicles, connected vehicle platforms, and drones. There may be additionalAdditional innovations impacting the transportation, trucking and supply chain/logistics industries are likely that we cannot yet foresee. In addition, there is a rapidly growing demand for e-commerce services, last mile home delivery and asset- and freight-
sharing services, which continue to disrupt the transportation industry with the goal of bringing efficiencies to the transportation marketplace.
Our inability to quickly adapt to and adopt new innovations in products and processes desired by our customers may result in a significant loss of demand for our service offerings. In addition, advances in technology may require us to increase investments in order to remain competitive, and our customers may not be willing to accept higher prices to cover the cost of these investments. Our lease and rental fleets could become unfavorable with our customers or obsolete within a relatively short period of time, and we may no longer be able to find buyers for our used vehicles. An increase in customer use of electric vehicles could reduce the needdemand for our vehicle maintenance services, diesel vehicles and related offerings. Likewise, self-driving vehicles may reduce the needdemand for our dedicated service offerings, where, in addition to a vehicle, Ryder provides a driver as part of an integrated, full service customer solution. While we are actively engaged in developing strategic partnerships with new technology providers, developing new products, and evaluating emerging technology, we cannot be certain that such initiatives will be successful or timely, and our failure to successfully and timely implement any of these initiatives could have an adverse impact on our financial condition or results of operations.
We face risks related to cybersecurity attacks and other breaches of our systems and information technology.
We depend on the proper functioning and availability of our information systems in operating our business. It is important that the data processed by these systems remains confidential, as it often includes sensitive customer information, confidential customer transaction data, employee records, and key financial and operational results and statistics. Failure to prevent or mitigate data loss or system intrusions from cybersecurity attacks or other security breaches could expose us, our vendors, or our customers to a risk of loss or misuse of such information, adversely affect our operating results, restrict or prevent operations or financial reporting, result in litigation or potential liability and otherwise harm our business. Likewise, data privacy breaches from our systems could expose personally identifiable information of our employees or contractors, sensitive customer data, or vendor data to unauthorized persons, adversely impacting our customer service, employee relationships and our reputation. We maintain an information security program, which consists of safeguards and controls to help ensure that our core fundamentals of confidentiality, integrity and availability are supported, but we cannot ensure that we will be able to prevent or mitigate all such data breaches or cyberattacks.
In addition, some of our software applications are utilized by third parties who provide outsourced administrative functions. Such third parties may have access to information we maintain about our company, customers, employees and vendors or operate systems that are critical to our business operations and services. These third parties are subject to risks imposed by data breaches, cyberattacks and other events or actions that could damage, disrupt or close down their networks or systems.
Our information systems are protected through physical and software safeguards as well as backup systems considered appropriate by management. However, threats to network and data security are becoming increasingly diverse and sophisticated. We have experienced cybersecurity threats and vulnerabilities targeting our information technology systems and networks and those of our third party providers. Such prior events, to date, have not had a material impact on our financial condition or results of operations. While we have significant security processes and initiatives in place, we may be unable to fully detect, mitigate or protect against a material breach or disruption in the future. In addition, efforts to prevent, detect and mitigate data breaches and cyberattacks subject us to additional costs. We have cyber insurance coverage in place that may cover certain events described above, subject to deductibles and coverage limitations. It is possible that claims could exceed the limits of our coverage. Further, such insurance may not address or cover injury to reputation or loss of business that may result should such an attack be material.
In addition, regulatory authorities have increased their focus on how companies collect, process, use, store, share and transmit personal data. New privacy security laws and regulations, including the United Kingdom’s Data Protection Act 2018 (“DPA”) and the European Union General Data Protection Regulation 2016 (“GDPR”), pose increasingly complex and rigorous compliance challenges, which may increase our compliance costs. Any failure to comply with data privacy laws and regulations could result in significant penalties, fines, legal challenges and reputational harm.
Failure to maintain, upgrade and consolidate our information technology networks could adversely affect us.us.
TheOur success of our strategic initiatives designed to increase our sales and capture a greater percentage of the outsourced transportation and supply chain markets is dependent in varying degreesdepends on the timely delivery and the functionality of information technology systems to support them.our service offerings. Extended delays or cost overruns in securing, developing and otherwise implementing technology solutions to support our business and the new business initiatives we are developing now, and will be developing in the future would delay and possibly even prevent us from realizing the projected benefits of these initiatives. Advances in technology require increased investments to remain competitive, and our customers may not be willing to accept higher prices to cover the cost of these investments. In addition, our reputation with our customers may suffer if outages, system failures or delays in
timely access to data occur in legacyour information technology systems that support key business processes.
We are continuously upgrading and consolidating our information technology systems includingby enhancing legacy systems, replacing legacy systems with successor systems and acquiring new systems with newerenhanced functionality. These types of activities subject us to additional costs and inherent risks associated with replacing and modifying theseour existing systems, including impairment of our ability to provide our services, potential disruption of our internal control structure, substantial capital expenditures, additional administration and operating expenses, retention of sufficiently skilled personnel to implement and operate the new systems, demands on management time, disruptions in our business operations, and other risks and costs of delays or difficulties in transitioning to new systems or integrating new systems into our current systems. Our system implementations may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. In addition,
We are in the process of implementing a multi-year Enterprise Resource Planning (ERP) project. This new system is designed to improve efficiencies and integrate and automate certain internal financial, operating, and other applications that are critical to our business operations. The implementation, operation, and proper functionality of the ERP system will require a significant investment of human, technological, and financial resources. While we expect to invest significant resources in planning, project management, consulting and training to minimize disruptions to our business during the conversion to the new technology systemsERP system, it is possible that significant implementation, operational, and functionality issues may cause disruptions inarise. It is further possible that we may experience significant delays, increased costs, and other difficulties that are not presently contemplated and that may interfere with our ability to meet our customer service requirements. If we encounter unforeseen problems with regard to our new ERP system, our business, operations and have an adverse effect onfinancial condition could be adversely affected.
We operate in a highly competitive industry and our business may suffer if we are unable to adequately address potential downward pricing pressures and operations, if not anticipatedother competitive factors.
The transportation industry is highly competitive. We face competition in all geographic markets and appropriately mitigated. each industry sector in which we operate. Increased competition or our inability to compete successfully may lead to a reduction in revenues, reduced profit margins, increased pricing pressure, or a loss of market share, any one of which could affect our financial results. Numerous competitive factors could impair our ability to maintain our current profitability, including the following:
our inability to obtain expected customer retention levels or profitability;
We may be subject to cybersecurity risks,we compete with many other transportation and logistics service providers, some of which are beyond have greater capital resources or lower cost structures than we do;
our control.inability to compete with new entrants in the transportation and logistics market that may offer similar services at lower cost or have greater technological capabilities;
customers may choose to provide the services we provide for themselves;
We depend on the proper functioningour competitors may periodically reduce their prices to gain business, especially during times of declining economic growth, which may limit our ability to maintain or increase prices or impede our ability to maintain our profitability or grow our market share or profitability;
many customers periodically accept bids from multiple carriers for their shipping needs, and availability of our information systems in operating our business, including communications and data processing systems. It is important that the data processed by these systems remains confidential, as it often includes competitive customer information, confidential customer transaction data, employee records, and key financial and operational results and statistics. Failure to preventthis process may depress rates or mitigate data loss or system intrusions from cybersecurity attacks or other security breaches could expose us or our vendors or customers to a risk of loss or misuse of such information, adversely affect our operating results, result in litigation or potential liability for us and otherwise harm our business. Likewise, data privacy breaches by employees and others who access our systems may pose a risk that sensitive customer or vendor data may be exposed to unauthorized persons or to the public, adversely impacting our customer service, employee relationships and our reputation.
In addition, portionsloss of some of our business utilize information systems that provide critical services to both our employeescompetitors;
the continuing trend toward consolidation in the trucking industry may result in larger carriers with greater financial resources than we have;
advances in technology require increased investments to remain competitive, and our customers. Cyber incidents that impactcustomers may not be willing to accept higher prices to cover the availability, reliability, speed, accuracy, or other proper functioningcost of these information systemsinvestments; and
because cost of capital is a significant competitive factor, any increase in either the cost of our debt or equity as a result of reductions in our debt rating or stock price volatility could have a significant impact on our operations. Some ofcompetitive position.
Failure to execute our software applications are utilizedgrowth strategy and develop, market and consistently deliver high-quality services that meet customer expectations may cause our revenue and earnings to suffer.
Our long-term growth strategy is to target clients new to outsourced transportation and logistics services and thereby expand the market for our services. We seek to execute our growth strategy by third parties who provide outsourced administrative functions,providing operational excellence, superior talent and best-
in-class information technology. By providing high-quality leasing services, we aim to attract customers that traditionally have only been interested in operating their own transportation and logistics networks.
To successfully execute on this strategy, we must continue to focus on developing innovative solutions that meet our existing and target customers’ evolving needs and keep pace with our competitors. Expanding our service offerings to entice and support new clients may strain our management, capital resources, information systems and customer service. We may also need to hire new employees, which may increase costs and may result in temporary inefficiencies until those employees become proficient in their jobs.
Notwithstanding our efforts, new or enhanced service offerings may not meet customer demands, prove to be profitable or succeed in the risklong term. If we do not respond to current customer needs and establish new, and further develop existing, customer relationships, our ability to maintain a competitive advantage and continue to grow our business profitability could be negatively affected.
We may be negatively impacted by adverse events in the global credit and financial markets, by an investment rating downgrade or by the loss of a cybersecurity incident. an investment grade rating.
Our information systemsbusiness is highly capital intensive and we have significant ongoing capital requirements that could affect our profitability if we are protected through physicalunable to obtain sufficient capital. In general, we rely in large part upon global credit and software safeguardsfinancial markets to fund our operations and contractual commitments as well as backup systems considered appropriate by management. However, werefinance existing debt. These markets can experience high levels of volatility for numerous reasons and our access to capital could be constrained for extended periods of time. Our ability to raise capital may be materially reduced and/or our borrowing costs may significantly increase if, among other things, access to public investment grade debt becomes limited or closed, we lose access to our global revolving credit facility, or funding costs increase due to the loss of an investment grade rating, a severe economic downturn or rising interest rates. Significant uncertainty, volatility, disruptions or downturns in the global credit and financial markets may also result in:
restricted access to capital and an increased cost of capital;
diminished liquidity and credit availability resulting in higher short- or long-term borrowing costs and more stringent borrowing terms;
unanticipated interest rate and currency exchange rate fluctuations; and
increased risk of default by counterparties under derivative instruments and hedging agreements.
As of December 31, 2019, we had $7.9 billion of outstanding indebtedness. If we are unable to fully protect againstraise additional capital by accessing the possibilitydebt and equity markets or our costs of damageraising additional capital were to materially increase, our ability to operate or breach created by natural disasters, power loss, telecommunications failures, cybersecurity grow our business, including refreshing, replacing and/or other security attacks in every potential circumstance that may arise.growing our vehicle fleets and acquiring new businesses, and refinance existing debt will be impaired, which could have a material adverse effect on our operating results or materially impact our ability to implement our long-term strategy.
We and the vehicle and equipment manufacturers in our FMS business rely on a small number of suppliers.suppliers.
We buy vehicles and related equipment from a relatively small number of original equipment manufacturers (OEMs) in our FMS business. Some of our vehicle manufacturers rely on a small concentration of suppliers for certain vehicle parts, components and equipment. A discrete event in a particular OEM'sOEM’s or supplier'ssupplier’s industry or location, or adverse regional economic conditions impacting an OEM or supplier'ssupplier’s ability to provide vehicles or a particular component, could adversely impact our FMS business and profitability. In addition, our business and reputation could also be negatively impacted if any parts, components or equipment from one of our suppliers suffer from broad-based quality control issues or become the subject of a product recall and we are unable to obtain replacement parts from another supplier in a timely manner.
We derive a significant portion of our SCS and DTS segment revenue from a relatively small number of customers.
customers.
During 2017,2019, sales to our top ten SCS customers representing all of the industry groups we service accounted for 53%54% of our SCS total revenue and 48%47% of our SCS operating revenue (total revenue less fuel and subcontracted transportation). Additionally, approximately 40%37% of our global SCS revenue is from the automotive industry and is directly impacted by automotive vehicle production. Our top ten DTS customers accounted for 46%47% of DTS total revenue and 39%40% of DTS operating revenue. The loss of any of these customers or a significant reduction in the services provided to any of these customers could materially and adversely impact our operations and adversely affect our SCS or DTS segment financialoperating results. While we continue to focus our efforts on diversifying our customer base, we may not be successful in doing so in the short-term.so.
We are also subject to credit risk associated with the concentration of our accounts receivable from our SCS and DTS customers. If one or more of these customers were to become bankrupt, insolvent or otherwise were unable to pay for the services provided by us, we may incur significant write-offs of accounts receivable or incur lease or asset impairment charges that could adversely affect our operating results and financial condition.
In addition, many of our customers operate in cyclical or seasonal industries, or operate in industries, including the food and beverage industry, that may be impacted by unanticipated weather, growing conditions (such as drought, insects or disease), natural disasters and other conditions over which we have no control. A downturn in our customers'customers’ businesses or unanticipated events impacting their businesses could cause a reduction in freight volume shipped by those customers or a reduction in their need for our SCS or DTS services.services, which could materially and adversely affect our operating results and financial condition.
We operate in a highly competitive industry and our business may suffer if we are unable to adequately address potential downward pricing pressures and other competitive factors.
Numerous competitive factors could impair our ability to maintain our current profitability. These factors include the following:
our inability to obtain expected customer retention levels or sales growth targets;
we compete with many other transportation and logistics service providers, some of which have greater capital resources than we do;
customers may choose to provide the services we provide for themselves;
some of our competitors periodically reduce their prices to gain business, and some of our smaller competitors may have lower cost structures than we do, which may limit our ability to maintain or increase prices; and
because cost of capital is a significant competitive factor, any increase in either the cost of our debt or equity as a result of reductions in our debt rating or stock price volatility could have a significant impact on our competitive position.
Our profitability could be negatively impacted if the key operational assumptions and pricing structure prove to be invalid.
Substantially all of our ChoiceLease, SelectCare, DTS and SCS services are provided under contractual arrangements with our customers. The pricing structure for our ChoiceLease and SelectCare business is based on certain assumptions regarding capital costs, our ability to acquire equipment at competitive rates from our suppliers, maintenance expense over the life of the contract, particularly in light of new engine technologies, residual values, productivity, and the mix of fixed and variable costs, many of which are derived from historical data and trends. Under most of our SCS contracts, all or a portion of our pricing is based on certain assumptions regarding the scope of services, production volumes, operational efficiencies, the mix of fixed versus variable costs, productivity and other factors.
If we are incorrect in our assumptions, or as a result of subsequent changes in our customers' business needs or operations, or market forces that are outside of our control, these assumptions prove to be invalid, we could have lower margins than anticipated or be unable to offer competitive products and services. Although some of our SCS contracts provide for renegotiation upon a material change, there is no assurance that we will be successful in obtaining the necessary price adjustments.
We may face difficulties in attracting and retaining drivers and technicians.technicians.
Drivers. We hire drivers primarily for our SCS and DTS business segment.segments. There is significant competition for qualified drivers in the transportation industry. Additionally, interventions and enforcement under the Federal Motor Carrier Safety Administration (FMCSA) Compliance, Safety, AccountabilityCSA program may shrink the industry'sindustry’s pool of drivers as those drivers with unfavorable scores may no longer be eligible to drive for us. As a result of driver shortages, we could be required to increase driver compensation, let trucks sit idle, utilize lower quality drivers or face difficulty meeting customer demands, all of which could adversely affect our growth and profitability.
Technicians. Similarly, we hire technicians in our FMS business segment to perform vehicle maintenance services on our ChoiceLease, SelectCare and rental fleets. In recent years, there has been a decrease in the overall supply of skilled maintenance technicians, particularly new technicians with qualifications from technical programs and schools, which could make it more difficult to attract and retain skilled technicians. If we are unable to maintain an adequate number of qualified technicians, whether through the retention of current technicians or the hiring of new qualified technicians, our business could be adversely affected.
We intend to continue to explore strategic transactions (including acquisitions or divestitures). Our business could be adversely affected if we are not able to identify or successfully execute these strategic transactions.
In furtherance of our strategy, we routinely evaluate opportunities and may enter into agreements for possible strategic transactions. We may face issuesbe unable to identify strategic transactions or we may be unable to negotiate commercially acceptable terms. Other risks involved in engaging in these strategic transactions include the possible failure to realize the expected benefits of such transactions within the anticipated time frame, or at all, such as cost savings, synergies, sales and growth opportunities. In addition, the integration of an acquired business may result in material unanticipated challenges, expenses and liabilities. Any one of these factors could result in lower than expected revenues or earnings related to combining the companies or derived from a strategic transaction and could adversely impact our financial condition or results of operations.
Failure to successfully negotiate with our union employees.
may result in strikes, work stoppages, or substantially higher labor costs.
We have approximately 4,1004,300 employees that are organized by labor unions whose wages and benefits are governed by 101104 labor agreements that are renegotiated periodically. Some of the industries in which we currently engage have experienced aA material work stoppage, slowdown or strike. Our business and operations could be impacted in the event of labor strikes or work stoppagesstrike involving our employees organized by labor unions in our FMS, DTS or SCS business segments.
We operate in a highly regulated industry, and costs of compliance with, or liability for violation of, existing or future regulations could significantly increase our costs of doing business.
Our business is subject to regulation by various federal, state, local and foreign governmental agencies. These agencies could institute new laws, rules or regulations or issue interpretation changes to existing regulations at any time. We have also seen an increase in proactive enforcement of existing regulations by some entities. Compliance with new laws, rules or regulations could substantially impair labor and equipment productivity, increase our costs or impact our ability to offer certain services. Conversely, our failure to comply with any applicable laws, rules or regulations to which we are subject, whether actual or alleged, could expose us to fines, penalties or potential litigation liabilities, including costs, settlements and judgments. We are also subject to reputational risk and other detrimental business consequences associated with noncompliance by other parties with whom we engage with, such as employees, customers, agents, suppliers or other persons using our supply chain or assets to commit illegal acts, including the use of company assets for terrorist activities, or a breach of data privacy laws.
U.S. Department of Transportation Regulations. The DOT and various local, state and federal agencies exercise broad powers over our motor carrier operations, safety and the generation, handling, storage, treatment and disposal of waste materials. Any regulatory initiatives could increase costs or operating complexity in the various states in which we operate.
Federal Motor Carrier Safety Administration (FMCSA) Compliance, Safety, Accountability Program. The FMCSA's Compliance, Safety, Accountability program may increase the cost for our customers given the potential impact to the driver pool, the additional hours of service requirements and additional investment in vehicle equipment. In addition, althoughRyder's scores are below the thresholds that would trigger concern, if performance worsens, we could risk intervention that may create risk to our operating authority.
Labor and Employment Laws and Regulations. We maintain operations and employees in numerous states throughout the United Sates, which are governed by federal and state labor and employment laws and regulations relating to compensation, benefits, healthcare and various workplace issues, all of which are applicable to our employees, and in some cases, independent contractors. State labor and employment rules vary from state to state and in some states, require us to meet much stricter standards than required in other states. Also, we are parties to various class-action lawsuits related to wage and hour violations and improper pay in certain states and may become exposed to similar litigation in the future. Unfavorable or unanticipated outcomes in any of such lawsuits could subject us to increased costs and impact our profitability.
International Laws Governing Countries Where We Have Operations.We currently operate in Canada, Europe, Mexico and Singapore, where we are subject to compliance with local laws and regulatory requirements of foreign jurisdictions, including local tax laws, and compliance with the Foreign Corrupt Practices Act and similar anti-bribery laws. Local laws and regulatory requirements may vary significantly from country to country. Customary levels of compliance with local regulations and the tolerance for noncompliance by regulatory authorities may also vary in different countries and geographical locations, and impact our ability to successfully implement our compliance and business initiatives in certain jurisdictions. Also, adherence to rigorous local laws and regulatory requirements may limit our ability to expand into certain international markets and result in residual liability for legal claims and tax disputes arising out of previously discontinued operations. In addition, continued uncertainty resulting from the U.K.'s withdrawal from the European Union (Brexit) could adversely impact our (or our customers) business financial condition and results of operations.
Laws Governing the Operations of our Customers. The U.S. governmentdisruptions or governments of other nations that regulate the operations of our customers or any instituted laws relating to cross-border tariffs or other penalties could disrupt international or domestic supply chain operations. The laws could adversely affect the ability for customers to continue their international operations, which would have a negative impact on the demand for our services.
Environmental Regulations Regarding Vehicle Exhaust Emissions, Carbon Emissions and Climate Change May Negatively Impact our Business. Current and future regulations governing vehicle exhaust emissions could adversely impact our business. The Environmental Protection Agency (EPA) issued regulations that required progressive reductions in exhaust emissions from certain diesel engines. The EPA Phase 2 vehicle emission requirements for medium and heavy-duty vehicles will include technology-advancing standards that substantially reduce greenhouse gas emissions and fuel consumption, allowing vehicle manufacturers to meet standards over time through a mix of different technologies. Rules impacting 2017 - 2027 model years require reductions in carbon dioxide, which can only be reduced by improving fuel economy, and which require compliance with different emissions standards for both engines and chassis, based on vocation. OEMs may be required to install additional engine componentry, additional aerodynamics on chassis and low-rolling resistance tires to comply with the regulations, which may result in higher operating costs, associated with the more complex componentry and a shorter useful tread life for tires and increased operating costs for customers and us.
Although customers may see reduced fuel consumption under new vehicle emission standards, this could be offset by higher maintenance costs per mile. Each of these requirements could also result in higher prices for vehicles, diesel engine fuel and vehicle maintenance, which are passed on to our customers, as well as higher maintenance costs and uncertainty as to reliability of the new engines, all of which could over time, increasehave an adverse effect on our costs and adversely affect our business andfinancial position, results of operations. New engine technologies may also impact the residual values of these vehicles when sold in the future.operations, or cash flows.
Future regulation of other environmental matters, including potential limits on carbon emissions under climate-change legislation, could also impact our business and profitability if enacted.
Other Regulations. We may also become subject to new or more restrictive regulations imposed by the Occupational Safety and Health Administration, the Department of Homeland Security, U.S. Customs Service or other authorities.
New lease accounting rules may negatively impact customer demand for our ChoiceLease product.
Demand for our ChoiceLease product line is based in part on customers' decisions to lease rather than buy vehicles. A number of factors can impact whether customers decide to lease or buy vehicles, including economic benefits, accounting considerations, tax treatment, interest rates and operational flexibility. In February 2016, the Financial Accounting Standards Board issued a new standard on lease accounting that differs from current practice. Most notably, the new approach eliminates off-balance sheet treatment of leases and require lessees to recognize a right-of-use asset and a lease liability on their balance sheets for all leases with a term of greater than 12 months. This new accounting standard must be implemented by public companies beginning with fiscal years that start after December 15, 2018, although companies may opt to adopt the standard before this date. Implementation of the new standard could be perceived to make leasing a less attractive option for some of our ChoiceLease customers.
Changes in income tax regulations for U.S. and multinational companies may increase our tax liability.
On December 22, 2017, President Trump signed into law U.S. federal tax legislation (the “2017 Tax Cuts and Jobs Act”), which includes a broad range of tax reform measures affecting businesses, including the lowering of corporate income tax rates, limits on interest deductibility, incentives for capital spending by permitting full expensing of the purchase of qualifying assets, the loss of certain business deductions, the loss of like-kind exchange programs for our assets and modifications of international tax provisions. These changes will not only impact our company, but will impact our customers’ businesses as well as the economy in general. While we currently believe these changes in the aggregate will have a positive effect on the Company and the overall economy, we cannot predict this with certainty. Further, the U.S. Congress, the Organization for Economic Co-operation and Development (OECD), the European Union, and other government agencies in jurisdictions in which we and our affiliates invest or do business have maintained a focus on the taxation of multinational companies. The OECD, which represents a coalition of member countries, is supporting changes to numerous long-standing tax principles through its base erosion and profit shifting (BEPS) project, which is focused on a number of issues, including the shifting of profits between affiliated entities in different tax jurisdictions. The European Union has a number of on-going tax initiatives. Certain of the proposals for further tax reform, if enacted by the United States or any state thereof or by other jurisdictions in which we or our affiliates invest or do business, could adversely affect us. It is unclear what any actual legislation would provide or what its prospects for enactment would be.
Volatility in assumptions and asset values related to our pension plans may reduceadversely affect the valuation of our profitability and adversely impactobligations, the current funding levels.
and our pension expense under our defined benefit pension plans.
We historically sponsored a number of defined benefit plans for employees not covered by union-administered plans, including certain employees in foreign countries. The retirement benefits under the defined benefit plans are frozen for non-grandfathered and certain non-union employees. Our major defined benefit plans are funded through qualified pension trusts, with trust assets invested in a diversified portfolio. The cash contributions made to our defined benefit trusts are required to comply with minimum funding requirements imposed by employee benefit and tax laws. The aggregate projected benefit obligations and plan assets of our global defined benefit pension plans as of December 31, 2017,2019, were $2.3 billion and $1.9$2.0 billion, respectively. The difference between plan obligations and assets, or the funded status of the plans, is a significant factor in determining pension expense and the ongoing funding requirements of those plans. Macroeconomic factors, as well as changes in investment returns and discount rates used to calculate pension expense and related assets and liabilities, can be volatile and may have an unfavorable impact on our costs and funding requirements. Although we have actively sought to control increases in these costs and funding requirements through investment policies and plan contributions, as well as through a lump-sum buyout offer in 2015, there can be no assurance that we will succeed, and continued cost and funding requirement pressure could reduce the profitability of our business and negatively impact our cash flows.
We are subject to risk of multi-employer pension plan withdrawal.
withdrawal.
We participate in certain U.S. multi-employer pension (MEP) plans that provide defined benefits to employees covered by collective bargaining agreements. In the event that we withdraw from participation in oneany of these plans, then applicable law could require us to make an additional lump-sum contribution to the plan. Our withdrawal liability for any MEP plan would depend on the extent of the plan'splan’s funding of vested benefits. Economic conditions have caused MEP plans to be significantly underfunded. As a result, although we have taken steps in recent years to withdraw from thesesignificantly underfunded MEP plans, we may still have liability for at least a period of time following our withdrawal. If the financial condition of the MEP plans were to continue to deteriorate, we could be subject to additional assessments.
We may fail to establish self-insurancesufficient insurance reserves based on historical loss development factors, which could lead to adjustments in theand adequately estimate for future based on actual development experience.
workers’ compensation and vehicle liabilities.
We retain a portion of the accident risk underare partially self-insured for vehicle liability and workers'workers’ compensation insurance programs.claims. Our self-insurance accruals are based on actuarially estimated, undiscounted cost of claims, which includes claims incurred but not reported. While we believe that our estimation processes are well designed every estimation processand comply with generally accepted accounting principles (GAAP) and other accounting and finance best practices, any projection of losses concerning workers’ compensation and vehicle insurance is inherently subject to limitations. Fluctuationsa considerable degree of variability. The causes of this variability include litigation trends, claim settlement patterns and fluctuations in the frequency or severity of accidents make it difficult to precisely predictaccidents. If actual losses incurred are greater than those anticipated, our self-insurance reserves may be insufficient and additional costs could be recorded in our consolidated financial statements. If we suffer a substantial loss in excess of our self-insured limits, the ultimate costloss and attendant expenses may be covered by traditional insurance and excess insurance the Company has in place, but if not covered or above such coverages, losses could harm our business, financial condition or results of claims. The actual cost of claims can be different than the historical selected loss development factors because of safety performance, payment patterns and settlement patterns.operations. For a detailed discussion on our accounting policies and assumptions relating to our self-insurance reserves, please see the “Critical Accounting Estimates - Self-Insurance Accruals” section in Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.
Impairment in the carrying value of goodwill could negatively affect our operating results.
We assess our goodwill for impairment at least annually and whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. In evaluating goodwill for impairment, we have the option to first assess qualitative factors to determine whether further impairment testing is necessary, such as macroeconomic conditions, changes in our industry and the markets in which we operate, and our market capitalization, as well as our reporting units' historical and expected future financial performance. If events occur that negatively affect key assumptions used in our analysis, then we may be required to record charges for goodwill impairments in the future, which could have a material adverse non-cash effect on our results of operations. Subsequent to December 31, 2019, we experienced a decline in our market capitalization and if this decline continues for a sustained period of time, we may be required to perform additional impairment analyses and could be required to recognize a non-cash goodwill impairment charge. For a detailed discussion on our accounting policies and assumptions relating to goodwill, please see “Critical Accounting Estimates - Goodwill” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Severe weather or other natural occurrences could result in significant business interruptions and expenditures in excess of available insurance coverage.
coverage.
Our operations may be affected by external factors such as severe weather and other natural occurrences, including floods, fires, hurricanes and earthquakes at operating locations where we have vehicles, warehouses and other facilities. As a result, our vehicles and facilities may be damaged, our workforce may be unavailable, fuel costs may rise and significant business interruptions could occur. In addition, the performance of our vehicles could be adversely affected by extreme weather conditions. Insurance to protect against loss of business and other related consequences resulting from these natural occurrences is subject to coverage limitations, depending on the nature of the risk insured. This insurance may not be sufficient to cover all of our damages or damages to others and this insurance may not continue to be available at commercially reasonable rates. Even with insurance, if any natural occurrence leads to a catastrophic interruption of service, we may not be able to mitigate a significant interruption in operations.
We face litigation risks that could have a material adverse effect on the operation of our business.
We face litigation risks regarding a variety of issues, including without limitation, accidents involving our trucks and injuries to employees, alleged violations of federal and state labor and employment law including class-action lawsuits alleging wage and hour violations, independent contractor misclassification and improper pay, securities laws, environmental liability, commercial claims and other matters. These proceedings may be time-consuming, expensive and disruptive to normal business operations. The defense of such lawsuits could result in significant expense and the diversion of our management’s time and attention from the operation of our business. In recent years, several insurance companies have stopped offering coverage to trucking companies as a result of increases in the severity of automobile liability claims and higher costs of settlements and verdicts, causing the cost of such insurance to increase. This trend could adversely affect our ability to obtain suitable insurance coverage or further increase the cost for such coverage significantly, each of which may adversely affect our financial condition, results of operations, liquidity or cash flows. Costs we incur to defend or to satisfy a judgment or settlement of these claims may not be covered by insurance or could exceed the amount of that coverage or increase our insurance costs and could have a material adverse effect on our financial condition, results of operations, liquidity and cash flows.
Damage to our reputation through unfavorable publicity or the actions of our employees could adversely affect our financial condition.
Our international operations subjectsuccess depends on our ability to consistently deliver operational excellence and strong customer service. Our inability to deliver our services and solutions as promised on a consistent basis, or our customers having a negative experience or otherwise becoming dissatisfied, can negatively impact our relationships with new or existing customers and adversely affect our brand and reputation, which could, in turn, adversely affect revenue and earnings growth. Adverse publicity (whether or not justified) relating to activities by our employees, contractors, agents or others with whom we do business, such as customer service mishaps or noncompliance with laws, could tarnish our reputation and reduce the value of our brand. With the increase in the use of social media outlets such as Facebook, YouTube, Instagram and Twitter, adverse publicity can be disseminated quickly and broadly, making it increasingly difficult for us to operationaleffectively respond. This unfavorable publicity could also require us to allocate significant resources to rebuild our reputation.
Future acts of terrorism, war or regulatory changes to combat the risk of terrorism may cause significant disruptions in our operations.
Terrorist attacks, along with any government response to those attacks, may adversely affect our financial condition, results of operations or liquidity. Our fleet, other key infrastructure and information technology systems may be targets or indirect casualties of acts of terror, other harmful acts, or war. Further, because transportation assets continue to be a target of terrorist activities, federal, state and local governmental bodies are proposing and, in some cases, have adopted legislation and regulations relating to security issues that impact the transportation industry, including checkpoints and travel restrictions on large trucks. If additional security measures disrupt or impede the timing of our operations, we may fail to meet the requirements of our customers or incur increased expenses to do so. In addition, complying with these or future regulations could continue to increase our operating costs and reduce operating efficiencies. We maintain insurance coverages addressing these risks and we have received U.S. Patriot Act protections for our security practices related to the rental of our assets. However, such insurance may be inadequate or become unavailable, premiums charged for some or all of the insurance could increase dramatically, regulations may change or U.S. Patriot Act protections could be reduced. These changes could exacerbate the effects of an act of terrorism on our business, resulting in a significant business interruption, increased costs and liabilities and decreased revenues or an adverse impact on results of operations.
Our business may be affected by uncertainty or changes in U.S. or global social, political or regulatory conditions.
Adverse developments in laws, policies or practices in the U.S. and internationally can negatively impact our business and the business of our customers. Negative domestic and international global trade conditions as a result of social, political or regulatory changes or perceptions could materially affect our business, financial risks.
conditions and results of operations.
We provide services domestically and to a lesser extent outside of the U.S., which subjects our business to various additional risks, including including:
changes in tariffs, trade restrictions, trade agreements and taxes;
varying tax regimes, including consequences from changes in applicable tax laws;
difficulties in managing or overseeing foreign operations and agents;
foreign currency fluctuations and limitations on the repatriation of funds due to foreign currency controls;
different liability standards;
the price and availability of fuel;
national and international conflict; and
intellectual property laws of countries that do not protect our rights in intellectual property to the same extent as the laws of the U.S. The
If we do not correctly anticipate changes in social, political or regulatory conditions or their impact on the transportation industry, we may not alter our business practices in time to avoid adverse effects. Additionally, the occurrence or consequences of any of these factors may restrict our ability to operate in the affected region and/or decrease the profitability of our operations in that region. Also, if we do not correctly anticipate
Our suppliers may also be affected by changes in the political and regulatory environment, both in the U.S. and internationally. Negative impacts on our suppliers could result in disruptions in the supply and availability of equipment or services needed for our business that could in turn affect our ability to operate and serve our customers as planned.
In addition, there may be changes to existing trade agreements, like the North American Free Trade Agreement (“NAFTA”) and its anticipated successor agreement, the U.S.-Mexico-Canada Agreement (“USMCA”), which is still subject to approval by Canada, greater restrictions on free trade generally, and significant increases in tariffs on goods imported into the United States, particularly tariffs on products manufactured in Mexico, among other possible changes. These changes may lead to fewer goods transported and we may need to restructure certain terms of business with suppliers or customers. It remains unclear what the U.S. administration or foreign governments will or will not do with respect to tariffs, NAFTA, USMCA or other international trade agreements or policies. It is therefore difficult to anticipate the full impact of this agreement on our business, financial condition, cash flows and results of operations.
The market value of our common stock may fluctuate and could be substantially affected by various factors.
We expect that the market price of our common stock will continue to fluctuate due to a variety of factors, some of which are beyond our control. These factors include, among others:
actual or anticipated variations in earnings, financial or operating performance or liquidity;
changes in analysts’ recommendations or projections;
failure to meet analysts’ and our Company's projections;
general political, social, economic and political conditions, wecapital market conditions;
announcements of developments or initiatives related to our business;
operating and stock performance of other companies deemed to be peers;
actions by government regulators; and
news reports of trends, concerns and other issues related to us or our industry, including changes in regulations.
Our common stock price may fluctuate significantly in the future, and these fluctuations may be unrelated to our performance. General market price declines or market volatility in the future could adversely affect the price of our common stock, and the current market price of our common stock may not alterbe indicative of future market prices.
Our failure to comply with U.S. or foreign tax laws or a government challenging our tax position could adversely affect our business practicesand future operating results.
We are affected by various U.S. federal, state and foreign tax laws, including income taxes and taxes imposed on the purchase, sale and lease of goods and services such as sales, excise, property, value-added tax (“VAT”), fuel, environmental and other taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. For example, significant judgment is required in determining our worldwide provision for income taxes. Our tax
expense includes estimates of additional tax that may be incurred for tax exposures and reflects various estimates and assumptions, including assessments that could affect the valuation of our net deferred tax assets. Our operating results could be adversely affected by changes in the effective tax rate as a result of a change in the mix of earnings in countries with differing statutory tax rates, changes in our overall profitability, changes in tax legislation, the results of audits and examinations of previously filed tax returns and continuing assessments of our income and indirect tax exposures.
In addition, from time to avoid adverse effects.
Wetime we are under audit by tax authorities in different jurisdictions with regards to income tax and indirect tax matters. Economic and political pressures to increase tax revenue in various jurisdictions may be negatively impacted by adverse eventsmake resolving tax disputes favorably more difficult. Although we believe our tax estimates are reasonable, the final determination of tax audits and any other related tax proceedings in the global creditjurisdictions where we are subject to taxation could be materially different from our historical income and indirect tax provisions and accruals.
Finally, changes in U.S. federal, state or international tax laws applicable to corporate multinationals, other tax reform currently being considered by many countries, including the U.S., and changes and clarifications in taxing jurisdictions’ administrative interpretations, decisions, policies and positions may materially adversely impact our tax expense and cash flows. The U.S. Congress, the Organization for Economic Co-operation and Development, the European Union, and other government agencies in jurisdictions in which we and our affiliates invest or do business have maintained a focus on the taxation of multinational companies and have a number of on-going tax initiatives. If we are unable to successfully take actions to manage the adverse impacts of new tax legislation, or if additional interpretations, regulations, amendments or technical corrections exacerbate the adverse impacts of such legislation, the legislation could have a material adverse effect on our financial markets.
In general, we rely in large part upon global credit and financial markets to fund ourcondition, results of operations and contractual commitments and refinance existing debt. These markets can experience high levels of volatility and access to capital can be constrained for extended periods of time. Significant uncertainty, volatility, disruptions or downturns in the global credit and financial markets may result in:cash flows.
unanticipated interest rate and currency exchange rate fluctuations;increased risk of default by counterparties under derivative instruments and hedging agreements;
diminished liquidity and credit availability resulting in higher short-term borrowing costs and more stringent borrowing terms; and
restricted access to capital and increased cost of capital and financing sources.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our properties consist primarily of vehicle maintenance and repair facilities, warehouses and other real estate and improvements.
We maintain 608593 FMS properties in the U.S., Puerto Rico and Canada; we own 408413 of these and lease the remaining 200.properties. Our FMS properties are primarily comprised of maintenance facilities generally including a repair shop, rental counter, fuel service island, administrative offices, and used vehicle retail sales centers.
Additionally, we manage 186174 on-site maintenance facilities, located at customer locations.
We also maintain 207263 locations in the U.S. and Canada in connection with our domestic SCS business. Almost all of our SCS locations are leased and generally include a warehouse and administrative offices.
We maintain 123119 international locations (locations outside of the U.S. and Canada) for our international businesses. There are 6054 locations in the U.K. and Germany, 59and 65 locations in Mexico and 4 locations in Singapore.Mexico. The majority of these locations are leased and may be a repair shop, warehouse or administrative office.
Additionally, we maintain 1011 U.S. locations primarily used for Central Support Services. These facilities are generally administrative offices, of which we own three and lease the remaining seven.locations.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various claims, lawsuits and administrative actions arising in the normal course of our businesses. Some involve claims for substantial amounts of money and/or claims for punitive damages. While any proceeding or litigation has an element of uncertainty, management believes that the disposition of such matters, in the aggregate, will not have a material impact on our consolidated financial condition or liquidity.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART IIOVERVIEW
Ryder System, Inc. (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) Fleet Management Solutions (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) Supply Chain Solutions (SCS), which provides integrated logistics solutions, including distribution, management, dedicated transportation and professional services in North America; and (3) Dedicated Transportation Solutions (DTS), which provides turnkey transportation solutions in the U.S. that includes dedicated vehicles, drivers and engineering and administrative support. Dedicated transportation services provided as part of an operationally integrated, multi-service, supply chain solution to SCS customers are primarily reported in the SCS business segment.
MISSION AND STRATEGY
Ryder's mission is to provide innovative fleet management and supply chain solutions that are reliable, safe and efficient, enabling our customers to deliver on their promises. We seek to deliver valuable solutions that will compel customers to outsource their fleet management and supply chain needs to us. Our primary strategy is to grow our fleet management and supply chain outsourcing services by targeting those companies not currently outsourcing their fleet-related and logistics services as well as companies who have outsourced to other providers by offering innovative solutions, operational excellence, best in class talent and information technology. This strategy is supported by:
offering innovative products, solutions and support services that will create and strengthen customer relationships;
delivering operational excellence through continuous productivity and process improvements;
attracting, developing and retaining the best talent; and
deploying technology that will enable growth while improving operational efficiencies.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERSINDUSTRY AND ISSUER PURCHASES OF EQUITY SECURITIES
Ryder Common Stock Prices
OPERATIONS
|
| | | | |
| Fleet Management Solutions |
|
| | | | | | | | | |
| | | Stock Price | | Dividends per Common Share |
| | | High | | Low | |
| 2017 | | | | | | |
| First quarter | | $ | 79.26 |
| | 70.89 |
| | 0.44 |
| Second quarter | | 79.63 |
| | 62.52 |
| | 0.44 |
| Third quarter | | 84.99 |
| | 70.24 |
| | 0.46 |
| Fourth quarter | | 85.77 |
| | 76.11 |
| | 0.46 |
| | | | | | | |
| 2016 | | | | | | |
| First quarter | | $ | 66.36 |
| | 45.12 |
| | 0.41 |
| Second quarter | | 71.90 |
| | 56.98 |
| | 0.41 |
| Third quarter | | 69.78 |
| | 59.57 |
| | 0.44 |
| Fourth quarter | | 85.42 |
| | 62.03 |
| | 0.44 |
Value Proposition
Through our FMS business, we provide our customers with a variety of fleet solutions that are designed to improve their competitive position. By outsourcing these services to us, our customers can focus on their core business, improve their efficiency and productivity, and lower their costs. Our common sharesFMS product offering is comprised of full service leasing as well as leasing with flexible maintenance options; shorter-term commercial truck rental; contract or transactional maintenance services; and value-added fleet support services such as vehicle administration and fuel services. In addition, we provide our customers the ability to purchase a large selection of used trucks, tractors and trailers through our used vehicle sales program. FMS also provides vehicles and maintenance, fuel and other services for all vehicles used in our SCS and DTS businesses.
Market Trends
The U.S. commercial fleet market is estimated to include 9 million vehicles,of which 5 million vehicles are listedprivately owned by companies, 2 million vehicles are with for-hire carriers, 1 million vehicles are leased from banks or other financial institutions, and 1 million vehicles are in the lease and rental market(1). The companies that privately own their own fleets generally provide all or a portion of the transportation services for themselves rather than outsourcing those services to third parties such as Ryder.
The Canadian commercial fleet is estimated at 500,000 vehicles, of which approximately 20,000 vehicles are in the lease and rental market(2). In the U.K., the commercial rental and lease market is estimated at 235,000 units(3). The total lease and rental market in Ryder’s major markets totals over 1 million units.
Over the last several years, many key trends have been reshaping the transportation industry. Companies that own, maintain and manage their own fleet of vehicles have put greater emphasis on the New York Stock Exchange underquality of their preventive maintenance and safety programs because of increased demand for efficiency and reliability. The maintenance and operation of commercial vehicles has become more complicated and expensive, requiring companies to spend a significant amount of time and money to keep up with new technology, diagnostics, retooling and training. Companies are also faced with labor issues, including a shortage of qualified truck drivers and mechanics. Increased regulation and active enforcement efforts by federal and state governments require more stringent and costly operational processes and oversight. Fluctuating energy prices and alternative fuel technologies make it difficult for businesses to predict and manage fleet costs. There has also been a tightening of capacity with respect to the trading symbol “R.” At January 31, 2018, there were 6,960 common stockholders of record and our stock price on the New York Stock Exchange was $87.03.
Performance Graph
The following graph compares the performance of our common stock with the performance of the Standard & Poor’s 500 Composite Stock Index and the Dow Jones Transportation 20 Index for a five year period by measuring the changes in common stock prices from December 31, 2012 to December 31, 2017.
The stock performance graph assumes for comparison thatU.S. trucking market. We believe these trends increase the value of our product offering and will increasingly lead privately held fleets and the Company’s Common Stockfor-hire carriers to decide to outsource.
Operations
In 2019, our global FMS business accounted for 56% of our consolidated revenue (excluding eliminations).
United States. Ryder was founded in the U.S. in 1933. Our FMS customers in the U.S. range from small businesses to large national enterprises operating in a wide variety of industries, the most significant of which are transportation and of each index was $100 onwarehousing, food and beverage, housing, business and personal services, and industrial. At December 31, 2012,2019, we had 524 operating locations, excluding ancillary storage locations, in 50 states and Puerto Rico. A location consists of a maintenance facility and serves multiple customers. Our maintenance facilities typically include a shop for preventive maintenance and repairs, a service island for fueling, safety inspections and preliminary maintenance checks, offices for sales and other personnel, and in many cases, a commercial rental vehicle counter. We also operate on-site at 160 customer locations, which primarily provide vehicle maintenance solely for that all dividends were reinvested. Past performancecustomer's fleet.
Canada. We have been operating in Canada for over 50 years. At December 31, 2019, we had 32 operating locations throughout 9 Canadian provinces. We also operate 14 maintenance facilities on-site at customer properties in Canada.
Europe. We began operating in the U.K. in 1971. At December 31, 2019, we had 54 operating locations, primarily throughout the U.K, including those that we manage on behalf of our customers. We also manage a network of 367 independent maintenance facilities in the U.K. to serve our customers when it is more effective than providing the service in a Ryder location. In addition to our typical FMS operations, we supply and manage vehicles, equipment and personnel for military organizations in the U.K. and Germany.
| |
| (1) | U.S. Fleet as of September 2019, Class 3-8, IHS Markit Ltd. (formerly RL Polk) |
| |
| (2) | Canada Outsourced Fleet Market as of September 2019, Class 3-8, IHS Markit Ltd. (formerly RL Polk) |
| |
| (3) | U.K. Lease and Rental HGV Market, Projection for December 2019, Source: The Society of Motor Manufacturers & Traders (SMMT) 2010 & Ryder Internal Estimate |
FMS Product Offerings
ChoiceLease. Our lease offering, ChoiceLease, provides customers with vehicles, maintenance services, supplies, and
related equipment necessary for operation of the vehicles while our customers furnish and supervise their own drivers and exercise control over the vehicles. The ChoiceLease offering allows customers to select the terms of their lease alongside the level of maintenance they prefer, from full service or total bumper-to-bumper coverage to on-demand or pay-as-you-go maintenance.
Our ChoiceLease customers receive the following benefits:
We are able to leverage our vehicle buying power for the benefit of our customers because we purchase a large number of vehicles from a limited number of manufacturers. Once we have signed an agreement with the customer, we acquire vehicles and components that are custom engineered to the customer’s requirements and lease the vehicles to the customer for periods generally ranging from three to seven years for trucks and tractors and typically ten years for trailers.
We offer ChoiceLease customers a complete maintenance program designed to reduce vehicle downtime through a preventive maintenance plan that is based on vehicle type and time or mileage intervals. Alternatively, we offer flexible maintenance options to our customers designed to provide them with choices on their preferred level of maintenance. Given our continued focus on improving the efficiency and effectiveness of our maintenance services, particularly in light of changing technology and increased regulation, we provide our ChoiceLease customers with a cost effective alternative to maintaining their own fleet of vehicles and the flexibility to choose the maintenance program that works for them.
Our customers have access to our extensive network of maintenance facilities and trained technicians for maintenance, vehicle repairs, 24-hour emergency roadside service, and replacement vehicles for vehicles that are temporarily out of service.
We typically retain vehicle residual risk exposure.
| |
| • | Customers have an opportunity to enhance their standard lease with additional fleet support services including our fuel and related services as described below; liability insurance coverage under our existing insurance policies and related insurance services; safety services including safety training, driver certification and loss prevention consulting; vehicle use and other tax reporting, permitting and licensing, and regulatory compliance (including hours of service administration); environmental services; and access to RydeSmart®, a full-featured GPS fleet location, tracking, and vehicle performance management system; and to RyderGuide®, our mobile fleet tool that provides customers with 24/7 access to key operational and maintenance management information about their fleets. In January 2020, we announced our plan to exit the extension of our liability insurance coverage for ChoiceLease customers. The exit of this program is estimated to be completed in the second quarter of 2021. |
For the year ended December 31, 2019, ChoiceLease revenue accounted for 56% of our FMS total revenue.
Commercial Rental. We offer rental customers that have a need to supplement their private fleet of vehicles on a short-term basis (one day up to one year in length), either because of seasonal increases in their business or discrete projects with additional transportation needs. ChoiceLease customers also utilize our commercial rental fleet to handle their peak or seasonal business needs, as substitute vehicles while their lease vehicles are undergoing maintenance, and while they are awaiting delivery of new lease vehicles. Although a portion of our commercial rental business is purely occasional in nature, we focus on building long-term relationships with customers so that we become their preferred source for commercial vehicle rentals. Our rental representatives assist in selecting a vehicle that satisfies a customer’s needs and supervise the rental process, which includes execution of a rental agreement and a vehicle inspection. In addition to vehicle rental, we may extend liability insurance coverage under our existing policies to our rental customers as well as the benefits of cost savings and convenience of our comprehensive fuel services program. For the year ended December 31, 2019, commercial rental revenue accounted for 18% of our FMS total revenue.
SelectCare. Through our SelectCare product line, we provide maintenance services to customers who do not necessarilychoose to lease vehicles from us. Our SelectCare customers commit to utilizing our extensive network of maintenance facilities and trained technicians to maintain the vehicles they own or lease from third parties. There are several bundles of services available to SelectCare customers including full service contract maintenance, preventive only maintenance and on-demand maintenance. We can also customize the services to include fleet support services as described above. Vehicles covered under this offering are typically serviced at our own facilities. However, based on the size and complexity of a customer’s fleet, we may operate an indicator of future results.on-site maintenance facility at the customer’s location.
Additionally, our lease and contract maintenance customers periodically require additional maintenance and repair services that are not included in their lease or contract maintenance agreements. For example, additional maintenance and repair
services may arise when a customer damages a vehicle. In such situations, we generally charge the customer on an hourly basis for work performed. By servicing all of our customers’ maintenance needs, we create stronger, long-term relationships and have greater opportunity to provide customers with a wide range of outsourcing solutions. For the year ended December 31, 2019, SelectCare revenue accounted for 10% of our FMS total revenue.
Purchases of Equity Securities
The following table provides information with respect to purchases we maderegarding the number of our common stock during the quarter endedvehicles and customers by FMS product offering as of December 31, 2017: 2019:
|
| | | | | | | | | | | | | |
| | | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program (2) | | Maximum Number of Shares That May Yet Be Purchased Under the Anti-Dilutive Program (2) |
| October 1 through October 31, 2017 | | 250 |
| | $ | 81.92 |
| | — |
| | 530,734 |
|
| November 1 through November 30, 2017 | | 99,924 |
| | 80.57 |
| | 99,818 |
| | 430,916 |
|
| December 1 through December 31, 2017 | | 54,530 |
| | 81.60 |
| | 54,115 |
| | 376,801 |
|
| Total | | 154,704 |
| | $ | 80.94 |
| | 153,933 |
| | |
|
| | | | | | | | | | | | |
| | U.S. | | Foreign | | Total |
| | | Vehicles | | Customers | | Vehicles | | Customers | | Vehicles | | Customers |
| ChoiceLease | | 136,100 | | 12,200 | | 23,700 | | 2,400 | | 159,800 | | 14,600 |
Commercial rental (1) | | 36,000 | | 32,200 | | 5,900 | | 5,000 | | 41,900 | | 37,200 |
SelectCare (2) | | 50,400 | | 1,800 | | 5,400 | | 300 | | 55,800 | | 2,100 |
______________
| |
| (1) | DuringCommercial rental customers represent those who rented a vehicle for more than 3 days during the three months ended December 31, 2017, we purchased an aggregate of 771 shares of our common stock in employee-related transactions. Employee-related transactions may include: (i) shares of common stock delivered as payment for the exercise price of options exercised or to satisfy the option holders’ tax withholding liability associated with our share-based compensation programsyear 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.
includes approximately 7,500 ChoiceLease customers |
| |
| (2) | In December 2017, our Board of Directors authorized a new share repurchase program intended to mitigate the dilutive impact of shares issued under our employee stock plans. Under the December 2017 program, management is authorized to repurchase up to 1.5 million shares of common stock issued to employees under the Company’s employee stock plans from December 1, 2017 through December 13, 2019. Share repurchases will be made periodically in open-market transactions using the Company's working capital, and are subject to market conditions, legal requirements, and other factors. In addition, management has been granted the authority to establish prearranged written trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934 as part of the repurchase program.SelectCare customers include approximately 1,000 ChoiceLease customers |
We also contract with large private fleet operators and for-hire carriers to provide maintenance on demand, particularly in geographic areas where these customers do not have their own maintenance operations. The contract for on-demand maintenance services is based on a maintenance program that is designed to meet the customer's specific needs and all maintenance is performed only when and as requested by the customer. This product allows us to expand our customer base to include customers that have traditionally chosen to own and maintain their fleet of vehicles.
Fuel Services. We provide our FMS customers with access to diesel fuel at competitive prices at approximately 460 of our maintenance facilities across the United States and Canada. We also provide fuel services such as fuel planning, fuel tax reporting, centralized billing, fuel cards and fuel monitoring. Although fuel sales do not have a significant impact on our FMS earnings, as it is largely a pass-through cost to customers, we believe allowing customers to leverage our fuel buying power is a significant and valuable benefit to our customers. For the year ended December 31, 2019, fuel services revenue accounted for 15% of our FMS total revenue.
Used Vehicles. We primarily sell our used vehicles out of our 51 retail sales centers throughout North America (14 of which are co-located at an FMS shop), at our branch locations and through our website at www.Usedtrucks.Ryder.com. Typically, before we offer used vehicles for sale, our technicians ensure that the vehicles are Ryder CertifiedTM, which means that they have passed a comprehensive, multi-point performance inspection based on specifications formulated through our maintenance program, Ryder VerifiedTM, which are fully inspected and DOT compliant vehicles with some wear and tear, or Ryder ReclassifiedTM. Generally, our retail sales centers throughout North America allow us to leverage our maintenance expertise and strong brand reputation to realize higher sales proceeds than in the wholesale market. Given our focus on maximizing sales proceeds, we primarily sell our used vehicles through retail centers. The realized sales proceeds of used vehicles are dependent upon various other factors, including the general state of the used vehicle market, the supply and demand for used commercial vehicles in wholesale and retail markets, the age and condition of the vehicle at the time of its disposal and vehicle depreciation estimates. In recent years, the general state of the used vehicle sales market has been particularly challenging, which has required us to sell many of our used vehicles below book value and lower residual value estimates on vehicles still in operation.
FMS Business Strategy
Our FMS business strategy is to be the leading provider of fleet management outsourcing services for light, medium and heavy duty commercial highway vehicles. This strategy revolves around the following interrelated goals and priorities:
drive profitable fleet growth that maximizes our return on investment by (1) successfully implementing sales and marketing initiatives designed to compel private fleet operators and for-hire carriers to outsource all or some portion of their fleet management needs to us; (2) offering innovative products, solutions and support services that will create and strengthen new and existing customer relationships; and (3) completing targeted acquisitions;
deliver a consistent, industry-leading and cost-effective maintenance program to our customers through continued process improvement and re-design, productivity initiatives and technology improvements allowing us to obtain new business, including from our competitors; and
optimize asset utilization and management, particularly with respect to our rental fleet, used vehicle operations and maintenance facility infrastructure.
Competition
As an alternative to using our fleet management services, companies may choose to provide these services for themselves or to obtain similar or alternative services from other third-party vendors.
Our FMS business segment competes with companies that provide and manage maintenance services themselves and those providing similar services on a national, regional and local level. Many regional and local competitors provide services on a national level through their participation in various cooperative programs. We compete with finance lessors, truck and trailer manufacturers and independent dealers who provide full service lease products, finance leases, extended warranty maintenance, rental and other transportation services. We compete with other companies based on factors such as price, geographic coverage, equipment, maintenance, and service. We also face competition from managed maintenance providers who are hired to coordinate and manage the maintenance of large fleets of vehicles through a network of third-party maintenance providers. Value-added differentiation of the ChoiceLease, SelectCare and commercial rental services, as well as continued commitment to offer innovative products and solutions, such as natural gas and electric vehicles, have been and will continue to be our focus.
Value Proposition
Through our SCS business, we offer a broad range of innovative logistics management services that are designed to optimize customers' supply chain and address customers' key business requirements. The business is organized by industry verticals (Automotive, Technology and Healthcare, Consumer Packaged Goods and Retail, and Industrial and other) to enable our teams to focus on the specific needs of their customers. Our SCS product offerings are organized into four categories: dedicated services, distribution management, transportation management and professional services. These offerings are supported by a variety of information technology and engineering solutions and can be provided independently or as an integrated solution to optimize supply chain effectiveness. A key aspect of our value proposition is our operational execution, which is an important differentiator in the marketplace.
Market Trends
Global logistics is an approximately $10 trillion market, of which approximately $995 billion is outsourced(1). Logistics spending in the markets we are targeting in North America equates to approximately $2 trillion, of which $266 billion is outsourced(1). Outsourced logistics is a market with significant growth opportunity. More sophisticated supply chain practices are required as supply chains expand and become more complex and companies look for lower cost supply chain alternatives. In addition, disruptions from unexpected events such as natural disasters have caused companies to focus on risk management of their supply chains. The more complicated the supply chain or the product requirements, the greater the need for companies to utilize the expertise of supply chain solution providers.
Operations
For the year ended December 31, 2019, our global SCS business accounted for 29% of our consolidated revenue.
U.S. At December 31, 2019, we had 188 SCS customer accounts in the U.S., most of which are large enterprises that maintain large, complex supply chains. Most of our core SCS business operations are geographically located to maximize efficiencies and reduce costs. At December 31, 2019, managed warehouse space totaled approximately 50 million square feet.
We also concentrate certain logistics expertise in locations not associated with specific customer sites. For example, our carrier procurement, contract management, freight bill audit and payment services, and transportation optimization and execution groups operate out of our logistics centers in Novi, Michigan and Fort Worth, Texas.
Mexico. At December 31, 2019, we had 131 SCS customer accounts and managed warehouse space totaling approximately 4 million square feet. Our Mexico operations offer a full range of SCS services and manage approximately 21,500 border crossings each month between Mexico and the U.S. and Canada, often highly integrated with our distribution and transportation operations.
Canada. At December 31, 2019, we had 38 SCS customer accounts and managed warehouse space totaling approximately 2.4 million square feet. Given the proximity of this market to our U.S. and Mexico operations, the Canadian operations are highly coordinated with their U.S. and Mexico counterparts, managing approximately 9,900 border crossings each month.
Singapore. In the second quarter of 2019, we ceased our Singapore business operations.
(1) Armstrong & Associates - Third-Party Logistics Market Results and Trends for 2019, June 2019
ITEM 6. SELECTED FINANCIAL DATASCS Product Offerings
Distribution Management. Our SCS business offers a wide range of services relating to a customer’s distribution operations, from designing a customer’s distribution network, to managing distribution facilities, to an e-commerce service designed specifically for high-volume from the receiving function to the shipping function, coordinating warehousing and transportation for inbound and outbound material flows, handling import and export for international shipments, coordinating just-in-time replenishment of component parts to manufacturing and final assembly, and providing shipments to customer distribution centers or end customer delivery points, including support for e-commerce networks. Additional value-added services such as light assembly of components into defined units (kitting), packaging and refurbishment may also be provided. For the year ended December 31, 2019, distribution management solutions accounted for 39% of our SCS revenue.
Dedicated Services. Dedicated services are offered as part of an integrated supply chain solution to our customers. We fulfill transportation needs for our customers with a combination of outside carriers and dedicated services. The dedicated services offering combines the equipment, maintenance, drivers and additional services to provide a customer with a dedicated transportation solution that, combined with outside transportation, is designed to increase their competitive position, improve risk management and integrate their transportation needs with their overall supply chain. Such additional services include routing and scheduling, fleet sizing, safety, regulatory compliance, risk management, technology and communication systems support including on-board computer and other technical support. These additional services allow us to mitigate, on behalf of our customers, labor challenges associated with maintaining a private fleet of vehicles, such as driver recruitment and turnover, and government regulation, including hours of service regulations, Department of Transportation (DOT) audits and workers' compensation. Our dedicated services solution offers a high degree of specialization to meet the needs of customers with sophisticated service requirements such as tight delivery windows, high value or time-sensitive distribution, closed-loop distribution, multi-stop shipments, specialized equipment and integrated transportation needs. Dedicated services operations are located at our customer facilities, and our dedicated offering utilizes and benefits from our extensive network of FMS facilities, which provides maintenance for all Ryder vehicles used in SCS solutions. For the year ended December 31, 2019, approximately 34% of our SCS revenue was related to dedicated services.
Transportation Management. Our SCS business offers services relating to all aspects of a customer’s transportation network. Our team of transportation specialists provides shipment planning and execution, which includes shipment optimization, load scheduling and delivery confirmation through a series of technological and web-based solutions. Our transportation consultants focus on carrier procurement of all modes of transportation with an emphasis on truck-based transportation, rate negotiation, and freight bill audit and payment services. In addition, our SCS business provides customers with capacity management services that are designed to maximize backhaul opportunities and minimize excess miles. For the year ended December 31, 2019, we purchased or executed approximately $7 billion in freight moves on our customers' behalf. For the year ended December 31, 2019, transportation management solutions accounted for 14% of our SCS revenue.
Last Mile. Our Ryder Last Mile offering consists of a network of over 120 locations strategically located throughout the U.S. that receive, assemble, and prepare big and bulky items ranging from furniture to exercise equipment for in home or office delivery. We offer tiered levels of delivery services to meet consumer’s needs including placing the newly delivered item in the location of a customer’s choosing, minor installation and disposal of the replaced item. We use proprietary scheduling software to provide customers with the appointment times they need and optimize routes for maximum efficiency. Finally, as an extension of our customer’s brand, we track and report the satisfaction of each delivery experience. For the year ended December 31, 2019, Ryder Last Mile accounted for 8% of our SCS revenue.
Professional Services. In conjunction with providing the SCS services described previously, our SCS business offers a variety of knowledge-based professional services that support every aspect of a customer’s supply chain. Our SCS professionals are available to evaluate a customer’s existing supply chain to identify inefficiencies as well as opportunities for integration and improvement. Once the assessment is complete, we work with the customer to develop a supply chain strategy that will create the most value for the customer and their target clients. Once a customer has adopted a supply chain strategy, our SCS logistics team, supported by functional experts and representatives from our information technology, real estate and finance groups, work together to design a strategically focused supply chain solution. The solution may include both a network design that sets forth the number, location and function of key components of the network and a transportation solution that optimizes the mode or modes of transportation and route selection. In addition to providing the distribution and transportation expertise necessary to implement the supply chain solution, our SCS representatives can coordinate and manage all aspects of the customer’s supply chain provider network to assure consistency, efficiency and flexibility. For the year ended December 31, 2019, knowledge-based professional services accounted for 5% of our SCS revenue.
SCS Business Strategy
Our SCS business strategy is to offer our customers differentiated, functional execution and proactive solutions from our expertise in key industry verticals. The strategy revolves around the following selectedinterrelated goals and priorities:
provide customers with best in class execution and quality through reliable and flexible supply chain solutions;
develop innovative solutions and capabilities that drive value for our customers within our targeted industry verticals;
create a culture of innovation and collaboration to share capabilities and solutions to meet our clients' needs;
focus consistently on network optimization and continuous improvement; and
execute on targeted sales and marketing growth strategies.
Competition
As an alternative to using our services, companies may choose to internally manage their own supply chains and logistics operations, or obtain similar or alternative services from other third-party vendors.
In the SCS business segment, we compete with a large number of companies providing similar services, each of which has a different set of core competencies. We compete with a handful of large, multi-service companies across all of our service offerings and industries. We also compete against other companies on specific service offerings (for example, in transportation management, distribution management or dedicated services) or with companies specializing in a specific industry. We face different competitors in each country or region where they may have a greater operational presence. We compete based on factors such as price, service offerings, market knowledge, expertise in logistics-related technology and overall performance (e.g. timeliness, accuracy, and flexibility).
|
| | | | |
| Dedicated Transportation Solutions |
Value Proposition
Through our DTS business segment, we combine equipment, maintenance, drivers, administrative services and additional services to provide customers with a dedicated transportation solution that is designed to increase their competitive position, improve risk management and integrate their transportation needs with their overall supply chain. Such additional services include routing and scheduling, fleet sizing, safety, regulatory compliance, risk management, technology and communication systems support, including on-board computers and other technical support. These additional services allow us to mitigate, on behalf of our customers, labor challenges associated with maintaining a private fleet of vehicles, such as driver recruitment and retention, and government regulation, including electronic logging devices and hours of service regulations, DOT audits and workers’ compensation. Our DTS solution offers a high degree of specialization to meet the needs of customers with sophisticated service requirements such as tight delivery windows, high-value or time-sensitive freight distribution, closed-loop distribution, multi-stop shipments, specialized equipment and integrated transportation needs.
Market Trends
The U.S. dedicated contract carriage market is estimated to be $18 billion(1) from an addressable market of approximately $400 billion(2). This market is affected by many of the same trends that impact our FMS business, including the tightening of capacity in the current U.S. trucking market. The administrative requirements relating to regulations issued by the DOT regarding driver screening, training and testing, as well as record keeping and other costs associated with the hours of service requirements, make our DTS product an attractive alternative to private fleet and driver management. With the changes in the regulatory environment, including the electronic logging device mandate that became effective in late 2017, there continues to be significant pressure on the availability of qualified truck drivers, whose supply remains tight, and shippers continue to seek dedicated capacity from quality transportation and logistics providers. In addition, market demand for just-in-time delivery creates a need for well-defined routing and scheduling plans that are based on comprehensive asset utilization analysis and fleet rationalization studies offered as part of our DTS services.
Operations/Product Offerings
For the year ended December 31, 2019, our global DTS business accounted for 15% of our consolidated financial information should be readrevenue. At December 31, 2019, we had 186 DTS customer accounts in the U.S. Because it is highly customized, our DTS product is particularly attractive to companies that operate in industries that have time-sensitive deliveries or special handling requirements, as well as companies who require specialized equipment. DTS accounts typically operate in a limited geographic area, and, therefore, most of the drivers assigned to these accounts are short haul drivers, meaning they return home at the end of each work day, which helps with driver recruiting and retention. Although a significant portion of our DTS operations are located at customer facilities, our DTS business also utilizes and benefits from our extensive network of FMS facilities, including the FMS maintenance network that services all vehicles used in DTS solutions.
(1) Armstrong & Associates - Third-Party Logistics Market Results and Trends for 2019, June 2019
(2) Addressable market as of December 2019, Class 3-8, IHS Markit Ltd. (formerly RL Polk) & Ryder Internal Estimates
In order to customize an appropriate DTS transportation solution for our customers, our DTS logistics specialists perform a transportation analysis using advanced logistics planning and operating tools. Based on this analysis, they formulate a logistics design that includes the routing and scheduling of vehicles, the efficient use of vehicle capacity and overall asset utilization. The goal of each customized plan is to create a distribution system that optimizes freight flow while meeting a customer’s service goals. A team of DTS transportation specialists can then implement the plan by leveraging the resources, expertise and technological capabilities of both our FMS and SCS businesses.
To the extent a distribution plan includes multiple modes of transportation (air, rail, sea and highway), our DTS team, in conjunction with our SCS transportation specialists, selects appropriate transportation modes and carriers, places the freight, monitors carrier performance and audits billing. In addition, through our SCS business, we can reduce costs and add value to a DTS customer’s distribution system by aggregating orders into loads, looking for shipment consolidation opportunities and organizing loads for vehicles that are returning from their destination point back to their point of origin (backhaul).
DTS Business Strategy
Our DTS business strategy is to offer services to customers who need specialized equipment, specialized handling or integrated services. This strategy revolves around the following interrelated goals and priorities:
increase market share with customers in the energy and utility, metals and mining, specialty retail, construction, and food and beverage industries;
leverage the support and talent of the FMS sales team to compel private fleet operators to outsource all or some of their transportation needs to us;
align the DTS business with other SCS product lines to create revenue opportunities and improve operating efficiencies in both segments; and
improve competitiveness in the non-specialized and non-integrated customer segments.
Competition
Our DTS business segment competes with other dedicated providers and truckload carriers servicing on a national, regional and local level. We compete with these companies based on a number of factors, including price, equipment options and features, maintenance, service and geographic coverage, driver availability and operations expertise. We are able to differentiate the DTS product offering by leveraging FMS and integrating the DTS services with those of SCS to create a more comprehensive transportation solution for our customers. Our strong safety record and focus on customer service also enables us to uniquely meet the needs of customers with high-value products that require specialized handling in a manner that differentiates us from truckload carriers.
ACQUISITIONS
In addition to our continued focus on organic growth, acquisitions play an important role in enhancing our growth strategy. In assessing potential acquisition targets in our FMS business segment, we look for companies that would create value through operating synergies, leveraging our existing facility infrastructure, improving our geographic coverage and diversifying our customer base. In our DTS business segment, we are focusing on strategies for growth, including acquisitions that enhance our technology capabilities, and expand our geographic density and vertical market sector. In our SCS business segment, we focus on adding capabilities and product offerings, potentially expanding into new industries, diversifying our customer base within our current industries, and improving our competitive position.
CYCLICALITY
Ryder's business is impacted by economic and market conditions. In a strong economic cycle, there is generally more demand for our fleet management, dedicated transportation and supply chain services. In a weak or volatile economy, demand for our services decreases and is considerably more unpredictable. Because of these factors, we have continued to focus on increasing the diversity of our customer base and strengthening our long-term business partnerships with our customers. Although we believe these efforts help mitigate the immediate impact of an economic downturn, during a protracted or severe economic downturn, customers are often unwilling to commit to a full-service lease or long-term supply chain and dedicated contracts. Because commercial rental and used vehicle sales are transactional, they are more cyclical in nature and are also heavily dependent on economic and market conditions, and results can vary significantly in both the short- and long-term. In 2019, we began to experience softening in used vehicle and commercial rental market conditions, which we expect to continue throughout 2020. We mitigate some of the potential impact of an economic downturn through a disciplined and centralized approach to asset management. This approach allows us to manage the size, mix and location of our operating fleet and used vehicle inventories to try and maximize asset utilization and used vehicle proceeds in both strong and weak market conditions.
ADMINISTRATION
Our financial administrative functions for the U.S. and Canada, including credit, billing and collections, are consolidated into our Shared Services Center, a centralized processing center located in Alpharetta, Georgia. Our Shared Services Center also manages contracted third parties providing administrative, finance and support services outside of the U.S. in order to reduce ongoing operating expenses and maximize our technology capabilities. This centralization results in more efficient and consistent centralized processing of selected administrative operations. Certain administrative functions are also performed at the Shared Services Center for our customers. The Shared Services Center’s main objectives are to enhance customer service through process standardization.
REGULATION
Our business is subject to regulation by various federal, state, local and foreign governmental entities. The DOT and various federal and state agencies exercise broad powers over certain aspects of our business, generally governing such activities as authorization to engage in motor carrier operations, safety and operations. The Federal Motor Carrier Safety Administration (FMCSA), under the DOT, manages a Compliance, Safety, Accountability initiative (known as "CSA"), partnering with state agencies designed to monitor and improve commercial vehicle motor safety, which uses roadside inspections and violations to measure motor carriers and drivers. The FMCSA also has regulations mandating electronic logging devices in commercial motor vehicles that impact various aspects of our dedicated, supply chain and rental businesses.
We are also subject to a variety of laws and regulations promulgated by national, state, provincial and local governments, including the U.S. Environmental Protection Agency (EPA) and the Occupational Safety and Health Administration (OSHA), which regulate safety, the management of hazardous materials, water discharges, air emissions, solid waste disposal and the release and cleanup of regulated substances. We must comply with licensing and other requirements imposed by the U.S. Department of Homeland Security and the U.S. Customs Service as a result of increased focus on homeland security and our Customs-Trade Partnership Against Terrorism certification. We may also become subject to new or more restrictive regulations imposed by these agencies or other authorities relating to carbon controls and reporting, engine exhaust emissions, drivers’ hours of service, wage and hour requirements, security including data privacy and cyber security and ergonomics.
ENVIRONMENTAL
We have a long-standing commitment to sound environmental practices that reduce risk and build value for us and our customers. We have a history of adopting “green” designs and processes because they are efficient, cost-effective transportation solutions that improve our bottom line and bring value to our customers. We have maintained an environmental policy since 1991 and have updated it periodically as regulatory and customer needs have changed. Our environmental policy reflects our commitment to supporting the goals of sustainable development, environmental protection, and pollution prevention in our business. We have adopted proactive environmental strategies that have advanced business growth and continued to improve our performance in ways that reduce emission outputs and environmental impact. Our environmental team works with operating employees to develop and administer programs in support of our environmental policy and to help ensure that environmental considerations are integrated into all business processes and decisions.
In establishing appropriate environmental objectives and targets for our wide range of business activities around the world, we focus on (1) the needs of our customers; (2) the communities in which we provide services; and (3) relevant laws and regulations. We regularly review and update our environmental management procedures, and information regarding our environmental activities is routinely disseminated throughout Ryder. We publish a Corporate Sustainability Report, which includes metrics related to our environmental and safety performance. The report is publicly available on the company website at www.rydercsr.com. In addition, we have voluntarily submitted an annual report to the Carbon Disclosure Project (CDP), disclosing direct and indirect emissions resulting from our operations, and earned leadership status for the quality of our disclosure reporting.
SAFETY
Our safety culture is founded upon a core commitment to the safety, health and well-being of our employees, customers and the community, a commitment that has made us a long-standing industry leader in safety. Safety is an integral part of our business strategy because preventing injuries and collisions improves employee quality of life, eliminates service disruptions to our customers, increases operational efficiency, and improves customer satisfaction. As a core value, our focus on safety is embedded in our day-to-day operations, reinforced by many safety programs and continuous operational improvement and supported by a talented and dedicated safety organization.
We deploy relevant vehicle safety systems in the vehicles we operate, including active brake assistance, lane departure warning systems, stability control, and others, to enhance safety performance. We also install aftermarket safety monitoring systems that provide effective means for our operations teams to measure and improve driver performance, including in-vehicle
video event recorders. Training is also a key component of our safety program. Monthly safety training delivered by location safety committees cover specific and relevant safety topics and managers receive annual safety leadership training. In driving operations, we use certified driver trainers to on-board and train our drivers using first hand experienced certified driver trainers. Quarterly and remedial training is also delivered online to each driver through a highly interactive lesson platform. Regular safety behavioral observations are conducted by managers throughout the organization everyday and remedial training and coaching takes place on the spot. Our proprietary, web-based Safety Management System, RyderSafetyNetSM, delivers monthly proactive safety programs as well as safety compliance tasks tailored to every location and helps measure safety activity effectiveness across the organization. Our safety policies require that all managers, supervisors and employees incorporate safe processes in all aspects of our business. Monthly safety scorecards are tracked and reviewed by management for progress toward key safety objectives.
EMPLOYEES
At December 31, 2019, we had approximately 39,900 full-time employees worldwide, of which 38,600 were employed in North America and 1,300 in Europe. We currently employ approximately 9,500 drivers and 6,300 technicians. We have approximately 25,600 hourly employees in the U.S., approximately 4,300 of which are organized by labor unions. Those employees organized by labor unions are principally represented by the International Brotherhood of Teamsters, the International Association of Machinists and Aerospace Workers and the United Auto Workers. Their wages and benefits are governed by 104 separate labor agreements which are renegotiated periodically. Although we have not experienced a material work stoppage or strike, these events can potentially occur given the types of businesses in which we currently engage. We consider the relationship with our employees to be good.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
|
| | | | |
| Name | | Age | | Position |
| Robert E. Sanchez | | 54 | | Chair and Chief Executive Officer |
| Scott T. Parker | | 52 | | Executive Vice President and Chief Financial Officer |
| John J. Diez | | 49 | | President, Global Fleet Management |
| J. Steven Sensing | | 52 | | President, Global Supply Chain Solutions and Dedicated Transportation Solutions |
| Robert D. Fatovic | | 54 | | Executive Vice President, Chief Legal Officer and Corporate Secretary |
| John Gleason | | 63 | | Executive Vice President and Chief Sales Officer |
| Karen M. Jones | | 57 | | Executive Vice President and Chief Marketing Officer |
| Frank Lopez | | 45 | | Executive Vice President and Chief Human Resources Officer |
| Tim Fiore | | 64 | | Senior Vice President and Chief Procurement Officer |
| Rajeev Ravindran | | 54 | | Senior Vice President and Chief Information Officer |
| Frank Mullen | | 50 | | Vice President and Controller |
Robert E. Sanchez was appointed Chair of Ryder's Board in May 2013 and promoted to Chief Executive Officer and became a Board member in January 2013. Previously, Mr. Sanchez served as President and Chief Operating Officer from February 2012 to December 2012. He served as President, Global Fleet Management Solutions from September 2010 to February 2012 and as Executive Vice President and Chief Financial Officer from October 2007 to September 2010. He also previously served as Executive Vice President of Operations, U.S. Fleet Management Solutions from October 2005 to October 2007 and as Senior Vice President and Chief Information Officer from January 2003 to October 2005. Mr. Sanchez joined Ryder in 1993 and has held various other positions of increasing responsibility, including leadership positions in all three of Ryder's business segments.
Scott T. Parker joined Ryder in April 2019 and was appointed Executive Vice President and Chief Financial Officer. Prior to joining Ryder, Mr. Parker served as Executive Vice President and Chief Financial Officer at OneMain Financial, a leading consumer finance company, where he was responsible for overseeing all financial operations since 2015. Prior to OneMain Financial, Mr. Parker served as Chief Financial Officer for CIT Group Inc., a commercial finance company, from 2010 to 2015. He also served as Chief Financial Officer from 2006 to 2008 and Chief Operating Officer from 2008 to 2010 of Cerberus Operations & Advisory Company, and spent more than 15 years in leadership roles within the industrial and financial services businesses at General Electric Company, including Chief Financial Officer of GE Capital Solutions from 2005 to 2006.
John J. Diez has served as President, Global Fleet Management Solutions since September 2019. Previously, Mr. Diez served as President of Dedicated Transportation Solutions from March 2015 to August 2019, as Senior Vice President of Ryder Dedicated from March 2014 to February 2015, and as Senior Vice President of Asset Management from January 2011 to February 2014. Mr. Diez joined Ryder's Finance department in 2002 and has since held various positions within Finance
including Senior Vice President Global Field Finance and Vice President and Chief Financial Officer of Fleet Management Solutions.
J. Steven Sensing has served as President of Global Supply Chain Solutions since March 2015. In September 2019, the DTS business was consolidated under the leadership of Mr. Sensing. Previously, Mr. Sensing served as Vice President and General Manager of the Technology industry group from February 2007 to February 2015. In July 2014, he also added the Retail industry group under his leadership. Mr. Sensing joined Ryder in 1992 and has since held various positions within Dedicated Services, Transportation Management and Distribution Management.
Robert D. Fatovic has served as Executive Vice President, Chief Legal Officer and Corporate Secretary since May 2004. He previously served as Senior Vice President, U.S. Supply Chain Operations, Hi-Tech and Consumer Industries from December 2002 to May 2004. Mr. Fatovic joined Ryder’s Law department in 1994 as Assistant Division Counsel and has held various other positions within the Law department including Vice President and Deputy General Counsel.
John Gleason has served as Executive Vice President and Chief Sales Officer since November 2015. Previously, Mr. Gleason served as Senior Vice President of Global Fleet Management Solutions from October 2009, when he joined Ryder, to October 2015. Prior to joining Ryder, Mr. Gleason served as Chief Sales Officer for Automatic Data Processing from April 2005 to September 2009 and as Senior Vice President of Sales from July 1998 to April 2005.
Karen M. Jones has served as Executive Vice President and Chief Marketing Officer since October 2014. She joined Ryder in September 2013 as Senior Vice President and Chief Marketing Officer. Prior to joining Ryder, Ms. Jones was Chief Marketing Officer for NRG/Reliant Energy, Inc from 2010 to 2013. Previously, Ms. Jones served as Senior Vice President of Marketing and Corporate Communications for DHL Express U.S. from 2006 to 2009 and as Vice President of Advertising, Brand Management and Promotion from 2004 to 2006. In addition, Ms. Jones has served in key positions responsible for worldwide brand advertising, sponsorship, and strategic alliances for Hewlett Packard.
Frank Lopez was appointed as Executive Vice President and Chief Human Resources Officer in February 2018. Previously, Mr. Lopez served as Chief Human Resources Officer since February 2016 and Senior Vice President, Global Human Resources Operations since July 2013. Mr. Lopez joined Ryder in 2002 and has since held various positions within the Human Resources, Labor Relations and Legal functions.
Timothy (Tim) Fiore was appointed Senior Vice President and Chief Procurement Officer in March of 2018. He previously held the same role from 2002 to 2005. Prior to his current role, Mr. Fiore was the Senior Vice President and Chief Procurement Officer of ThyssenKrupp NA, a manufacturer and supplier of automotive and industrial components and equipment, from 2012 until his retirement in 2014. In that role, he was responsible for developing and implementing ThyssenKrupp’s first consolidated North American supply management program. He also serves as Chair of the Institute for Supply Management's Manufacturing Business Survey Committee since 2017. Over the course of his career, Mr. Fiore has also held senior supply management roles at Terex Corporation, Celanese Corporation, and United Technologies Corporation.
Rajeev Ravindran joined Ryder and was appointed Senior Vice President and Chief Information Officer in January 2018. Mr. Ravindran has over 20 years of IT leadership experience and was previously the CIO and Group Vice President at JM Enterprises since 2012. Prior to JM, Mr. Ravindran worked in IT leadership roles at various companies including Interactive Metronome, Asista.com, and AutoNation.
Frank Mullen joined Ryder and was appointed Vice President and Controller in September 2017. Mr. Mullen joined Ryder from Global Eagle Entertainment, a global provider of media, content, connectivity and data analytics, where he held the position of Senior Vice President and Chief Accounting Officer since 2016. From 2015 to 2016, he served as Vice President and Controller of Pinnacle Foods Inc., a manufacturer, marketer and distributor of branded food products. Prior to joining Pinnacle, Mr. Mullen held roles of increasing responsibility at Aramark, a provider of food service, facilities and uniform services, from 2000 through 2015, including Vice President and Assistant Controller from 2014 to 2015 and Associate Vice President – Corporate Accounting from 2006 to 2014.
FURTHER INFORMATION
For further discussion concerning our business, see the information included in Items 7 and 8 of this report. During 2017, we adopted ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715), ImprovingIndustry and market data used throughout Item 1 was obtained through a compilation of surveys and studies conducted by industry sources, consultants and analysts.
We make available our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports through the PresentationInvestor Relations page on our website at www.ryder.com as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (SEC). The SEC maintains an Internet site that contains our reports, proxy and information statements, and our other SEC filings. The address of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, and are reporting all components of net benefit cost other than the service cost component within "Non-operating pension costs" in the Consolidated Statements of Earnings for both the current and prior year periods. We also updated our current and historical comparable earnings measures to exclude the amortization of prior service cost, in order to conform the presentation of "Non-operating pension costs" with the ASU.
|
| | | | | | | | | | | | | | | | |
| | Years ended December 31 |
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | | (Dollars and shares in thousands, except per share amounts) |
| Operating Data: | | | | | | | | | | |
| Total Revenue | | $ | 7,329,599 |
| | 6,786,984 |
| | 6,571,893 |
| | 6,638,285 |
| | 6,419,285 |
|
Operating Revenue (1) | | $ | 6,040,380 |
| | 5,790,897 |
| | 5,561,077 |
| | 5,252,217 |
| | 4,965,818 |
|
Earnings from continuing operations (2) | | $ | 791,015 |
| | 264,640 |
| | 305,989 |
| | 220,225 |
| | 243,275 |
|
Comparable earnings from continuing operations (3) | | $ | 240,809 |
| | 290,488 |
| | 326,485 |
| | 294,279 |
| | 255,394 |
|
Net earnings (2), (4) | | $ | 790,558 |
| | 262,477 |
| | 304,768 |
| | 218,341 |
| | 237,871 |
|
| Per Share Data: | | | | | | | | | | |
Earnings from continuing operations -Diluted (2) | | $ | 14.87 |
| | 4.94 |
| | 5.73 |
| | 4.14 |
| | 4.63 |
|
Comparable earnings from continuing operations -Diluted (3) | | $ | 4.53 |
| | 5.42 |
| | 6.10 |
| | 5.53 |
| | 4.85 |
|
Net earnings -Diluted (2), (4) | | $ | 14.87 |
| | 4.90 |
| | 5.71 |
| | 4.11 |
| | 4.53 |
|
| Cash dividends | | $ | 1.80 |
| | 1.70 |
| | 1.56 |
| | 1.42 |
| | 1.30 |
|
Book value (5) | | $ | 53.54 |
| | 38.39 |
| | 37.15 |
| | 34.30 |
| | 35.56 |
|
| Financial Data: | | | | | | | | | | |
| Total assets | | $ | 11,452,231 |
| | 10,902,454 |
| | 10,952,580 |
| | 9,837,776 |
| | 9,156,175 |
|
Average assets (6) | | $ | 11,133,727 |
| | 11,056,740 |
| | 10,464,001 |
| | 9,594,878 |
| | 8,692,120 |
|
Return on average assets (%) (6) | | 7.1 |
| | 2.4 |
| | 2.9 |
| | 2.3 |
| | 2.7 |
|
| Long-term debt | | $ | 4,583,582 |
| | 4,599,864 |
| | 4,868,097 |
| | 4,681,240 |
| | 4,010,810 |
|
| Total debt | | $ | 5,409,651 |
| | 5,391,274 |
| | 5,502,627 |
| | 4,717,524 |
| | 4,283,013 |
|
Shareholders’ equity (5) | | $ | 2,835,016 |
| | 2,052,275 |
| | 1,987,111 |
| | 1,819,087 |
| | 1,896,561 |
|
Debt to equity (%) (5) | | 191 |
| | 263 |
| | 277 |
| | 259 |
| | 226 |
|
Average shareholders’ equity (5), (6) | | $ | 2,201,219 |
| | 2,052,371 |
| | 1,894,917 |
| | 1,925,824 |
| | 1,593,942 |
|
Return on average shareholders’ equity (%) (5), (6) | | 35.9 |
| | 12.8 |
| | 16.1 |
| | 11.3 |
| | 14.9 |
|
Adjusted return on average capital (%) (6), (7) | | 4.2 |
| | 4.8 |
| | 5.8 |
| | 5.8 |
| | 5.8 |
|
| Net cash provided by operating activities from continuing operations | | $ | 1,547,986 |
| | 1,601,022 |
| | 1,441,788 |
| | 1,382,818 |
| | 1,251,811 |
|
| Net cash (used in) provided by financing activities from continuing operations | | $ | (155,115 | ) | | (185,922 | ) | | 731,485 |
| | 311,650 |
| | 347,070 |
|
| Net cash used in investing activities from continuing operations | | $ | (1,366,340 | ) | | (1,405,833 | ) | | (2,161,355 | ) | | (1,704,510 | ) | | (1,603,818 | ) |
Free cash flow (8) | | $ | 189,722 |
| | 193,675 |
| | (727,714 | ) | | (315,116 | ) | | (339,596 | ) |
| Capital expenditures paid | | $ | 1,860,436 |
| | 1,905,157 |
| | 2,667,978 |
| | 2,259,164 |
| | 2,122,628 |
|
| Other Data: | | | | | | | | | | |
| Average common shares — Diluted | | 52,988 |
| | 53,361 |
| | 53,260 |
| | 53,036 |
| | 52,071 |
|
| Number of vehicles — Owned and leased | | 186,200 |
| | 185,100 |
| | 185,200 |
| | 174,100 |
| | 172,100 |
|
| Average number of vehicles — Owned and leased | | 185,200 |
| | 185,400 |
| | 180,500 |
| | 172,800 |
| | 171,200 |
|
| Number of employees | | 36,100 |
| | 34,500 |
| | 33,100 |
| | 30,600 |
| | 28,900 |
|
____________________
| |
(1) | Non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section in Item 7 for a reconciliation of total revenue to operating revenue, as well as the reasons management believes these measures are important to investors. |
| |
(2) | 2017 amounts reflect tax benefit as a result of the 2017 Tax Cuts and Jobs Act. Refer to Note 13 , "Income Taxes ," for additional information. |
| |
(3) | Non-GAAP financial measures. Refer to the “Non-GAAP Financial Measures” section in Item 7 of this report for a reconciliation of net earnings from continuing operations to comparable earnings from continuing operations and net earnings from continuing operations per diluted common share to comparable earnings per diluted common share, as well as the reasons management believes these measures are important to investors. |
| |
(4) | Net earnings in 2017, 2016, 2015, 2014 and 2013, included losses from discontinued operations of $(0.5) million, or $(0.01) per diluted common share, $(2) million, or $(0.04) per diluted common share, $(1) million, or $(0.02) per diluted common share, $(2) million, or $(0.03) per diluted common share, and $(5) million, or $(0.10) per diluted common share, respectively. |
| |
(5) | Shareholders’ equity at December 31, 2017, 2016, 2015, 2014 and 2013, reflected cumulative after-tax equity charges of $567 million, $627 million, $577 million, $584 million, and $474 million, respectively, related to our pension and postretirement plans. |
| |
(6) | Amounts were computed using an 8-point average based on quarterly information. |
| |
(7) | Non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section in Item 7 of this report for a reconciliation of the non-GAAP elements of this calculation and a numerical reconciliation of net earnings to adjusted net earnings and average total debt and average shareholders' equity to adjusted average total capital used to calculate adjusted return on average capital, as well as the reasons management believes these measures are important to investors. |
| |
(8) | Non-GAAP financial measure. Refer to the “Non-GAAP financial measures” section in Item 7 of this report for a reconciliation of net cash provided by operating activities to free cash flow, as well as the reasons why management believes this measure is important to investors. |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEC's website is www.sec.gov.
In addition, our Corporate Governance Guidelines, Principles of Business Conduct and Board committee charters are posted on the Corporate Governance page of our website at www.investors.ryder.com. Upon request to our Investor Relations page on our website at www.ryder.com, we will provide a copy of these documents to anyone, free of charge.
ITEM 1A. RISK FACTORS
The following is a cautionary discussion of the material risks and uncertainties that management believes affect us. Any of the following risks, as well as risks that we do not know or currently deem immaterial, could have a material adverse effect on our business, financial condition or results of operations. Accordingly, you should carefully consider the following risk factors in conjunction with all of the other information set forth in or incorporated by reference in this Form 10-K.
Decreased customer demand for transportation services due to adverse economic conditions, competition or other factors could adversely impact our business and operating results.
The transportation industry is highly cyclical and highly susceptible to trends in economic activity. Weakness or uncertainty in economic conditions in the United States, and to a lesser extent the other geographic markets in which we operate, could adversely impact our business and operating results. Our business relies on the strength of our customers’ businesses and the level of confidence our customers have about current and future economic conditions and trends. Our vehicles are leased or rented to customers that transport goods commercially, so the demand for our products and services is tied directly to the production and sale of goods by our customers, and more generally, the health of the North American economy and overall levels of competition in the transportation and logistics industry. Because of this, our business may begin to slow before market slowdowns, at the point of customer uncertainty, and may recover later than market recoveries, as our customers may continue to feel uncertain about future market conditions. If uncertainty and lack of customer confidence around macroeconomic and transportation industry conditions increase, our future growth prospects, business and results of operations could be materially adversely affected.
Among our services and product offerings, demand for our longer-term contractual services is particularly susceptible to changes in economic and market conditions, as customers are often unwilling to commit to long-term lease, maintenance, dedicated services or supply chain contracts in a weak or volatile economy. Accordingly, any sustained weakness in demand or a protracted economic downturn can negatively impact performance and operating results in our longer-term contractual services, which include ChoiceLease and SelectCare contracts in our FMS business segment, supply chain and last mile delivery contracts in our SCS business segment and dedicated services in our DTS business segment.
We bear the residual risk on the value of our vehicles.
Impact on Used Vehicle Sales. We generally bear the risk that we will not be able to resell our vehicles at a price equal to or above their expected residual values. If we overestimate a vehicle’s residual value this could contribute to lower gains or losses on sales of our used vehicles. A decline in market demand for used vehicles would likely result in a reduction in our residual values. Factors that could contribute to a decline in the market demand for used vehicles include an oversupply of vehicles in the marketplace; decline in customers due to economic conditions; concerns regarding the real or perceived quality, maintenance or condition of our vehicles; foreign exchange movements; or changes in technology that render select vehicle technology obsolete or less attractive to purchasers. We sell our used vehicles through various channels, including retail sales centers, at our branch locations, through our website at www.UsedTrucks.Ryder.com, as well as through the wholesale market. Pricing and demand for used vehicles varies among selling channels, particularly between the retail and wholesale markets, as we generally obtain lower proceeds on vehicles sold through wholesale channels. If we are unable to meet our targeted sales goals and inventory levels through our projected sales mix of retail versus wholesale, we may be required to sell more vehicles than planned through the wholesale market, which will impact our sales proceeds. Beginning in the latter part of 2015, which reflected an all-time high for residual values as a percent of net vehicle investment, and continuing through mid-2019, we experienced a weakening of conditions in the used vehicle sales market. Beginning in the second half of 2019, conditions significantly deteriorated further requiring us to sell a larger number of used vehicles through wholesale channels and adversely affected used vehicle sales volume and pricing. As a result, we lowered residual value estimates in the third quarter of 2019 for the entire fleet of power vehicles. If the market for our used vehicles declines further than those lower residual values, or there is a concern regarding the quality, maintenance or condition of our vehicles, we may obtain lower sales proceeds upon the sale of used vehicles, which would negatively impact the residual value estimates of our operating fleet and require us to further lower our residual value estimates.
Impact on our ChoiceLease Product Line. Changes in residual values also impact the overall competitiveness of our ChoiceLease product line, as estimated sales proceeds are a significant component of the overall price of the lease. Additionally, technology changes, sudden changes in supply and demand, competitor pricing, and other market factors beyond our control, vary from year to year and from vehicle to vehicle, making it difficult to accurately predict residual values used in calculating and pricing our ChoiceLease arrangements. Although we have developed disciplines related to the management and
maintenance of our leased vehicles designed to maximize the value of our used vehicles, there is no assurance that these practices will sufficiently reduce the residual risk.
For a detailed discussion on our accounting policies and assumptions relating to depreciation and residual values, please see “Critical Accounting Estimates - Depreciation and Residual Value Estimates” in Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)Operations.
Our profitability could be negatively impacted if our key operational assumptions and pricing structure prove to be invalid.
Substantially all of our SCS and DTS services, as well as our ChoiceLease and SelectCare products, are provided under long-term contractual arrangements with our customers. These contractual arrangements include pricing terms that are subject to a number of key operational assumptions including, but not limited to:
with respect to our SCS contracts, the scope of services, production volumes, operational efficiencies, the mix of fixed versus variable costs, productivity and other factors;
with respect to our DTS contracts, market wages, availability of labor, insurance rates and other operating costs that experience market fluctuations; and
with respect to our ChoiceLease and SelectCare contracts, residual values (ChoiceLease only) and maintenance expense.
If we are incorrect in our assumptions, or, as a result of subsequent changes in customer demand or other market forces that are outside of our control, these assumptions prove to be invalid, we could have lower margins than anticipated in a contract or segment, lose business, or be unable to offer competitive products and services. For example, our SCS and DTS services are highly customized and offer a high degree of specialization to meet the needs of our customers. We may not be able to adjust the pricing terms in some of our SCS and DTS contracts in the event any of our assumptions prove to be incorrect or invalid. As a result, if we do not accurately predict the costs to us to execute the SCS or DTS contract, it could result in a significant decrease in revenue or loss on the contract that could adversely affect our operating results and financial condition. Additionally, although some of our SCS or DTS contracts provide for renegotiation upon a material change, there is no assurance that we will be successful in obtaining the necessary price adjustments or that pricing will be sufficient to cover the risk.
Our capital intensive business requires us to make capital decisions based upon projected customer activity levels and market demand for our commercial rental product line.
We make significant investments in vehicles to support our rental business based on anticipated customer demand. We make commitments to purchase the vehicles many months in advance of the expected use of the vehicle and seek to optimize the size and mix of the commercial rental fleet based on demand projections and various other factors. As a result, our business is dependent on our ability to accurately estimate future levels of rental activity and consumer preferences to effectively capitalize on market demand in order to drive the highest levels of utilization and revenue per unit. Missing our projections could result in too much or too little capacity in our rental fleet. Overcapacity could require us to deploy or sell vehicles at lower than anticipated pricing levels or result in asset write-downs, and undercapacity could negatively impact our ability to reliably provide rental vehicles to our customers, each of which could result in lower revenues, higher costs and an adverse impact on profitability. We employ a sales force and operations team on a full-time basis to manage and optimize this product line; however, their efforts may not be sufficient to overcome unforeseen changes in market demand in the rental business. In contrast, in our ChoiceLease product line, we typically do not purchase vehicles until we have an executed contract with a customer.
We operate in a highly regulated industry, and changes in existing regulations or costs of compliance with, or liability for violation of, existing or future laws or regulations could have a material adverse effect on our business.
Our business is subject to regulation by various federal, state, local and foreign governmental agencies. In the United States, we are regulated by the DOT as well as local, state and federal agencies that exercise broad powers over our motor carrier operations, safety and the generation, handling, storage, treatment and disposal of waste materials. The FMCSA, under the DOT, also manages a compliance and enforcement initiative partnering with state agencies designed to monitor and improve commercial vehicle motor safety. We are also subject to other regulations relating to our business, employees and customers,
including labor and employment laws, international laws and regulations governing our foreign operations, environmental laws and regulations, among others.
Compliance with existing laws and regulations has involved, and we expect will continue to involve, significant time commitments and costs, and in recent years, we have seen an increase in proactive regulatory enforcement. In addition, new laws, rules or regulations may be adopted or interpretative changes to existing regulations could be issued at any time. Any new initiatives could further increase our costs or operating complexity and our ability to offer certain services in the jurisdictions in which we operate.
Our failure to comply with any existing or future laws, rules or regulations to which we are, or may become subject, whether actual or alleged, could have a material adverse effect on our business and on our ability to access the capital required to operate our business. Among other things, any such failure could expose us to reputational harm, loss of business, fines, penalties or potential litigation liabilities, including costs, settlements and judgments, as well as the loss of operating authority and restrictions on our operations. For example, the DOT periodically conducts compliance reviews to ensure compliance with its safety and other rules and regulations, and evaluates the safety rating assessed to motor carriers (“satisfactory,” “conditional” or “unsatisfactory”). The receipt of a final “conditional” or “unsatisfactory” safety rating due to deficiencies in our safety and compliance program could have a material adverse effect on our customer relationships, as some of our existing customer contracts require a “satisfactory” DOT safety rating. Moreover, if we fail to comply with DOT regulations, including our failure to maintain a “satisfactory” DOT safety rating, the DOT could levy fines and require us to cease all transportation services under our operating authority, which could have a material adverse effect on our business.
In addition, the FMCSA’s enforcement and compliance programs, designed to monitor and improve commercial motor vehicle safety by measuring the safety record of both the motor carrier and the driver, may shrink the industry’s pool of drivers. This and the shortage of qualified drivers could increase the costs to attract, train and retain qualified drivers as well as increase driver turnover, decrease asset utilization, limit growth, and adversely impact our results of operations.
Other compliance issues we may face include:
companies we acquire may not have historically maintained internal controls, policies or procedures to monitor compliance with the regulatory and legal requirements consistent with our standards;
our operations in Canada, Europe and Mexico may expose us to liability for failure to comply with local laws and regulatory requirements of foreign jurisdictions, which may vary significantly from country to country, including local tax laws, and anti-bribery laws;
compliance with environmental laws and regulations, including regulations imposed by the EPA on exhaust emissions and increasingly stringent regulations related to climate change, which may impose restrictions on our activities or require us to take certain actions, all of which may, over time, increase our costs and adversely affect our business and results of operations;
compliance with health and safety laws and regulations imposed by OSHA; and
compliance with new laws or regulations that may change the employee/independent contractor classification of independent contractors doing business with us, which could cause us to incur additional exposure under federal and state tax and employment laws.
In addition, we are also subject to reputational risk and other detrimental business consequences associated with noncompliance by other parties with whom we engage with, such as employees, customers, agents, suppliers or other persons using our supply chain or assets to commit illegal acts, including the use of company assets for terrorist activities, or a breach of data privacy laws.
We may fail to respond adequately or in a timely manner to innovative changes in new technology in our industry.
In recent years, our industry has been characterized by rapid changes in technology, leading to innovative transportation and logistics concepts that have impacted or have the potential to significantly impact our business model, competitive landscape and the industries of our customers and suppliers. For example, new concepts are currently under development for more advanced electric vehicles, automatic or semi-automatic self-driving vehicles, connected vehicle platforms, and drones. Additional innovations impacting the transportation, trucking and supply chain/logistics industries are likely that we cannot yet foresee. In addition, there is a rapidly growing demand for e-commerce services, last mile home delivery and asset- and freight-
sharing services, which continue to disrupt the transportation industry with the goal of bringing efficiencies to the transportation marketplace.
Our inability to quickly adapt to and adopt new innovations in products and processes desired by our customers may result in a significant loss of demand for our service offerings. In addition, advances in technology may require us to increase investments in order to remain competitive, and our customers may not be willing to accept higher prices to cover the cost of these investments. Our lease and rental fleets could become unfavorable with our customers or obsolete within a relatively short period of time, and we may no longer be able to find buyers for our used vehicles. An increase in customer use of electric vehicles could reduce the demand for our vehicle maintenance services, diesel vehicles and related offerings. Likewise, self-driving vehicles may reduce the demand for our dedicated service offerings, where, in addition to a vehicle, Ryder provides a driver as part of an integrated, full service customer solution. While we are actively engaged in developing strategic partnerships with new technology providers, developing new products, and evaluating emerging technology, we cannot be certain that such initiatives will be successful or timely, and our failure to successfully and timely implement any of these initiatives could have an adverse impact on our financial condition or results of operations.
We face risks related to cybersecurity attacks and other breaches of our systems and information technology.
We depend on the proper functioning and availability of our information systems in operating our business. It is important that the data processed by these systems remains confidential, as it often includes sensitive customer information, confidential customer transaction data, employee records, and key financial and operational results and statistics. Failure to prevent or mitigate data loss or system intrusions from cybersecurity attacks or other security breaches could expose us, our vendors, or our customers to a risk of loss or misuse of such information, adversely affect our operating results, restrict or prevent operations or financial reporting, result in litigation or potential liability and otherwise harm our business. Likewise, data privacy breaches from our systems could expose personally identifiable information of our employees or contractors, sensitive customer data, or vendor data to unauthorized persons, adversely impacting our customer service, employee relationships and our reputation. We maintain an information security program, which consists of safeguards and controls to help ensure that our core fundamentals of confidentiality, integrity and availability are supported, but we cannot ensure that we will be able to prevent or mitigate all such data breaches or cyberattacks.
In addition, some of our software applications are utilized by third parties who provide outsourced administrative functions. Such third parties may have access to information we maintain about our company, customers, employees and vendors or operate systems that are critical to our business operations and services. These third parties are subject to risks imposed by data breaches, cyberattacks and other events or actions that could damage, disrupt or close down their networks or systems.
Our information systems are protected through physical and software safeguards as well as backup systems considered appropriate by management. However, threats to network and data security are becoming increasingly diverse and sophisticated. We have experienced cybersecurity threats and vulnerabilities targeting our information technology systems and networks and those of our third party providers. Such prior events, to date, have not had a material impact on our financial condition or results of operations. While we have significant security processes and initiatives in place, we may be unable to fully detect, mitigate or protect against a material breach or disruption in the future. In addition, efforts to prevent, detect and mitigate data breaches and cyberattacks subject us to additional costs. We have cyber insurance coverage in place that may cover certain events described above, subject to deductibles and coverage limitations. It is possible that claims could exceed the limits of our coverage. Further, such insurance may not address or cover injury to reputation or loss of business that may result should such an attack be readmaterial.
In addition, regulatory authorities have increased their focus on how companies collect, process, use, store, share and transmit personal data. New privacy security laws and regulations, including the United Kingdom’s Data Protection Act 2018 (“DPA”) and the European Union General Data Protection Regulation 2016 (“GDPR”), pose increasingly complex and rigorous compliance challenges, which may increase our compliance costs. Any failure to comply with data privacy laws and regulations could result in conjunctionsignificant penalties, fines, legal challenges and reputational harm.
Failure to maintain, upgrade and consolidate our information technology networks could adversely affect us.
Our success depends on the functionality of information technology systems to support our service offerings. Extended delays or cost overruns in securing, developing and otherwise implementing technology solutions to support our business and the business initiatives we will be developing in the future would delay and possibly prevent us from realizing the projected benefits of these initiatives. In addition, our reputation with our customers may suffer if outages, system failures or delays in
timely access to data occur in our information technology systems that support key business processes.
We are continuously upgrading and consolidating our information technology systems by enhancing legacy systems, replacing legacy systems with successor systems and acquiring new systems with enhanced functionality. These types of activities subject us to additional costs and inherent risks associated with replacing and modifying our existing systems, including impairment of our ability to provide our services, disruption of our internal control structure, substantial capital expenditures, additional administration and operating expenses, retention of sufficiently skilled personnel to implement and operate the new systems, demands on management time, disruptions in our business operations, and other risks and costs of delays or difficulties in transitioning to new systems or integrating new systems into our current systems. Our system implementations may not result in productivity improvements at a level that outweighs the costs of implementation, or at all.
We are in the process of implementing a multi-year Enterprise Resource Planning (ERP) project. This new system is designed to improve efficiencies and integrate and automate certain internal financial, operating, and other applications that are critical to our business operations. The implementation, operation, and proper functionality of the ERP system will require a significant investment of human, technological, and financial resources. While we expect to invest significant resources in planning, project management, consulting and training to minimize disruptions to our business during the conversion to the new ERP system, it is possible that significant implementation, operational, and functionality issues may arise. It is further possible that we may experience significant delays, increased costs, and other difficulties that are not presently contemplated and that may interfere with our ability to meet our customer service requirements. If we encounter unforeseen problems with regard to our new ERP system, our business, operations and financial condition could be adversely affected.
We operate in a highly competitive industry and our business may suffer if we are unable to adequately address potential downward pricing pressures and other competitive factors.
The transportation industry is highly competitive. We face competition in all geographic markets and each industry sector in which we operate. Increased competition or our inability to compete successfully may lead to a reduction in revenues, reduced profit margins, increased pricing pressure, or a loss of market share, any one of which could affect our financial results. Numerous competitive factors could impair our ability to maintain our current profitability, including the following:
our inability to obtain expected customer retention levels or profitability;
we compete with many other transportation and logistics service providers, some of which have greater capital resources or lower cost structures than we do;
our inability to compete with new entrants in the transportation and logistics market that may offer similar services at lower cost or have greater technological capabilities;
customers may choose to provide the services we provide for themselves;
our competitors may periodically reduce their prices to gain business, especially during times of declining economic growth, which may limit our ability to maintain or increase prices or impede our ability to maintain our profitability or grow our market share or profitability;
many customers periodically accept bids from multiple carriers for their shipping needs, and this process may depress rates or result in the loss of some of our business to competitors;
the continuing trend toward consolidation in the trucking industry may result in larger carriers with greater financial resources than we have;
advances in technology require increased investments to remain competitive, and our customers may not be willing to accept higher prices to cover the cost of these investments; and
because cost of capital is a significant competitive factor, any increase in either the cost of our debt or equity as a result of reductions in our debt rating or stock price volatility could have a significant impact on our competitive position.
Failure to execute our growth strategy and develop, market and consistently deliver high-quality services that meet customer expectations may cause our revenue and earnings to suffer.
Our long-term growth strategy is to target clients new to outsourced transportation and logistics services and thereby expand the market for our services. We seek to execute our growth strategy by providing operational excellence, superior talent and best-
in-class information technology. By providing high-quality leasing services, we aim to attract customers that traditionally have only been interested in operating their own transportation and logistics networks.
To successfully execute on this strategy, we must continue to focus on developing innovative solutions that meet our existing and target customers’ evolving needs and keep pace with our competitors. Expanding our service offerings to entice and support new clients may strain our management, capital resources, information systems and customer service. We may also need to hire new employees, which may increase costs and may result in temporary inefficiencies until those employees become proficient in their jobs.
Notwithstanding our efforts, new or enhanced service offerings may not meet customer demands, prove to be profitable or succeed in the long term. If we do not respond to current customer needs and establish new, and further develop existing, customer relationships, our ability to maintain a competitive advantage and continue to grow our business profitability could be negatively affected.
We may be negatively impacted by adverse events in the global credit and financial markets, by an investment rating downgrade or by the loss of an investment grade rating.
Our business is highly capital intensive and we have significant ongoing capital requirements that could affect our profitability if we are unable to obtain sufficient capital. In general, we rely in large part upon global credit and financial markets to fund our operations and contractual commitments as well as refinance existing debt. These markets can experience high levels of volatility for numerous reasons and our access to capital could be constrained for extended periods of time. Our ability to raise capital may be materially reduced and/or our borrowing costs may significantly increase if, among other things, access to public investment grade debt becomes limited or closed, we lose access to our global revolving credit facility, or funding costs increase due to the loss of an investment grade rating, a severe economic downturn or rising interest rates. Significant uncertainty, volatility, disruptions or downturns in the global credit and financial markets may also result in:
restricted access to capital and an increased cost of capital;
diminished liquidity and credit availability resulting in higher short- or long-term borrowing costs and more stringent borrowing terms;
unanticipated interest rate and currency exchange rate fluctuations; and
increased risk of default by counterparties under derivative instruments and hedging agreements.
As of December 31, 2019, we had $7.9 billion of outstanding indebtedness. If we are unable to raise additional capital by accessing the debt and equity markets or our costs of raising additional capital were to materially increase, our ability to operate or grow our business, including refreshing, replacing and/or growing our vehicle fleets and acquiring new businesses, and refinance existing debt will be impaired, which could have a material adverse effect on our operating results or materially impact our ability to implement our long-term strategy.
We and the vehicle and equipment manufacturers in our FMS business rely on a small number of suppliers.
We buy vehicles and related equipment from a relatively small number of original equipment manufacturers (OEMs) in our FMS business. Some of our vehicle manufacturers rely on a small concentration of suppliers for certain vehicle parts, components and equipment. A discrete event in a particular OEM’s or supplier’s industry or location, or adverse regional economic conditions impacting an OEM or supplier’s ability to provide vehicles or a particular component, could adversely impact our FMS business and profitability. In addition, our business and reputation could also be negatively impacted if any parts, components or equipment from one of our suppliers suffer from broad-based quality control issues or become the subject of a product recall and we are unable to obtain replacement parts from another supplier in a timely manner.
We derive a significant portion of our SCS and DTS segment revenue from a relatively small number of customers.
During 2019, sales to our top ten SCS customers accounted for 54% of our SCS total revenue and 47% of our SCS operating revenue (total revenue less fuel and subcontracted transportation). Additionally, approximately 37% of our global SCS revenue is from the automotive industry and is directly impacted by automotive vehicle production. Our top ten DTS customers accounted for 47% of DTS total revenue and 40% of DTS operating revenue. The loss of any of these customers or a significant reduction in the services provided to any of these customers could materially and adversely impact our operating results. While we continue to focus our efforts on diversifying our customer base, we may not be successful in doing so.
We are also subject to credit risk associated with the concentration of our accounts receivable from our SCS and DTS customers. If one or more of these customers were to become bankrupt, insolvent or otherwise were unable to pay for the services provided by us, we may incur significant write-offs of accounts receivable or incur lease or asset impairment charges that could adversely affect our operating results and financial condition.
In addition, many of our customers operate in cyclical or seasonal industries, or operate in industries, including the food and beverage industry, that may be impacted by unanticipated weather, growing conditions (such as drought, insects or disease), natural disasters and other conditions over which we have no control. A downturn in our customers’ businesses or unanticipated events impacting their businesses could cause a reduction in freight volume shipped by those customers or a reduction in their need for our services, which could materially and adversely affect our operating results and financial condition.
We may face difficulties in attracting and retaining drivers and technicians.
Drivers. We hire drivers primarily for our SCS and DTS business segments. There is significant competition for qualified drivers in the transportation industry. Additionally, interventions and enforcement under the CSA program may shrink the industry’s pool of drivers as those drivers with unfavorable scores may no longer be eligible to drive for us. As a result of driver shortages, we could be required to increase driver compensation, let trucks sit idle, utilize lower quality drivers or face difficulty meeting customer demands, all of which could adversely affect our growth and profitability.
Technicians. Similarly, we hire technicians in our FMS business segment to perform vehicle maintenance services on our ChoiceLease, SelectCare and rental fleets. In recent years, there has been a decrease in the overall supply of skilled maintenance technicians, particularly new technicians with qualifications from technical programs and schools, which could make it more difficult to attract and retain skilled technicians. If we are unable to maintain an adequate number of qualified technicians, whether through the retention of current technicians or the hiring of new qualified technicians, our business could be adversely affected.
We intend to continue to explore strategic transactions (including acquisitions or divestitures). Our business could be adversely affected if we are not able to identify or successfully execute these strategic transactions.
In furtherance of our strategy, we routinely evaluate opportunities and may enter into agreements for possible strategic transactions. We may be unable to identify strategic transactions or we may be unable to negotiate commercially acceptable terms. Other risks involved in engaging in these strategic transactions include the possible failure to realize the expected benefits of such transactions within the anticipated time frame, or at all, such as cost savings, synergies, sales and growth opportunities. In addition, the integration of an acquired business may result in material unanticipated challenges, expenses and liabilities. Any one of these factors could result in lower than expected revenues or earnings related to combining the companies or derived from a strategic transaction and could adversely impact our financial condition or results of operations.
Failure to successfully negotiate with our union employees may result in strikes, work stoppages, or substantially higher labor costs.
We have approximately 4,300 employees that are organized by labor unions whose wages and benefits are governed by 104 labor agreements that are renegotiated periodically. A material work stoppage, slowdown or strike involving our employees organized by labor unions could result in business disruptions or higher operating costs, which could have an adverse effect on our financial position, results of operations, or cash flows.
Volatility in assumptions and asset values related to our pension plans may adversely affect the valuation of our obligations, the current funding levels and our pension expense under our defined benefit pension plans.
We historically sponsored a number of defined benefit plans for employees not covered by union-administered plans, including certain employees in foreign countries. The aggregate projected benefit obligations and plan assets of our global defined benefit pension plans as of December 31, 2019, were $2.3 billion and $2.0 billion, respectively. The difference between plan obligations and assets, or the funded status of the plans, is a significant factor in determining pension expense and the ongoing funding requirements of those plans. Macroeconomic factors, as well as changes in investment returns and discount rates used to calculate pension expense and related assets and liabilities, can be volatile and may have an unfavorable impact on our costs and funding requirements. Although we have actively sought to control increases in these costs and funding requirements through investment policies and plan contributions, there can be no assurance that we will succeed, and continued cost and funding requirement pressure could reduce the profitability of our business and negatively impact our cash flows.
We are subject to risk of multi-employer pension plan withdrawal.
We participate in certain U.S. multi-employer pension (MEP) plans that provide defined benefits to employees covered by collective bargaining agreements. In the event that we withdraw from participation in any of these plans, then applicable law could require us to make an additional lump-sum contribution to the plan. Our withdrawal liability for any MEP plan would depend on the extent of the plan’s funding of vested benefits. Economic conditions have caused MEP plans to be significantly underfunded. As a result, although we have taken steps in recent years to withdraw from significantly underfunded MEP plans, we may still have liability for at least a period of time following our withdrawal. If the financial condition of the MEP plans were to continue to deteriorate, we could be subject to additional assessments.
We may fail to establish sufficient insurance reserves and adequately estimate for future workers’ compensation and vehicle liabilities.
We are partially self-insured for vehicle liability and workers’ compensation claims. Our self-insurance accruals are based on actuarially estimated, undiscounted cost of claims, which includes claims incurred but not reported. While we believe that our estimation processes are well designed and comply with generally accepted accounting principles (GAAP) and other accounting and finance best practices, any projection of losses concerning workers’ compensation and vehicle insurance is subject to a considerable degree of variability. The causes of this variability include litigation trends, claim settlement patterns and fluctuations in the frequency or severity of accidents. If actual losses incurred are greater than those anticipated, our self-insurance reserves may be insufficient and additional costs could be recorded in our consolidated financial statementsstatements. If we suffer a substantial loss in excess of our self-insured limits, the loss and attendant expenses may be covered by traditional insurance and excess insurance the Company has in place, but if not covered or above such coverages, losses could harm our business, financial condition or results of operations. For a detailed discussion on our accounting policies and assumptions relating to our self-insurance reserves, please see the “Critical Accounting Estimates - Self-Insurance Accruals” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Impairment in the carrying value of goodwill could negatively affect our operating results.
We assess our goodwill for impairment at least annually and whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. In evaluating goodwill for impairment, we have the option to first assess qualitative factors to determine whether further impairment testing is necessary, such as macroeconomic conditions, changes in our industry and the markets in which we operate, and our market capitalization, as well as our reporting units' historical and expected future financial performance. If events occur that negatively affect key assumptions used in our analysis, then we may be required to record charges for goodwill impairments in the future, which could have a material adverse non-cash effect on our results of operations. Subsequent to December 31, 2019, we experienced a decline in our market capitalization and if this decline continues for a sustained period of time, we may be required to perform additional impairment analyses and could be required to recognize a non-cash goodwill impairment charge. For a detailed discussion on our accounting policies and assumptions relating to goodwill, please see “Critical Accounting Estimates - Goodwill” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Severe weather or other natural occurrences could result in significant business interruptions and expenditures in excess of available insurance coverage.
Our operations may be affected by external factors such as severe weather and other natural occurrences, including floods, fires, hurricanes and earthquakes at operating locations where we have vehicles, warehouses and other facilities. As a result, our vehicles and facilities may be damaged, our workforce may be unavailable, fuel costs may rise and significant business interruptions could occur. In addition, the performance of our vehicles could be adversely affected by extreme weather conditions. Insurance to protect against loss of business and other related notes containedconsequences resulting from these natural occurrences is subject to coverage limitations, depending on the nature of the risk insured. This insurance may not be sufficient to cover all of our damages or damages to others and this insurance may not continue to be available at commercially reasonable rates. Even with insurance, if any natural occurrence leads to a catastrophic interruption of service, we may not be able to mitigate a significant interruption in Item 8operations.
We face litigation risks that could have a material adverse effect on the operation of this report on Form 10-K.our business.
We face litigation risks regarding a variety of issues, including without limitation, accidents involving our trucks and injuries to employees, alleged violations of federal and state labor and employment law including class-action lawsuits alleging wage and hour violations, independent contractor misclassification and improper pay, securities laws, environmental liability, commercial claims and other matters. These proceedings may be time-consuming, expensive and disruptive to normal business operations. The following MD&A describesdefense of such lawsuits could result in significant expense and the principal factors affectingdiversion of our management’s time and attention from the operation of our business. In recent years, several insurance companies have stopped offering coverage to trucking companies as a result of increases in the severity of automobile liability claims and higher costs of settlements and verdicts, causing the cost of such insurance to increase. This trend could adversely affect our ability to obtain suitable insurance coverage or further increase the cost for such coverage significantly, each of which may adversely affect our financial condition, results of operations, liquidity or cash flows. Costs we incur to defend or to satisfy a judgment or settlement of these claims may not be covered by insurance or could exceed the amount of that coverage or increase our insurance costs and could have a material adverse effect on our financial resources,condition, results of operations, liquidity contractualand cash obligations,flows.
Damage to our reputation through unfavorable publicity or the actions of our employees could adversely affect our financial condition.
Our success depends on our ability to consistently deliver operational excellence and critical accounting estimates. The information presentedstrong customer service. Our inability to deliver our services and solutions as promised on a consistent basis, or our customers having a negative experience or otherwise becoming dissatisfied, can negatively impact our relationships with new or existing customers and adversely affect our brand and reputation, which could, in turn, adversely affect revenue and earnings growth. Adverse publicity (whether or not justified) relating to activities by our employees, contractors, agents or others with whom we do business, such as customer service mishaps or noncompliance with laws, could tarnish our reputation and reduce the value of our brand. With the increase in the MD&Ause of social media outlets such as Facebook, YouTube, Instagram and Twitter, adverse publicity can be disseminated quickly and broadly, making it increasingly difficult for us to effectively respond. This unfavorable publicity could also require us to allocate significant resources to rebuild our reputation.
Future acts of terrorism, war or regulatory changes to combat the risk of terrorism may cause significant disruptions in our operations.
Terrorist attacks, along with any government response to those attacks, may adversely affect our financial condition, results of operations or liquidity. Our fleet, other key infrastructure and information technology systems may be targets or indirect casualties of acts of terror, other harmful acts, or war. Further, because transportation assets continue to be a target of terrorist activities, federal, state and local governmental bodies are proposing and, in some cases, have adopted legislation and regulations relating to security issues that impact the transportation industry, including checkpoints and travel restrictions on large trucks. If additional security measures disrupt or impede the timing of our operations, we may fail to meet the requirements of our customers or incur increased expenses to do so. In addition, complying with these or future regulations could continue to increase our operating costs and reduce operating efficiencies. We maintain insurance coverages addressing these risks and we have received U.S. Patriot Act protections for our security practices related to the rental of our assets. However, such insurance may be inadequate or become unavailable, premiums charged for some or all of the insurance could increase dramatically, regulations may change or U.S. Patriot Act protections could be reduced. These changes could exacerbate the effects of an act of terrorism on our business, resulting in a significant business interruption, increased costs and liabilities and decreased revenues or an adverse impact on results of operations.
Our business may be affected by uncertainty or changes in U.S. or global social, political or regulatory conditions.
Adverse developments in laws, policies or practices in the U.S. and internationally can negatively impact our business and the business of our customers. Negative domestic and international global trade conditions as a result of social, political or regulatory changes or perceptions could materially affect our business, financial conditions and results of operations.
We provide services domestically and to a lesser extent outside of the U.S., which subjects our business to various additional risks, including:
changes in tariffs, trade restrictions, trade agreements and taxes;
varying tax regimes, including consequences from changes in applicable tax laws;
difficulties in managing or overseeing foreign operations and agents;
foreign currency fluctuations and limitations on the repatriation of funds due to foreign currency controls;
different liability standards;
the price and availability of fuel;
national and international conflict; and
intellectual property laws of countries that do not protect our rights in intellectual property to the same extent as the laws of the U.S.
If we do not correctly anticipate changes in social, political or regulatory conditions or their impact on the transportation industry, we may not alter our business practices in time to avoid adverse effects. Additionally, the occurrence or consequences of any of these factors may restrict our ability to operate in the affected region and/or decrease the profitability of our operations in that region.
Our suppliers may also be affected by changes in the political and regulatory environment, both in the U.S. and internationally. Negative impacts on our suppliers could result in disruptions in the supply and availability of equipment or services needed for our business that could in turn affect our ability to operate and serve our customers as planned.
In addition, there may be changes to existing trade agreements, like the North American Free Trade Agreement (“NAFTA”) and its anticipated successor agreement, the U.S.-Mexico-Canada Agreement (“USMCA”), which is still subject to approval by Canada, greater restrictions on free trade generally, and significant increases in tariffs on goods imported into the United States, particularly tariffs on products manufactured in Mexico, among other possible changes. These changes may lead to fewer goods transported and we may need to restructure certain terms of business with suppliers or customers. It remains unclear what the U.S. administration or foreign governments will or will not do with respect to tariffs, NAFTA, USMCA or other international trade agreements or policies. It is therefore difficult to anticipate the full impact of this agreement on our business, financial condition, cash flows and results of operations.
The market value of our common stock may fluctuate and could be substantially affected by various factors.
We expect that the market price of our common stock will continue to fluctuate due to a variety of factors, some of which are beyond our control. These factors include, among others:
actual or anticipated variations in earnings, financial or operating performance or liquidity;
changes in analysts’ recommendations or projections;
failure to meet analysts’ and our Company's projections;
general political, social, economic and capital market conditions;
announcements of developments or initiatives related to our business;
operating and stock performance of other companies deemed to be peers;
actions by government regulators; and
news reports of trends, concerns and other issues related to us or our industry, including changes in regulations.
Our common stock price may fluctuate significantly in the future, and these fluctuations may be unrelated to our performance. General market price declines or market volatility in the future could adversely affect the price of our common stock, and the current market price of our common stock may not be indicative of future market prices.
Our failure to comply with U.S. or foreign tax laws or a government challenging our tax position could adversely affect our business and future operating results.
We are affected by various U.S. federal, state and foreign tax laws, including income taxes and taxes imposed on the purchase, sale and lease of goods and services such as sales, excise, property, value-added tax (“VAT”), fuel, environmental and other taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. For example, significant judgment is required in determining our worldwide provision for income taxes. Our tax
expense includes estimates of additional tax that may be incurred for tax exposures and reflects various estimates and assumptions, including assessments that could affect the years ended December 31, 2017valuation of our net deferred tax assets. Our operating results could be adversely affected by changes in the effective tax rate as a result of a change in the mix of earnings in countries with differing statutory tax rates, changes in our overall profitability, changes in tax legislation, the results of audits and examinations of previously filed tax returns and continuing assessments of our income and indirect tax exposures.
In addition, from time to time we are under audit by tax authorities in different jurisdictions with regards to income tax and indirect tax matters. Economic and political pressures to increase tax revenue in various jurisdictions may make resolving tax disputes favorably more difficult. Although we believe our tax estimates are reasonable, the final determination of tax audits and any other related tax proceedings in the jurisdictions where we are subject to taxation could be materially different from our historical income and indirect tax provisions and accruals.
Finally, changes in U.S. federal, state or international tax laws applicable to corporate multinationals, other tax reform currently being considered by many countries, including the U.S., 2016and 2015 unless otherwise noted.changes and clarifications in taxing jurisdictions’ administrative interpretations, decisions, policies and positions may materially adversely impact our tax expense and cash flows. The U.S. Congress, the Organization for Economic Co-operation and Development, the European Union, and other government agencies in jurisdictions in which we and our affiliates invest or do business have maintained a focus on the taxation of multinational companies and have a number of on-going tax initiatives. If we are unable to successfully take actions to manage the adverse impacts of new tax legislation, or if additional interpretations, regulations, amendments or technical corrections exacerbate the adverse impacts of such legislation, the legislation could have a material adverse effect on our financial condition, results of operations and cash flows.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our properties consist primarily of vehicle maintenance and repair facilities, warehouses and other real estate and improvements.
We maintain 593 FMS properties in the U.S., Puerto Rico and Canada; we own 413 of these and lease the remaining properties. Our FMS properties are primarily comprised of maintenance facilities generally including a repair shop, rental counter, fuel service island, administrative offices, and used vehicle retail sales centers.
Additionally, we manage 174 on-site maintenance facilities, located at customer locations.
We also maintain 263 locations in the U.S. and Canada in connection with our domestic SCS business. Almost all of our SCS locations are leased and generally include a warehouse and administrative offices.
We maintain 119 international locations (locations outside of the U.S. and Canada) for our international businesses. There are 54 locations in the U.K. and Germany, and 65 locations in Mexico. The majority of these locations are leased and may be a repair shop, warehouse or administrative office.
Additionally, we maintain 11 U.S. locations primarily used for Central Support Services. These facilities are generally administrative offices, of which we own three and lease the remaining locations.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various claims, lawsuits and administrative actions arising in the normal course of our businesses. Some involve claims for substantial amounts of money and/or claims for punitive damages. While any proceeding or litigation has an element of uncertainty, management believes that the disposition of such matters, in the aggregate, will not have a material impact on our consolidated financial condition or liquidity.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
OVERVIEW
Ryder System, Inc. (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,Fleet Management Solutions (FMS), which provides full service leasing and leasing with flexible maintenance options, commercial rental, and contract or transactional maintenance services forof trucks, tractors and trailers to customers principally in the U.S., Canada and the U.K.; (2) DTS,Supply Chain Solutions (SCS), which provides vehicles and drivers as part of a dedicated transportation solution in the U.S.; and (3) SCS, which provides comprehensive supply chainintegrated logistics solutions, including distribution, management, dedicated transportation and transportationprofessional services in North AmericaAmerica; and Singapore.(3) Dedicated Transportation Solutions (DTS), which provides turnkey transportation solutions in the U.S. that includes dedicated vehicles, drivers and engineering and administrative support. Dedicated transportation services provided as part of an operationally integrated, multi-service, supply chain solution to SCS customers are primarily reported in the SCS business segment.
MISSION AND STRATEGY
Ryder's mission is to provide innovative fleet management and supply chain solutions that are reliable, safe and efficient, enabling our customers to deliver on their promises. We seek to deliver valuable solutions that will compel customers to outsource their fleet management and supply chain needs to us. Our primary strategy is to grow our fleet management and supply chain outsourcing services by targeting those companies not currently outsourcing their fleet-related and logistics services as well as companies who have outsourced to other providers by offering innovative solutions, operational excellence, best in class talent and information technology. This strategy is supported by:
offering innovative products, solutions and support services that will create and strengthen customer relationships;
delivering operational excellence through continuous productivity and process improvements;
attracting, developing and retaining the best talent; and
deploying technology that will enable growth while improving operational efficiencies.
INDUSTRY AND OPERATIONS
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| Fleet Management Solutions |
Value Proposition
Through our FMS business, we provide our customers with a variety of fleet solutions that are designed to improve their competitive position. By outsourcing these services to us, our customers can focus on their core business, improve their efficiency and productivity, and lower their costs. Our FMS product offering is comprised of full service leasing as well as leasing with flexible maintenance options; shorter-term commercial truck rental; contract or transactional maintenance services; and value-added fleet support services such as vehicle administration and fuel services. In addition, we provide our customers the ability to purchase a large selection of used trucks, tractors and trailers through our used vehicle sales program. FMS also provides vehicles and maintenance, fuel and other services for all vehicles used in our SCS and DTS businesses.
Market Trends
The U.S. commercial fleet market is estimated to include 9 million vehicles,of which 5 million vehicles are privately owned by companies, 2 million vehicles are with for-hire carriers, 1 million vehicles are leased from banks or other financial institutions, and 1 million vehicles are in the lease and rental market(1). The companies that privately own their own fleets generally provide all or a portion of the transportation services for themselves rather than outsourcing those services to third parties such as Ryder.
The Canadian commercial fleet is estimated at 500,000 vehicles, of which approximately 20,000 vehicles are in the lease and rental market(2). In the U.K., the commercial rental and lease market is estimated at 235,000 units(3). The total lease and rental market in Ryder’s major markets totals over 1 million units.
Over the last several years, many key trends have been reshaping the transportation industry. Companies that own, maintain and manage their own fleet of vehicles have put greater emphasis on the quality of their preventive maintenance and safety programs because of increased demand for efficiency and reliability. The maintenance and operation of commercial vehicles has become more complicated and expensive, requiring companies to spend a significant amount of time and money to keep up with new technology, diagnostics, retooling and training. Companies are also faced with labor issues, including a shortage of qualified truck drivers and mechanics. Increased regulation and active enforcement efforts by federal and state governments require more stringent and costly operational processes and oversight. Fluctuating energy prices and alternative fuel technologies make it difficult for businesses to predict and manage fleet costs. There has also been a tightening of capacity with respect to the U.S. trucking market. We believe these trends increase the value of our product offering and will increasingly lead privately held fleets and the for-hire carriers to decide to outsource.
Operations
In 2019, our global FMS business accounted for 56% of our consolidated revenue (excluding eliminations).
United States. Ryder was founded in the U.S. in 1933. Our FMS customers in the U.S. range from small businesses to large national enterprises operating in a wide variety of industries, the most significant of which are transportation and warehousing, food and beverage, housing, business and personal services, and industrial. At December 31, 2019, we had 524 operating locations, excluding ancillary storage locations, in 50 states and Puerto Rico. A location consists of a maintenance facility and serves multiple customers. Our maintenance facilities typically include a shop for preventive maintenance and repairs, a service island for fueling, safety inspections and preliminary maintenance checks, offices for sales and other personnel, and in many cases, a commercial rental vehicle counter. We also operate on-site at 160 customer locations, which primarily provide vehicle maintenance solely for that customer's fleet.
Canada. We have been operating in Canada for over 50 years. At December 31, 2019, we had 32 operating locations throughout 9 Canadian provinces. We also operate 14 maintenance facilities on-site at customer properties in Canada.
Europe. We began operating in the U.K. in 1971. At December 31, 2019, we had 54 operating locations, primarily throughout the U.K, including those that we manage on behalf of our customers. We also manage a network of 367 independent maintenance facilities in the U.K. to serve our customers when it is more effective than providing the service in a Ryder location. In addition to our typical FMS operations, we supply and manage vehicles, equipment and personnel for military organizations in the U.K. and Germany.
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| (1) | U.S. Fleet as of September 2019, Class 3-8, IHS Markit Ltd. (formerly RL Polk) |
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| (2) | Canada Outsourced Fleet Market as of September 2019, Class 3-8, IHS Markit Ltd. (formerly RL Polk) |
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| (3) | U.K. Lease and Rental HGV Market, Projection for December 2019, Source: The Society of Motor Manufacturers & Traders (SMMT) 2010 & Ryder Internal Estimate |
FMS Product Offerings
ChoiceLease. Our lease offering, ChoiceLease, provides customers with vehicles, maintenance services, supplies, and
related equipment necessary for operation of the vehicles while our customers furnish and supervise their own drivers and exercise control over the vehicles. The ChoiceLease offering allows customers to select the terms of their lease alongside the level of maintenance they prefer, from full service or total bumper-to-bumper coverage to on-demand or pay-as-you-go maintenance.
Our ChoiceLease customers receive the following benefits:
We are able to leverage our vehicle buying power for the benefit of our customers because we purchase a large number of vehicles from a limited number of manufacturers. Once we have signed an agreement with the customer, we acquire vehicles and components that are custom engineered to the customer’s requirements and lease the vehicles to the customer for periods generally ranging from three to seven years for trucks and tractors and typically ten years for trailers.
We offer ChoiceLease customers a complete maintenance program designed to reduce vehicle downtime through a preventive maintenance plan that is based on vehicle type and time or mileage intervals. Alternatively, we offer flexible maintenance options to our customers designed to provide them with choices on their preferred level of maintenance. Given our continued focus on improving the efficiency and effectiveness of our maintenance services, particularly in light of changing technology and increased regulation, we provide our ChoiceLease customers with a cost effective alternative to maintaining their own fleet of vehicles and the flexibility to choose the maintenance program that works for them.
Our customers have access to our extensive network of maintenance facilities and trained technicians for maintenance, vehicle repairs, 24-hour emergency roadside service, and replacement vehicles for vehicles that are temporarily out of service.
We typically retain vehicle residual risk exposure.
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| • | Customers have an opportunity to enhance their standard lease with additional fleet support services including our fuel and related services as described below; liability insurance coverage under our existing insurance policies and related insurance services; safety services including safety training, driver certification and loss prevention consulting; vehicle use and other tax reporting, permitting and licensing, and regulatory compliance (including hours of service administration); environmental services; and access to RydeSmart®, a full-featured GPS fleet location, tracking, and vehicle performance management system; and to RyderGuide®, our mobile fleet tool that provides customers with 24/7 access to key operational and maintenance management information about their fleets. In January 2020, we announced our plan to exit the extension of our liability insurance coverage for ChoiceLease customers. The exit of this program is estimated to be completed in the second quarter of 2021. |
For the year ended December 31, 2019, ChoiceLease revenue accounted for 56% of our FMS total revenue.
Commercial Rental. We offer rental customers that have a need to supplement their private fleet of vehicles on a short-term basis (one day up to one year in length), either because of seasonal increases in their business or discrete projects with additional transportation needs. ChoiceLease customers also utilize our commercial rental fleet to handle their peak or seasonal business needs, as substitute vehicles while their lease vehicles are undergoing maintenance, and while they are awaiting delivery of new lease vehicles. Although a portion of our commercial rental business is purely occasional in nature, we focus on building long-term relationships with customers so that we become their preferred source for commercial vehicle rentals. Our rental representatives assist in selecting a vehicle that satisfies a customer’s needs and supervise the rental process, which includes execution of a rental agreement and a vehicle inspection. In addition to vehicle rental, we may extend liability insurance coverage under our existing policies to our rental customers as well as the benefits of cost savings and convenience of our comprehensive fuel services program. For the year ended December 31, 2019, commercial rental revenue accounted for 18% of our FMS total revenue.
SelectCare. Through our SelectCare product line, we provide maintenance services to customers who do not choose to lease vehicles from us. Our SelectCare customers commit to utilizing our extensive network of maintenance facilities and trained technicians to maintain the vehicles they own or lease from third parties. There are several bundles of services available to SelectCare customers including full service contract maintenance, preventive only maintenance and on-demand maintenance. We can also customize the services to include fleet support services as described above. Vehicles covered under this offering are typically serviced at our own facilities. However, based on the size and complexity of a customer’s fleet, we may operate an on-site maintenance facility at the customer’s location.
Additionally, our lease and contract maintenance customers periodically require additional maintenance and repair services that are not included in their lease or contract maintenance agreements. For example, additional maintenance and repair
services may arise when a customer damages a vehicle. In such situations, we generally charge the customer on an hourly basis for work performed. By servicing all of our customers’ maintenance needs, we create stronger, long-term relationships and have greater opportunity to provide customers with a wide range of outsourcing solutions. For the year ended December 31, 2019, SelectCare revenue accounted for 10% of our FMS total revenue.
The following table provides information regarding the number of vehicles and customers by FMS product offering as of December 31, 2019:
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| | | | | | | | | | | | |
| | U.S. | | Foreign | | Total |
| | | Vehicles | | Customers | | Vehicles | | Customers | | Vehicles | | Customers |
| ChoiceLease | | 136,100 | | 12,200 | | 23,700 | | 2,400 | | 159,800 | | 14,600 |
Commercial rental (1) | | 36,000 | | 32,200 | | 5,900 | | 5,000 | | 41,900 | | 37,200 |
SelectCare (2) | | 50,400 | | 1,800 | | 5,400 | | 300 | | 55,800 | | 2,100 |
______________
| |
| (1) | Commercial rental customers represent those who rented a vehicle for more than 3 days during the year and includes approximately 7,500 ChoiceLease customers |
| |
| (2) | SelectCare customers include approximately 1,000 ChoiceLease customers |
We also contract with large private fleet operators and for-hire carriers to provide maintenance on demand, particularly in geographic areas where these customers do not have their own maintenance operations. The contract for on-demand maintenance services is based on a maintenance program that is designed to meet the customer's specific needs and all maintenance is performed only when and as requested by the customer. This product allows us to expand our customer base to include customers that have traditionally chosen to own and maintain their fleet of vehicles.
Fuel Services. We provide our FMS customers with access to diesel fuel at competitive prices at approximately 460 of our maintenance facilities across the United States and Canada. We also provide fuel services such as fuel planning, fuel tax reporting, centralized billing, fuel cards and fuel monitoring. Although fuel sales do not have a significant impact on our FMS earnings, as it is largely a pass-through cost to customers, we believe allowing customers to leverage our fuel buying power is a significant and valuable benefit to our customers. For the year ended December 31, 2019, fuel services revenue accounted for 15% of our FMS total revenue.
Used Vehicles. We primarily sell our used vehicles out of our 51 retail sales centers throughout North America (14 of which are co-located at an FMS shop), at our branch locations and through our website at www.Usedtrucks.Ryder.com. Typically, before we offer used vehicles for sale, our technicians ensure that the vehicles are Ryder CertifiedTM, which means that they have passed a comprehensive, multi-point performance inspection based on specifications formulated through our maintenance program, Ryder VerifiedTM, which are fully inspected and DOT compliant vehicles with some wear and tear, or Ryder ReclassifiedTM. Generally, our retail sales centers throughout North America allow us to leverage our maintenance expertise and strong brand reputation to realize higher sales proceeds than in the wholesale market. Given our focus on maximizing sales proceeds, we primarily sell our used vehicles through retail centers. The realized sales proceeds of used vehicles are dependent upon various other factors, including the general state of the used vehicle market, the supply and demand for used commercial vehicles in wholesale and retail markets, the age and condition of the vehicle at the time of its disposal and vehicle depreciation estimates. In recent years, the general state of the used vehicle sales market has been particularly challenging, which has required us to sell many of our used vehicles below book value and lower residual value estimates on vehicles still in operation.
FMS Business Strategy
Our FMS business strategy is to be the leading provider of fleet management outsourcing services for light, medium and heavy duty commercial highway vehicles. This strategy revolves around the following interrelated goals and priorities:
drive profitable fleet growth that maximizes our return on investment by (1) successfully implementing sales and marketing initiatives designed to compel private fleet operators and for-hire carriers to outsource all or some portion of their fleet management needs to us; (2) offering innovative products, solutions and support services that will create and strengthen new and existing customer relationships; and (3) completing targeted acquisitions;
deliver a consistent, industry-leading and cost-effective maintenance program to our customers through continued process improvement and re-design, productivity initiatives and technology improvements allowing us to obtain new business, including from our competitors; and
optimize asset utilization and management, particularly with respect to our rental fleet, used vehicle operations and maintenance facility infrastructure.
Competition
As an alternative to using our fleet management services, companies may choose to provide these services for themselves or to obtain similar or alternative services from other third-party vendors.
Our FMS business segment competes with companies that provide and manage maintenance services themselves and those providing similar services on a national, regional and local level. Many regional and local competitors provide services on a national level through their participation in various cooperative programs. We compete with finance lessors, truck and trailer manufacturers and independent dealers who provide full service lease products, finance leases, extended warranty maintenance, rental and other transportation services. We compete with other companies based on factors such as price, geographic coverage, equipment, maintenance, and service. We also face competition from managed maintenance providers who are hired to coordinate and manage the maintenance of large fleets of vehicles through a network of third-party maintenance providers. Value-added differentiation of the ChoiceLease, SelectCare and commercial rental services, as well as continued commitment to offer innovative products and solutions, such as natural gas and electric vehicles, have been and will continue to be our focus.
Value Proposition
Through our SCS business, we offer a broad range of innovative logistics management services that are designed to optimize customers' supply chain and address customers' key business requirements. The business is organized by industry verticals (Automotive, Technology and Healthcare, Consumer Packaged Goods and Retail, and Industrial and other) to enable our teams to focus on the specific needs of their customers. Our SCS product offerings are organized into four categories: dedicated services, distribution management, transportation management and professional services. These offerings are supported by a variety of information technology and engineering solutions and can be provided independently or as an integrated solution to optimize supply chain effectiveness. A key aspect of our value proposition is our operational execution, which is an important differentiator in the marketplace.
Market Trends
Global logistics is an approximately $10 trillion market, of which approximately $995 billion is outsourced(1). Logistics spending in the markets we are targeting in North America equates to approximately $2 trillion, of which $266 billion is outsourced(1). Outsourced logistics is a market with significant growth opportunity. More sophisticated supply chain practices are required as supply chains expand and become more complex and companies look for lower cost supply chain alternatives. In addition, disruptions from unexpected events such as natural disasters have caused companies to focus on risk management of their supply chains. The more complicated the supply chain or the product requirements, the greater the need for companies to utilize the expertise of supply chain solution providers.
Operations
For the year ended December 31, 2019, our global SCS business accounted for 29% of our consolidated revenue.
U.S. At December 31, 2019, we had 188 SCS customer accounts in the U.S., most of which are large enterprises that maintain large, complex supply chains. Most of our core SCS business operations are geographically located to maximize efficiencies and reduce costs. At December 31, 2019, managed warehouse space totaled approximately 50 million square feet.
We also concentrate certain logistics expertise in locations not associated with specific customer sites. For example, our carrier procurement, contract management, freight bill audit and payment services, and transportation optimization and execution groups operate out of our logistics centers in Novi, Michigan and Fort Worth, Texas.
Mexico. At December 31, 2019, we had 131 SCS customer accounts and managed warehouse space totaling approximately 4 million square feet. Our Mexico operations offer a full range of SCS services and manage approximately 21,500 border crossings each month between Mexico and the U.S. and Canada, often highly integrated with our distribution and transportation operations.
Canada. At December 31, 2019, we had 38 SCS customer accounts and managed warehouse space totaling approximately 2.4 million square feet. Given the proximity of this market to our U.S. and Mexico operations, the Canadian operations are highly coordinated with their U.S. and Mexico counterparts, managing approximately 9,900 border crossings each month.
Singapore. In the second quarter of 2019, we ceased our Singapore business operations.
(1) Armstrong & Associates - Third-Party Logistics Market Results and Trends for 2019, June 2019
SCS Product Offerings
Distribution Management. Our SCS business offers a wide range of services relating to a customer’s distribution operations, from designing a customer’s distribution network, to managing distribution facilities, to an e-commerce service designed specifically for high-volume from the receiving function to the shipping function, coordinating warehousing and transportation for inbound and outbound material flows, handling import and export for international shipments, coordinating just-in-time replenishment of component parts to manufacturing and final assembly, and providing shipments to customer distribution centers or end customer delivery points, including support for e-commerce networks. Additional value-added services such as light assembly of components into defined units (kitting), packaging and refurbishment may also be provided. For the year ended December 31, 2019, distribution management solutions accounted for 39% of our SCS revenue.
Dedicated Services. Dedicated services are offered as part of an integrated supply chain solution to our customers. We fulfill transportation needs for our customers with a combination of outside carriers and dedicated services. The dedicated services offering combines the equipment, maintenance, drivers and additional services to provide a customer with a dedicated transportation solution that, combined with outside transportation, is designed to increase their competitive position, improve risk management and integrate their transportation needs with their overall supply chain. Such additional services include routing and scheduling, fleet sizing, safety, regulatory compliance, risk management, technology and communication systems support including on-board computer and other technical support. These additional services allow us to mitigate, on behalf of our customers, labor challenges associated with maintaining a private fleet of vehicles, such as driver recruitment and turnover, and government regulation, including hours of service regulations, Department of Transportation (DOT) audits and workers' compensation. Our dedicated services solution offers a high degree of specialization to meet the needs of customers with sophisticated service requirements such as tight delivery windows, high value or time-sensitive distribution, closed-loop distribution, multi-stop shipments, specialized equipment and integrated transportation needs. Dedicated services operations are located at our customer facilities, and our dedicated offering utilizes and benefits from our extensive network of FMS facilities, which provides maintenance for all Ryder vehicles used in SCS solutions. For the year ended December 31, 2019, approximately 34% of our SCS revenue was related to dedicated services.
Transportation Management. Our SCS business offers services relating to all aspects of a customer’s transportation network. Our team of transportation specialists provides shipment planning and execution, which includes shipment optimization, load scheduling and delivery confirmation through a series of technological and web-based solutions. Our transportation consultants focus on carrier procurement of all modes of transportation with an emphasis on truck-based transportation, rate negotiation, and freight bill audit and payment services. In addition, our SCS business provides customers with capacity management services that are designed to maximize backhaul opportunities and minimize excess miles. For the year ended December 31, 2019, we purchased or executed approximately $7 billion in freight moves on our customers' behalf. For the year ended December 31, 2019, transportation management solutions accounted for 14% of our SCS revenue.
Last Mile. Our Ryder Last Mile offering consists of a network of over 120 locations strategically located throughout the U.S. that receive, assemble, and prepare big and bulky items ranging from furniture to exercise equipment for in home or office delivery. We offer tiered levels of delivery services to meet consumer’s needs including placing the newly delivered item in the location of a customer’s choosing, minor installation and disposal of the replaced item. We use proprietary scheduling software to provide customers with the appointment times they need and optimize routes for maximum efficiency. Finally, as an extension of our customer’s brand, we track and report the satisfaction of each delivery experience. For the year ended December 31, 2019, Ryder Last Mile accounted for 8% of our SCS revenue.
Professional Services. In conjunction with providing the SCS services described previously, our SCS business offers a variety of knowledge-based professional services that support every aspect of a customer’s supply chain. Our SCS professionals are available to evaluate a customer’s existing supply chain to identify inefficiencies as well as opportunities for integration and improvement. Once the assessment is complete, we work with the customer to develop a supply chain strategy that will create the most value for the customer and their target clients. Once a customer has adopted a supply chain strategy, our SCS logistics team, supported by functional experts and representatives from our information technology, real estate and finance groups, work together to design a strategically focused supply chain solution. The solution may include both a network design that sets forth the number, location and function of key components of the network and a transportation solution that optimizes the mode or modes of transportation and route selection. In addition to providing the distribution and transportation expertise necessary to implement the supply chain solution, our SCS representatives can coordinate and manage all aspects of the customer’s supply chain provider network to assure consistency, efficiency and flexibility. For the year ended December 31, 2019, knowledge-based professional services accounted for 5% of our SCS revenue.
SCS Business Strategy
Our SCS business strategy is to offer our customers differentiated, functional execution and proactive solutions from our expertise in key industry verticals. The strategy revolves around the following interrelated goals and priorities:
provide customers with best in class execution and quality through reliable and flexible supply chain solutions;
develop innovative solutions and capabilities that drive value for our customers within our targeted industry verticals;
create a culture of innovation and collaboration to share capabilities and solutions to meet our clients' needs;
focus consistently on network optimization and continuous improvement; and
execute on targeted sales and marketing growth strategies.
Competition
As an alternative to using our services, companies may choose to internally manage their own supply chains and logistics operations, or obtain similar or alternative services from other third-party vendors.
In the SCS business segment, we compete with a large number of companies providing similar services, each of which has a different set of core competencies. We compete with a handful of large, multi-service companies across all of our service offerings and industries. We also compete against other companies on specific service offerings (for example, in transportation management, distribution management or dedicated services) or with companies specializing in a specific industry. We face different competitors in each country or region where they may have a greater operational presence. We compete based on factors such as price, service offerings, market knowledge, expertise in logistics-related technology and overall performance (e.g. timeliness, accuracy, and flexibility).
|
| | | | |
| Dedicated Transportation Solutions |
Value Proposition
Through our DTS business segment, we combine equipment, maintenance, drivers, administrative services and additional services to provide customers with a dedicated transportation solution that is designed to increase their competitive position, improve risk management and integrate their transportation needs with their overall supply chain. Such additional services include routing and scheduling, fleet sizing, safety, regulatory compliance, risk management, technology and communication systems support, including on-board computers and other technical support. These additional services allow us to mitigate, on behalf of our customers, labor challenges associated with maintaining a private fleet of vehicles, such as driver recruitment and retention, and government regulation, including electronic logging devices and hours of service regulations, DOT audits and workers’ compensation. Our DTS solution offers a high degree of specialization to meet the needs of customers with sophisticated service requirements such as tight delivery windows, high-value or time-sensitive freight distribution, closed-loop distribution, multi-stop shipments, specialized equipment and integrated transportation needs.
Market Trends
The U.S. dedicated contract carriage market is estimated to be $18 billion(1) from an addressable market of approximately $400 billion(2). This market is affected by many of the same trends that impact our FMS business, including the tightening of capacity in the current U.S. trucking market. The administrative requirements relating to regulations issued by the DOT regarding driver screening, training and testing, as well as record keeping and other costs associated with the hours of service requirements, make our DTS product an attractive alternative to private fleet and driver management. With the changes in the regulatory environment, including the electronic logging device mandate that became effective in late 2017, there continues to be significant pressure on the availability of qualified truck drivers, whose supply remains tight, and shippers continue to seek dedicated capacity from quality transportation and logistics providers. In addition, market demand for just-in-time delivery creates a need for well-defined routing and scheduling plans that are based on comprehensive asset utilization analysis and fleet rationalization studies offered as part of our DTS services.
Operations/Product Offerings
For the year ended December 31, 2019, our global DTS business accounted for 15% of our consolidated revenue. At December 31, 2019, we had 186 DTS customer accounts in the U.S. Because it is highly customized, our DTS product is particularly attractive to companies that operate in industries that have time-sensitive deliveries or special handling requirements, as well as companies who require specialized equipment. DTS accounts typically operate in a limited geographic area, and, therefore, most of the drivers assigned to these accounts are short haul drivers, meaning they return home at the end of each work day, which helps with driver recruiting and retention. Although a significant portion of our DTS operations are located at customer facilities, our DTS business also utilizes and benefits from our extensive network of FMS facilities, including the FMS maintenance network that services all vehicles used in DTS solutions.
(1) Armstrong & Associates - Third-Party Logistics Market Results and Trends for 2019, June 2019
(2) Addressable market as of December 2019, Class 3-8, IHS Markit Ltd. (formerly RL Polk) & Ryder Internal Estimates
In order to customize an appropriate DTS transportation solution for our customers, our DTS logistics specialists perform a transportation analysis using advanced logistics planning and operating tools. Based on this analysis, they formulate a logistics design that includes the routing and scheduling of vehicles, the efficient use of vehicle capacity and overall asset utilization. The goal of each customized plan is to create a distribution system that optimizes freight flow while meeting a customer’s service goals. A team of DTS transportation specialists can then implement the plan by leveraging the resources, expertise and technological capabilities of both our FMS and SCS businesses.
To the extent a distribution plan includes multiple modes of transportation (air, rail, sea and highway), our DTS team, in conjunction with our SCS transportation specialists, selects appropriate transportation modes and carriers, places the freight, monitors carrier performance and audits billing. In addition, through our SCS business, we can reduce costs and add value to a DTS customer’s distribution system by aggregating orders into loads, looking for shipment consolidation opportunities and organizing loads for vehicles that are returning from their destination point back to their point of origin (backhaul).
DTS Business Strategy
Our DTS business strategy is to offer services to customers who need specialized equipment, specialized handling or integrated services. This strategy revolves around the following interrelated goals and priorities:
increase market share with customers in the energy and utility, metals and mining, specialty retail, construction, and food and beverage industries;
leverage the support and talent of the FMS sales team to compel private fleet operators to outsource all or some of their transportation needs to us;
align the DTS business with other SCS product lines to create revenue opportunities and improve operating efficiencies in both segments; and
improve competitiveness in the non-specialized and non-integrated customer segments.
Competition
Our DTS business segment competes with other dedicated providers and truckload carriers servicing on a national, regional and local level. We compete with these companies based on a number of factors, including price, equipment options and features, maintenance, service and geographic coverage, driver availability and operations expertise. We are able to differentiate the DTS product offering by leveraging FMS and integrating the DTS services with those of SCS to create a more comprehensive transportation solution for our customers. Our strong safety record and focus on customer service also enables us to uniquely meet the needs of customers with high-value products that require specialized handling in a manner that differentiates us from truckload carriers.
ACQUISITIONS
In addition to our continued focus on organic growth, acquisitions play an important role in enhancing our growth strategy. In assessing potential acquisition targets in our FMS business segment, we look for companies that would create value through operating synergies, leveraging our existing facility infrastructure, improving our geographic coverage and diversifying our customer base. In our DTS business segment, we are focusing on strategies for growth, including acquisitions that enhance our technology capabilities, and expand our geographic density and vertical market sector. In our SCS business segment, we focus on adding capabilities and product offerings, potentially expanding into new industries, diversifying our customer base within our current industries, and improving our competitive position.
CYCLICALITY
Ryder's business is impacted by economic and market conditions. In a strong economic cycle, there is generally more demand for our fleet management, dedicated transportation and supply chain services. In a weak or volatile economy, demand for our services decreases and is considerably more unpredictable. Because of these factors, we have continued to focus on increasing the diversity of our customer base and strengthening our long-term business partnerships with our customers. Although we believe these efforts help mitigate the immediate impact of an economic downturn, during a protracted or severe economic downturn, customers are often unwilling to commit to a full-service lease or long-term supply chain and dedicated contracts. Because commercial rental and used vehicle sales are transactional, they are more cyclical in nature and are also heavily dependent on economic and market conditions, and results can vary significantly in both the short- and long-term. In 2019, we began to experience softening in used vehicle and commercial rental market conditions, which we expect to continue throughout 2020. We mitigate some of the potential impact of an economic downturn through a disciplined and centralized approach to asset management. This approach allows us to manage the size, mix and location of our operating fleet and used vehicle inventories to try and maximize asset utilization and used vehicle proceeds in both strong and weak market conditions.
ADMINISTRATION
Our financial administrative functions for the U.S. and Canada, including credit, billing and collections, are consolidated into our Shared Services Center, a centralized processing center located in Alpharetta, Georgia. Our Shared Services Center also manages contracted third parties providing administrative, finance and support services outside of the U.S. in order to reduce ongoing operating expenses and maximize our technology capabilities. This centralization results in more efficient and consistent centralized processing of selected administrative operations. Certain administrative functions are also performed at the Shared Services Center for our customers. The Shared Services Center’s main objectives are to enhance customer service through process standardization.
REGULATION
Our business is subject to regulation by various federal, state, local and foreign governmental entities. The DOT and various federal and state agencies exercise broad powers over certain aspects of our business, generally governing such activities as authorization to engage in motor carrier operations, safety and operations. The Federal Motor Carrier Safety Administration (FMCSA), under the DOT, manages a Compliance, Safety, Accountability initiative (known as "CSA"), partnering with state agencies designed to monitor and improve commercial vehicle motor safety, which uses roadside inspections and violations to measure motor carriers and drivers. The FMCSA also has regulations mandating electronic logging devices in commercial motor vehicles that impact various aspects of our dedicated, supply chain and rental businesses.
We are also subject to a variety of laws and regulations promulgated by national, state, provincial and local governments, including the U.S. Environmental Protection Agency (EPA) and the Occupational Safety and Health Administration (OSHA), which regulate safety, the management of hazardous materials, water discharges, air emissions, solid waste disposal and the release and cleanup of regulated substances. We must comply with licensing and other requirements imposed by the U.S. Department of Homeland Security and the U.S. Customs Service as a result of increased focus on homeland security and our Customs-Trade Partnership Against Terrorism certification. We may also become subject to new or more restrictive regulations imposed by these agencies or other authorities relating to carbon controls and reporting, engine exhaust emissions, drivers’ hours of service, wage and hour requirements, security including data privacy and cyber security and ergonomics.
ENVIRONMENTAL
We have a long-standing commitment to sound environmental practices that reduce risk and build value for us and our customers. We have a history of adopting “green” designs and processes because they are efficient, cost-effective transportation solutions that improve our bottom line and bring value to our customers. We have maintained an environmental policy since 1991 and have updated it periodically as regulatory and customer needs have changed. Our environmental policy reflects our commitment to supporting the goals of sustainable development, environmental protection, and pollution prevention in our business. We have adopted proactive environmental strategies that have advanced business growth and continued to improve our performance in ways that reduce emission outputs and environmental impact. Our environmental team works with operating employees to develop and administer programs in support of our environmental policy and to help ensure that environmental considerations are integrated into all business processes and decisions.
In establishing appropriate environmental objectives and targets for our wide range of business activities around the world, we focus on (1) the needs of our customers; (2) the communities in which we provide services; and (3) relevant laws and regulations. We regularly review and update our environmental management procedures, and information regarding our environmental activities is routinely disseminated throughout Ryder. We publish a Corporate Sustainability Report, which includes metrics related to our environmental and safety performance. The report is publicly available on the company website at www.rydercsr.com. In addition, we have voluntarily submitted an annual report to the Carbon Disclosure Project (CDP), disclosing direct and indirect emissions resulting from our operations, and earned leadership status for the quality of our disclosure reporting.
SAFETY
Our safety culture is founded upon a core commitment to the safety, health and well-being of our employees, customers and the community, a commitment that has made us a long-standing industry leader in safety. Safety is an integral part of our business strategy because preventing injuries and collisions improves employee quality of life, eliminates service disruptions to our customers, increases operational efficiency, and improves customer satisfaction. As a core value, our focus on safety is embedded in our day-to-day operations, reinforced by many safety programs and continuous operational improvement and supported by a talented and dedicated safety organization.
We deploy relevant vehicle safety systems in the vehicles we operate, including active brake assistance, lane departure warning systems, stability control, and others, to enhance safety performance. We also install aftermarket safety monitoring systems that provide effective means for our operations teams to measure and improve driver performance, including in-vehicle
video event recorders. Training is also a key component of our safety program. Monthly safety training delivered by location safety committees cover specific and relevant safety topics and managers receive annual safety leadership training. In driving operations, we use certified driver trainers to on-board and train our drivers using first hand experienced certified driver trainers. Quarterly and remedial training is also delivered online to each driver through a highly interactive lesson platform. Regular safety behavioral observations are conducted by managers throughout the organization everyday and remedial training and coaching takes place on the spot. Our proprietary, web-based Safety Management System, RyderSafetyNetSM, delivers monthly proactive safety programs as well as safety compliance tasks tailored to every location and helps measure safety activity effectiveness across the organization. Our safety policies require that all managers, supervisors and employees incorporate safe processes in all aspects of our business. Monthly safety scorecards are tracked and reviewed by management for progress toward key safety objectives.
EMPLOYEES
At December 31, 2019, we had approximately 39,900 full-time employees worldwide, of which 38,600 were employed in North America and 1,300 in Europe. We currently employ approximately 9,500 drivers and 6,300 technicians. We have approximately 25,600 hourly employees in the U.S., approximately 4,300 of which are organized by labor unions. Those employees organized by labor unions are principally represented by the International Brotherhood of Teamsters, the International Association of Machinists and Aerospace Workers and the United Auto Workers. Their wages and benefits are governed by 104 separate labor agreements which are renegotiated periodically. Although we have not experienced a material work stoppage or strike, these events can potentially occur given the types of businesses in which we currently engage. We consider the relationship with our employees to be good.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
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| | | | |
| Name | | Age | | Position |
| Robert E. Sanchez | | 54 | | Chair and Chief Executive Officer |
| Scott T. Parker | | 52 | | Executive Vice President and Chief Financial Officer |
| John J. Diez | | 49 | | President, Global Fleet Management |
| J. Steven Sensing | | 52 | | President, Global Supply Chain Solutions and Dedicated Transportation Solutions |
| Robert D. Fatovic | | 54 | | Executive Vice President, Chief Legal Officer and Corporate Secretary |
| John Gleason | | 63 | | Executive Vice President and Chief Sales Officer |
| Karen M. Jones | | 57 | | Executive Vice President and Chief Marketing Officer |
| Frank Lopez | | 45 | | Executive Vice President and Chief Human Resources Officer |
| Tim Fiore | | 64 | | Senior Vice President and Chief Procurement Officer |
| Rajeev Ravindran | | 54 | | Senior Vice President and Chief Information Officer |
| Frank Mullen | | 50 | | Vice President and Controller |
Robert E. Sanchez was appointed Chair of Ryder's Board in May 2013 and promoted to Chief Executive Officer and became a Board member in January 2013. Previously, Mr. Sanchez served as President and Chief Operating Officer from February 2012 to December 2012. He served as President, Global Fleet Management Solutions from September 2010 to February 2012 and as Executive Vice President and Chief Financial Officer from October 2007 to September 2010. He also previously served as Executive Vice President of Operations, U.S. Fleet Management Solutions from October 2005 to October 2007 and as Senior Vice President and Chief Information Officer from January 2003 to October 2005. Mr. Sanchez joined Ryder in 1993 and has held various other positions of increasing responsibility, including leadership positions in all three of Ryder's business segments.
Scott T. Parker joined Ryder in April 2019 and was appointed Executive Vice President and Chief Financial Officer. Prior to joining Ryder, Mr. Parker served as Executive Vice President and Chief Financial Officer at OneMain Financial, a leading consumer finance company, where he was responsible for overseeing all financial operations since 2015. Prior to OneMain Financial, Mr. Parker served as Chief Financial Officer for CIT Group Inc., a commercial finance company, from 2010 to 2015. He also served as Chief Financial Officer from 2006 to 2008 and Chief Operating Officer from 2008 to 2010 of Cerberus Operations & Advisory Company, and spent more than 15 years in leadership roles within the industrial and financial services businesses at General Electric Company, including Chief Financial Officer of GE Capital Solutions from 2005 to 2006.
John J. Diez has served as President, Global Fleet Management Solutions since September 2019. Previously, Mr. Diez served as President of Dedicated Transportation Solutions from March 2015 to August 2019, as Senior Vice President of Ryder Dedicated from March 2014 to February 2015, and as Senior Vice President of Asset Management from January 2011 to February 2014. Mr. Diez joined Ryder's Finance department in 2002 and has since held various positions within Finance
including Senior Vice President Global Field Finance and Vice President and Chief Financial Officer of Fleet Management Solutions.
J. Steven Sensing has served as President of Global Supply Chain Solutions since March 2015. In September 2019, the DTS business was consolidated under the leadership of Mr. Sensing. Previously, Mr. Sensing served as Vice President and General Manager of the Technology industry group from February 2007 to February 2015. In July 2014, he also added the Retail industry group under his leadership. Mr. Sensing joined Ryder in 1992 and has since held various positions within Dedicated Services, Transportation Management and Distribution Management.
Robert D. Fatovic has served as Executive Vice President, Chief Legal Officer and Corporate Secretary since May 2004. He previously served as Senior Vice President, U.S. Supply Chain Operations, Hi-Tech and Consumer Industries from December 2002 to May 2004. Mr. Fatovic joined Ryder’s Law department in 1994 as Assistant Division Counsel and has held various other positions within the Law department including Vice President and Deputy General Counsel.
John Gleason has served as Executive Vice President and Chief Sales Officer since November 2015. Previously, Mr. Gleason served as Senior Vice President of Global Fleet Management Solutions from October 2009, when he joined Ryder, to October 2015. Prior to joining Ryder, Mr. Gleason served as Chief Sales Officer for Automatic Data Processing from April 2005 to September 2009 and as Senior Vice President of Sales from July 1998 to April 2005.
Karen M. Jones has served as Executive Vice President and Chief Marketing Officer since October 2014. She joined Ryder in September 2013 as Senior Vice President and Chief Marketing Officer. Prior to joining Ryder, Ms. Jones was Chief Marketing Officer for NRG/Reliant Energy, Inc from 2010 to 2013. Previously, Ms. Jones served as Senior Vice President of Marketing and Corporate Communications for DHL Express U.S. from 2006 to 2009 and as Vice President of Advertising, Brand Management and Promotion from 2004 to 2006. In addition, Ms. Jones has served in key positions responsible for worldwide brand advertising, sponsorship, and strategic alliances for Hewlett Packard.
Frank Lopez was appointed as Executive Vice President and Chief Human Resources Officer in February 2018. Previously, Mr. Lopez served as Chief Human Resources Officer since February 2016 and Senior Vice President, Global Human Resources Operations since July 2013. Mr. Lopez joined Ryder in 2002 and has since held various positions within the Human Resources, Labor Relations and Legal functions.
Timothy (Tim) Fiore was appointed Senior Vice President and Chief Procurement Officer in March of 2018. He previously held the same role from 2002 to 2005. Prior to his current role, Mr. Fiore was the Senior Vice President and Chief Procurement Officer of ThyssenKrupp NA, a manufacturer and supplier of automotive and industrial components and equipment, from 2012 until his retirement in 2014. In that role, he was responsible for developing and implementing ThyssenKrupp’s first consolidated North American supply management program. He also serves as Chair of the Institute for Supply Management's Manufacturing Business Survey Committee since 2017. Over the course of his career, Mr. Fiore has also held senior supply management roles at Terex Corporation, Celanese Corporation, and United Technologies Corporation.
Rajeev Ravindran joined Ryder and was appointed Senior Vice President and Chief Information Officer in January 2018. Mr. Ravindran has over 20 years of IT leadership experience and was previously the CIO and Group Vice President at JM Enterprises since 2012. Prior to JM, Mr. Ravindran worked in IT leadership roles at various companies including Interactive Metronome, Asista.com, and AutoNation.
Frank Mullen joined Ryder and was appointed Vice President and Controller in September 2017. Mr. Mullen joined Ryder from Global Eagle Entertainment, a global provider of media, content, connectivity and data analytics, where he held the position of Senior Vice President and Chief Accounting Officer since 2016. From 2015 to 2016, he served as Vice President and Controller of Pinnacle Foods Inc., a manufacturer, marketer and distributor of branded food products. Prior to joining Pinnacle, Mr. Mullen held roles of increasing responsibility at Aramark, a provider of food service, facilities and uniform services, from 2000 through 2015, including Vice President and Assistant Controller from 2014 to 2015 and Associate Vice President – Corporate Accounting from 2006 to 2014.
FURTHER INFORMATION
For further discussion concerning our business, see the information included in Items 7 and 8 of this report. Industry and market data used throughout Item 1 was obtained through a compilation of surveys and studies conducted by industry sources, consultants and analysts.
We make available our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports through the Investor Relations page on our website at www.ryder.com as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (SEC). The SEC maintains an Internet site that contains our reports, proxy and information statements, and our other SEC filings. The address of the SEC's website is www.sec.gov.
In addition, our Corporate Governance Guidelines, Principles of Business Conduct and Board committee charters are posted on the Corporate Governance page of our website at www.investors.ryder.com. Upon request to our Investor Relations page on our website at www.ryder.com, we will provide a copy of these documents to anyone, free of charge.
ITEM 1A. RISK FACTORS
The following is a cautionary discussion of the material risks and uncertainties that management believes affect us. Any of the following risks, as well as risks that we do not know or currently deem immaterial, could have a material adverse effect on our business, financial condition or results of operations. Accordingly, you should carefully consider the following risk factors in conjunction with all of the other information set forth in or incorporated by reference in this Form 10-K.
Decreased customer demand for transportation services due to adverse economic conditions, competition or other factors could adversely impact our business and operating results.
The transportation industry is highly cyclical and highly susceptible to trends in economic activity. Weakness or uncertainty in economic conditions in the United States, and to a lesser extent the other geographic markets in which we operate, could adversely impact our business and operating results. Our business relies on the strength of our customers’ businesses and the level of confidence our customers have about current and future economic conditions and trends. Our vehicles are leased or rented to customers that transport goods commercially, so the demand for our products and services is tied directly to the production and sale of goods by our customers, and more generally, the health of the North American economy and overall levels of competition in the transportation and logistics industry. Because of this, our business may begin to slow before market slowdowns, at the point of customer uncertainty, and may recover later than market recoveries, as our customers may continue to feel uncertain about future market conditions. If uncertainty and lack of customer confidence around macroeconomic and transportation industry conditions increase, our future growth prospects, business and results of operations could be materially adversely affected.
Among our services and product offerings, demand for our longer-term contractual services is particularly susceptible to changes in economic and market conditions, as customers are often unwilling to commit to long-term lease, maintenance, dedicated services or supply chain contracts in a weak or volatile economy. Accordingly, any sustained weakness in demand or a protracted economic downturn can negatively impact performance and operating results in our longer-term contractual services, which include ChoiceLease and SelectCare contracts in our FMS business segment, supply chain and last mile delivery contracts in our SCS business segment and dedicated services in our DTS business segment.
We bear the residual risk on the value of our vehicles.
Impact on Used Vehicle Sales. We generally bear the risk that we will not be able to resell our vehicles at a price equal to or above their expected residual values. If we overestimate a vehicle’s residual value this could contribute to lower gains or losses on sales of our used vehicles. A decline in market demand for used vehicles would likely result in a reduction in our residual values. Factors that could contribute to a decline in the market demand for used vehicles include an oversupply of vehicles in the marketplace; decline in customers due to economic conditions; concerns regarding the real or perceived quality, maintenance or condition of our vehicles; foreign exchange movements; or changes in technology that render select vehicle technology obsolete or less attractive to purchasers. We sell our used vehicles through various channels, including retail sales centers, at our branch locations, through our website at www.UsedTrucks.Ryder.com, as well as through the wholesale market. Pricing and demand for used vehicles varies among selling channels, particularly between the retail and wholesale markets, as we generally obtain lower proceeds on vehicles sold through wholesale channels. If we are unable to meet our targeted sales goals and inventory levels through our projected sales mix of retail versus wholesale, we may be required to sell more vehicles than planned through the wholesale market, which will impact our sales proceeds. Beginning in the latter part of 2015, which reflected an all-time high for residual values as a percent of net vehicle investment, and continuing through mid-2019, we experienced a weakening of conditions in the used vehicle sales market. Beginning in the second half of 2019, conditions significantly deteriorated further requiring us to sell a larger number of used vehicles through wholesale channels and adversely affected used vehicle sales volume and pricing. As a result, we lowered residual value estimates in the third quarter of 2019 for the entire fleet of power vehicles. If the market for our used vehicles declines further than those lower residual values, or there is a concern regarding the quality, maintenance or condition of our vehicles, we may obtain lower sales proceeds upon the sale of used vehicles, which would negatively impact the residual value estimates of our operating fleet and require us to further lower our residual value estimates.
Impact on our ChoiceLease Product Line. Changes in residual values also impact the overall competitiveness of our ChoiceLease product line, as estimated sales proceeds are a significant component of the overall price of the lease. Additionally, technology changes, sudden changes in supply and demand, competitor pricing, and other market factors beyond our control, vary from year to year and from vehicle to vehicle, making it difficult to accurately predict residual values used in calculating and pricing our ChoiceLease arrangements. Although we have developed disciplines related to the management and
maintenance of our leased vehicles designed to maximize the value of our used vehicles, there is no assurance that these practices will sufficiently reduce the residual risk.
For a detailed discussion on our accounting policies and assumptions relating to depreciation and residual values, please see “Critical Accounting Estimates - Depreciation and Residual Value Estimates” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Our profitability could be negatively impacted if our key operational assumptions and pricing structure prove to be invalid.
Substantially all of our SCS and DTS services, as well as our ChoiceLease and SelectCare products, are provided under long-term contractual arrangements with our customers. These contractual arrangements include pricing terms that are subject to a number of key operational assumptions including, but not limited to:
with respect to our SCS contracts, the scope of services, production volumes, operational efficiencies, the mix of fixed versus variable costs, productivity and other factors;
with respect to our DTS contracts, market wages, availability of labor, insurance rates and other operating costs that experience market fluctuations; and
with respect to our ChoiceLease and SelectCare contracts, residual values (ChoiceLease only) and maintenance expense.
If we are incorrect in our assumptions, or, as a result of subsequent changes in customer demand or other market forces that are outside of our control, these assumptions prove to be invalid, we could have lower margins than anticipated in a contract or segment, lose business, or be unable to offer competitive products and services. For example, our SCS and DTS services are highly customized and offer a high degree of specialization to meet the needs of our customers. We may not be able to adjust the pricing terms in some of our SCS and DTS contracts in the event any of our assumptions prove to be incorrect or invalid. As a result, if we do not accurately predict the costs to us to execute the SCS or DTS contract, it could result in a significant decrease in revenue or loss on the contract that could adversely affect our operating results and financial condition. Additionally, although some of our SCS or DTS contracts provide for renegotiation upon a material change, there is no assurance that we will be successful in obtaining the necessary price adjustments or that pricing will be sufficient to cover the risk.
Our capital intensive business requires us to make capital decisions based upon projected customer activity levels and market demand for our commercial rental product line.
We make significant investments in vehicles to support our rental business based on anticipated customer demand. We make commitments to purchase the vehicles many months in advance of the expected use of the vehicle and seek to optimize the size and mix of the commercial rental fleet based on demand projections and various other factors. As a result, our business is dependent on our ability to accurately estimate future levels of rental activity and consumer preferences to effectively capitalize on market demand in order to drive the highest levels of utilization and revenue per unit. Missing our projections could result in too much or too little capacity in our rental fleet. Overcapacity could require us to deploy or sell vehicles at lower than anticipated pricing levels or result in asset write-downs, and undercapacity could negatively impact our ability to reliably provide rental vehicles to our customers, each of which could result in lower revenues, higher costs and an adverse impact on profitability. We employ a sales force and operations team on a full-time basis to manage and optimize this product line; however, their efforts may not be sufficient to overcome unforeseen changes in market demand in the rental business. In contrast, in our ChoiceLease product line, we typically do not purchase vehicles until we have an executed contract with a customer.
We operate in a highly regulated industry, and changes in existing regulations or costs of compliance with, or liability for violation of, existing or future laws or regulations could have a material adverse effect on our business.
Our business is subject to regulation by various federal, state, local and foreign governmental agencies. In the United States, we are regulated by the DOT as well as local, state and federal agencies that exercise broad powers over our motor carrier operations, safety and the generation, handling, storage, treatment and disposal of waste materials. The FMCSA, under the DOT, also manages a compliance and enforcement initiative partnering with state agencies designed to monitor and improve commercial vehicle motor safety. We are also subject to other regulations relating to our business, employees and customers,
including labor and employment laws, international laws and regulations governing our foreign operations, environmental laws and regulations, among others.
Compliance with existing laws and regulations has involved, and we expect will continue to involve, significant time commitments and costs, and in recent years, we have seen an increase in proactive regulatory enforcement. In addition, new laws, rules or regulations may be adopted or interpretative changes to existing regulations could be issued at any time. Any new initiatives could further increase our costs or operating complexity and our ability to offer certain services in the jurisdictions in which we operate.
Our failure to comply with any existing or future laws, rules or regulations to which we are, or may become subject, whether actual or alleged, could have a material adverse effect on our business and on our ability to access the capital required to operate our business. Among other things, any such failure could expose us to reputational harm, loss of business, fines, penalties or potential litigation liabilities, including costs, settlements and judgments, as well as the loss of operating authority and restrictions on our operations. For example, the DOT periodically conducts compliance reviews to ensure compliance with its safety and other rules and regulations, and evaluates the safety rating assessed to motor carriers (“satisfactory,” “conditional” or “unsatisfactory”). The receipt of a final “conditional” or “unsatisfactory” safety rating due to deficiencies in our safety and compliance program could have a material adverse effect on our customer relationships, as some of our existing customer contracts require a “satisfactory” DOT safety rating. Moreover, if we fail to comply with DOT regulations, including our failure to maintain a “satisfactory” DOT safety rating, the DOT could levy fines and require us to cease all transportation services under our operating authority, which could have a material adverse effect on our business.
In addition, the FMCSA’s enforcement and compliance programs, designed to monitor and improve commercial motor vehicle safety by measuring the safety record of both the motor carrier and the driver, may shrink the industry’s pool of drivers. This and the shortage of qualified drivers could increase the costs to attract, train and retain qualified drivers as well as increase driver turnover, decrease asset utilization, limit growth, and adversely impact our results of operations.
Other compliance issues we may face include:
companies we acquire may not have historically maintained internal controls, policies or procedures to monitor compliance with the regulatory and legal requirements consistent with our standards;
our operations in Canada, Europe and Mexico may expose us to liability for failure to comply with local laws and regulatory requirements of foreign jurisdictions, which may vary significantly from country to country, including local tax laws, and anti-bribery laws;
compliance with environmental laws and regulations, including regulations imposed by the EPA on exhaust emissions and increasingly stringent regulations related to climate change, which may impose restrictions on our activities or require us to take certain actions, all of which may, over time, increase our costs and adversely affect our business and results of operations;
compliance with health and safety laws and regulations imposed by OSHA; and
compliance with new laws or regulations that may change the employee/independent contractor classification of independent contractors doing business with us, which could cause us to incur additional exposure under federal and state tax and employment laws.
In addition, we are also subject to reputational risk and other detrimental business consequences associated with noncompliance by other parties with whom we engage with, such as employees, customers, agents, suppliers or other persons using our supply chain or assets to commit illegal acts, including the use of company assets for terrorist activities, or a breach of data privacy laws.
We may fail to respond adequately or in a timely manner to innovative changes in new technology in our industry.
In recent years, our industry has been characterized by rapid changes in technology, leading to innovative transportation and logistics concepts that have impacted or have the potential to significantly impact our business model, competitive landscape and the industries of our customers and suppliers. For example, new concepts are currently under development for more advanced electric vehicles, automatic or semi-automatic self-driving vehicles, connected vehicle platforms, and drones. Additional innovations impacting the transportation, trucking and supply chain/logistics industries are likely that we cannot yet foresee. In addition, there is a rapidly growing demand for e-commerce services, last mile home delivery and asset- and freight-
sharing services, which continue to disrupt the transportation industry with the goal of bringing efficiencies to the transportation marketplace.
Our inability to quickly adapt to and adopt new innovations in products and processes desired by our customers may result in a significant loss of demand for our service offerings. In addition, advances in technology may require us to increase investments in order to remain competitive, and our customers may not be willing to accept higher prices to cover the cost of these investments. Our lease and rental fleets could become unfavorable with our customers or obsolete within a relatively short period of time, and we may no longer be able to find buyers for our used vehicles. An increase in customer use of electric vehicles could reduce the demand for our vehicle maintenance services, diesel vehicles and related offerings. Likewise, self-driving vehicles may reduce the demand for our dedicated service offerings, where, in addition to a vehicle, Ryder provides a driver as part of an integrated, full service customer solution. While we are actively engaged in developing strategic partnerships with new technology providers, developing new products, and evaluating emerging technology, we cannot be certain that such initiatives will be successful or timely, and our failure to successfully and timely implement any of these initiatives could have an adverse impact on our financial condition or results of operations.
We face risks related to cybersecurity attacks and other breaches of our systems and information technology.
We depend on the proper functioning and availability of our information systems in operating our business. It is important that the data processed by these systems remains confidential, as it often includes sensitive customer information, confidential customer transaction data, employee records, and key financial and operational results and statistics. Failure to prevent or mitigate data loss or system intrusions from cybersecurity attacks or other security breaches could expose us, our vendors, or our customers to a risk of loss or misuse of such information, adversely affect our operating results, restrict or prevent operations or financial reporting, result in litigation or potential liability and otherwise harm our business. Likewise, data privacy breaches from our systems could expose personally identifiable information of our employees or contractors, sensitive customer data, or vendor data to unauthorized persons, adversely impacting our customer service, employee relationships and our reputation. We maintain an information security program, which consists of safeguards and controls to help ensure that our core fundamentals of confidentiality, integrity and availability are supported, but we cannot ensure that we will be able to prevent or mitigate all such data breaches or cyberattacks.
In addition, some of our software applications are utilized by third parties who provide outsourced administrative functions. Such third parties may have access to information we maintain about our company, customers, employees and vendors or operate systems that are critical to our business operations and services. These third parties are subject to risks imposed by data breaches, cyberattacks and other events or actions that could damage, disrupt or close down their networks or systems.
Our information systems are protected through physical and software safeguards as well as backup systems considered appropriate by management. However, threats to network and data security are becoming increasingly diverse and sophisticated. We have experienced cybersecurity threats and vulnerabilities targeting our information technology systems and networks and those of our third party providers. Such prior events, to date, have not had a material impact on our financial condition or results of operations. While we have significant security processes and initiatives in place, we may be unable to fully detect, mitigate or protect against a material breach or disruption in the future. In addition, efforts to prevent, detect and mitigate data breaches and cyberattacks subject us to additional costs. We have cyber insurance coverage in place that may cover certain events described above, subject to deductibles and coverage limitations. It is possible that claims could exceed the limits of our coverage. Further, such insurance may not address or cover injury to reputation or loss of business that may result should such an attack be material.
In addition, regulatory authorities have increased their focus on how companies collect, process, use, store, share and transmit personal data. New privacy security laws and regulations, including the United Kingdom’s Data Protection Act 2018 (“DPA”) and the European Union General Data Protection Regulation 2016 (“GDPR”), pose increasingly complex and rigorous compliance challenges, which may increase our compliance costs. Any failure to comply with data privacy laws and regulations could result in significant penalties, fines, legal challenges and reputational harm.
Failure to maintain, upgrade and consolidate our information technology networks could adversely affect us.
Our success depends on the functionality of information technology systems to support our service offerings. Extended delays or cost overruns in securing, developing and otherwise implementing technology solutions to support our business and the business initiatives we will be developing in the future would delay and possibly prevent us from realizing the projected benefits of these initiatives. In addition, our reputation with our customers may suffer if outages, system failures or delays in
timely access to data occur in our information technology systems that support key business processes.
We are continuously upgrading and consolidating our information technology systems by enhancing legacy systems, replacing legacy systems with successor systems and acquiring new systems with enhanced functionality. These types of activities subject us to additional costs and inherent risks associated with replacing and modifying our existing systems, including impairment of our ability to provide our services, disruption of our internal control structure, substantial capital expenditures, additional administration and operating expenses, retention of sufficiently skilled personnel to implement and operate the new systems, demands on management time, disruptions in our business operations, and other risks and costs of delays or difficulties in transitioning to new systems or integrating new systems into our current systems. Our system implementations may not result in productivity improvements at a level that outweighs the costs of implementation, or at all.
We are in the process of implementing a multi-year Enterprise Resource Planning (ERP) project. This new system is designed to improve efficiencies and integrate and automate certain internal financial, operating, and other applications that are critical to our business operations. The implementation, operation, and proper functionality of the ERP system will require a significant investment of human, technological, and financial resources. While we expect to invest significant resources in planning, project management, consulting and training to minimize disruptions to our business during the conversion to the new ERP system, it is possible that significant implementation, operational, and functionality issues may arise. It is further possible that we may experience significant delays, increased costs, and other difficulties that are not presently contemplated and that may interfere with our ability to meet our customer service requirements. If we encounter unforeseen problems with regard to our new ERP system, our business, operations and financial condition could be adversely affected.
We operate in a highly competitive industry and our business may suffer if we are unable to adequately address potential downward pricing pressures and other competitive factors.
The transportation industry is highly competitive. We face competition in all geographic markets and each industry sector in which we operate. Increased competition or our inability to compete successfully may lead to a reduction in revenues, reduced profit margins, increased pricing pressure, or a loss of market share, any one of which could affect our financial results. Numerous competitive factors could impair our ability to maintain our current profitability, including the following:
our inability to obtain expected customer retention levels or profitability;
we compete with many other transportation and logistics service providers, some of which have greater capital resources or lower cost structures than we do;
our inability to compete with new entrants in the transportation and logistics market that may offer similar services at lower cost or have greater technological capabilities;
customers may choose to provide the services we provide for themselves;
our competitors may periodically reduce their prices to gain business, especially during times of declining economic growth, which may limit our ability to maintain or increase prices or impede our ability to maintain our profitability or grow our market share or profitability;
many customers periodically accept bids from multiple carriers for their shipping needs, and this process may depress rates or result in the loss of some of our business to competitors;
the continuing trend toward consolidation in the trucking industry may result in larger carriers with greater financial resources than we have;
advances in technology require increased investments to remain competitive, and our customers may not be willing to accept higher prices to cover the cost of these investments; and
because cost of capital is a significant competitive factor, any increase in either the cost of our debt or equity as a result of reductions in our debt rating or stock price volatility could have a significant impact on our competitive position.
Failure to execute our growth strategy and develop, market and consistently deliver high-quality services that meet customer expectations may cause our revenue and earnings to suffer.
Our long-term growth strategy is to target clients new to outsourced transportation and logistics services and thereby expand the market for our services. We seek to execute our growth strategy by providing operational excellence, superior talent and best-
in-class information technology. By providing high-quality leasing services, we aim to attract customers that traditionally have only been interested in operating their own transportation and logistics networks.
To successfully execute on this strategy, we must continue to focus on developing innovative solutions that meet our existing and target customers’ evolving needs and keep pace with our competitors. Expanding our service offerings to entice and support new clients may strain our management, capital resources, information systems and customer service. We may also need to hire new employees, which may increase costs and may result in temporary inefficiencies until those employees become proficient in their jobs.
Notwithstanding our efforts, new or enhanced service offerings may not meet customer demands, prove to be profitable or succeed in the long term. If we do not respond to current customer needs and establish new, and further develop existing, customer relationships, our ability to maintain a competitive advantage and continue to grow our business profitability could be negatively affected.
We may be negatively impacted by adverse events in the global credit and financial markets, by an investment rating downgrade or by the loss of an investment grade rating.
Our business is highly capital intensive and we have significant ongoing capital requirements that could affect our profitability if we are unable to obtain sufficient capital. In general, we rely in large part upon global credit and financial markets to fund our operations and contractual commitments as well as refinance existing debt. These markets can experience high levels of volatility for numerous reasons and our access to capital could be constrained for extended periods of time. Our ability to raise capital may be materially reduced and/or our borrowing costs may significantly increase if, among other things, access to public investment grade debt becomes limited or closed, we lose access to our global revolving credit facility, or funding costs increase due to the loss of an investment grade rating, a severe economic downturn or rising interest rates. Significant uncertainty, volatility, disruptions or downturns in the global credit and financial markets may also result in:
restricted access to capital and an increased cost of capital;
diminished liquidity and credit availability resulting in higher short- or long-term borrowing costs and more stringent borrowing terms;
unanticipated interest rate and currency exchange rate fluctuations; and
increased risk of default by counterparties under derivative instruments and hedging agreements.
As of December 31, 2019, we had $7.9 billion of outstanding indebtedness. If we are unable to raise additional capital by accessing the debt and equity markets or our costs of raising additional capital were to materially increase, our ability to operate or grow our business, including refreshing, replacing and/or growing our vehicle fleets and acquiring new businesses, and refinance existing debt will be impaired, which could have a material adverse effect on our operating results or materially impact our ability to implement our long-term strategy.
We and the vehicle and equipment manufacturers in our FMS business rely on a small number of suppliers.
We buy vehicles and related equipment from a relatively small number of original equipment manufacturers (OEMs) in our FMS business. Some of our vehicle manufacturers rely on a small concentration of suppliers for certain vehicle parts, components and equipment. A discrete event in a particular OEM’s or supplier’s industry or location, or adverse regional economic conditions impacting an OEM or supplier’s ability to provide vehicles or a particular component, could adversely impact our FMS business and profitability. In addition, our business and reputation could also be negatively impacted if any parts, components or equipment from one of our suppliers suffer from broad-based quality control issues or become the subject of a product recall and we are unable to obtain replacement parts from another supplier in a timely manner.
We derive a significant portion of our SCS and DTS segment revenue from a relatively small number of customers.
During 2019, sales to our top ten SCS customers accounted for 54% of our SCS total revenue and 47% of our SCS operating revenue (total revenue less fuel and subcontracted transportation). Additionally, approximately 37% of our global SCS revenue is from the automotive industry and is directly impacted by automotive vehicle production. Our top ten DTS customers accounted for 47% of DTS total revenue and 40% of DTS operating revenue. The loss of any of these customers or a significant reduction in the services provided to any of these customers could materially and adversely impact our operating results. While we continue to focus our efforts on diversifying our customer base, we may not be successful in doing so.
We are also subject to credit risk associated with the concentration of our accounts receivable from our SCS and DTS customers. If one or more of these customers were to become bankrupt, insolvent or otherwise were unable to pay for the services provided by us, we may incur significant write-offs of accounts receivable or incur lease or asset impairment charges that could adversely affect our operating results and financial condition.
In addition, many of our customers operate in cyclical or seasonal industries, or operate in industries, including the food and beverage industry, that may be impacted by unanticipated weather, growing conditions (such as drought, insects or disease), natural disasters and other conditions over which we have no control. A downturn in our customers’ businesses or unanticipated events impacting their businesses could cause a reduction in freight volume shipped by those customers or a reduction in their need for our services, which could materially and adversely affect our operating results and financial condition.
We may face difficulties in attracting and retaining drivers and technicians.
Drivers. We hire drivers primarily for our SCS and DTS business segments. There is significant competition for qualified drivers in the transportation industry. Additionally, interventions and enforcement under the CSA program may shrink the industry’s pool of drivers as those drivers with unfavorable scores may no longer be eligible to drive for us. As a result of driver shortages, we could be required to increase driver compensation, let trucks sit idle, utilize lower quality drivers or face difficulty meeting customer demands, all of which could adversely affect our growth and profitability.
Technicians. Similarly, we hire technicians in our FMS business segment to perform vehicle maintenance services on our ChoiceLease, SelectCare and rental fleets. In recent years, there has been a decrease in the overall supply of skilled maintenance technicians, particularly new technicians with qualifications from technical programs and schools, which could make it more difficult to attract and retain skilled technicians. If we are unable to maintain an adequate number of qualified technicians, whether through the retention of current technicians or the hiring of new qualified technicians, our business could be adversely affected.
We intend to continue to explore strategic transactions (including acquisitions or divestitures). Our business could be adversely affected if we are not able to identify or successfully execute these strategic transactions.
In furtherance of our strategy, we routinely evaluate opportunities and may enter into agreements for possible strategic transactions. We may be unable to identify strategic transactions or we may be unable to negotiate commercially acceptable terms. Other risks involved in engaging in these strategic transactions include the possible failure to realize the expected benefits of such transactions within the anticipated time frame, or at all, such as cost savings, synergies, sales and growth opportunities. In addition, the integration of an acquired business may result in material unanticipated challenges, expenses and liabilities. Any one of these factors could result in lower than expected revenues or earnings related to combining the companies or derived from a strategic transaction and could adversely impact our financial condition or results of operations.
Failure to successfully negotiate with our union employees may result in strikes, work stoppages, or substantially higher labor costs.
We have approximately 4,300 employees that are organized by labor unions whose wages and benefits are governed by 104 labor agreements that are renegotiated periodically. A material work stoppage, slowdown or strike involving our employees organized by labor unions could result in business disruptions or higher operating costs, which could have an adverse effect on our financial position, results of operations, or cash flows.
Volatility in assumptions and asset values related to our pension plans may adversely affect the valuation of our obligations, the current funding levels and our pension expense under our defined benefit pension plans.
We historically sponsored a number of defined benefit plans for employees not covered by union-administered plans, including certain employees in foreign countries. The aggregate projected benefit obligations and plan assets of our global defined benefit pension plans as of December 31, 2019, were $2.3 billion and $2.0 billion, respectively. The difference between plan obligations and assets, or the funded status of the plans, is a significant factor in determining pension expense and the ongoing funding requirements of those plans. Macroeconomic factors, as well as changes in investment returns and discount rates used to calculate pension expense and related assets and liabilities, can be volatile and may have an unfavorable impact on our costs and funding requirements. Although we have actively sought to control increases in these costs and funding requirements through investment policies and plan contributions, there can be no assurance that we will succeed, and continued cost and funding requirement pressure could reduce the profitability of our business and negatively impact our cash flows.
We are subject to risk of multi-employer pension plan withdrawal.
We participate in certain U.S. multi-employer pension (MEP) plans that provide defined benefits to employees covered by collective bargaining agreements. In the event that we withdraw from participation in any of these plans, then applicable law could require us to make an additional lump-sum contribution to the plan. Our withdrawal liability for any MEP plan would depend on the extent of the plan’s funding of vested benefits. Economic conditions have caused MEP plans to be significantly underfunded. As a result, although we have taken steps in recent years to withdraw from significantly underfunded MEP plans, we may still have liability for at least a period of time following our withdrawal. If the financial condition of the MEP plans were to continue to deteriorate, we could be subject to additional assessments.
We may fail to establish sufficient insurance reserves and adequately estimate for future workers’ compensation and vehicle liabilities.
We are partially self-insured for vehicle liability and workers’ compensation claims. Our self-insurance accruals are based on actuarially estimated, undiscounted cost of claims, which includes claims incurred but not reported. While we believe that our estimation processes are well designed and comply with generally accepted accounting principles (GAAP) and other accounting and finance best practices, any projection of losses concerning workers’ compensation and vehicle insurance is subject to a considerable degree of variability. The causes of this variability include litigation trends, claim settlement patterns and fluctuations in the frequency or severity of accidents. If actual losses incurred are greater than those anticipated, our self-insurance reserves may be insufficient and additional costs could be recorded in our consolidated financial statements. If we suffer a substantial loss in excess of our self-insured limits, the loss and attendant expenses may be covered by traditional insurance and excess insurance the Company has in place, but if not covered or above such coverages, losses could harm our business, financial condition or results of operations. For a detailed discussion on our accounting policies and assumptions relating to our self-insurance reserves, please see the “Critical Accounting Estimates - Self-Insurance Accruals” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Impairment in the carrying value of goodwill could negatively affect our operating results.
We assess our goodwill for impairment at least annually and whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. In evaluating goodwill for impairment, we have the option to first assess qualitative factors to determine whether further impairment testing is necessary, such as macroeconomic conditions, changes in our industry and the markets in which we operate, and our market capitalization, as well as our reporting units' historical and expected future financial performance. If events occur that negatively affect key assumptions used in our analysis, then we may be required to record charges for goodwill impairments in the future, which could have a material adverse non-cash effect on our results of operations. Subsequent to December 31, 2019, we experienced a decline in our market capitalization and if this decline continues for a sustained period of time, we may be required to perform additional impairment analyses and could be required to recognize a non-cash goodwill impairment charge. For a detailed discussion on our accounting policies and assumptions relating to goodwill, please see “Critical Accounting Estimates - Goodwill” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Severe weather or other natural occurrences could result in significant business interruptions and expenditures in excess of available insurance coverage.
Our operations may be affected by external factors such as severe weather and other natural occurrences, including floods, fires, hurricanes and earthquakes at operating locations where we have vehicles, warehouses and other facilities. As a result, our vehicles and facilities may be damaged, our workforce may be unavailable, fuel costs may rise and significant business interruptions could occur. In addition, the performance of our vehicles could be adversely affected by extreme weather conditions. Insurance to protect against loss of business and other related consequences resulting from these natural occurrences is subject to coverage limitations, depending on the nature of the risk insured. This insurance may not be sufficient to cover all of our damages or damages to others and this insurance may not continue to be available at commercially reasonable rates. Even with insurance, if any natural occurrence leads to a catastrophic interruption of service, we may not be able to mitigate a significant interruption in operations.
We face litigation risks that could have a material adverse effect on the operation of our business.
We face litigation risks regarding a variety of issues, including without limitation, accidents involving our trucks and injuries to employees, alleged violations of federal and state labor and employment law including class-action lawsuits alleging wage and hour violations, independent contractor misclassification and improper pay, securities laws, environmental liability, commercial claims and other matters. These proceedings may be time-consuming, expensive and disruptive to normal business operations. The defense of such lawsuits could result in significant expense and the diversion of our management’s time and attention from the operation of our business. In recent years, several insurance companies have stopped offering coverage to trucking companies as a result of increases in the severity of automobile liability claims and higher costs of settlements and verdicts, causing the cost of such insurance to increase. This trend could adversely affect our ability to obtain suitable insurance coverage or further increase the cost for such coverage significantly, each of which may adversely affect our financial condition, results of operations, liquidity or cash flows. Costs we incur to defend or to satisfy a judgment or settlement of these claims may not be covered by insurance or could exceed the amount of that coverage or increase our insurance costs and could have a material adverse effect on our financial condition, results of operations, liquidity and cash flows.
Damage to our reputation through unfavorable publicity or the actions of our employees could adversely affect our financial condition.
Our success depends on our ability to consistently deliver operational excellence and strong customer service. Our inability to deliver our services and solutions as promised on a consistent basis, or our customers having a negative experience or otherwise becoming dissatisfied, can negatively impact our relationships with new or existing customers and adversely affect our brand and reputation, which could, in turn, adversely affect revenue and earnings growth. Adverse publicity (whether or not justified) relating to activities by our employees, contractors, agents or others with whom we do business, such as customer service mishaps or noncompliance with laws, could tarnish our reputation and reduce the value of our brand. With the increase in the use of social media outlets such as Facebook, YouTube, Instagram and Twitter, adverse publicity can be disseminated quickly and broadly, making it increasingly difficult for us to effectively respond. This unfavorable publicity could also require us to allocate significant resources to rebuild our reputation.
Future acts of terrorism, war or regulatory changes to combat the risk of terrorism may cause significant disruptions in our operations.
Terrorist attacks, along with any government response to those attacks, may adversely affect our financial condition, results of operations or liquidity. Our fleet, other key infrastructure and information technology systems may be targets or indirect casualties of acts of terror, other harmful acts, or war. Further, because transportation assets continue to be a target of terrorist activities, federal, state and local governmental bodies are proposing and, in some cases, have adopted legislation and regulations relating to security issues that impact the transportation industry, including checkpoints and travel restrictions on large trucks. If additional security measures disrupt or impede the timing of our operations, we may fail to meet the requirements of our customers or incur increased expenses to do so. In addition, complying with these or future regulations could continue to increase our operating costs and reduce operating efficiencies. We maintain insurance coverages addressing these risks and we have received U.S. Patriot Act protections for our security practices related to the rental of our assets. However, such insurance may be inadequate or become unavailable, premiums charged for some or all of the insurance could increase dramatically, regulations may change or U.S. Patriot Act protections could be reduced. These changes could exacerbate the effects of an act of terrorism on our business, resulting in a significant business interruption, increased costs and liabilities and decreased revenues or an adverse impact on results of operations.
Our business may be affected by uncertainty or changes in U.S. or global social, political or regulatory conditions.
Adverse developments in laws, policies or practices in the U.S. and internationally can negatively impact our business and the business of our customers. Negative domestic and international global trade conditions as a result of social, political or regulatory changes or perceptions could materially affect our business, financial conditions and results of operations.
We provide services domestically and to a lesser extent outside of the U.S., which subjects our business to various additional risks, including:
changes in tariffs, trade restrictions, trade agreements and taxes;
varying tax regimes, including consequences from changes in applicable tax laws;
difficulties in managing or overseeing foreign operations and agents;
foreign currency fluctuations and limitations on the repatriation of funds due to foreign currency controls;
different liability standards;
the price and availability of fuel;
national and international conflict; and
intellectual property laws of countries that do not protect our rights in intellectual property to the same extent as the laws of the U.S.
If we do not correctly anticipate changes in social, political or regulatory conditions or their impact on the transportation industry, we may not alter our business practices in time to avoid adverse effects. Additionally, the occurrence or consequences of any of these factors may restrict our ability to operate in the affected region and/or decrease the profitability of our operations in that region.
Our suppliers may also be affected by changes in the political and regulatory environment, both in the U.S. and internationally. Negative impacts on our suppliers could result in disruptions in the supply and availability of equipment or services needed for our business that could in turn affect our ability to operate and serve our customers as planned.
In addition, there may be changes to existing trade agreements, like the North American Free Trade Agreement (“NAFTA”) and its anticipated successor agreement, the U.S.-Mexico-Canada Agreement (“USMCA”), which is still subject to approval by Canada, greater restrictions on free trade generally, and significant increases in tariffs on goods imported into the United States, particularly tariffs on products manufactured in Mexico, among other possible changes. These changes may lead to fewer goods transported and we may need to restructure certain terms of business with suppliers or customers. It remains unclear what the U.S. administration or foreign governments will or will not do with respect to tariffs, NAFTA, USMCA or other international trade agreements or policies. It is therefore difficult to anticipate the full impact of this agreement on our business, financial condition, cash flows and results of operations.
The market value of our common stock may fluctuate and could be substantially affected by various factors.
We expect that the market price of our common stock will continue to fluctuate due to a variety of factors, some of which are beyond our control. These factors include, among others:
actual or anticipated variations in earnings, financial or operating performance or liquidity;
changes in analysts’ recommendations or projections;
failure to meet analysts’ and our Company's projections;
general political, social, economic and capital market conditions;
announcements of developments or initiatives related to our business;
operating and stock performance of other companies deemed to be peers;
actions by government regulators; and
news reports of trends, concerns and other issues related to us or our industry, including changes in regulations.
Our common stock price may fluctuate significantly in the future, and these fluctuations may be unrelated to our performance. General market price declines or market volatility in the future could adversely affect the price of our common stock, and the current market price of our common stock may not be indicative of future market prices.
Our failure to comply with U.S. or foreign tax laws or a government challenging our tax position could adversely affect our business and future operating results.
We are affected by various U.S. federal, state and foreign tax laws, including income taxes and taxes imposed on the purchase, sale and lease of goods and services such as sales, excise, property, value-added tax (“VAT”), fuel, environmental and other taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. For example, significant judgment is required in determining our worldwide provision for income taxes. Our tax
expense includes estimates of additional tax that may be incurred for tax exposures and reflects various estimates and assumptions, including assessments that could affect the valuation of our net deferred tax assets. Our operating results could be adversely affected by changes in the effective tax rate as a result of a change in the mix of earnings in countries with differing statutory tax rates, changes in our overall profitability, changes in tax legislation, the results of audits and examinations of previously filed tax returns and continuing assessments of our income and indirect tax exposures.
In addition, from time to time we are under audit by tax authorities in different jurisdictions with regards to income tax and indirect tax matters. Economic and political pressures to increase tax revenue in various jurisdictions may make resolving tax disputes favorably more difficult. Although we believe our tax estimates are reasonable, the final determination of tax audits and any other related tax proceedings in the jurisdictions where we are subject to taxation could be materially different from our historical income and indirect tax provisions and accruals.
Finally, changes in U.S. federal, state or international tax laws applicable to corporate multinationals, other tax reform currently being considered by many countries, including the U.S., and changes and clarifications in taxing jurisdictions’ administrative interpretations, decisions, policies and positions may materially adversely impact our tax expense and cash flows. The U.S. Congress, the Organization for Economic Co-operation and Development, the European Union, and other government agencies in jurisdictions in which we and our affiliates invest or do business have maintained a focus on the taxation of multinational companies and have a number of on-going tax initiatives. If we are unable to successfully take actions to manage the adverse impacts of new tax legislation, or if additional interpretations, regulations, amendments or technical corrections exacerbate the adverse impacts of such legislation, the legislation could have a material adverse effect on our financial condition, results of operations and cash flows.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our properties consist primarily of vehicle maintenance and repair facilities, warehouses and other real estate and improvements.
We maintain 593 FMS properties in the U.S., Puerto Rico and Canada; we own 413 of these and lease the remaining properties. Our FMS properties are primarily comprised of maintenance facilities generally including a repair shop, rental counter, fuel service island, administrative offices, and used vehicle retail sales centers.
Additionally, we manage 174 on-site maintenance facilities, located at customer locations.
We also maintain 263 locations in the U.S. and Canada in connection with our domestic SCS business. Almost all of our SCS locations are leased and generally include a warehouse and administrative offices.
We maintain 119 international locations (locations outside of the U.S. and Canada) for our international businesses. There are 54 locations in the U.K. and Germany, and 65 locations in Mexico. The majority of these locations are leased and may be a repair shop, warehouse or administrative office.
Additionally, we maintain 11 U.S. locations primarily used for Central Support Services. These facilities are generally administrative offices, of which we own three and lease the remaining locations.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various claims, lawsuits and administrative actions arising in the normal course of our businesses. Some involve claims for substantial amounts of money and/or claims for punitive damages. While any proceeding or litigation has an element of uncertainty, management believes that the disposition of such matters, in the aggregate, will not have a material impact on our consolidated financial condition or liquidity.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Ryder Common Stock
Our common shares are listed on the New York Stock Exchange under the trading symbol “R.” At January 31, 2020, there were 6,307 common stockholders of record.
Performance Graph
The following graph compares the performance of our common stock with the performance of the Standard & Poor’s MidCap 400 Index and the Dow Jones Transportation 20 Index for a five year period by measuring the changes in common stock prices from December 31, 2014 to December 31, 2019.
The stock performance graph assumes for comparison that the value of our common stock and of each index was $100 on December 31, 2014 and that all dividends were reinvested. Past performance is not necessarily an indicator of future results.
Purchases of Equity Securities
The following table provides information with respect to purchases we made of our common stock during the quarter ended December 31, 2019:
|
| | | | | | | | | | | | | |
| | | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Programs (2) | | Maximum Number of Shares That May Yet Be Purchased Under the Anti-Dilutive Programs (2) |
| October 1 through October 31, 2019 | | 73 |
| | $ | 51.50 |
| | — |
| | 667,372 |
|
| November 1 through November 30, 2019 | | 63,621 |
| | 51.22 |
| | 63,621 |
| | 603,751 |
|
| December 1 through December 31, 2019 | | 548 |
| | 53.23 |
| | — |
| | 1,500,000 |
|
| Total | | 64,242 |
| | $ | 51.24 |
| | 63,621 |
| | |
______________
| |
| (1) | During the three months ended December 31, 2019, we purchased an aggregate of 621 shares of our common stock in employee-related transactions. Employee-related transactions may include: (i) shares of common stock delivered as payment for the exercise price of options exercised or to satisfy the option holders’ 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 was authorized to repurchase up to 1.5 million shares of common stock. The 2-year program expired in December 2019. |
In December 2019, our Board of Directors authorized a new share repurchase program intended to mitigate the dilutive impact of shares issued under our employee stock plans. Under the December 2019 program, management is authorized to repurchase up to 1.5 million shares of common stock issued to employees under our employee stock plans from December 1, 2019 to December 11, 2021. Share repurchases are made periodically in open-market transactions using the Company's working capital, and are subject to market conditions, legal requirements, and other factors. In addition, management has been granted the authority to establish prearranged written trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934 as part of the repurchase program.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial information should be read in conjunction with Items 7 and 8 of this Annual Report. Amounts in 2019, 2018 and 2017 reflect the impact of the retrospective adoption in 2019 of the new accounting standard related to leasing. See Note 2 to our Consolidated Financial Statements for additional information on the new leasing standard. Amounts in 2015 do not reflect the impact of the retrospective adoption of the new accounting standard in 2018 related to revenue recognition. See Note 1 to our Consolidated Financial Statements for additional information on our revenue recognition accounting policy.
|
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31 |
| | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | | (In thousands, except per share amounts and other data) |
| Operating Data: | | | | | | | | | | |
| Total revenue | | $ | 8,925,801 |
| | $ | 8,413,946 |
| | $ | 7,280,074 |
| | $ | 6,758,138 |
| | $ | 6,571,893 |
|
Operating revenue (1) | | 7,224,332 |
| | 6,698,116 |
| | 6,022,505 |
| | 5,790,897 |
| | 5,561,077 |
|
Earnings (loss) from continuing operations (2) | | (23,272 | ) | | 286,922 |
| | 720,101 |
| | 265,232 |
| | 305,989 |
|
Comparable earnings from continuing operations (3) | | 53,554 |
| | 314,781 |
| | 225,187 |
| | 291,080 |
| | 326,485 |
|
Net earnings (loss) (2), (4) | | (24,410 | ) | | 284,613 |
| | 719,644 |
| | 263,069 |
| | 304,768 |
|
| Per Share Data: | | | | | | | | | | |
Earnings (loss) from continuing operations — Diluted (2) | | $ | (0.45 | ) | | $ | 5.43 |
| | $ | 13.54 |
| | $ | 4.95 |
| | $ | 5.73 |
|
Comparable earnings from continuing operations — Diluted (3) | | 1.01 |
| | 5.95 |
| | 4.23 |
| | 5.43 |
| | 6.10 |
|
Net earnings (loss) — Diluted (2), (4) | | (0.47 | ) | | 5.38 |
| | 13.53 |
| | 4.91 |
| | 5.71 |
|
| Cash dividends | | 2.20 |
| | 2.12 |
| | 1.80 |
| | 1.70 |
| | 1.56 |
|
Book value (5) | | 46.48 |
| | 47.75 |
| | 46.33 |
| | 38.49 |
| | 37.15 |
|
| Financial Data: | | | | | | | | | | |
| Total debt | | $ | 7,924,788 |
| | $ | 6,649,277 |
| | $ | 5,440,006 |
| | $ | 5,391,274 |
| | $ | 5,502,627 |
|
Shareholders’ equity (5) | | 2,476,310 |
| | 2,536,568 |
| | 2,453,577 |
| | 2,057,620 |
| | 1,987,111 |
|
Debt to equity (5) | | 320 | % | | 262 | % | | 222 | % | | 262 | % | | 277 | % |
Adjusted return on equity (5), (6), (7) | | 0.3 | % | | 12.7 | % | | 11.1 | % | | 13.2 | % | | 16.5 | % |
Adjusted return on capital (5), (6), (8) | | 1.9 | % | | 5.2 | % | | 4.2 | % | | 4.8 | % | | 5.8 | % |
| Cash Flow Data: | | | | | | | | | | |
| Net cash provided by (used in): | | | | | | | | | | |
| Operating activities from continuing operations | | $ | 2,140,539 |
| | $ | 1,717,993 |
| | $ | 1,628,098 |
| | $ | 1,601,022 |
| | $ | 1,441,788 |
|
| Investing activities from continuing operations | | (3,217,193 | ) | | (2,821,459 | ) | | (1,438,676 | ) | | (1,407,347 | ) | | (2,161,355 | ) |
| Financing activities from continuing operations | | 1,084,139 |
| | 1,085,515 |
| | (162,055 | ) | | (185,922 | ) | | 731,485 |
|
Free cash flow (9) | | (1,076,654 | ) | | (936,094 | ) | | 196,662 |
| | 193,675 |
| | (727,714 | ) |
| Capital expenditures paid | | 3,735,174 |
| | 3,050,409 |
| | 1,860,436 |
| | 1,905,157 |
| | 2,667,978 |
|
| Other Data: | | | | | | | | | | |
| Number of vehicles — Owned and leased | | 213,800 |
| | 201,600 |
| | 186,200 |
| | 185,100 |
| | 185,200 |
|
____________________
| |
| (1) | Non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section in Item 7 of this Annual Report for a reconciliation of total revenue to operating revenue, as well as the reasons management believes these measures are important to investors. |
| |
| (2) | Amounts in 2017 reflect a tax benefit as a result of the 2017 Tax Cuts and Jobs Act. Refer to Note 12 , "Income Taxes", for additional information. |
| |
| (3) | Non-GAAP financial measures. Refer to the “Non-GAAP Financial Measures” section in Item 7 of this Annual Report for a reconciliation of net earnings from continuing operations to comparable earnings from continuing operations and net earnings from continuing operations per diluted common share to comparable earnings per diluted common share, as well as the reasons management believes these measures are important to investors. |
| |
| (4) | Net earnings in 2019, 2018, 2017, 2016 and 2015 included losses from discontinued operations of $1 million, or $0.03 per diluted common share, $2 million, or $0.04 per diluted common share, $0.5 million, or $0.01 per diluted common share, $2 million, or $0.04 per diluted common share, and $1 million, or $0.02 per diluted common share, respectively. |
| |
| (5) | Shareholders’ equity as of December 31, 2019, 2018, 2017, 2016 and 2015 reflected cumulative after-tax equity charges of $667 million, $712 million, $567 million, $627 million, and $577 million, respectively, related to our pension and postretirement plans. |
| |
| (6) | Amounts were computed primarily using an 5-point average based on quarterly information. |
| |
| (7) | Non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section in Item 7 of this Annual Report for a reconciliation of the non-GAAP elements of this calculation and a numerical reconciliation of net earnings to adjusted net earnings and average shareholders' equity to adjusted average equity used to calculate adjusted return on equity, as well as the reasons management believes these measures are important to investors. |
| |
| (8) | Non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section in Item 7 of this Annual Report for a reconciliation of the non-GAAP elements of this calculation and a numerical reconciliation of net earnings to adjusted net earnings and average total debt and average shareholders' equity to adjusted average total capital used to calculate adjusted return on capital, as well as the reasons management believes these measures are important to investors. |
| |
| (9) | Non-GAAP financial measure. Refer to the “Non-GAAP financial measures” section in Item 7 of this Annual Report for a reconciliation of net cash provided by operating activities to free cash flow, as well as the reasons why management believes this measure is important to investors. |
ITEM 7. 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 our consolidated financial statements and related notes contained in Item 8 of this Annual Report on Form 10-K. The following MD&A describes the principal factors affecting results of operations, financial resources, liquidity, contractual cash obligations and critical accounting estimates. The information presented in the MD&A is for the years ended December 31, 2019, 2018 and 2017 unless otherwise noted. Amounts in 2019, 2018 and 2017 reflect the impact of the retrospective adoption in 2019 of the new accounting standard related to leasing. See Note 2 to our Consolidated Financial Statements for additional information on the new leasing standard.
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) SCS, which provides integrated logistics solutions, including distribution, management, dedicated transportation and professional services in North America; and (3) DTS, which provides turnkey transportation solutions in the U.S. that includes dedicated vehicles, drivers and engineering, and administrative support. Dedicated transportation services provided as part of an operationally integrated, multi-service, supply chain solution to SCS customers are primarily reported in the SCS business segment.
The FMS business, our largest segment, had total revenue (net of intercompany eliminations) and assets in 20172019 of $4.26$5.6 billion and $10.39$13.0 billion, respectively, representing 58%56% of our consolidated revenue (excluding eliminations) and 90% of consolidated assets. SCS total revenue and assets in 2019 were $2.6 billion and $1.2 billion, respectively, representing 29% of our consolidated revenue and 91%9% of consolidated assets. DTS total revenue and assets in 20172019 were $1.10$1.4 billion and $277$327 million, respectively, representing 15% of our consolidated revenue and 2% of consolidated assets. SCS total revenue and assets in 2017 were $1.97 billion and $864 million, respectively, representing 27% of our consolidated revenue and 8% of consolidated assets.
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 (22%), transportation and warehousing (20%logistics (21%), automotive (11%), retail and consumer goods (10%(11%), industrial (8%), housing (8%), technology (7%(6%), business and personal services (5%) and other (9%(8%). In April 2018, we acquired MXD, an e-commerce fulfillment provider with a national network of facilities, including last mile delivery capabilities, which is included in our SCS business segment. Refer to Note 3, "Acquisitions," in the Notes to Consolidated Financial Statements for additional information.
Our results of operations and financial condition are influenced by a number of factors including, but not limited to: used vehicle sales; market conditions including pricing and demand; customer contracting activity and retention; rental demand; maintenance costs; residual value estimates and other depreciation 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 thethese non-GAAP measures, included in the MD&A,including reconciliations to the most comparable GAAP financial measure and the reasons why we believe each measure is useful to investors. In addition, this MD&A includes certain forward-looking statements regarding our 2020 outlook. These statements 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. For a detailed description of certain of these risk factors, please see “Item 1A-Risk Factors” and "Special Note Regarding Forward-Looking Statements" sections of this Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
The following discussion provides a summary of financial highlights that are discussed in more detail throughout our MD&A and within the Notes to Consolidated Financial Statements:
| | | | | | | Change | | | | Change |
| | | 2017 | | 2016 | | 2015 | | 2017/2016 | | 2016/2015 | | 2019 | | 2018 | | 2017 | | 2019/2018 | | 2018/2017 |
| | | (Dollars in thousands, except per share amounts) | | | | | | (In thousands, except per share amounts) | | | | |
| Total revenue | | $ | 7,329,599 |
| | 6,786,984 |
| | 6,571,893 |
| | 8% | | 3% | | $ | 8,925,801 |
| | $ | 8,413,946 |
| | $ | 7,280,074 |
| | 6% | | 16% |
Operating revenue (1) | | 6,040,380 |
| | 5,790,897 |
| | 5,561,077 |
| | 4% | | 4% | | 7,224,332 |
| | 6,698,116 |
| | 6,022,505 |
| | 8 | | 11 |
| | | | | | | | | | | | | | | |
| Earnings before income taxes (EBT) | | $ | 313,786 |
| | 406,381 |
| | 469,215 |
| | (23)% | | (13)% | |
| Earnings (loss) from continuing operations before income taxes (EBT) | | | $ | (42,271 | ) | | $ | 389,469 |
| | $ | 296,436 |
| | NM | | 31% |
Comparable EBT (2) | | 369,747 |
| | 449,048 |
| | 504,571 |
| | (18)% | | (11)% | | 56,089 |
| | 418,862 |
| | 348,257 |
| | (87) | | 20 |
Earnings from continuing operations (3) | | 791,015 |
| | 264,640 |
| | 305,989 |
| | 199% | | (14)% | |
Earnings (loss) from continuing operations (3) | | | (23,272 | ) | | 286,922 |
| | 720,101 |
| | NM | | (60) |
Comparable earnings from continuing operations (2) | | 240,809 |
| | 290,488 |
| | 326,485 |
| | (17)% | | (11)% | | 53,554 |
| | 314,781 |
| | 225,187 |
| | (83) | | 40 |
Net earnings (3) | | 790,558 |
| | 262,477 |
| | 304,768 |
| | 201% | | (14)% | |
| Earnings per common share — Diluted | | | | | | | | |
Net earnings (loss) (3) | | | (24,410 | ) | | 284,613 |
| | 719,644 |
| | NM | | (60) |
| Earnings (loss) per common share (EPS) — Diluted | | | | | | | | |
Continuing operations (3) | | $ | 14.87 |
| | 4.94 |
| | 5.73 |
| | 201% | | (14)% | | $ | (0.45 | ) | | $ | 5.43 |
| | $ | 13.54 |
| | NM | | (60)% |
Comparable (2) | | 4.53 |
| | 5.42 |
| | 6.10 |
| | (16)% | | (11)% | | 1.01 |
| | 5.95 |
| | 4.23 |
| | (83) | | 41 |
Net earnings (3) | | 14.87 |
| | 4.90 |
| | 5.71 |
| | 203% | | (14)% | |
Net earnings (loss) (3) | | | (0.47 | ) | | 5.38 |
| | 13.53 |
| | NM | | (60) |
_________________
| |
| (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 (loss) from continuing operations and earnings (loss) from continuing operations per diluted common share to the comparable measures and the reasons why management believes these measures are important to investors. |
| |
| (3) | 2017 amounts reflect a total tax provision benefit as a result of $424 million, which includes the impact from the 2017 Tax Cuts and Jobs Act. Refer to Note 1312 , "Income Taxes ," in the Notes to Consolidated Financial Statements for additional information. |
In 2017,2019, total revenue increased 8%6% to $7.33$8.9 billion and operating revenue (a non-GAAP measure excluding fuel and subcontracted transportation) increased 4%8% to $6.04$7.2 billion. Total revenue and operating revenue increased due to higher operating revenue and increased subcontracted transportation passed through to customers, reflecting new business and higher volumes as well as higher fuel costs passed through to customers. Operatingin all segments. Total and operating revenue increased due to higher revenuegrowth also reflects the acquisition of MXD in the SCS business andsecond quarter of 2018. The following table summarizes the components of the change in revenue on a percentage basis versus the prior year:
|
| | | | | | | | |
| | | 2019/2018 | | 2018/2017 |
| | | Total | | Operating | | Total | | Operating |
| Organic, including price and volume | | 5% | | 8% | | 12% | | 10% |
| Acquisitions | | 1 | | — | | 2 | | 1 |
| Fuel | | — | | — | | 2 | | — |
| Total increase | | 6% | | 8% | | 16% | | 11% |
EBT decreased to a loss of $(42) million in 2019, reflecting higher contractual ChoiceLease revenue,depreciation expense related to changes in vehicle residual value estimates in our FMS segment in the third quarter of 2019 partially offset by lower commercial rental revenue. EBT decreased 23%improved operating results in 2017, primarily reflecting increased accelerated depreciation of $21 million, lower used vehicle sales resultsDTS and increased maintenance costs as maintenance spending associated with vehicles being prepared for sale returned to more normal levels.SCS segments.
Cash provided by operating activities from continuing operations decreased 3%increased 25% to $1.55$2.1 billion in 20172019 compared with $1.60$1.7 billion in 20162018, primarily reflecting the impact ofhigher cash earnings as well as lower comparable earnings.working capital needs in 2019. Free cash flow from continuing operations (a non-GAAP financial measure) decreased 2% to $190 milliona use of $(1.1) billion in 20172019 from $194 milliona use of $(0.9) billion in 2016,2018, primarily due to lower cash flows from operations, partially offset by lower cash paid for purchases of property and revenue earning equipment reflecting lowerhigher capital expenditures.expenditures in 2019.
Capital expenditures increased 10%14% to $1.94$3.6 billion in 2017,2019, reflecting higher planned investments to refreshin our ChoiceLease and commercial rental fleet, partially offset by lower ChoiceLease capital spending.fleets. Our debt balance of $5.41$7.9 billion at as of December 31, 2017, was substantially unchanged2019 increased 19% from the prior year.year reflecting financing for the higher planned vehicle capital spending. Our debt to equity ratio decreasedincreased to 191%320% from 263%262% in 2016, largely driven by the impact of the 2017 Tax Cuts & Jobs Act on2018 reflecting higher debt and a decrease in our equity balance.balance due to the net loss in 2019.
We increased our annualized dividend rate by 5%4% to $1.84$2.24 per share of common stock during 2017.2019.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
2018 Outlook
In 2018, we expect solid earnings growth across all business segments driven by robust contractual revenue growth from record sales results in 2017, as well as the strength of our sales pipeline. We forecast a significant increase in ChoiceLease fleet growth of 6,500 vehicles, driven by a continued trend toward outsourcing, our ongoing sales and marketing initiatives, and a strengthening freight environment. We are also anticipating strong commercial rental revenue growth in this accelerating freight environment. We plan to grow the commercial rental fleet by 6%, as well as increase pricing. In DTS and SCS, we are also expecting revenue growth and margin expansion due to improved operating performance. Additionally, we instituted a zero-based budgeting process, significantly lowering overhead costs. We also anticipate 2018 earnings to benefit from the 2017 Tax Cut & Jobs Act, primarily due to a lower effective income tax rate. These expected overhead reductions and tax benefits will improve earnings and fund 2018 strategic investments in sales and marketing, new product development, and technology, which are focused on driving long term revenue and earnings growth.
These benefits are expected to be partially offset by impacts from the extended downturn in the used vehicle market as well as higher maintenance costs on certain older model year vehicles that will largely exit the fleet over the next 18 months. We anticipate a modestly improved outlook for used vehicle pricing in 2018 that will benefit year over year results; however, we still expect used vehicle sales to incur a loss for the year. We are also reducing our long term residual value estimates on vehicles in operation to reflect used vehicle market trends. Additionally, we are further accelerating depreciation on vehicles, which we expect to make available for sale through mid-2019.
We expect cash provided by operating activities from continuing operations to increase approximately $270 million to $1.8 billion in 2018, due to growth in pre-tax earnings adjusted for non-cash items, primarily depreciation. We expect free cash flow to decrease to negative $600 million in 2018, reflecting higher capital spending, partially offset by higher cash from operations. With expected negative free cash flow, we expect our leverage to increase to just below the bottom end of our target range of 200% - 250%.
We forecast 2018 earnings from continuing operations of $5.34 to $5.64 per diluted share, compared with $14.87 per diluted share in 2017, which included a $10.75 one-time net benefit from the 2017 Tax Cut & Jobs Act, and comparable earnings from continuing operations of $5.40 to $5.70 per diluted share, compared with $4.53 per diluted share in 2017. Comparable earnings exclude non-operating pension costs of $0.06 per diluted share in 2018, as well as non-operating pension, restructuring and other net benefit of $10.34 in 2017. Total revenue for 2018 is expected to be up 6% to approximately $8 billion. Operating revenue for 2018 is forecast to be up 8% to approximately $7 billion.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
FULL YEAR CONSOLIDATED RESULTS
Revenue and cost of revenue by source
Total revenue increased 8% in 2017 to $7.33 billion and increased 3% in 2016 to $6.79 billion. Operating revenue (a non-GAAP measure excluding fuel and subcontracted transportation) increased 4% in 2017 to $6.04 billion and increased 4% in 2016 to $5.79 billion. The following table summarizes the components of the change in revenue on a percentage basis versus the prior year:
|
| | | | | | | | |
| | | 2017 | | 2016 |
| | | Total | | Operating | | Total | | Operating |
| Organic, including price and volume | | 7% | | 4% | | 6% | | 5% |
| Fuel | | 1 | | — | | (2) | | — |
| Foreign exchange | | — | | — | | (1) | | (1) |
| Total increase | | 8% | | 4% | | 3% | | 4% |
Lease & Related Maintenance and Rental
| | | | | | | Change | | | | Change |
| | | 2017 | | 2016 | | 2015 | | 2017/2016 |
| 2016/2015 | | 2019 | | 2018 | | 2017 | | 2019/2018 |
| 2018/2017 |
| | | (Dollars in thousands) | | | | | | (In thousands) | | | | |
| Lease and rental revenues | | $ | 3,237,685 |
| | 3,170,952 |
| | 3,121,553 |
| | 2% | | 2% | |
| Cost of lease and rental | | 2,355,043 |
| | 2,234,284 |
| | 2,153,450 |
| | 5% | | 4% | |
| Lease & related maintenance and rental revenues | | | $ | 3,784,744 |
| | $ | 3,512,867 |
| | $ | 3,220,705 |
| | 8% | | 9% |
| Cost of lease & related maintenance and rental | | | 3,103,703 |
| | 2,555,358 |
| | 2,353,209 |
| | 21 | | 9 |
| Gross margin | | 882,642 |
| | 936,668 |
| | 968,103 |
| | (6)% | | (3)% | | $ | 681,041 |
| | $ | 957,509 |
| | $ | 867,496 |
| | (29)% | | 10% |
| Gross margin % | | 27 | % | | 30 | % | | 31 | % | | | 18 | % | | 27 | % | | 27 | % | |
Lease & related maintenance and rental revenues represent ChoiceLease and commercial rental product offerings within our FMS business segment. Revenues increased 2%8% and 9% in both 20172019 and 20162018, respectively, from higher ChoiceLease revenue, driven by growth in the average ChoiceLease fleet (up 2%9% in 20172019 and 4% in 2016)2018), and higher prices on replacement vehicles. ChoiceLeaseLease & related maintenance and rental revenue growth was partially offset by lowerin 2019 and 2018 also reflects higher commercial rental revenue reflecting weakerdriven by higher pricing and demand. Foreign exchange did not have a significant impact on revenue in 2017, but negatively impacted revenue growth by 100 basis points in 2016.
Cost of lease & related maintenance and rental represents the direct costs related to lease & related maintenance and rental revenues. These costsrevenues and are comprised of depreciation of revenue earning equipment, maintenance costs (primarily repair parts and labor), and other fixed costs such as licenses, insurance and operating taxes. Cost of lease & related maintenance and rental excludes interest costs from vehicle financing.financing, which are reported within "Interest expense" in our Consolidated Statements of Earnings. Cost of lease & related maintenance and rental increased 5%21% in 20172019 due to higher depreciation expense of approximately $297 million related to the change in estimate for residual values of our lease and 4%commercial rental fleet in 2016. In both years, costour FMS business segment in the third quarter of 2019 (of the total increase in depreciation expense of $317 million), as well as higher insurance costs of $27 million related to higher claim activity and adverse development on prior year claims. These costs also increased from a larger average lease and rental reflectedfleet, partially offset by a significant maintenance cost recovery item.
Cost of lease & related maintenance and rental increased 9% in 2018 due to higher depreciation and maintenance costs fromon a larger average lease and rental fleet, policy depreciation changes of $40 million and accelerated depreciation of $39 million in 2018 and $30 million in 2017 and $10 million in 2016, offset by lower depreciation and maintenance on a smaller average rental fleet. In 2017, maintenance spending also increased as the number of vehicles being prepared for sale returned to more normal levels and due to an increase in the age of the fleet. Changes in estimated residual values and useful lives of revenue earning equipment effective January 1 of each respective year negatively impacted cost of lease and rental by $4 million in 2017 and benefited cost of lease and rental by $35 million in 2016.2017.
Lease & related maintenance and rental gross margin decreased 6%29% and gross margin as a percentage of revenue decreased to 27%18% in 2017.2019. The decrease in gross margin dollars in 2019 was primarily due to higher depreciation as a result of changes in our vehicle residual value estimates in the third quarter of 2019. Lease & related maintenance and rental gross margin increased 10% and gross margin as a percentage of revenue remained flat at 27% in 2018. The 2018 increase in gross margin dollars was due to increased maintenance costs,commercial rental utilization, reflecting strong demand, and lease fleet growth, partially offset by higher depreciation from residual value changes as well as accelerated depreciation and lower commercial rental demand. Leasehigher maintenance costs on certain older model vehicles.
Refer to "Critical Accounting Estimates" below and rental gross margin decreased 3%Note 7, "Revenue Earning Equipment, net" in the Notes to Consolidated Financial Statements for additional information on policy and gross margin as a percentageaccelerated depreciation and the changes in our vehicle residual value estimates in the third quarter of revenue decreased to 30% in 2016, due to lower commercial rental demand, partially offset by lease fleet growth, as well as benefits from improved residual values.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
2019 which primarily impacted our FMS business segment.
Services
| | | | | | | Change | | | | Change |
| | | 2017 | | 2016 | | 2015 | | 2017/2016 | | 2016/2015 | | 2019 | | 2018 | | 2017 | | 2019/2018 | | 2018/2017 |
| | | (Dollars in thousands) | | | | | | (In thousands) | | | | |
| Services revenue | | $ | 3,571,414 |
| | 3,152,294 |
| | 2,912,063 |
| | 13% | | 8% | | $ | 4,555,692 |
| | $ | 4,280,834 |
| | $ | 3,538,869 |
| | 6% | | 21% |
| Cost of services | | 3,003,348 |
| | 2,602,978 |
| | 2,413,156 |
| | 15% | | 8% | | 3,879,863 |
| | 3,663,348 |
| | 2,977,426 |
| | 6 | | 23 |
| Gross margin | | 568,066 |
| | 549,316 |
| | 498,907 |
| | 3% | | 10% | | $ | 675,829 |
| | $ | 617,486 |
| | $ | 561,443 |
| | 9% | | 10% |
| Gross margin % | | 16 | % | | 17 | % | | 17 | % | | | 15 | % | | 14 | % | | 16 | % | |
Services revenue represents all the revenues associated with our DTSSCS and SCSDTS business segments, as well as SelectCare and fleet support services associated with our FMS business segment. Services revenue increased 13%6% and 21% in 20172019 and 2018, respectively, due to new business, increased volumes and higher pricing in the SCS and DTS segments. In 2017, servicesDTS. Services revenue also benefitedreflects
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
the MXD acquisition since the second quarter of 2018 and benefits from higher fuel costs passed through to our SCS and DTS and SCS customers. Services revenue increased 8%customers in 2016 due to new business, increased volumes and higher pricing in the DTS and SCS segments. In 2016, the SelectCare product line in FMS benefited from growth in fleet size and increased volumes, which were partially offset by lower fuel prices passed through to our DTS and SCS customers. Foreign exchange did not have a significant impact on revenue in 2017, but negatively impacted revenue growth by 200 basis points in 2016.2018.
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), maintenancefuel, vehicle liability costs and fuel.maintenance costs. Cost of services increased 15%6% in 20172019 due to the growth of SCS and DTS. Cost of services increased 23% in 2018 due to higher volumes and higher fuel costs. Cost of services increased 8% in 2016 due to higher volumes, partially offset by lower fuel and insurance costs. Foreign exchange did not have a significant impact on cost of services in 2017, but reduced cost of services by 100 basis points in 2016.
Services gross margin increased 3%9% and 10% in 2017,2019 and 2018, respectively, reflecting benefits from revenue growth in our SCS and DTS and SCS segments,segments. In 2019, there was also a benefit from favorable insurance claim developments of $5 million. In 2018, benefits from revenue growth were partially offset by lowerhigher costs incurred during the start-up phase of a new DTS customer account. Services gross margin as a percentage of revenue increased to 15% in 2019, reflecting improved operating performance on certainin SCS contracts and increased maintenance costs on certain older model year vehicles in DTS. Services gross margin as a percentage of revenue decreased to 16%,14% in 2018, reflecting lower operating performance on certain SCS contracts and higher maintenance costsa change in DTS. Services gross margin increased 10% in 2016 due to higher revenue. Services gross margin as a percentagethe mix of revenue remained at 17% in 2016, reflecting no change from the prior year.business.
Fuel
| | | | | | | Change | | | | Change |
| | | 2017 | | 2016 | | 2015 | | 2017/2016 | | 2016/2015 | | 2019 | | 2018 | | 2017 | | 2019/2018 | | 2018/2017 |
| | | (Dollars in thousands) | | | | | | (In thousands) | | | | |
| Fuel services revenue | | $ | 520,500 |
| | 463,738 |
| | 538,277 |
| | 12% | | (14)% | | $ | 585,365 |
| | $ | 620,245 |
| | $ | 520,500 |
| | (6)% | | 19% |
| Cost of fuel services | | 507,440 |
| | 448,306 |
| | 519,843 |
| | 13% | | (14)% | | 571,658 |
| | 605,613 |
| | 507,440 |
| | (6) | | 19 |
| Gross margin | | 13,060 |
| | 15,432 |
| | 18,434 |
| | (15)% | | (16)% | | $ | 13,707 |
| | $ | 14,632 |
| | $ | 13,060 |
| | (6)% | | 12% |
| Gross margin % | | 3 | % | | 3 | % | | 3 | % | | | 2 | % | | 2 | % | | 3 | % | |
Fuel services revenue represents fuel services provided to our FMS customers. Fuel services revenue decreased 6% in 2019 primarily reflecting lower fuel costs passed through to customers. Fuel services revenue increased 12%19% in 2017 and decreased 14% in 2016. In 2017, the revenue increase was2018 due to higher fuel costs passed through to customers. In 2016, the revenue decrease was due to lower fuel costs passed through to customers.
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 6% in 2019 as a result of lower price and volume. Cost of fuel services increased 13%19% in 20172018 due to higher fuel costs and decreased 14% in 2016 due to lower fuel costs.
Fuel services gross margin decreased 15%6% in 20172019 and 16%increased 12% in 20162018. Fuel services gross margin as a percentage of revenue remained flat at 3%2% in 20172019 and 2016.decreased to 2% in 2018. 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 was impacted by these price change dynamics as fuel prices fluctuated during the periods.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Other operating expenses
|
| | | | | | | | | | | | | | |
| | | | | Change |
| | | 2017 | | 2016 | | 2015 | | 2017/2016 | | 2016/2015 |
| | | (In thousands) | | | | |
| Other operating expenses | | $ | 115,507 |
| | 113,461 |
| | 117,082 |
| | 2% | | (3)% |
|
| | | | | | | | | | | | | | | | |
| | | | | Change |
| | | 2019 | | 2018 | | 2017 | | 2019/2018 | | 2018/2017 |
| | | (In thousands) | | | | |
| Other operating expenses | | $ | 121,980 |
| | $ | 123,964 |
| | $ | 115,019 |
| | (2)% | | 8% |
Other operating expenses include costs related to our owned and leased facilities within the FMS business segment, such as facility depreciation, rent, purchased insurance, utilities and taxes. These facilities are utilized to provide maintenance to our ChoiceLease, rental, SelectCareFMS customers. Other operating expenses decreased slightly in 2019. Other operating expenses increased in 2018 due to higher facility maintenance and fleet support services customers.weather-related utility costs.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Selling, general and administrative expenses
| | | | | | | | | | | Change | | | | | | | | Change |
| | | 2017 | | 2016 | | 2015 | | 2017/2016 | | 2016/2015 | | 2019 | | 2018 | | 2017 | | 2019/2018 | | 2018/2017 |
| | | (Dollars in thousands) | | | | | | (In thousands) | | | | |
| Selling, general and administrative expenses (SG&A) | | $ | 871,983 |
| | 805,104 |
| | 822,857 |
| | 8% | | (2)% | | $ | 907,449 |
| | $ | 849,410 |
| | $ | 870,918 |
| | 7% | | (2)% |
| Percentage of total revenue | | 12 | % | | 12 | % | | 13 | % | | | 10% | | 10% | | 12% | |
SG&A expenses increased 8%7% in 20172019 and decreased 2% in 2016. SG&A2018. The increase in 2019 primarily reflects higher compensation-related expenses, as a percent of total revenue remained at 12%well as growth-related investments in 2017 after decreasing to 12%sales, marketing and technology. The decrease in 2016. The 2017 increase2018 was primarily due to higher compensation-related costscost savings initiatives implemented during 2018 and professional fees, as well as a $5 million estimated pension settlement charge for the exit from a U.S. multi-employer pension plan. The decrease in 2016 was due to lower compensation-related and marketing-relatedcosts.
Non-operating pension costs professional fees and the effects from foreign exchange in SG&A expenses, partially offset by increased information technology costs. Foreign exchange did not significantly impact SG&A expenses in 2017, but reduced growth in SG&A expenses by 100 basis points in 2016.
|
| | | | | | | | | | | | | | |
| | | | | | | | | Change |
| | | 2017 | | 2016 | | 2015 | | 2017/2016 | | 2016/2015 |
| | | (In thousands) | | | | |
| Non-operating pension costs | | $ | 27,741 |
| | 37,593 |
| | 17,797 |
| | (26)% | | 111% |
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | Change |
| | | 2019 | | 2018 | | 2017 | | 2019/2018 | | 2018/2017 |
| | | (In thousands) | | | | |
| Non-operating pension costs | | $ | 60,406 |
| | $ | 7,541 |
| | $ | 27,741 |
| | NM | | 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 and amortization of actuarial loss and prior service cost. Non-operating pension costs decreased 26% in 2017, primarily due to a one-time charge of $8 million in 2016 to fully reflect pension benefit improvements made in 2009 in our pension benefit obligation that were not fully reflected in prior years.cost, as well as settlement or curtailment charges. Non-operating pension costs increased by $53 million in 2019 due to a pension settlement charge of $32 million related to employee benefit settlements from the U.S. pension plan in 2019 and unfavorable asset returns in 2018, partially offset by higher interest rates. Non-operating pension costs decreased by $20 million in 2016,2018 due to the impactbenefit of favorable asset returns in 2017 and lower interest rates, partially offset by a lower asset return assumption and a higher discount rate, as well as the $8pension settlement charge of $3 million one-time charge.related to employee benefit settlements from our U.K. pension plan.
Losses on used vehicle sales, net |
| | | | | | | | | | | | | | |
| | | | | Change |
| | | 2017 | | 2016 | | 2015 | | 2017/2016 | | 2016/2015 |
| | | (In thousands) | | | | |
| Used vehicle sales, net | | $ | (17,241 | ) | | 972 |
| | 99,853 |
| | NM | | (99)% |
|
| | | | | | | | | | | | | | | | |
| | | | | Change |
| | | 2019 | | 2018 | | 2017 | | 2019/2018 | | 2018/2017 |
| | | (In thousands) | | | | |
| Losses on used vehicle sales, net | | $ | 58,706 |
| | $ | 22,325 |
| | $ | 16,989 |
| | NM | | 31% |
UsedLosses on used vehicle sales, net includes gains and losses from sales of used vehicles, selling costs associated with used vehicles and write-downs of vehicles held for sale to fair market value. Usedvalue (referred to as "valuation adjustments"). Losses on used vehicle sales, net decreasedwas $59 million in 2019 as compared to $22 million in 2018 primarily due to higher valuation adjustments on a loss oflarger inventory, as well as lower sales prices. Losses on used vehicle sales, net was $22 million in 2018 as compared to $17 million in 2017 primarily due to a drop in the market value of tractors and trucks, which resulted in lower gains on sales. We anticipate a modestly improved outlook for used vehicle pricing in 2018 that will benefit year over year results; however, we still expect used vehicle sales to incur a loss for the year. Used vehicle sales, net decreased to a gain of $1 million in 2016, due to a drop in the market value of trucks and tractors, which resulted in lower gains onfrom sales of used vehicles driven by the mix and volume of units sold in 2018, partially offset by lower valuation adjustments.
Global average proceeds per unit in 2019 decreased for both tractors and trucks due to higher fairsales volumes in the wholesale markets which generally have lower proceeds per unit. In the fourth quarter, we also experienced a decrease in proceeds per unit in the retail markets and we expect these trends to continue in 2020. Global average proceeds per unit in 2018 increased for both tractors and trucks primarily due to a higher mix of retail sales, as well as lower average age of vehicles sold and improved market value write-downs.
pricing. The following table presents the used vehicle pricing changes for 20172019 and 20162018 compared with the respective prior years:
| | | | Proceeds per unit change | Proceeds per unit change |
| | 2017/2016 | | 2016/2015 | 2019/2018 | | 2018/2017 |
| | | | | | | |
| Tractors | (12 | )% | | (14 | )% | (3)% | | 12% |
| Trucks | (12 | )% | | (1 | )% | (6)% | | 9% |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Interest expense
| | | | | | | | | | | Change | | | | | | | | Change |
| | | 2017 | | 2016 | | 2015 | | 2017/2016 | | 2016/2015 | | 2019 | | 2018 | | 2017 | | 2019/2018 | | 2018/2017 |
| | | (Dollars in thousands) | | | | | | (In thousands) | | | | |
| Interest expense | | $ | 140,350 |
| | 147,843 |
| | 150,434 |
| | (5)% | | (2)% | | $ | 241,381 |
| | $ | 180,488 |
| | $ | 141,876 |
| | 34% | | 27% |
| Effective interest rate | | 2.6 | % | | 2.7 | % | | 2.9 | % | | | 3.3% | | 3.0% | | 2.6% | |
Interest expense decreased 5%increased 34% to $140$241 million in 2017,2019 reflecting a lowerhigher average outstanding debt and a lowerhigher effective interest rate. Interest expense decreased 2% to $148 millionThe increase in 2016, reflecting a lower effective interest rate, partially offset by a higher average outstanding debt.debt reflects higher planned vehicle capital spending. The lowerhigher effective interest rate in both years2019 reflects the replacement of higherlower fixed interest rate debt with debt issuances at higher fixed rates. Interest expense increased 27% to $180 million in 2018 reflecting a higher effective interest rate and higher average outstanding debt. The higher effective interest rate in 2018 reflects the replacement of lower rates.fixed interest rate debt with debt issuances at higher fixed rates as well as the impact on variable rate debt of an increasing interest rate environment. The increase in average outstanding debt reflects higher planned vehicle capital spending as well as acquisitions.
Miscellaneous income, net
|
| | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| | | (In thousands) |
| Miscellaneous income, net | | $ | 44,245 |
| | 13,068 |
| | 10,156 |
|
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | Change |
| | | 2019 | | 2018 | | 2017 | | 2019/2018 | | 2018/2017 |
| | | (In thousands) | | | | |
| Miscellaneous (income) loss, net | | $ | (33,642 | ) | | $ | (5,422 | ) | | $ | (44,245 | ) | | NM | | NM |
Refer to Note 27, Miscellaneous25, "Miscellaneous Income, NetNet" in the Notes to Consolidated Financial Statements for a discussion of the changes in miscellaneous income, net.further discussion.
Restructuring and other items, net
|
| | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| | | (In thousands) |
| Restructuring charges and fees, net | | $ | 21,405 |
| | 5,074 |
| | 18,068 |
|
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | Change |
| | | 2019 | | 2018 | | 2017 | | 2019/2018 | | 2018/2017 |
| | | (In thousands) | | | | |
| Restructuring and other items, net | | $ | 56,568 |
| | $ | 21,852 |
| | $ | 17,265 |
| | NM | | 27% |
During the fourth quarters of 2017, 2016 and 2015, we approved plans to reduce our workforce in multiple locations as a result of cost containment actions. These actions resulted in pre-tax charges of $13 million in 2017, $5 million in 2016 and $9 million in 2015. The workforce reduction approved in 2017 will be completed during 2018 and is expected to result in annual cost savings of approximately $30 million. The workforce reduction approved in 2016 was completed during 2017, and the workforce reduction in 2015 was completed during 2016. During the fourth quarter of 2015, we also committed to a plan to divest our Ryder Canadian Retail Shippers Association Logistics operations and shutdown our Ryder Container Terminals business in Canada. The sale and shutdown were completed in 2016. We recognized charges in 2015 for this action of $3 million for employee termination costs and $2 million for asset impairment to adjust assets held for sale to fair value. Refer to Note 4,5, “Restructuring Charges and Fees,Other Items, Net” in the Notes to Consolidated Financial Statements for further discussion.
Provision for income taxes
| | | | | | | Change | | | | Change |
| | | 2017 | | 2016 | | 2015 | | 2017/2016 | | 2016/2015 | | 2019 | | 2018 | | 2017 | | 2019/2018 | | 2018/2017 |
| | | (Dollars in thousands) | | | | | | (In thousands) | | | | |
| (Benefit from) provision for income taxes | | $ | (477,229 | ) | | 141,741 |
| | 163,226 |
| | NM | | (13)% | |
| Provision for (benefit from) income taxes | | | $ | (18,999 | ) | | $ | 102,547 |
| | $ | (423,665 | ) | | NM | | NM |
| Effective tax rate from continuing operations | | (152.1 | )% | | 34.9 | % | | 34.8 | % | | | 44.9% | | 26.3% | | (142.9)% | |
Our provision for income taxes and effective income tax rates from continuing operations are impacted by discrete items such as enactedchanges in the mix of earnings in countries with different statutory rates, changes in our overall profitability, changes in tax law changes,legislation (including the 2017 Tax Cuts and Jobs Act), settlement of tax audits, and the reversalexpiration of reserves forstatutes of limitations. In 2019, the effective tax rate was impacted by losses due to the residual value estimate change in the third quarter of 2019, as well as an increase in the expiration of state net operating losses and the release of uncertain tax positionsposition reserves due to the expiration of statutes of limitation.limitations. In the aggregate, these items reduced the effective rate by 188.2% in 2017, 0.8% in 20162019 and 2.2% in 2015. The other components of2018, the effective tax rate in 2017 and 2016 remained consistentwas also impacted by the lower federal rate associated with the prior year.
On December 22, 2017 the Tax Cuts and Jobs Act was signed into law. We recognizedAct. The 2017 tax rate reflects the net impact of the remeasurement of our deferred taxes and the transition tax as a benefitresult of $586 million in the fourth quarter of 2017 associated with the adoption of tax reform.Tax Cuts and Jobs Act. Refer to Note 13,12, “Income Taxes” in the Notes to Consolidated Financial Statements for further discussion.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
FULL YEAR OPERATING RESULTS BY BUSINESS SEGMENT
| | | | | | | Change | | | | Change |
| | | 2017 | | 2016 | | 2015 | | 2017/2016 | | 2016/2015 | | 2019 | | 2018 | | 2017 | | 2019/2018 | | 2018/2017 |
| | | (In thousands) | | | | | | (In thousands) | | | | |
| Revenue: | | | | | | | | | | | | | | | | | |
| Fleet Management Solutions | | $ | 4,733,571 |
| | 4,556,194 |
| | 4,545,692 |
| | 4 | % | | — | % | | $ | 5,571,403 |
| | $ | 5,258,693 |
| | $ | 4,716,541 |
| | 6% | | 11% |
| Supply Chain Solutions | | | 2,551,271 |
| | 2,398,144 |
| | 1,937,352 |
| | 6 | | 24 |
| Dedicated Transportation Solutions | | 1,096,042 |
| | 1,020,895 |
| | 895,538 |
| | 7 |
| | 14 |
| | 1,417,483 |
| | 1,333,313 |
| | 1,095,645 |
| | 6 | | 22 |
| Supply Chain Solutions | | 1,969,500 |
| | 1,637,850 |
| | 1,547,763 |
| | 20 |
| | 6 |
| |
| Eliminations | | (469,514 | ) | | (427,955 | ) | | (417,100 | ) | | (10 | ) | | (3 | ) | | (614,356 | ) | | (576,204 | ) | | (469,464 | ) | | (7) | | (23) |
| Total | | $ | 7,329,599 |
| | 6,786,984 |
| | 6,571,893 |
| | 8 | % | | 3 | % | | $ | 8,925,801 |
| | $ | 8,413,946 |
| | $ | 7,280,074 |
| | 6% | | 16% |
| | | | | | | | | | | | | | | | | | |
Operating Revenue: (1) | | | | | | | | | | | | | | | | | |
| Fleet Management Solutions | | $ | 4,043,762 |
| | 3,947,740 |
| | 3,846,046 |
| | 2 | % | | 3 | % | | $ | 4,755,041 |
| | $ | 4,411,038 |
| | $ | 4,026,732 |
| | 8% | | 10% |
| Supply Chain Solutions | | | 1,879,965 |
| | 1,765,336 |
| | 1,507,548 |
| | 6 | | 17 |
| Dedicated Transportation Solutions | | 789,294 |
| | 774,319 |
| | 714,453 |
| | 2 |
| | 8 |
| | 972,694 |
| | 870,537 |
| | 789,294 |
| | 12 | | 10 |
| Supply Chain Solutions | | 1,507,548 |
| | 1,352,077 |
| | 1,256,309 |
| | 11 |
| | 8 |
| |
| Eliminations | | (300,224 | ) | | (283,239 | ) | | (255,731 | ) | | (6 | ) | | (11 | ) | | (383,368 | ) | | (348,795 | ) | | (301,069 | ) | | (10) | | (16) |
| Total | | $ | 6,040,380 |
| | 5,790,897 |
| | 5,561,077 |
| | 4 | % | | 4 | % | | $ | 7,224,332 |
| | $ | 6,698,116 |
| | $ | 6,022,505 |
| | 8% | | 11% |
| | | | | | | | | | | | | | | | | | |
| EBT: | | | | | | | | | | | |
| Earnings (Loss) Before Taxes: | | | | | | | | |
| Fleet Management Solutions | | $ | 312,720 |
| | 370,829 |
| | 461,314 |
| | (16 | )% | | (20 | )% | | $ | (70,274 | ) | | $ | 340,038 |
| | $ | 295,618 |
| | NM | | 15% |
| Supply Chain Solutions | | | 145,060 |
| | 130,262 |
| | 98,825 |
| | 11 | | 32 |
| Dedicated Transportation Solutions | | 55,328 |
| | 63,571 |
| | 45,575 |
| | (13 | ) | | 39 |
| | 81,149 |
| | 61,236 |
| | 55,346 |
| | 33 | | 11 |
| Supply Chain Solutions | | 103,102 |
| | 105,532 |
| | 93,575 |
| | (2 | ) | | 13 |
| |
| Eliminations | | (53,275 | ) | | (50,148 | ) | | (47,193 | ) | | (6 | ) | | (6 | ) | | (50,732 | ) | | (63,593 | ) | | (53,273 | ) | | 20 | | (19) |
| | | 417,875 |
| | 489,784 |
| | 553,271 |
| | (15 | ) | | (11 | ) | | 105,203 |
| | 467,943 |
| | 396,516 |
| | (78) | | 18 |
| Unallocated Central Support Services | | (48,128 | ) | | (40,736 | ) | | (48,700 | ) | | (18 | ) | | 16 |
| | (49,114 | ) | | (49,081 | ) | | (48,259 | ) | | — | | (2) |
| Non-operating pension costs | | (27,741 | ) | | (29,943 | ) | | (17,797 | ) | | 7 |
| | (68 | ) | | (60,406 | ) | | (7,541 | ) | | (27,741 | ) | | NM | | 73 |
| Restructuring charges and fees, net and other items | | (28,220 | ) | | (12,724 | ) | | (17,559 | ) | | NM |
| | NM |
| |
| Earnings from continuing operations before income taxes | | $ | 313,786 |
| | 406,381 |
| | 469,215 |
| | (23 | )% | | (13 | )% | |
Other items impacting comparability, net (2) | | | (37,954 | ) | | (21,852 | ) | | (24,080 | ) | | (74) | | 9 |
| Earnings (loss) from continuing operations before income taxes | | | $ | (42,271 | ) | | $ | 389,469 |
| | $ | 296,436 |
| | NM | | 31% |
————————————
NM - Not Meaningful
| |
| (1) | Non-GAAP financial measures. Refer to the “Non-GAAP Financial Measures” section of this MD&A for a reconciliation of total revenue to operating revenue and segment total revenue to segment operating revenue for FMS, DTSSCS and SCS,DTS, as well as the reasons why management believes these measures are important to investors. |
| |
| (2) | Refer to Note 22, "Other Items Impacting Comparability," and below for a discussion of items excluded from our primary measure of segment performance. |
As part of management’s evaluation of segment operating performance, we define the primary measurement of our segment financial performance as EBT"Earnings from continuing operations before taxes" (EBT), which includes an allocation of Central Support Services (CSS), and excludes non-operating pension costs and restructuring and other charges,items, net, as described in Note 4, “Restructuring Charges and Fees, Net,” and the items discussed in Note 24,22, “Other Items Impacting Comparability,” in the Notes to Consolidated Financial Statements. CSS represents those costs incurred to support all business segments, including finance and procurement, corporate services, human resources, finance, corporate services andinformation technology, 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 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 28,26, “Segment Reporting,” in the Notes to Consolidated Financial Statements for a description of the methodology for allocating the remainder of CSS costs to the business segments.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Our FMS segment leases revenue earning equipment and provides fuel, maintenance and other ancillary services to the SCS and DTS 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 DTSSCS and SCSDTS 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). Inter-segment EBT allocated to SCS and DTS includes earnings related to equipment used in providing services to SCS and DTS customers. Refer to Note 28,26, "Segment Reporting" in the Notes to Consolidated Financial Statements for additional information. Prior year amounts have been reclassifiedrevised to conform to the current period presentation.presentation, which excludes EBT from our Singapore operations that were shut down during the second quarter of 2019.
The following table sets forth equipment contribution included in EBT for our DTSSCS and SCSDTS business segments:
| | | | | | | | | | Change | | | | | | | Change |
| | 2017 | | 2016 | | 2015 | | 2017/2016 | | 2016/2015 | 2019 | | 2018 | | 2017 | | 2019/2018 | | 2018/2017 |
| | (In thousands) | | | | | (In thousands) | | | | |
| Equipment Contribution: | | | | | | | | | | | | |
| Supply Chain Solutions | | $ | 22,267 |
| | $ | 27,067 |
| | $ | 22,244 |
| | (18)% | | 22% |
| Dedicated Transportation Solutions | $ | 31,029 |
| | 32,731 |
| | 32,471 |
| | (5)% | | 1% | 28,465 |
| | 36,526 |
| | 31,029 |
| | (22) | | 18 |
| Supply Chain Solutions | 22,246 |
| | 17,417 |
| | 14,722 |
| | 28 | | 18 | |
Total | $ | 53,275 |
| | 50,148 |
| | 47,193 |
| | 6% | | 6% | $ | 50,732 |
| | $ | 63,593 |
| | $ | 53,273 |
| | (20)% | | 19% |
————————————
| |
| (1) | Total amount is included in FMS EBTEBT. |
SCS and DTS equipment contribution decreased 5%18% and 22%, respectively, in 2017,2019, primarily related to the impact of higher depreciation expense due to higher maintenance coststhe change in estimate for residual values on an oldervehicles used to provide services to SCS and DTS customers. Refer to "Critical Accounting Estimates" below and Note 8, "Revenue Earning Equipment, net" in the Notes to Consolidated Financial Statements for additional information on the changes in our vehicle fleet used inresidual value estimates. SCS and DTS operations. SCS equipment contribution increased 28%22% and 18%, respectively, in 2017,2018, primarily driven by new business and increased volumes. DTS equipment contribution increased slightly in 2016. SCS equipment contribution increased 18% in 2016, primarily driven by new business and increased volumes.business.
The following table provides items excluded from our segment EBT measure and their classification within our Consolidated Statements of Earnings:
|
| | | | | | | | | | | | |
| | | | | |
| Description | | Consolidated Statements of Earnings Line Item | | 2017 | | 2016 | | 2015 |
| | | | | (In thousands) |
Restructuring (1) | | Restructuring charges and fees, net | | $ | (10,500 | ) | | (5,074 | ) | | (14,225 | ) |
Fees related to cost-savings program (2) | | Restructuring charges and fees, net | | (10,905 | ) | | — |
| | (3,843 | ) |
| Restructuring charges and fees, net | | | | (21,405 | ) | | (5,074 | ) | | (18,068 | ) |
Non-operating pension costs (3) | | Non-operating pension costs | | (27,741 | ) | | (29,943 | ) | | (17,797 | ) |
Tax reform related bonus (2) | | SG&A | | (23,278 | ) | | — |
| | — |
|
Operating tax adjustment (2) | | SG&A | | (2,205 | ) | | — |
| | — |
|
Gain on sale of property (2) | | Miscellaneous income | | 24,122 |
| | — |
| | — |
|
Pension related adjustment (4) | | SG&A | | (5,454 | ) | | | | 509 |
|
Pension related adjustment (4) | | Non-operating pension costs | | — |
| | (7,650 | ) | | — |
|
| | | | | $ | (55,961 | ) | | (42,667 | ) | | (35,356 | ) |
|
| | | | | | | | | | | | | | |
| | | | | |
| Description | | Classification | | 2019 | | 2018 | | 2017 |
| | | | | (In thousands) |
Restructuring and other, net (1) | | Restructuring and other items, net | | $ | (20,532 | ) | | $ | (5,597 | ) | | $ | (6,360 | ) |
Goodwill impairment (2) | | Restructuring and other items, net | | — |
| | (15,513 | ) | | — |
|
ERP implementation costs (1) | | Restructuring and other items, net | | (21,260 | ) | | (742 | ) | | — |
|
Costs related to cost savings initiatives (1) | | Restructuring and other items, net | | (14,776 | ) | | — |
| | (10,905 | ) |
Tax reform related bonus (3) | | SG&A | | — |
| | — |
| | (23,278 | ) |
Pension related adjustment (4) | | SG&A | | — |
| | — |
| | (5,454 | ) |
Operating tax adjustment (3) | | SG&A | | — |
| | — |
| | (2,205 | ) |
Gain on sale of property (5) | | Miscellaneous income | | 18,614 |
| | — |
| | 24,122 |
|
| Other items impacting comparability, net | | | | (37,954 | ) | | (21,852 | ) | | (24,080 | ) |
Non-operating pension costs (4) | | Non-operating pension costs | | (60,406 | ) | | (7,541 | ) | | (27,741 | ) |
| | | | | $ | (98,360 | ) | | $ | (29,393 | ) | | $ | (51,821 | ) |
________________
| |
| (1) | See Note 4 ,5, "Restructuring Charges and Fees,Other Items, Net, ,"" in the Notes to Consolidated Financial Statements for additional information. |
| |
| (2) | See Note 24,10, "Goodwill," in the Notes to Consolidated Financial Statements for additional information. |
| |
| (3) | See Note 22, “Other Items Impacting Comparability,” in the Notes to Consolidated Financial Statements for additional information. |
| |
(3)(4) | See Note 28 “Segment Reporting,20, “Employee Benefit Plans,” in the Notes to Consolidated Financial Statements for additional information. |
| |
(4)(5) | See Note 22, “Employee Benefit Plans,”25, "Miscellaneous Income, Net" in the Notes to Consolidated Financial Statements for additional information. |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Fleet Management Solutions
| | | | | | | | | | | Change | | | | | | | | Change |
| | | 2017 | | 2016 | | 2015 | | 2017/2016 |
| 2016/2015 | | 2019 | | 2018 | | 2017 | | 2019/2018 |
| 2018/2017 |
| | | (Dollars in thousands) | | | | (In thousands) | | |
| ChoiceLease | | $ | 2,688,717 |
| | 2,573,638 |
| | 2,406,711 |
| | 4% | | 7% | | $ | 3,112,311 |
| | $ | 2,860,266 |
| | $ | 2,671,687 |
| | 9% | | 7% |
| SelectCare | | 464,056 |
| | 449,729 |
| | 421,665 |
| | 3 | | 7 | | 541,358 |
| | 502,835 |
| | 464,056 |
| | 8 | | 8 |
| Commercial rental | | 813,539 |
| | 846,331 |
| | 940,045 |
| | (4) | | (10) | | 1,009,086 |
| | 960,606 |
| | 813,539 |
| | 5 | | 18 |
| Other | | 77,450 |
| | 78,042 |
| | 77,625 |
| | (1) | | 1 | | 92,286 |
| | 87,331 |
| | 77,450 |
| | 6 | | 13 |
| Fuel services revenue | | 689,809 |
| | 608,454 |
| | 699,646 |
| | 13 | | (13) | | 816,362 |
| | 847,655 |
| | 689,809 |
| | (4) | | 23 |
FMS total revenue (1) | | $ | 4,733,571 |
| | 4,556,194 |
| | 4,545,692 |
| | 4% | | —% | | $ | 5,571,403 |
| | $ | 5,258,693 |
| | $ | 4,716,541 |
| | 6% | | 11% |
| | | | | | | | | | | | | | | |
FMS operating revenue (2) | | $ | 4,043,762 |
| | 3,947,740 |
| | 3,846,046 |
| | 2 | | 3 | | $ | 4,755,041 |
| | $ | 4,411,038 |
| | $ | 4,026,732 |
| | 8% | | 10% |
| | | | | | | | | | | | | | | |
| FMS EBT | | $ | 312,720 |
| | 370,829 |
| | 461,314 |
| | (16)% | | (20)% | | $ | (70,274 | ) | | $ | 340,038 |
| | $ | 295,618 |
| | NM | | 15% |
| | | | | | | | | | | | | | | |
| FMS EBT as a % of FMS total revenue | | 6.6 | % | | 8.1 | % | | 10.1 | % | | (150) bps | | (200) bps | | (1.3)% | | 6.5% | | 6.3% | | (780) bps | | 20 bps |
| | | | | | | | | | | | | | | |
FMS EBT as a % of FMS operating revenue (1)(2) | | 7.7 | % | | 9.4 | % | | 12.0 | % | | (170) bps | | (260) bps | | (1.5)% | | 7.7% | | 7.3% | | (920) bps | | 40 bps |
____________________
| |
| (1) | Includes intercompany fuel sales from FMS to DTSSCS and SCS.DTS. |
| |
| (2) | Non-GAAP financial measures. Reconciliations of FMS total revenue to FMS operating revenue and 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. |
FMS total revenue increased 4%6% to $4.73$5.6 billion in 20172019 and increased slightly11% to $5.3 billion in 2016 to $4.56 billion.2018. FMS operating revenue (a non-GAAP measure excluding fuel) increased 2%8% to $4.8 billion in 20172019 and 10% to $4.04$4.4 billion and 3% in 2016 to $3.95 billion.2018. The following table summarizes the components of the change in revenue on a percentage basis versus the prior year:
| | | | | 2017 | | 2016 | | 2019/2018 | | 2018/2017 |
| | | Total | | Operating (1) | | Total | | Operating (1) | | Total | | Operating (1) | | Total | | Operating (1) |
| Organic, including price and volume | | 2% | | 2% | | 3% | | 4% | | 7% | | 8% | | 8% | | 10% |
| Fuel | | 2 | | — | | (2) | | — | | (1) | | — | | 3 | | — |
| Foreign exchange | | — | | — | | (1) | | (1) | |
| Total increase | | 4% | | 2% | | —% | | 3% | | 6% | | 8% | | 11% | | 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. |
20172019 versus 20162018
ChoiceLease revenue increased 9% in 2019 reflecting a larger average fleet size as well as higher prices on replacement vehicles. The average number of ChoiceLease vehicles increased 9% from the prior year reflecting continuing sales activity. We expect ChoiceLease revenue growth to slow next year due to a lower OEM production environment, the non-renewal of lease business with lower returns and anticipated lost business related to the discontinuation of our liability insurance program to ChoiceLease customers. SelectCare revenue increased 8% in 2019 due to increased volumes. Commercial rental revenue increased 5% in 2019 due to higher pricing and demand. We expect unfavorable commercial rental comparisons next year based on a weakening demand environment and a smaller fleet. Fuel services revenue decreased 4% in 2019 due to lower fuel costs passed through to customers.
FMS EBT decreased in 2019 primarily driven by higher depreciation expense of approximately $297 million related to the change in estimate for residual values of our lease and commercial rental fleet in the third quarter of 2019 (of the total increase in depreciation expense of $317 million). FMS EBT also decreased by approximately $37 million in 2019 as used vehicle sales results reflected higher losses as a result of higher valuation adjustments on a larger inventory and lower expected sales prices. At the end of the second quarter of 2019, we began to experience softening in used vehicle market conditions, which intensified during the third quarter of 2019 and we now expect to continue throughout 2020. In addition, our inventory of used vehicles to be made available for sale was higher than expected, which has, and is expected to continue to, impact the
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
volume of used vehicle sales expected to be transacted through our wholesale channels. Due to these dynamics and our updated outlook, management concluded in the third quarter of 2019 that our residual value estimates likely exceeded the expected future values that would be realized upon the sale of power vehicles in our existing fleet and accordingly changed the vehicle residual value estimates. As a result of the change in vehicle residual value estimates, we expect higher depreciation expense on our current fleet in the future, which negatively impacted FMS EBT in 2019 as discussed above and will negatively impact FMS EBT in 2020 by approximately $275 million. We expect the negative impact of the higher depreciation expense on FMS EBT to decline each quarter going forward starting in 2020 through 2025. Refer to "Critical Accounting Estimates" below and Note 7, "Revenue Earning Equipment, net" in the Consolidated Financial Statements for additional information. In addition, FMS EBT decreased due to higher insurance costs of $23 million from higher claim activity and adverse development of prior year claims. The impact of these items was partially offset as lease results benefited from a larger average fleet size, as well as higher prices on replacement vehicles. Commercial rental performance was lower reflecting lower utilization in 2019. Rental power fleet utilization was 75.0% in 2019, down from 79.2% in 2018, on a 10% larger average rental power fleet.
2018 versus 2017
ChoiceLease revenue increased 7% in 2018 reflecting a larger average fleet size and higher prices on replacement vehicles. The average number of ChoiceLease vehicles increased 2%4% from the prior year reflecting continued solid sales activity. We expect favorable ChoiceLease comparisons to continue next year due to strong 2017 sales activity, as well as expected sales in 2018. Commercial rental revenue decreased 4%increased 18% in 20172018 due to lower demand. However, we expect favorable commercial rental comparisons next year based on a stronger demand environment experienced in the latter half of 2017.and higher pricing. SelectCare revenue increased 3%8% in 2017,2018 due to new businesssales activity and higherincreased volumes. Fuel services revenue increased 13%23% in 20172018 due to higher fuel costs passed through to customers.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
FMS EBT decreased 16%increased 15% in 2017, due to increased accelerated depreciation of $21 million, lower used vehicle sales and2018 primarily driven by growth in commercial rental results.and ChoiceLease, as well as cost savings initiatives implemented during 2018. These decreasesbenefits were partially offset by improved SelectCarehigher depreciation of $40 million due to residual value estimate changes and ChoiceLease performance. The increase in accelerated depreciation reflects a full year of accelerated depreciation and the expansion of acceleration$9 million to vehicles expected to be made available for sale through June 2019. Used vehicle sales results declined primarily due to lower pricing.2020; higher compensation-related expenses; and unfavorable self-insurance developments. Commercial rental performance declined 4%improved in 2017,2018 due to increased utilization reflecting lower demand. However, rental power fleet utilization was 75.6% in 2017, up from 74.7% in 2016, on a 6% smaller average rental power fleet, reflecting fleet right-sizing actions taken during the year. SelectCare performance was driven by new business and increased volumes. ChoiceLease comparisons benefited from growth in fleet sizestronger demand and higher per vehicle pricing.
2016 versus 2015
ChoiceLease revenue increased 7% in 2016 , reflecting a larger average fleet size and higher prices on replacement vehicles. Foreign exchange negatively impacted ChoiceLease revenue growth by 100 basis points. The average number of ChoiceLease vehicles increased 4% from the prior year, reflecting strong sales activity. Commercial rental revenue decreased 10% in 2016, due to lower demand. Foreign exchange negatively impacted commercial rental revenue growth by 100 basis points. SelectCare revenue increased 7%, primarily due to higher volumes and new business. Fuel services revenue declined 13% due to lower fuel costs passed through to customers.
FMS EBT decreased 20% in 2016, reflecting lower used vehicle sales results, decreased commercial rental performance and accelerated depreciation on vehicles expected to be made available for sale through June 2018 of $10 million, partially offset by higher ChoiceLease performance and lower overhead costs. Used vehicle sales results declined due to lower pricing, primarily on tractors and higher fair market value write-downs on vehicles held for sale. Commercial rental performance declined 10% in 2016, reflecting decreased demand. Rental power fleet utilization was 74.7%79.2% in 2016, down2018, up from 76.5%75.6% in 20152017, on a 7% smaller10% larger average rental power fleet. ChoiceLease comparisons benefited from growth in fleet size and higher pergrowth. Used vehicle pricing. ChoiceLease and commercial rentalsales results benefiteddeclined $5 million reflecting lower gains from lower depreciationsales of $35 millionused vehicles due to residual value changes implemented on January 1, 2016.the mix and volume of units sold, partially offset by lower valuation adjustments.
The following table provides commercial rental statistics on our global fleet:
| | | | | | | | | | | Change | | | | | | | | Change |
| | | 2017 | | 2016 | | 2015 | | 2017/2016 | | 2016/2015 | | 2019 | | 2018 | | 2017 | | 2019/2018 | | 2018/2017 |
| | (Dollars in thousands) | | | | (In thousands, except vehicle counts) | | | |
Rental revenue from non-lease customers | | $ | 517,874 |
| | 528,892 |
| | 571,985 |
| | (2)% | | (8)% | | $ | 609,840 |
| | $ | 566,612 |
| | $ | 517,874 |
| | 8% | | 9% |
Rental revenue from lease customers (1)(2) | | $ | 295,665 |
| | 317,439 |
| | 368,060 |
| | (7)% | | (14)% | | $ | 399,246 |
| | $ | 393,994 |
| | $ | 295,665 |
| | 1% | | 33% |
Average commercial rental power fleet size – in service (2), (3) | | 29,700 |
| | 31,500 |
| | 33,800 |
| | (6)% | | (7)% | |
Average commercial rental power fleet size – in service (3), (4) | | | 36,000 | | 32,800 | | 29,700 | | 10% | | 10% |
Commercial rental utilization – power fleet (2)(3) | | 75.6 | % | | 74.7 | % | | 76.5 | % | | 90 bps | | (180) bps | | 75.0% | | 79.2% | | 75.6% | | (420) bps | | 360 bps |
______________
| |
| (1) | Also includes additional vehicles rented to lease customers, incremental to the lease fleet. |
| |
| (2) | Represents revenue from rental vehicles provided to our existing ChoiceLease customers, generally in place of a lease vehicle. |
| |
(2)(3) | Number of units rounded to nearest hundred and calculated using quarterly average unit counts. |
| |
(3)(4) | Excluding trailers. |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Our global fleet of owned and leased revenue earning equipment and SelectCare vehicles, including vehicles under on-demand maintenance, is summarized as follows (rounded to the nearest hundred):
| | | | | | | | | | | |
| Our global fleet of owned and leased revenue earning equipment and SelectCare vehicles, including vehicles under on-demand maintenance, is summarized as follows (number of units rounded to the nearest hundred): | |
| | | | | | | | | Change | | | | | | | | Change |
| | | 2017 | | 2016 | | 2015 | | 2017/2016 | | 2016/2015 | | 2019 | | 2018 | | 2017 | | 2019/2018 | | 2018/2017 |
| End of period vehicle count | | | | | | | | |
| By type: | | | | | | | | |
Trucks (1) | | 76,400 |
| | 73,300 |
| | 72,800 |
| | 4% | | 1% | | 85,200 | | 81,700 | | 76,400 | | 4% | | 7% |
Tractors (2) | | 66,000 |
| | 67,900 |
| | 68,700 |
| | (3) | | (1) | | 82,400 | | 74,000 | | 66,000 | | 11 | | 12 |
Trailers (3), (4) | | 42,600 |
| | 42,800 |
| | 42,400 |
| | — | | 1 | |
Trailers (3) | | | 45,400 | | 44,700 | | 42,600 | | 2 | | 5 |
| Other | | 1,200 |
| | 1,100 |
| | 1,300 |
| | 9 | | (15) | | 800 | | 1,200 | | 1,200 | | (33) | | — |
| Total | | 186,200 |
| | 185,100 |
| | 185,200 |
| | 1% | | —% | | 213,800 | | 201,600 | | 186,200 | | 6% | | 8% |
| | | | | | | | | |
| By ownership: | | | | | | | |
| |
| |
| Owned | | 184,900 |
| | 183,700 |
| | 184,700 |
| | 1% | | (1)% | |
| Leased | | 1,300 |
| | 1,400 |
| | 500 |
| | (7) | | 180 | |
| Total | | 186,200 |
| | 185,100 |
| | 185,200 |
| | 1% | | —% | |
| | | | | | | | | |
By product line: (4) | | | | | | | |
| |
| |
| By product line: | | |
| |
|
| ChoiceLease | | 139,100 |
| | 136,500 |
| | 131,800 |
| | 2% | | 4% | | 159,800 | | 149,300 | | 139,100 | | 7% | | 7% |
| Commercial rental | | 37,800 |
| | 37,800 |
| | 42,100 |
| | — | | (10) | | 41,900 | | 42,600 | | 37,800 | | (2) | | 13 |
| Service vehicles and other | | 3,300 |
| | 3,300 |
| | 3,300 |
| | — | | — | | 2,700 | | 2,800 | | 3,300 | | (4) | | (15) |
| Active units | | 180,200 |
| | 177,600 |
| | 177,200 |
| | 1 | | — | |
| | | | 204,400 | | 194,700 | | 180,200 | | 5 | | 8 |
| Held for sale | | 6,000 |
| | 7,500 |
| | 8,000 |
| | (20) | | (6) | | 9,400 | | 6,900 | | 6,000 | | 36 | | 15 |
| Total | | 186,200 |
| | 185,100 |
|
| 185,200 |
|
| 1 | | — | | 213,800 | | 201,600 | | 186,200 |
| 6% | | 8% |
| | | |
| Active ChoiceLease vehicles | | | 147,400 | | 139,200 | | 131,000 | | 6% | | 6% |
| | | |
| Customer vehicles under SelectCare contracts | | 54,400 |
| | 49,000 |
| | 46,700 |
| | 11 | | 5 | | 55,800 | | 56,300 | | 54,400 | | (1)% | | 3% |
| | | | | | | | | |
| Average vehicle count | | | | | | | |
| |
| |
| |
|
| By product line: | | | | | | | |
| |
| |
| |
|
| ChoiceLease | | 137,600 |
| | 134,400 |
| | 128,800 |
| | 2% | | 4% | | 156,600 | | 143,100 | | 137,600 | | 9% | | 4% |
| Commercial rental | | 37,500 |
| | 39,200 |
| | 42,400 |
| | (4) | | (8) | | 44,100 | | 41,000 | | 37,500 | | 8 | | 9 |
| Service vehicles and other | | 3,400 |
| | 3,400 |
| | 3,200 |
| | — | | 6 | | 2,700 | | 3,100 | | 3,400 | | (13) | | (9) |
| Active units | | 178,500 |
| | 177,000 |
| | 174,400 |
|
| 1 | | 1 | |
| | | | 203,400 | | 187,200 | | 178,500 |
| 9 | | 5 |
| Held for sale | | 6,700 |
| | 8,400 |
| | 6,100 |
| | (20) | | 38 | | 7,800 | | 6,100 | | 6,700 | | 28 | | (9) |
| Total | | 185,200 |
| | 185,400 |
| | 180,500 |
| | — | | 3 | | 211,200 | | 193,300 | | 185,200 | | 9% | | 4% |
| | | |
Active ChoiceLease vehicles (4) | | | 144,300 | | 134,400 | | 129,300 | | 7% | | 4% |
| Revenue per active ChoiceLease vehicle | | | $21,600 | | $21,300 | | $20,700 | | 1% | | 3% |
| | | | | | | | | |
| Customer vehicles under SelectCare contracts | | 52,100 |
| | 49,200 |
| | 43,300 |
| | 6% | | 14% | | 56,300 | | 55,600 | | 52,100 | | 1% | | 7% |
| | | | | | | | | | | | | | | |
Customer vehicles under SelectCare on-demand (5) | | 24,500 |
| | 21,000 |
| | 20,000 |
| | 17% | | 5% | | 23,200 | | 23,200 | | 24,500 | | —% | | (5)% |
| | | | | | | | | |
| Total vehicles serviced | | 261,800 |
| | 255,600 |
| | 243,800 |
| | 2% | | 5% | | 290,700 | | 272,100 | | 261,800 | | 7% | | 4% |
__________________
| |
| (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) | Includes 4,900 UK trailers (3,100Active ChoiceLease vehicles are calculated as those units currently earning revenue and 1,800 commercial rental), 5,300 UK trailers (3,300 ChoiceLease and 2,000 commercial rental) and 6,100 UK trailers (3,900 ChoiceLease and 2,200 commercial rental)not classified as of December 31, 2017, 2016 and 2015, respectively.
not yet earning or no longer earning units. |
| |
| (5) | Comprised of the number of unique vehicles serviced under on-demand maintenance agreements. This does not represent averages for the periods. Vehicles included in the end of period count may have been serviced more than one time during the respective annual period. |
|
| |
| Note: | Average vehicle counts were computed using a 24-point average based on monthly information. |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
The totals in the previous table include the following non-revenue earning equipment for the global fleet (number of units rounded(rounded to the nearest hundred):
| | | | | | | Change | | December 31, | | Change |
| Number of Units | | 2017 | | 2016 | | 2015 | | 2017/2016 | | 2016/2015 | | 2019 | | 2018 | | 2017 | | 2019/2018 | | 2018/2017 |
| Not yet earning revenue (NYE) | | 2,900 |
| | 1,700 |
| | 2,800 |
| | 71% | | (39)% | | 3,500 | | 4,500 | | 2,900 | | (22)% | | 55% |
| No longer earning revenue (NLE): | | | | | | | | |
| Units held for sale | | 6,000 |
| | 7,500 |
| | 8,000 |
| | (20) | | (6) | | 9,400 | | 6,900 | | 6,000 | | 36 | | 15 |
| Other NLE units | | 3,400 |
| | 4,400 |
| | 3,300 |
| | (23) | | 33 | | 8,400 | | 4,300 | | 3,400 | | 95 | | 26 |
| Total NLE | | | 17,800 | | 11,200 | | 9,400 | | 59% | | 19% |
| Total | | 12,300 |
| | 13,600 |
| | 14,100 |
| | (10)% | | (4)% | | 21,300 | | 15,700 | | 12,300 | | 36% | | 28% |
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. For 2017, theThe number of NYE units decreased 22% in 2019 reflecting quicker customer fulfillment activities. The number of NYE units increased 71% compared with December 31, 2016,in 2018 reflecting lease fleet growth. growth and a significant amount of deliveries close to the end of the year.
NLE units represent all 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. For 2017,2019, the number of NLE units decreased 21%,increased 59% reflecting a higher number of vehicles being prepared for sale or redeployment and a higher number of contract terminations, as well as higher used vehicle inventories as a result of lower demand. For 2018, the number of NLE units increased 19% reflecting higher used vehicle inventories and a lowerhigher number of vehicles being prepared for sale at the end of the year. We expect NLE units to increase slightlydecrease in 2018,2020 as a result of higher expectedredeployments of used vehicle inventoriesvehicles.
|
| | | | | | | | | | | | | | | | |
| | | | | Change |
| | | 2019 | | 2018 | | 2017 | | 2019/2018 | | 2018/2017 |
| | | (In thousands, except vehicle counts) | | | | |
| Automotive | | $ | 693,211 |
| | $ | 628,766 |
| | $ | 566,302 |
| | 10% | | 11% |
| Technology and healthcare | | 268,305 |
| | 329,843 |
| | 271,551 |
| | (19) | | 21 |
| Consumer product goods and retail | | 736,083 |
| | 637,244 |
| | 511,793 |
| | 16 | | 25 |
| Industrial and other | | 182,366 |
| | 169,483 |
| | 157,902 |
| | 8 | | 7 |
| Subcontracted transportation | | 554,678 |
| | 521,028 |
| | 354,644 |
| | 6 | | 47 |
| Fuel | | 116,628 |
| | 111,780 |
| | 75,160 |
| | 4 | | 49 |
| SCS total revenue | | $ | 2,551,271 |
| | $ | 2,398,144 |
| | $ | 1,937,352 |
| | 6% | | 24% |
| | | | | | | | | | | |
SCS operating revenue (1) | | $ | 1,879,965 |
| | $ | 1,765,336 |
| | $ | 1,507,548 |
| | 6% | | 17% |
| | | | | | | | | | | |
| SCS EBT | | $ | 145,060 |
| | $ | 130,262 |
| | $ | 98,825 |
| | 11% | | 32% |
| SCS EBT as a % of SCS total revenue | | 5.7% | | 5.4% | | 5.1% | | 30 bps | | 30 bps |
SCS EBT as a % of SCS operating revenue(1) | | 7.7% | | 7.4% | | 6.6% | | 30 bps | | 80 bps |
| | | | | | | | | | | |
| Memo: | | | | | | | | | | |
| Average fleet | | 9,700 | | 8,800 | | 7,900 | | 10% | | 11% |
————————————
| |
| (1) | Non-GAAP financial measures. Reconciliations of SCS total revenue to SCS operating revenue and 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. |
SCS total revenue increased 6% to $2.6 billion in 2019 and 24% to $2.4 billion in 2018. SCS operating revenue (a non-GAAP measure excluding fuel and subcontracted transportation) increased 6% to $1.9 billion in 2019 and 17% to $1.8 billion in 2018. We expect favorable operating revenue comparisons to continue next year at a slower growth rate.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
The following table summarizes the components of the change in revenue on a percentage basis versus the prior year:
|
| | | | | | | | |
| | | 2019/2018 | | 2018/2017 |
| | | Total | | Operating (1) | | Total | | Operating (1) |
| Organic, including price and volume | | 4% | | 5% | | 14% | | 12% |
| Acquisition | | 2 | | 1 | | 8 | | 5 |
| Fuel | | — | | — | | 2 | | — |
| Total increase | | 6% | | 6% | | 24% | | 17% |
————————————
| |
| (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. |
2019 versus 2018
SCS total revenue increased 6% and SCS operating revenue increased 6% in 2019 largely reflecting new business and higher pricing, as well as the full year results of Ryder Last Mile (formerly MXD), which was acquired in the second quarter of 2018. SCS EBT increased 11% in 2019 driven by revenue growth and improved operating performance, partially offset by a decrease in equipment contribution of $4.8 million (see further discussions on equipment contribution above). We expect equipment contribution to be negatively impacted in the lease replacement cycle.future due to the change in the vehicle residual value estimates in the third quarter of 2019 for the FMS revenue earning equipment that is utilized in the SCS business. However, we do not expect this impact to SCS EBT to be material.
2018 versus 2017
SCS total revenue increased 24% in 2018 due to increased volumes and new business, the MXD acquisition, as well as higher fuel costs passed through to our customers. SCS operating revenue increased 17% primarily reflecting increased volumes, the MXD acquisition and new business. SCS EBT increased 32% in 2018 driven by revenue growth and better operating results.
Dedicated Transportation Solutions | | | | | | | | Change | | | | | Change |
| | | 2017 | | 2016 | | 2015 | | 2017/2016 | | 2016/2015 | | 2019 | | 2018 | | 2017 | | 2019/2018 | | 2018/2017 |
| | | (Dollars in thousands) | | | | | | (In thousands) | | | | |
| DTS total revenue | | $ | 1,096,042 |
| | 1,020,895 |
| | 895,538 |
| | 7% | | 14% | | $ | 1,417,483 |
| | $ | 1,333,313 |
| | $ | 1,095,645 |
| | 6% | | 22% |
| | | | |
|
| |
|
| | | | | | | | |
DTS operating revenue (1) | | $ | 789,294 |
| | 774,319 |
| | 714,453 |
| | 2% | | 8% | | $ | 972,694 |
| | $ | 870,537 |
| | $ | 789,294 |
| | 12% | | 10% |
| | | | | | | | | | | | | | | |
| DTS EBT | | $ | 55,328 |
| | 63,571 |
| | 45,575 |
| | (13)% | | 39% | | $ | 81,149 |
| | $ | 61,236 |
| | $ | 55,346 |
| | 33% | | 11% |
| DTS EBT as a % of DTS total revenue | | 5.0 | % | | 6.2 | % | | 5.1 | % | | (120) bps | | 110 bps | | 5.7% | | 4.6% | | 5.1% | | 110 bps | | (50) bps |
DTS EBT as a % of DTS operating revenue(1) | | 7.0 | % | | 8.2 | % | | 6.4 | % | | (120) bps | | 180 bps | | 8.3% | | 7.0% | | 7.0% | | 130 bps | | — |
| | | | | | | | | | | | | | | |
| Memo: | | | | | | | | | | | | | | |
| Average fleet | | 8,200 |
| | 8,200 |
| | 7,700 |
| | —% | | 6% | | 9,600 | | 8,900 | | 8,200 | | 8% | | 9% |
__________________
| |
| (1) | Non-GAAP financial measures. Reconciliations of DTS total revenue to DTS operating revenue and 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. |
DTS total revenue increased 7%6% to $1.4 billion in 2017 to $1.10 billion2019 and increased 14%22% to $1.3 billion in 2016 to $1.02 billion.2018. DTS operating revenue (a non-GAAP measure excluding fuel and subcontracted transportation) increased 2%12% to $973 million in 20172019 and increased 10% to $789$871 million and 8% in 2016 to $774 million.2018. We expect improved operating revenue growthto slightly decline next year, based on strongreflecting lower sales activity as well as expected 2018 activity.
and fewer large deals signed in the second half of 2019.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
The following table summarizes the components of the change in revenue on a percentage basis versus the prior year:
| | | | | 2017 | | 2016 | | 2019/2018 | | 2018/2017 |
| | | Total | | Operating (1) | | Total | | Operating (1) | | Total | | Operating (1) | | Total | | Operating (1) |
| Organic, including price and volume | | 6% | | 2% | | 16% | | 8% | | 8% | | 12% | | 19% | | 10% |
| Subcontracted transportation | | | (1) | | — | | — | | — |
| Fuel | | 1 | | — | | (2) | | — | | (1) | | — | | 3 | | — |
| Total increase | | 7% | | 2% | | 14% | | 8% | | 6% | | 12% | | 22% | | 10% |
————————————
| |
| (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. |
20172019 versus 20162018
In 2017, DTS total revenue increased 7%6% and operating revenue increased 12% in 2019 primarily reflecting organicnew business. DTS EBT increased 33% due to revenue growth, increased rates, improved operating performance and favorable insurance claim developments, partially offset by a decrease in equipment contribution of $8.1 million (see further discussions on equipment contribution above). We expect equipment contribution to a lesser extent,be negatively impacted in the future due to the change in the vehicle residual value estimates in the third quarter of 2019 for the FMS revenue earning equipment that is utilized in the DTS business. However, we do not expect this impact to DTS EBT to be material.
2018 versus 2017
DTS total revenue increased 22% in 2018 reflecting higher operating revenue, as well as higher fuel costs passed through to our customers. DTS operating revenue increased 2%10% due to new business and increased volumes and higher pricing.volumes. DTS EBT decreased 13%increased 11% due to higher insurance premiums, increased maintenance costs on certain older model year vehicles and higher labor costs from increased driver turnover. These items were partially offset by favorable developments of self-insurance claims from prior years.
2016 versus 2015
In 2016, DTS total revenue increased 14% reflecting organic growth, partially offset by lower fuel prices passed throughhigher costs incurred during the start-up phase of a new customer account.
|
| | | | | | | | | | | | | | | | |
| | | | | Change |
| | | 2019 | | 2018 | | 2017 | | 2019/2018 | | 2018/2017 |
| | | (In thousands) | | | | |
| Human resources | | $ | 21,447 |
| | $ | 20,082 |
| | $ | 18,947 |
| | 7% | | 6% |
| Finance and procurement | | 74,382 |
| | 70,921 |
| | 68,929 |
| | 5 | | 3 |
| Corporate services and public affairs | | 11,103 |
| | 11,583 |
| | 12,561 |
| | (4) | | (8) |
| Information technology | | 98,756 |
| | 90,083 |
| | 89,453 |
| | 10 | | 1 |
| Legal and safety | | 28,626 |
| | 25,969 |
| | 25,388 |
| | 10 | | 2 |
| Marketing | | 22,356 |
| | 18,287 |
| | 16,927 |
| | 22 | | 8 |
| Other | | 34,798 |
| | 37,725 |
| | 35,788 |
| | (8) | | 5 |
| Total CSS | | 291,468 |
| | 274,650 |
| | 267,993 |
| | 6 | | 2 |
| Allocation of CSS to business segments | | (242,354 | ) | | (225,569 | ) | | (219,734 | ) | | 7 | | 3 |
| Unallocated CSS | | $ | 49,114 |
| | $ | 49,081 |
| | $ | 48,259 |
| | —% | | 2% |
2019 versus 2018
Total CSS costs increased 6% to our customers. DTS operating revenue$291 million in 2019 primarily reflecting investments in technology, increased 8% due to new business, increased volumesmarketing efforts and higher pricing. DTS EBTcompensation-related costs. Unallocated CSS costs remained flat in 2019.
2018 versus 2017
Total CSS costs increased 39% due2% to $275 million in 2018 primarily reflecting higher compensation-related costs. Unallocated CSS costs increased revenue and,2% to a lesser extent,$49 million in 2018 reflecting higher compensation-related costs, partially offset by lower insuranceprofessional services costs.
|
| | | | | | | | | | | | | | | | |
| | | | | Change |
| | | 2017 | | 2016 | | 2015 | | 2017/2016 | | 2016/2015 |
| | | (Dollars in thousands) | | | | |
| Automotive | | $ | 566,302 |
| | 548,659 |
| | 469,178 |
| | 3% | | 17% |
| Technology and healthcare | | 271,551 |
| | 242,474 |
| | 251,188 |
| | 12 | | (3) |
| CPG and retail | | 511,793 |
| | 436,368 |
| | 431,571 |
| | 17 | | 1 |
| Industrial and other | | 157,902 |
| | 124,576 |
| | 104,372 |
| | 27 | | 19 |
| Subcontracted transportation | | 386,792 |
| | 224,060 |
| | 226,880 |
| | 73 | | (1) |
| Fuel | | 75,160 |
| | 61,713 |
| | 64,574 |
| | 22 | | (4) |
| SCS total revenue | | $ | 1,969,500 |
| | $ | 1,637,850 |
| | $ | 1,547,763 |
| | 20% | | 6% |
| | | | | | | | | | | |
SCS operating revenue (1) | | $ | 1,507,548 |
| | 1,352,077 |
| | 1,256,309 |
| | 11% | | 8% |
| | | | | | | | | | | |
| SCS EBT | | $ | 103,102 |
| | 105,532 |
| | 93,575 |
| | (2)% | | 13% |
| SCS EBT as a % of SCS total revenue | | 5.2 | % | | 6.4 | % |
| 6.0 | % | | (120) bps | | 40 bps |
SCS EBT as a % of SCS operating revenue(1) | | 6.8 | % | | 7.8 | % |
| 7.4 | % | | (100) bps | | 40 bps |
| | | | | | | | | | | |
| Memo: | | | | | | | | | | |
| Average fleet | | 7,900 |
| | 7,200 |
| | 6,300 |
| | 10% | | 14% |
————————————
| |
(1) | Non-GAAP financial measures. Reconciliations of SCS total revenue to SCS operating revenue and 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. |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
SCS total revenue increased 20% in 2017 to $1.97 billion and 6% in 2016 to $1.64 billion. SCS operating revenue (a non-GAAP measure excluding fuel and subcontracted transportation) increased 11% in 2017 to $1.51 billion and 8% in 2016 to $1.35 billion. We expect favorable operating revenue comparisons to continue next year, although at a lower level than realized in 2017.
The following table summarizes the components of the change in revenue on a percentage basis versus the prior year:
|
| | | | | | | | |
| | | 2017 | | 2016 |
| | | Total | | Operating (1) | | Total | | Operating (1) |
| Organic, including price and volume | | 19% | | 11% | | 8% | | 9% |
| Foreign exchange | | — | | — | | (2) | | (1) |
| Fuel | | 1 | | — | | — | | — |
| Total increase | | 20% |
| 11% | | 6% | | 8% |
————————————
| |
(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. |
2017 versus 2016
SCS total revenue increased 20% in 2017 due to organic growth and, to a lesser extent, higher fuel costs passed through to our customers. SCS operating revenue increased 11% due to new business, increased volumes and higher pricing. SCS EBT decreased 2% in 2017 as benefits from increased revenue were offset by the performance of two customer accounts, higher compensation-related costs and higher overhead spending due to planned investments in information technology and sales.
2016 versus 2015
SCS total revenue increased 6% in 2016 as increased operating revenue was partially offset by a negative impact from foreign exchange. SCS operating revenue increased 8% due to new business, increased volumes and higher pricing, partially offset by a negative impact from foreign exchange. SCS EBT increased 13% in 2016 due to increased revenue.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
|
| | | | | | | | | | | | | | |
| | | | | Change |
| | | 2017 | | 2016 | | 2015 | | 2017/2016 | | 2016/2015 |
| | | (In thousands) | | | | |
| Human resources | | $ | 16,820 |
| | 17,501 |
| | 20,150 |
| | (4)% | | (13)% |
| Finance | | 58,597 |
| | 59,445 |
| | 60,998 |
| | (1) | | (3) |
| Corporate services and public affairs | | 12,561 |
| | 11,682 |
| | 12,303 |
| | 8 | | (5) |
| Information technology | | 89,453 |
| | 82,087 |
| | 84,729 |
| | 9 | | (3) |
| Legal and safety | | 25,382 |
| | 23,977 |
| | 24,522 |
| | 6 | | (2) |
| Marketing | | 18,306 |
| | 18,029 |
| | 22,206 |
| | 2 | | (19) |
| Other | | 34,284 |
| | 24,144 |
| | 33,888 |
| | 42 | | (29) |
| Total CSS | | 255,403 |
| | 236,865 |
| | 258,796 |
| | 8 | | (8) |
| Allocation of CSS to business segments | | (207,275 | ) | | (196,129 | ) | | (210,096 | ) | | 6 | | (7) |
| Unallocated CSS | | $ | 48,128 |
| | 40,736 |
| | 48,700 |
| | 18% | | (16)% |
2017 versus 2016
Total CSS costs increased 8% in 2017 to $255 million, due to higher information technology and compensation-related costs, as well as, higher professional services costs associated with strategic initiatives. Unallocated CSS costs increased 18% in 2017 to $48 million, primarily due to higher professional services costs associated with strategic initiatives.
2016 versus 2015
Total CSS costs decreased 8% in 2016 to $237 million, due to lower compensation-related expenses and lower marketing-related and information technology costs. Unallocated CSS costs decreased 16% in 2016 to $41 million, primarily due to the 2015 settlement of a customer-extended insurance claim that adversely impacted costs in the prior year and lower compensation-related expenses.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
FOURTH QUARTER CONSOLIDATED RESULTS
|
| | | | | | | | | |
| | | Three months ended December 31, | | Change |
| | | 2017 | | 2016 | | 2017/2016 |
| | | (Dollars in thousands, except per share amounts) | | |
| Total revenue | | $ | 1,939,693 |
| | 1,729,150 |
| | 12% |
Operating revenue (1) | | 1,586,612 |
| | 1,466,878 |
| | 8 |
| | | | | | | |
| EBT | | $ | 78,795 |
| | 69,196 |
| | 14% |
Comparable EBT (2) | | 104,540 |
| | 82,165 |
| | 27 |
Earnings from continuing operations (3) | | 642,480 |
| | 49,275 |
| | 1,204 |
Comparable earnings from continuing operations (2) | | 72,730 |
| | 57,435 |
| | 27 |
Net earnings (3) | | 642,970 |
| | 48,181 |
| | 1,234 |
| | | | | | | |
| Earnings per common share (EPS) — Diluted | | | | | | |
Continuing operations (3) | | $ | 12.10 |
| | 0.92 |
| | 1,215% |
Comparable (2) | | 1.37 |
| | 1.07 |
| | 28 |
Net earnings (3) | | $ | 12.11 |
| | 0.91 |
| | 1,231 |
————————————
| |
(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 from continuing operations and earnings per diluted common share to their respective comparable measures and the reasons why management believes these measures are important to investors. |
| |
(3) | 2017 amounts reflect tax benefit as a result of the 2017 Tax Cuts and Jobs Act. Refer to Note 13 , "Income Taxes ," in the Notes to Consolidated Financial Statements for additional information. |
Total revenue increased 12% in the fourth quarter of 2017 to $1.94 billion. Operating revenue (a non-GAAP measure excluding fuel and subcontracted transportation) increased 8% in the fourth quarter of 2017 to $1.59 billion. The following table summarizes the components of the change in revenue on a percentage basis versus the prior year:
|
| | | | |
| | | Three months ended December 31, 2017 |
| | | Total | | Operating (1) |
| Organic, including price and volume | | 9% | | 7% |
| Foreign exchange | | 1 | | 1 |
| Fuel | | 2 | | — |
| Total increase | | 12% | | 8% |
————————————
| |
(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. |
Total revenue and operating revenue grew across all three business segments reflecting new business and higher volumes. Total revenue also grew due to higher fuel costs passed through to customers. EBT increased 14% in the fourth quarter of 2017 to $79 million. The increase in EBT primarily reflects improved used vehicle sales results and higher commercial rental and lease performance, partially offset by higher restructuring and other charges. See “Fourth Quarter Operating Results by Business Segment” for further discussion of segment operating results.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
FOURTH QUARTER OPERATING RESULTS BY BUSINESS SEGMENT
|
| | | | | | | | | |
| | | Three months ended December 31, | | Change |
| | | 2017 | | 2016 | | 2017/2016 |
| | | (In thousands) | | |
| Revenue: | | | | | | |
| Fleet Management Solutions | | $ | 1,241,724 |
| | 1,151,742 |
| | 8% |
| Dedicated Transportation Solutions | | 284,422 |
| | 256,870 |
| | 11 |
| Supply Chain Solutions | | 540,023 |
| | 430,185 |
| | 26 |
| Eliminations | | (126,476 | ) | | (109,647 | ) | | (15) |
| Total | | $ | 1,939,693 |
| | 1,729,150 |
| | 12% |
Operating Revenue: (1) | | | | | | |
| Fleet Management Solutions | | $ | 1,056,970 |
| | 992,274 |
| | 7% |
| Dedicated Transportation Solutions | | 198,249 |
| | 193,106 |
| | 3 |
| Supply Chain Solutions | | 410,649 |
| | 352,650 |
| | 16 |
| Eliminations | | (79,256 | ) | | (71,152 | ) | | (11) |
| Total | | $ | 1,586,612 |
| | 1,466,878 |
| | 8% |
| EBT: | | | | | | |
| Fleet Management Solutions | | $ | 91,747 |
| | 64,275 |
| | 43% |
| Dedicated Transportation Solutions | | 15,436 |
| | 15,271 |
| | 1 |
| Supply Chain Solutions | | 27,743 |
| | 26,427 |
| | 5 |
| Eliminations | | (15,222 | ) | | (13,032 | ) | | (17) |
| | | 119,704 |
| | 92,941 |
| | 29 |
| Unallocated Central Support Services | | (15,163 | ) | | (10,775 | ) | | (41) |
| Non-operating pension costs | | (6,866 | ) | | (7,895 | ) | | 13 |
| Restructuring and other charges, net and other items | | (18,880 | ) | | (5,074 | ) | | NM |
| Earnings from continuing operations before income taxes | | $ | 78,795 |
| | 69,196 |
| | 14% |
————————————
| |
(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 segment total revenue to segment operating revenue, as well as the reasons why management believes these measures are important to investors. |
Fleet Management Solutions
FMS total revenue increased 8% to $1.24 billion in the fourth quarter of 2017. FMS operating revenue (a non-GAAP measure excluding fuel) increased 7% in the fourth quarter of 2017 to $1.06 billion. The following table summarizes the components of the change in revenue on a percentage basis versus the prior year.
|
| | | | |
| | | Three months ended December 31, 2017 |
| | | Total | | Operating (1) |
| Organic, including price and volume | | 5% | | 6% |
| Fuel | | 2 | | — |
| Foreign exchange | | 1 | | 1 |
| Total increase | | 8% | | 7% |
————————————
| |
(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. |
ChoiceLease revenue increased 6% to $696 million in the fourth quarter of 2017, reflecting a larger average lease fleet size and higher prices on replacement vehicles. Commercial rental revenue grew 7% in the fourth quarter of 2017 due to increased demand and higher pricing. Fuel services revenue increased 16% to $185 million in the fourth quarter of 2017 due to higher fuel costs passed through to customers.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
FMS EBT increased 43% in the fourth quarter of 2017 to $92 million, reflecting improved used vehicle sales results and higher commercial rental and ChoiceLease performance. Used vehicle sales comparisons primarily reflect prior year inventory valuation adjustments of $21 million. Commercial rental performance improved due to higher pricing and increased utilization, reflecting stronger demand on a smaller fleet due to the fleet right-sizing actions taken earlier in the year. Rental power fleet utilization increased to 81.2% in the fourth quarter of 2017 from 77.3% in the year-earlier period. ChoiceLease results benefited from fleet growth. These items were partially offset by higher compensation-related costs. Additionally, FMS results in the fourth quarter included accelerated depreciation of $9 million in 2017 and $10 million in 2016 to reflect a challenging used vehicle market outlook.
Dedicated Transportation Solutions
DTS total revenue increased 11% in the fourth quarter of 2017 to $284 million and DTS operating revenue (a non-GAAP measure excluding fuel and subcontracted transportation) increased 3% in the fourth quarter of 2017 to $198 million. The following table summarizes the components of the change in revenue on a percentage basis versus the prior year:
|
| | | | |
| | | Three months ended December 31, 2017 |
| | | Total | | Operating (1) |
| Organic, including price and volume | | 9% | | 3% |
| Fuel | | 2 | | — |
| Total increase | | 11% | | 3% |
The growth in DTS total revenue and DTS operating revenue primarily reflects increased volumes. DTS EBT increased 1% from the fourth quarter of the prior year as favorable developments of self-insurance claims from prior years largely offset by higher driver costs due to increased turnover and seasonal volumes at select customer accounts, as well as elevated maintenance costs on certain older model year vehicles.
Supply Chain Solutions
SCS total revenue increased 26% in the fourth quarter of 2017 to $540 million. SCS operating revenue (a non-GAAP measure excluding fuel and subcontracted transportation) increased 16% in the fourth quarter of 2017 to $411 million. The following table summarizes the components of the change in revenue on a percentage basis versus the prior year:
|
| | | | |
| | | Three months ended December 31, 2017 |
| | | Total | | Operating (1) |
| Organic, including price and volume | | 24% | | 15% |
| Fuel | | 1 | | — |
| Foreign exchange | | 1 | | 1 |
| Total increase | | 26% | | 16% |
————————————
| |
(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 and SCS operating revenue grew primarily as a result of new business. SCS EBT increased 5% in the fourth quarter of 2017 to $28 million reflecting the impact of revenue growth, partially offset by lower performance in two customer accounts, although to a lesser extent than in the third quarter of 2017. Additionally, results were negatively impacted by higher overhead spending due to planned investments in information technology and sales.
Central Support Services
Unallocated CSS costs increased 41% in the fourth quarter of 2017 to $15 million primarily due to higher compensation-related costs and professional fees in 2017.
ITEM 7. 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:
| | | | | | | | | | | Years ended December 31, |
| | | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
| | | (In thousands) | | (In thousands) |
| Net cash provided by (used in): | | | | | | | | | | | | |
| Operating activities | | $ | 1,547,986 |
| | 1,601,022 |
| | 1,441,788 |
| | $ | 2,140,539 |
| | $ | 1,717,993 |
| | $ | 1,628,098 |
|
| Investing activities | | | (3,217,193 | ) | | (2,821,459 | ) | | (1,438,676 | ) |
| Financing activities | | (155,115 | ) | | (185,922 | ) | | 731,485 |
| | 1,084,139 |
| | 1,085,515 |
| | (162,055 | ) |
| Investing activities | | (1,366,340 | ) | | (1,405,833 | ) | | (2,161,355 | ) | |
| Effect of exchange rates on cash | | (5,539 | ) | | (9,482 | ) | | 37 |
| | (4,272 | ) | | 4,694 |
| | (5,539 | ) |
| Net change in cash and cash equivalents | | $ | 20,992 |
| | (215 | ) | | 11,955 |
| | $ | 3,213 |
| | $ | (13,257 | ) | | $ | 21,828 |
|
| | | | | | | | |
| | | | Years ended December 31, |
| | | | 2019 | | 2018 | | 2017 |
| Net cash provided by operating activities | | | (In thousands) |
| Earnings (loss) from continuing operations | | | $ | (23,272 | ) | | $ | 286,922 |
| | $ | 720,101 |
|
| Non-cash and other, net | | | 2,178,662 |
| | 1,716,802 |
| | 983,981 |
|
| Collections on sales-type leases | | | 121,201 |
| | 82,803 |
| | 81,015 |
|
| Changes in operating assets and liabilities: | | | | | | | |
| Receivables | | | 27,149 |
| | (193,144 | ) | | (178,861 | ) |
| Accounts payable | | | (26,596 | ) | | 16,869 |
| | 66,149 |
|
| Changes in other assets and liabilities | | | (136,605 | ) | | (192,259 | ) | | (44,287 | ) |
| Cash flows from operating activities from continuing operations | | | $ | 2,140,539 |
| | $ | 1,717,993 |
| | $ | 1,628,098 |
|
Cash provided by operating activities from continuing operations decreased to $1.55 billion in 2017, compared with $1.60 billion in 2016, primarily reflecting the impact of lower comparable earnings. Cash used in financing activities totaled $155 million in 2017, compared with $186 million in 2016, driven by share repurchases and common stock dividends. Cash used in investing activities decreased to $1.37 billion in 2017, compared with $1.41 billion in 2016, primarily due to lower payments for capital expenditures and higher proceeds from operating property and equipment sales, partially offset by lower proceeds from revenue earning equipment sales.2019 versus 2018
Cash provided by operating activities from continuing operations increased to $1.60$2.1 billion in 2016,2019 compared with $1.44$1.7 billion in 2015,2018 reflecting higher cash earnings adjusted for non-cash items, primarily depreciation, andas well as lower working capital improvements, partially offset by higher pension contributions. Theneeds. Our working capital improvements wereneeds are primarily driven by the timing of collections of our receivables and payments of our trade account payments to vendors. Cash usedpayables, as well as other changes in financing activitiesoperating assets and liabilities. The favorable impact in receivables was $186 million in 2016, compared to cash provided from financing activities of $731 million in 2015primarily due to improved collection efforts in our SCS and DTS segments. The unfavorable impact from trade payables was due to timing of payments. In addition, the favorable impact from changes in other assets and liabilities was driven by lower borrowing needs.insurance and income tax payments, partially offset by higher payments related to our pension plans in 2019 and higher bonus payments in 2019. Cash used in investing activities decreasedincreased to $1.41$3.2 billion in 2016,2019 compared with $2.16$2.8 billion in 2015,2018 primarily due to increased capital expenditures for planned vehicle purchases, partially offset by higher proceeds from the sale of revenue-earning equipment and operating property and equipment. Cash provided by financing activities was $1.1 billion in both 2019 and 2018.
2018 versus 2017
Cash provided by operating activities from continuing operations increased to $1.7 billion in 2018 compared with $1.6 billion in 2017 reflecting higher cash earnings offset by higher working capital needs. The unfavorable impact from trade payables was due to timing of payments. In addition, the unfavorable impact from changes in other assets and liabilities was driven by higher tax payments and lower paymentsaccruals for salaries and wages, partially offset by lower pension payments. Cash used in investing activities increased to $2.8 billion in 2018 compared with $1.4 billion in 2017 primarily due to increased capital expenditures. Cash provided by financing activities was $1.1 billion in 2018 compared with cash used in financing activities of $162 million in 2017 due to higher borrowing needs.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
The following table shows the components of our free cash flow:
| | | | | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
| | | (In thousands) | | (In thousands) |
| Net cash provided by operating activities | | $ | 1,547,986 |
| | 1,601,022 |
| | 1,441,788 |
| | $ | 2,140,539 |
| | $ | 1,717,993 |
| | $ | 1,628,098 |
|
Sales of revenue earning equipment (1) | | 376,743 |
| | 414,249 |
| | 423,605 |
| | 465,705 |
| | 379,716 |
| | 376,743 |
|
Sales of operating property and equipment (1) | | 52,257 |
| | 7,051 |
| | 3,891 |
| | 52,276 |
| | 16,606 |
| | 52,257 |
|
Collections on direct finance leases and other (1) | | 73,172 |
| | 76,510 |
| | 70,980 |
| |
Total cash generated (2) | | 2,050,158 |
| | 2,098,832 |
| | 1,940,264 |
| | 2,658,520 |
| | 2,114,315 |
| | 2,057,098 |
|
Purchases of property and revenue earning equipment (1) | | (1,860,436 | ) | | (1,905,157 | ) | | (2,667,978 | ) | | (3,735,174 | ) | | (3,050,409 | ) | | (1,860,436 | ) |
Free cash flow (2) | | $ | 189,722 |
| | 193,675 |
| | (727,714 | ) | | $ | (1,076,654 | ) | | $ | (936,094 | ) | | $ | 196,662 |
|
| | | | | | | | | | | | | |
| Memo: | | | | | | | |
| Net cash (used in) provided by financing activities | | $ | (155,115 | ) | | (185,922 | ) | | 731,485 |
| |
| Net cash used in investing activities | | $ | (1,366,340 | ) | | (1,405,833 | ) | | (2,161,355 | ) | |
———————————
| |
| (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. |
Free cash flow of $190 milliondecreased to $(1.1) billion in 2017 was level with 2019 from $194(936) million in 2016,2018 primarily due to lowerhigher capital expenditures, partially offset by higher cash flows from operations partially offset by lower cash paid for purchases of property and revenue earning equipment in 2017.2019. Free cash flow increaseddecreased to $194(936) million in 20162018 from $(728)$197 million in 20152017 primarily due to lowerhigher capital expenditures in 2016.2018.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
We expect cash provided by operating activities from continuing operations to increasedecrease to approximately $270 million to $1.8$2.1 billion in 2018,2020 due to pre-tax earnings growth adjusted for non-cash items, primarily depreciation. We expect 20182020 free cash flow to decreaseincrease to negative $600approximately $350 million reflecting lower capital spending to fund higher growth and replacement infor the lease and rental vehicle fleets.
Capital expenditures are generally used torepresent the purchase of revenue earning equipment (trucks, tractors and trailers) within our FMS segment. These expenditures primarily support the ChoiceLease and commercial rental product lines. The level of capital required to support the ChoiceLease product line varies based on customer contract signings for replacement vehicles and growth. These contracts are long-term agreements that result in predictable cash flows typically over a three to seven year termyears for trucks and tractors and ten years for trailers. We utilize capital for the purchase of vehicles in our commercial rental product line to replenish and expand the fleet available for shorter-term use by contractual or occasional customers. Operating property and equipment expenditures primarily relate to spending on items such as vehicle maintenance facilities and equipment, computer and telecommunications equipment, investments in technologies, and warehouse facilities and equipment.
The following is a summary of capital expenditures:
| | | | | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
| | | (In thousands) | | (In thousands) |
| Revenue earning equipment: | | | | | | | | | | | | |
| ChoiceLease | | $ | 1,456,758 |
| | 1,547,717 |
| | 2,060,254 |
| | $ | 2,871,043 |
| | $ | 2,206,500 |
| | $ | 1,456,758 |
|
| Commercial rental | | 351,707 |
| | 82,580 |
| | 522,940 |
| | 556,560 |
| | 796,617 |
| | 351,707 |
|
| | | 1,808,465 |
| | 1,630,297 |
| | 2,583,194 |
| | 3,427,603 |
| | 3,003,117 |
| | 1,808,465 |
|
| Operating property and equipment | | 132,752 |
| | 132,603 |
| | 112,918 |
| | 192,820 |
| | 162,154 |
| | 132,752 |
|
Total capital expenditures (1) | | 1,941,217 |
| | 1,762,900 |
| | 2,696,112 |
| | 3,620,423 |
| | 3,165,271 |
| | 1,941,217 |
|
| Changes in accounts payable related to purchases of revenue earning equipment | | (80,781 | ) | | 142,257 |
| | (28,134 | ) | | 114,751 |
| | (114,862 | ) | | (80,781 | ) |
| Cash paid for purchases of property and revenue earning equipment | | $ | 1,860,436 |
| | 1,905,157 |
| | 2,667,978 |
| | $ | (3,735,174 | ) | | $ | (3,050,409 | ) | | $ | (1,860,436 | ) |
_____________
| |
| (1) | Non-cash additions exclude approximately $7$22 million, $1$15 million and $6$23 million in 20172019, 20162018 and 20152017, respectively, in assets held under capitalfinance leases resulting from new or the extension of existing operatingfinance leases and other additions. |
Capital expenditures increased to $1.94$3.6 billion in 2017,2019 reflecting planned higher planned investments to refresh our commercial rental fleet, partially offset by lowerin the ChoiceLease spending.fleet. Capital expenditures decreasedincreased to $3.2 billion in 2016 to $1.76 billion,2018 reflecting lower planned higher investments in the ChoiceLease and commercial rental fleets. We expect capital expenditures to increasedecrease to approximately $2.9$2.1 billion in 2018,2020 primarily due to increased investments to growlower growth in our ChoiceLease fleet,lease and to refresh and expand our commercial rental fleet.vehicle fleets. We expect to fund 20182020 capital expenditures primarily with additional debt financing.
Working Capital
|
| | | | | | | | |
| | | 2017 | | 2016 |
| | | (In thousands) |
| Current assets | | $ | 1,322,282 |
| | $ | 1,101,557 |
|
| Current liabilities | | 2,012,778 |
| | 1,744,069 |
|
| Working capital | | $ | (690,496 | ) | | $ | (642,512 | ) |
Our net working capital was negative $690 million at December 31, 2017, compared with negative $643 million at December 31, 2016. Approximately $826 million of our negative working capital is associated with debt due in the next year. Our global revolving credit facility is used primarily to finance working capital needs. See "Financing and Other Funding Transactions" for further discussion on the adequacy of our funding sources to meet our operating, investing and financing needs.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
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 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 unsecured commercial paper and medium-term notes.
Cash and equivalents totaled $74 million as of December 31, 2019. As of December 31, 2019, approximately $21 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 equivalents held outside the U.S., we may be subject to additional income and 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 bond 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 would meet our liquidity needs by drawing upon contractually committed lending agreements and/or by seeking other funding sources.
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 fixed income 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 December 31, 20172019 were as follows:
|
| | | | | | |
| | Rating Summary | | |
| | | Short-term | | Long-term |
| | Rating | | Outlook | | Rating | | Outlook |
Moody’s Investors ServiceFitch Ratings | | P2F2 | | A- | | Stable | | Baa1 | | Stable (affirmed May 2017) |
| Standard & Poor’s Ratings Services | | A2 | | Stable | | BBB+ | | Stable (affirmed October 2017) |
Fitch Ratings | | F2BBB | | Stable |
| Moody’s Investors Service | | A-P2 | | Baa1 | | Stable (affirmed October 2017) |
| DBRS | | R-1 (Low) | | A (Low) | | Stable |
Cash and equivalents totaled $78 million as of
At December 31, 2017. Approximately $23 million was held outside the U.S. as of December 31, 2017, and is available to fund operations and other growth of our non-U.S. subsidiaries. We have historically reinvested such earnings overseas indefinitely and may continue to reinvest future foreign earnings overseas
indefinitely. Since the 2017 Tax Cut and Jobs Act implements a territorial tax system, whereby certain foreign subsidiary earnings can be repatriated to the U.S. with no federal tax, we are reassessing whether to indefinitely reinvest our overseas earnings. If we decide to repatriate cash and equivalents held outside the U.S., we may be subject to additional U.S. income taxes and foreign withholding taxes. Refer to Note 13, “Income Taxes,” in the Notes to Consolidated Financial Statements for an additional discussion.
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 would meet our liquidity needs by drawing upon contractually committed lending agreements as described below and/or by seeking other funding sources.
At December 31, 20172019, we had the following amounts available to fund operations:
|
| |
| | (In millions) |
| Global revolving credit facility | $577744 |
| Trade receivables program | $175225 |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Refer to Note 15, “Debt,” in the Notes to Consolidated Financial Statements for a discussion of these debt facilities.The following table shows the movements in our debt balance:
|
| | | | | | | |
| | | 2017 | | 2016 |
| | | (In thousands) |
| Debt balance at January 1 | | $ | 5,391,274 |
| | 5,502,627 |
|
| Cash-related changes in debt: | | | | |
| Net change in commercial paper borrowings and revolving credit facilities | | 89,519 |
| | (77,798 | ) |
| Proceeds from issuance of medium-term notes | | 595,785 |
| | 596,283 |
|
| Proceeds from issuance of other debt instruments | | 277,517 |
| | 78,645 |
|
| Retirement of medium-term notes | | (700,000 | ) | | (600,000 | ) |
| Other debt repaid | | (262,577 | ) | | (69,047 | ) |
| Debt issuance costs paid | | (1,738 | ) | | (1,776 | ) |
| | | (1,494 | ) | | (73,693 | ) |
| Non-cash changes in debt: | | | | |
| Fair market value adjustment on notes subject to hedging | | (8,302 | ) | | (4,143 | ) |
| Addition of capital lease obligations | | 7,057 |
| | 1,231 |
|
| Changes in foreign currency exchange rates and other non-cash items | | 21,116 |
| | (34,748 | ) |
| Total changes in debt | | 18,377 |
| | (111,353 | ) |
| Debt balance at December 31 | | $ | 5,409,651 |
| | 5,391,274 |
|
In accordance with our funding philosophy, we attempt to align the aggregate average remaining re-pricing life of our vehicle-related debt with the aggregate average remaining re-pricing life of our vehicle 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 31%17% and 30%28% at December 31, 20172019 and 20162018, respectively.
Refer to Note 14 , respectively."Debt" in the Notes to the Consolidated 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'sOur debt to equity ratios were 191%320% and 263%262% at December 31, 20172019 and 2016,2018, respectively. The debt to equity ratio represents total debt divided by total equity. OurThe increase in our debt to equity ratio decreased as of December 31, 2017, primarilyreflects higher debt and a decrease in our equity balance due to a one-timethe net tax benefit of $586 million related to the 2017 Tax Cut and Jobs Act for the estimated impact of the changeloss in the future tax rates on our deferred tax liabilities as of December 31, 2017.2019.
Off-Balance Sheet Arrangements
Guarantees. Refer to Note 17,15, “Guarantees,” in the Notes to Consolidated Financial Statements for a discussion of our agreements involving guarantees.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Contractual Obligations and Commitments
As part of our ongoing operations, we enter into arrangements that obligate us to make future payments under contracts such as debt agreements, lease agreements and unconditional purchase obligations. The following table summarizes our expected future contractual cash obligations and commitments at December 31, 20172019:
| | | | | 2018 | | 2019-2020 | | 2021-2022 | | Thereafter | | Total | | Total | | 2020 | | 2021-2022 | | 2023-2024 | | Thereafter |
| | | (In thousands) | | (In thousands) |
Debt | | $ | 818,510 |
| | 2,970,078 |
| | 1,416,874 |
| | 190,510 |
| | 5,395,972 |
| | $ | 7,898,484 |
| | $ | 1,322,055 |
| | $ | 2,378,765 |
| | $ | 3,441,759 |
| | $ | 755,905 |
|
| Capital lease obligations | | 7,559 |
| | 9,502 |
| | 3,810 |
| | — |
| | 20,871 |
| |
Total debt, including capital leases (1) | | 826,069 |
| | 2,979,580 |
| | 1,420,684 |
| | 190,510 |
| | 5,416,843 |
| |
| Finance lease obligations | | | 61,155 |
| | 14,663 |
| | 22,390 |
| | 11,541 |
| | 12,561 |
|
| Total debt, including finance leases | | | 7,959,639 |
| | 1,336,718 |
| | 2,401,155 |
| | 3,453,300 |
| | 768,466 |
|
Interest on debt (2) | | 148,150 |
| | 201,785 |
| | 71,900 |
| | 32,570 |
| | 454,405 |
| | 707,704 |
| | 208,165 |
| | 320,308 |
| | 141,846 |
| | 37,385 |
|
Operating leases (3) | | 84,824 |
| | 104,469 |
| | 43,443 |
| | 38,288 |
| | 271,024 |
| | 243,516 |
| | 79,345 |
| | 100,496 |
| | 45,220 |
| | 18,455 |
|
Purchase obligations (4) | | 26,417 |
| | 29,668 |
| | 6,641 |
| | 259 |
| | 62,985 |
| | 533,621 |
| | 486,979 |
| | 34,822 |
| | 10,865 |
| | 955 |
|
| Total contractual cash obligations | | 259,391 |
| | 335,922 |
| | 121,984 |
| | 71,117 |
| | 788,414 |
| | 1,484,841 |
| | 774,489 |
| | 455,626 |
| | 197,931 |
| | 56,795 |
|
| Insurance obligations (primarily self-insurance) | | 110,632 |
| | 114,543 |
| | 49,590 |
| | 78,341 |
| | 353,106 |
| | 438,371 |
| | 152,533 |
| | 141,501 |
| | 61,101 |
| | 83,236 |
|
Other long-term liabilities (5), (6), (7) | | 6,771 |
| | 6,957 |
| | 4,547 |
| | 71,308 |
| | 89,583 |
| | 72,106 |
| | 3,162 |
| | 5,035 |
| | 5,842 |
| | 58,067 |
|
| Total | | $ | 1,202,863 |
| | 3,437,002 |
| | 1,596,805 |
| | 411,276 |
| | 6,647,946 |
| | $ | 9,954,957 |
| | $ | 2,266,902 |
| | $ | 3,003,317 |
| | $ | 3,718,174 |
| | $ | 966,564 |
|
____________
| |
| (1) | Net of unamortized discount and excludes the fair market value adjustment on notes subject to hedging. |
| |
| (2) | Total debt matures at various dates through fiscal year 20252026 and bears interest principally at fixed rates. Interest on variable-rate debt is calculated based on the applicable rate at as of December 31, 2017.2019. Amounts are based on existing debt obligations including capital leases, and do not consider potential refinancing of expiring debt obligations. |
| |
| (3) | Represents future lease payments associated with vehicles, equipment and properties under operating leases. Amounts are based upon the general assumption that the leased asset will remain on lease for the length of time specified by the respective lease agreements. No effect has been given to renewals, cancellations, contingent rentals or future rate changes. |
| |
| (4) | The majority of our purchase obligations are pay-as-you-go transactions made in the ordinary course of business. Purchase obligations include agreements to purchase goods or services that are legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed minimum or variable price provisions; and the approximate timing of the transaction. The most significant item included in the above table are purchase obligations related to vehicles. Purchase orders made in the ordinary course of business that are cancelable are excluded from the above table. Any amounts for which we are liable under purchase orders for goods received are reflected in ourthe Consolidated Balance Sheets as “Accounts payable” and “Accrued expenses and other current liabilities” and are excluded from the above table. |
| |
| (5) | Represents other long-term liability amountsliabilities reflected in our Consolidated Balance Sheets that have known payment streams. The most significant items included were asset retirement obligations and deferred compensation obligations. |
| |
| (6) | The amounts exclude our estimated pension contributions. For 2018,2020, our pension contributions, including our minimum funding requirements as set forth by U.S. and international regulations and legislation (including ERISA), are expected to be $34$37 million. Our minimum funding requirements after 20182020 are dependent on several factors. However, we estimate that the undiscounted required global contributions over the next five years are approximately $296$276 million (pre-tax) (assuming expected long-term rate of return realized and other assumptions remain unchanged). We also have payments due under our other postretirement benefit (OPEB) plans. These plans are not required to be funded in advance, but are pay-as-you-go. See Note 22,20,“Employee Benefit Plans,” in the Notes to Consolidated Financial Statements for further discussion. |
| |
| (7) | The amounts exclude $68$54 million of liabilities associated with uncertain tax positions as we are unable to reasonably estimate the ultimate amount or timing of settlement. See Note 13,12, “Income Taxes,” in the Notes to Consolidated Financial Statements for further discussion. |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Pension Information
We have defined benefit retirement plans which are frozen for non-grandfathered and certain non-union employees in the U.S., Canada and the United Kingdom. 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. During 2017,2019, total global pension contributions were $41$72 million compared with $128$28 million in 2016.2018 and $41 million in 2017. We estimate 20182020 required pension contributions will be $34 million.$37 million. The present value of estimated global pension contributions that would be required over the next 5 years totals approximately $266$254 million (pre-tax). Changes in interest rates and the market value of the securities held by the plans could materially change, positively or negatively, the funded status of the plans and affect the level of pension expense and required contributions in future years. The ultimate amount of contributions is also dependent upon the requirements of applicable laws and regulations. See Note 22,20, “Employee Benefit Plans,” in the Notes to Consolidated Financial Statements for additional information.
Due to the underfunded status of our defined benefit plans, we had an accumulated net pension equity charge (after-tax) of $567$667 million and $627$712 million at as of December 31, 20172019 and 2016,2018, respectively. The improvement in funded status reflects the benefit of asset returns of 15%19% in 2017.2019, partially offset by a decrease in discount rates.
Pension expense totaled $57was $82 million, $30 million, and $57 million in 2019, 2018 and 2017 compared to $61 million in 2016., respectively. The increase in pension expense is primarilywas due to a pension settlement charge of $32 million related to employee benefit settlements from the U.S. pension plan in 2019 and unfavorable asset returns in 2018, partially offset by higher expense for union-administered multi-employer plans.interest rates. We expect 20182020 pension expense to decrease approximately $22$54 million primarily due toas a result of the benefit ofnon-recurring settlement charges in 2019, as well as favorable asset returns in 2017.2019 and a decrease in interest rates. Our 20182020 pension expense estimates are subject to change based upon the completion of the actuarial analysis for all pension plans. See the “Critical Accounting Estimates — Pension Plans” section for further discussion on pension accounting estimates.
During 2017, we completed a transfer of future retiree benefits in our U.S. defined benefit plan to a third-party annuity company. We paid $71 million in connection with this transfer, which included a $66 million reduction in our projected benefit obligation and an annuity premium. We did not record a gain or loss on this transaction as the cost of all settlements during the year, including this transaction, were less than our combined service and interest costs for the year.
We participate in certain U.S. multi-employer pension (MEP) plans that provide defined benefits to employees covered by collective bargaining agreements. At December 31, 2017,2019, approximately 1,100 employees (approximately 3% of total employees) participated in these MEP plans. The annual net pension cost of the MEP plans is equal to the annual contribution determined in accordance with the provisions of negotiated labor contracts. Our current year MEP plan contributions total approximately $10 million.in 2019 was $11 million. Pursuant to current U.S. pension laws, if any MEP plans fail to meet certain minimum funding thresholds, we could be required to make additional MEP plan contributions, until the respective labor agreement expires, of up to 10% of current contractual requirements. Several factors could cause MEP plans not to meet these minimum funding thresholds, including unfavorable investment performance, changes in participant demographics, and increased benefits to participants. The plan administrators and trustees of the MEP plans provide us with the annual funding notice as required by law. This notice sets forth the funded status of the plan as of the beginning of the prior year but does not provide any company-specific information.
Employers participating in MEP plans can elect to withdraw from the plans, contingent upon certain requirements, and be subject to a withdrawal obligation based on, among other factors, the MEP plan’s unfunded vested benefits. U.S. pension regulations provide that an employer can fund its withdrawal obligation in a lump sum or over a time period of up to 20 years based on previous contribution rates. During 2017, we recorded estimated pension settlement charges of $5 million related to our exit from a U.S. multi-employer pension plan. These charges were recorded within "Selling, general and administrative expenses" in our Consolidated Statement of Earnings and are included in the Union-administered plans expense. See Note 22,20, “Employee Benefit Plans,” in the Notes to Consolidated Financial Statements for additional information.
Share Repurchase Programs and Cash Dividends
Refer to Note 18,16, “Share Repurchase Programs,” in the Notes to Consolidated Financial Statements for a discussion on our share repurchase programs.
Cash dividend payments to shareholders of common stock were $116 million in 2019, $112 million in 2018, and $96 million in 2017, $91 million in 2016, and $83 million in 2015.2017. During 2017,2019, we increased our annualized dividend rate 5%4% to $1.84$2.24 per share of common stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Market Risk
In the normal course of business, we are exposed to fluctuations in interest rates, foreign currency exchange rates and fuel prices. We manage these exposures in several ways, including, in certain circumstances, the use of a variety of derivative financial instruments when deemed prudent. We do not enter into leveraged derivative financial transactions or use derivative financial instruments for trading purposes.
Exposure to market risk for changes in interest rates exists for our debt obligations. Our interest rate risk management program objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. A hypothetical 100 basis point10% change in short-term market interest rates would change annual pre-tax earnings by $13 million.approximately $12 million. We manage our exposure to interest rate risk primarily through the proportion of fixed-rate and variable-rate debt we hold in the total debt portfolio. From time to time, we also use interest rate swap agreements to manage our fixed-rate and variable-rate exposure and to better match the repricing of debt instruments to that of our portfolio of assets. See Note 16, “Derivatives,” in the Notes to Consolidated Financial Statements for further discussion on interest rate swap agreements.
At The fair value of derivatives was not material as of December 31, 2017,2019.
At December 31, 2019, we had $3.225.7 billion of fixed-rate debt outstanding (excluding capitalfinance leases and U.S. asset- backed securities) with a weighted-average interest rate of 3%3.18% and a fair value of $3.26$5.6 billion. A hypothetical 10% decrease or increase in the December 31, 20172019 market interest rates would impact the fair value of our fixed-rate debt by approximately $28$47 million at December 31, 2017.2019. Changes in the relative sensitivity of the fair value of our financial instrument portfolio for these theoretical changes in the level of interest rates are primarily driven by changes in our debt maturities, interest rate profile and amount.
At December 31, 2017,2019, we had $1.69$1.4 billion of variable-rate debt, including $825$525 million of fixed-rate debt instruments swapped to LIBOR-based floating-rate debt. Changes in the fair value of the interest rate swaps were offset by changes in the fair value of the debt instruments and no net gain or loss was recognized in earnings. The fair value of our interest rate swap agreements at December 31, 2017 was a net liability of $7 million. The fair value of our variable-rate debt at December 31, 20172019 was $1.69$1.4 billion. A hypothetical 10% increase in market interest rates would have impacted 20172019 pre-tax earnings from continuing operations by approximately $3 million.$3 million.
We are also subject to interest rate risk with respect to our pension and postretirement benefit obligations, as changes in interest rates will effectively increase or decrease our liabilities associated with these benefit plans, which also results in changes to the amount of pension and postretirement benefit expense recognized each period.
Exposure to market risk for changes in foreign currency exchange rates relates primarily to our foreign operations’ buying, selling and financing in currencies other than local currencies and to the carrying value of net investments in foreign subsidiaries. The majority of our transactions are denominated in U.S. dollars. The principal foreign currency exchange rate risks to which we are exposed include the Canadian dollar, British pound sterling and Mexican peso. We manage our exposure to foreign currency exchange rate risk related to our foreign operations’ buying, selling and financing in currencies other than local currencies by naturally offsetting assets and liabilities not denominated in local currencies to the extent possible. A hypothetical uniform 10% strengthening in the value of the dollar relative to all the currencies in which our transactions are denominated would result in a decrease to pre-tax earnings from continuing operationsnot materially impact results of approximately $0.1 million.operations. We also use foreign currency option contracts and forward agreements from time to time to hedge foreign currency transactional exposure. We generally do not hedge the foreign currency exposure related to our net investment in foreign subsidiaries, since we have no near-term intent to repatriate funds from such subsidiaries.
Exposure to market risk for fluctuations in fuel prices relates to a small portion of our service contracts for which the cost of fuel is integral to service delivery and the service contract does not have a mechanism to adjust for increases in fuel prices. At December 31, 20172019, we also had various fuel purchase arrangements in place to ensure delivery of fuel at market rates in the event of fuel shortages. We are exposed to fluctuations in fuel prices in these arrangements since none of the arrangements fix the price of fuel to be purchased. Increases and decreasesChanges in the price of fuel are generally passed on to our customers for which we realize minimal changes in profitability during periods of steady market fuel prices. However, profitability may be positively or negatively impacted by sudden increases or decreases in market fuel prices during a short period of time as customer pricing for fuel services is established based on trailing market fuel costs. We believe the exposure to fuel price fluctuations would not materially impact our results of operations, cash flows or financial position.
ENVIRONMENTAL MATTERS
Refer to Note 23,21, “Environmental Matters,” in the Notes to Consolidated Financial Statements for a discussion surrounding environmental matters.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions. Our significant accounting policies are described in the Notes to Consolidated Financial Statements. Certain of these policies require the application of subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. These estimates and assumptions are based on historical experience, changes in the business environment and other factors that we believe to be reasonable under the circumstances. Different estimates that could have been applied in the current period or changes in the accounting estimates that are reasonably likely can result in a material impact on our financial condition and operating results in the current and future periods. We review the development, selection and disclosure of these critical accounting estimates with Ryder’s Audit Committee on an annual basis.
The following discussion, which should be read in conjunction with the descriptions in the Notes to Consolidated Financial Statements, is furnished for additional insight into certain accounting estimates that we consider to be critical.
Depreciation and Residual Value Guarantees.Estimates. We periodically review and adjust, as appropriate, the estimated residual values and useful lives of revenue earning equipment for the purposes of our FMS business segmentrecording depreciation expense as described in Note 1, “Summary of Significant Accounting Policies — Revenue7, “Revenue Earning Equipment, Operating Property and Equipment, and Depreciation”Net" in the Notes to Consolidated Financial Statements. Reductions in
Our review of the estimated residual values (i.e., the price at which we ultimately expect to dispose of revenue earning equipment) or useful lives will result in an increase in depreciation expense over the life of the equipment. Based on the mix of revenue earning equipment at December 31, 2017, a 10% decline in expected vehicle residual values would increase depreciation expense in 2018 by approximately $126 million.
We review residual values and useful lives of revenue earning equipment on an annual basis or more often if deemed necessary for specific groups of our revenue earning equipment. Reviews are performedis established with a long-term view based on vehicle class, generally subcategories of trucks, tractors and trailers by weight and usage. Our annual review is established with ausage, as well as other factors. We refer to this long-term view consideringas "policy depreciation." These other factors include, but are not limited to, historical market price changes,prices, current and expected future market price trends,prices, expected lives of vehicles, and expected sales of used vehicles in the wholesale and retail markets. Reductions in estimated residual values or useful lives will result in an increase in depreciation expense over the remaining life of vehicles includedthe equipment. Factors that could cause actual results to materially differ from estimates include, but are not limited to, changes in the fleettechnology; changes in supply and extent of alternative uses for leased vehicles (e.g., rental fleet,demand; competitor pricing; regulatory requirements; driver shortages, requirements and DTSpreferences; and SCS applications).changes in underlying assumption factors. As a result, future depreciation expense rates are subject to change based upon changes in these factors. While we believe that the carrying values and estimated sales proceeds for revenue earning equipment are appropriate, there can be no assurance that deterioration in economic conditions or adverse changes to expectations of future sales proceeds will not occur, resulting in lower gains or losses on sales. We have disciplines related to the management and maintenance of our vehicles designed to manage the risk associated with the residual values of our revenue earning equipment.
At the end of eachthe second quarter of 2019, we began to experience softening in used vehicle market conditions, which intensified during the third quarter of 2019 and we now expect to continue throughout 2020. In addition, our inventory of used vehicles that is expected to be made available for sale was higher than expected, which has and will impact the volume of used vehicle sales expected to be sold through our wholesale channels. Due to these dynamics and our updated outlook, we concluded that our residual value estimates likely exceeded the expected future values that would be realized upon the sale of power vehicles in our fleet. As a result, we changed the estimates of our residual values for our revenue earning equipment in the third quarter of 2019 to reflect more recent multi-year trends and our outlook for the expected used vehicle market. In 2019, the impact to policy depreciation and accelerated depreciation related to the change in the residual value estimates that occurred in the third quarter of 2019 was $104 million and $193 million, respectively.
Each year, we complete our annuala review of the estimated residual values and useful lives of revenue earning equipment. Based on the results of our analysis, we adjust the estimated residual values and useful lives of certain classes of our revenue earning equipment effective January 1 of each year. The approximate (unfavorable) / favorableunfavorable incremental impact on the annual depreciation expense resulting from the residual value and useful life reviews iswas as follows:
|
| | | | |
| 2018 | | 2017 | | 2016 |
| ($40 million) | | ($4 million) | | $35 million |
|
| | | | | |
| | 2020 | | 2019 | | 2018 |
| Policy depreciation | $205 million | | $134 million | | $40 million |
In addition, we also monitor market trends throughoutThe impact of policy depreciation in 2019 included the year and assessvehicle residual values of vehicles expected to be soldestimate change that occurred in the near term and may adjust residual values forthird quarter of 2019, as well as $30 million of depreciation expense related to the vehicles.
Factors that could cause actual results to materially differ from the estimated results include significant changes in the used equipment market brought on by unforeseen changes in technology innovations and any resulting changes in the useful lives of used equipment.
Depreciation expense was $1.26 billion, $1.19 billion and $1.12 billion in 2017, 2016 and 2015, respectively. Depreciation expense relates primarily to FMS revenue earning equipment. Depreciation expense increased 6% in 2017, driven by a larger average full service lease fleet and acceleratedpolicy depreciation on vehicles expected to be made available for sale through June 2019 of $21 million, partially offset by a smaller average commercial rental fleet. Depreciation expense increased 6% in 2016, driven by a larger average full service lease fleet and accelerated depreciation of $10 million. The increase in 2016 was partially offset by $35 million from increases in residual values.estimate change effective January 1, 2019.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
In addition, we also monitor market trends throughout the year and assess estimates of residual values of vehicles expected to be made available for sale in the near-term (generally 12 to 24 months) and may adjust residual values for these vehicles to reflect current market rates, which we refer to as “accelerated depreciation.” Following the completion of our review in the third quarter of 2019, the near-term forecast for realized residual values on used vehicle sales was below our estimates of residual value as discussed above. As a result, we adjusted the estimated residual values for these vehicles and increased accelerated depreciation expense for these vehicles beginning in the third quarter of 2019. The approximate unfavorable incremental impact on annual depreciation expense resulting from accelerated depreciation was as follows:
|
| | | | | |
| | 2020 | | 2019 | | 2018 |
| Accelerated depreciation | $70 million | | $223 million | | $39 million |
Depreciation expense was $1.9 billion, $1.4 billion and $1.3 billion in 2019, 2018 and 2017, respectively. Depreciation expense relates primarily to FMS revenue earning equipment. Depreciation expense increased in 2019 driven by the change in estimated residual values in the third quarter of 2019 as discussed above. Depreciation expense increased in 2018 driven by larger average lease and commercial rental fleets and accelerated depreciation on vehicles expected to be made available for sale through June 2020 of $9 million.
The impact of the estimate change in 2019 as a percentage of our original vehicle investment (cost) of our revenue earning equipment was approximately 5% at December 31, 2019.
Based on our fleet of revenue earning equipment as of December 31, 2019, a hypothetical additional 10% reduction in estimated residual values used for policy depreciation would increase depreciation expense in 2020 by approximately $111 million and would increase depreciation expense over the remaining life of these vehicles beyond 2020 by approximately $222 million.
Revenue Recognition. We generate revenue primarily through contracts with customers to lease, rent and maintain revenue earning equipment and to provide logistics management and dedicated transportation services. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectibility of consideration is probable. We recognize revenue upon the transfer of control of promised products and services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We generally recognize revenue over time as we perform because of continuous transfer of control to our customers.
We offer a full service lease as well as a lease with more flexible maintenance options under our ChoiceLease product line in our FMS business segment, which are marketed, priced and managed as bundled products, that include the equipment lease, maintenance and other related services. We do not offer a stand-alone lease of new vehicles. Our ChoiceLease product line includes the lease of a vehicle (lease component) and maintenance and other services (non-lease component). Contract consideration is allocated between the lease and non-lease components based on management's best estimate of the relative stand-alone selling price of each component. Allocating consideration between the lease and maintenance components in our ChoiceLease product requires significant judgment. We do not sell the components of our ChoiceLease product offering on a stand-alone basis, therefore significant judgment is required to determine the stand-alone selling prices of the lease and maintenance components in order to allocate the consideration on a relative stand-alone selling price basis.
For the lease component, we estimate the stand-alone selling price using the projected cash outflows related to the underlying leased vehicle, net of the estimated disposal proceeds, and a certain targeted return considering the weighted average cost of capital. For the non-lease component of the contract, we estimate the stand-alone selling 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 the 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.
We recognize maintenance revenue using an input method, consistent with the estimated pattern of the costs to maintain the underlying vehicles. This generally results in the recognition of a contract liability for the portion of the customer's bill allocated to the maintenance service component of the agreement. The non-lease revenue component for maintenance included in lease & related maintenance and rental revenues was $950 million, $909 million and $832 million in 2019, 2018 and 2017, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
The stand-alone price for both the lease and non-lease components could vary in the future based on both external market conditions and our pricing strategies as a result of the market conditions.
Pension Plans. We apply actuarial methods to determine the annual net periodic pension expense and pension plan liabilities on an annual basis, or on an interim basis if there is an event requiring remeasurement. Each December, we review actual experience compared with the assumptions used and make adjustments to our assumptions, if warranted. In determining our annual estimate of periodic pension cost, we are required to make an evaluation of critical factors such as discount rate, expected long-term rate of return on assets, expected increase in compensation levels, retirement rate and mortality. Discount rates are based upon a duration analysis of expected benefit payments and the equivalent average yield for high quality corporate fixed income investments as of our December 31 annual measurement date. In order to estimate the discount rate relevant to our plan, we use models that match projected benefits payments of our primary U.S. plan to coupons and maturities from a hypothetical portfolio of high quality corporate bonds. Long-term rate of return assumptions are based on actuariala review of our asset allocation strategy and long-term expected asset returns. Investment management and other fees paid using plan assets are factored into the determination of asset return assumptions.
Assumptions as to mortality of the participants in our pension plan is a key estimate in measuring the expected payments participants may receive over their lifetime, and therefore the amount of expense we will recognize. We update our mortality assumptions as deemed necessary by taking into consideration relevant actuarial studies as they become available as well as reassessing our own historical experience.
As part of our strategy to manage future pension costs and net funded status volatility, we regularly assess our pension investment strategy. Our U.S. pension investment policy and strategy seek to reduce the effects of future volatility on the fair value of our pension assets relative to our pension liabilities by increasing our allocation of high quality, longer-term fixed income securities and reducing our allocation of equity investments as the funded status of the plan improves. The composition of our pension assets was 52%45% equity securities and alternative assets and 48%55% debt securities and other investments atas of December 31, 2017.2019. We continually evaluate our mix of investments between equity and fixed income securities and adjust the composition of our pension assets when appropriate. In 2017,2020, we adjusted our long-term expected rate of return assumption for our primary U.S. plan to 5.40%5.10% from 5.85%5.40% based on our expected asset mix. The expected rate of return assumption for the fixed income portion of our portfolio mirrors the discount rate in order to align the expected return on fixed income securities with the movement in the pension liability under our strategy.
Accounting guidance applicable to pension plans does not require immediate recognition of the effects of a deviation between these assumptions and actual experience or the revision of an estimate. This approach allows the favorable and unfavorable effects that fall within an acceptable range to be netted and included in “Accumulated other comprehensive loss.” We had a pre-tax accumulated actuarial loss of $878$870 million and $961$930 million at the endas of 2017December 31, 2019 and 2016,2018, respectively. To the extent the amount of cumulative actuarial gains and losses exceed 10% of the greater of the benefit obligation or plan assets, the excess amount is amortized over the average remaining life expectancy of active participants or the remaining life expectancy of inactive participants if all or almost all of a plan’s participants are inactive. TheAs of December 31, 2019, the amount of the actuarial loss subject to amortization in 20182020 and future years will be $649 million.is $637 million. We expect to recognize approximately $29$32 million of the net actuarial loss as a component of pension expense in 20182020. The effect on years beyond 20182020 will depend substantially upon the actual experience of our plans.plans in future years.
Disclosure of the significant assumptions used in arriving at the 20172019 net pension expense is presented in Note 22,20, “Employee Benefit Plans,” in the Notes to Consolidated Financial Statements. A sensitivity analysis of2017 net pension expense to changes in key underlying assumptions for our primary plan, the U.S. pension plan, is presented below.below:
|
| | | | | | | | | |
| | | Assumed Rate | | Change | | Impact on 2018 Net
Pension Expense | | Effect on
December 31, 2017
Projected Benefit Obligation |
| Expected long-term rate of return on assets | | 5.40 | % | | +/- 0.25 | | +/- $3.0 million | | N/A |
| Discount rate increase | | 3.70 | % | | + 0.25 | | + $4.0 million | | - $52 million |
| Discount rate decrease | | 3.70 | % | | - 0.25 | | - $4.0 million | | + $52 million |
|
| | | | | | | | |
| | Assumed Rate | | Change | | Impact on 2020 Net Pension Expense | | Effect on December 31, 2019 Projected Benefit Obligation |
| Expected long-term rate of return on assets | | 5.10% | | +/- 0.25 | | +/- $3.5 million | | N/A |
| Discount rate | | 3.30% | | +/- 0.25 | | N/M | | +/- $54 million |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Self-Insurance Accruals. Self-insurance accruals were $349$411 million and $337$358 million as of December 31, 20172019 and 2016,2018, respectively. The majority of our self-insurance relates to vehicle liability and workers’ compensation. We use a variety of statistical and actuarial methods that are widely used and accepted in the insurance industry to estimate amounts for claims that have been reported but not paid and claims incurred but not reported. In applying these methods and assessing their results, we consider such factors as frequency and severity of claims, claim development and payment patterns, and changes in the nature of our business, among other factors. Such factors are analyzed for each of our business segments. Our estimates may be impacted by such factors as increases in the market price for medical services, unpredictability of the size of jury awards and limitations inherent in the estimation process. During 2017, we recognized a $9 million benefit from the development of estimated prior years’ self-insured loss reserves. For 20162019, 2018, and 2015,2017, we recognized a charge of $9$18 million, a charge of $1 million, and $4a benefit of $9 million, respectively, from the development of estimated prior years’ self-insured loss reserves. Based on self-insurance accruals at December 31, 2017,2019, a 5% adverse change in actuarial claim loss estimates would increase operating expense in 20182020 by approximately $16 million.$19 million.
Goodwill Impairment. We assess goodwill for impairment, as described in Note 1, “Summary of Significant Accounting Policies — Goodwill and Other Intangible Assets,” in the Notes to Consolidated Financial Statements, on an annual basis or more often if deemed necessary. At As of December 31, 2017,2019, total goodwill totaled $396 million.was $475 million. To determine whether goodwill impairment indicators exist,is impaired, we are required to assess the fair value of theeach reporting unit and compare it to theits carrying value. A reporting unit is a component of an operating segment for which discrete financial information is available and management regularly reviews its operating performance.
We assess goodwill for impairment on October 1st of each year or more often if deemed necessary. In evaluating goodwill for impairment, we have the option to first assess qualitative factors to determine whether further impairment testing is necessary.
We have historically performednecessary, such as macroeconomic conditions, changes in our industry and the annual impairment testmarkets in which we operate, and our market capitalization as of April 1 for all ofwell as our reporting units. However, duringunits' historical and expected future financial performance. If we conclude that it is more likely than not that a reporting unit's fair value is less than its carrying value or we bypass the three months ended December 31, 2017,optional qualitative assessment, recoverability is assessed by comparing the fair value of the reporting unit with its carrying amount. If a reporting unit's carrying value exceeds its fair value, we elected to change our annual impairment assessment date from April 1 to October 1 for all of our reporting units. We believe this change, which represents a change in method of applying an accounting principle, is preferable under our circumstances. The change was made to align the annualwill measure any goodwill impairment test date with our strategic and business plan time lines andlosses as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to reduceexceed the risktotal amount of goodwill allocated to that an interim impairment triggering event might occur between the annual goodwill impairment test date and the year-end balance sheet date. This change in assessment date required us to perform another impairment review. The following summarized the nature of our reviews:
|
| | | | | | | | | | | | |
| | | December 31, 2017 |
| | April 1, 2017 | | October 1, 2017 |
| Reporting unit: | | Goodwill | | Quantitative | | Qualitative | | Quantitative | | Qualitative |
| | | (In millions) | | | | | | | | |
| FMS North America | | $ | 211.7 |
| | X | | | | | | X |
| FMS Europe | | 15.1 |
| | X | | | | X | | |
| DTS | | 40.8 |
| | | | X | | | | X |
| SCS U.S. | | 121.8 |
| | | | X | | | | X |
| SCS Canada | | 6.1 |
| | | | X | | | | X |
| Total | | $ | 395.5 |
| | | | | | | | |
For quantitative tests, we estimated the fair value of the reporting units using a discounted cash flow model. The principal assumptions used in the discounted cash flow model were projected operating results, weighted-average costcombination of capital,both an income and terminal value. Based onmarket approach. We perform our quantitative analysis,impairment test with the assistance of a third-party specialist. Under the market approach, we determineduse a selection of comparable publicly-traded companies that correspond to the reporting unit to derive a market-based multiple. Under the income approach, the fair value of the reporting unit is estimated based on the discounted present value of the projected future cash flows. Rates used to discount cash flows are dependent upon interest rates and the cost of capital based on our industry and capital structure, adjusted for equity and size risk premiums based on market capitalization. Estimates of future cash flows are dependent on our knowledge and experience about past and current events and significant judgments and assumptions about conditions we expect to exist, including revenue growth rates, margins, long-term growth rates, capital requirements, proceeds from the sale of used vehicles, the ability to utilize our tax net operating losses, and the discount rate. Our estimates of cash flows are also based on historical and future operating performance, economic conditions and actions we expect to take. In addition to these factors, our SCS and DTS reporting units exceeded theirare dependent on several key customers or industry sectors. The loss of a key customer may have a significant impact to our SCS or DTS reporting units, causing us to assess whether or not the event resulted in a goodwill impairment loss.
In making our assessments of fair value, we rely on our knowledge and experience about past and current events and assumptions about conditions we expect to exist in the future. These assumptions are based on a number of factors, including future operating performance, economic conditions, actions we expect to take and present value techniques. There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of goodwill impairment. It is possible that assumptions underlying the impairment analysis will change in such a manner that impairment in value may occur in the future. We conduct additional sensitivity analyses to assess the risk for potential impairment based upon changes in the key assumptions in our goodwill valuation test, including long-term growth rates and discount rates.
In the third quarter of 2019, we performed an interim impairment test of our FMS North America reporting unit (“FMS NA”) as a result of the decline in market conditions and our updated outlook primarily in the used vehicle market, which negatively affects our forecasted cash flows from the sale of used vehicles. Based on our analysis, we determined that FMS NA goodwill was not impaired as of September 30, 2019. However, the fair value of FMS NA was not substantially in excess of its carrying values resulting in no impairment to goodwill at both test dates. Weamount. The estimated the fair value of the FMS EuropeNA reporting unit exceeded its carrying value by approximately 25%5%. Given this level
As a result of excess fair value, ina revised forecast and outlook for the event the financial performance of FMS Europe does not meet our expectations during 2018, we may be required to perform an interim impairment analysis prior to our next annual test, and based on the outcome of that analysis, could be required to take a non-cash impairment charge. As of October 1, 2017, there was $15 million of goodwill recorded related to FMS Europe.
For qualitative tests, we considered individual factors suchNA reporting unit as macroeconomic conditions, changes in our industry, and the markets in which we operate, as well as our historical and expected future financial performance. Examples of factors we considered included the results of our most recent impairment tests, declines in our financial performance, a lack of significant changes in our competitive landscape, changes in our stock price as compared to a relatively stable carrying value since our most recent impairment tests and improvements in macroeconomic conditions since our most recent impairment test. After performing the qualitative assessments, we concluded it is more likely than not that fair values are greater than carrying values and no additional testing was performed.
As of December 31, 2017, there have been no events or changes2019, we performed an additional impairment test. Based on our analysis, we determined that FMS NA goodwill was not impaired as of December 31, 2019. However, the fair value of FMS NA was not substantially in circumstances that indicate that it is more likely than not that a goodwill impairment has occurred sinceexcess of its carrying amount. The estimated fair value of the October 1, 2017 assessment date.FMS NA reporting unit exceeded its carrying value by approximately 15% as of December 31, 2019.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
The increase in the estimated fair value of FMS NA in excess of its carrying value as compared to September 30, 2019 is due to improved estimated future cash flows from management actions which moderate future ChoiceLease growth assumptions, lower expected future capital expenditures and improve future profit margins. As of December 31, 2019, there was $244 million of goodwill recorded related to FMS NA.
As the fair value is not substantially in excess of its carrying amount, in the event the financial performance of FMS NA does not meet our expectations in the future; we experience future prolonged market downturns, including in the used vehicle market or a sustained decline in our stock price; or other negative revisions to key assumptions, we may be required to perform additional impairment analyses and could be required to recognize a non-cash goodwill impairment charge. Subsequent to December 31, 2019, we experienced a decline in our market capitalization and if this decline continues for a sustained period of time, we may also be required to perform additional impairment analyses and could be required to recognize a non-cash goodwill impairment charge.
On October 1, 2019, we completed our annual goodwill impairment test for our SCS and DTS related reporting units and determined there was no impairments.
Income Taxes. Our overall tax position is complex and requires careful analysis by management to estimate the expected realization of income tax assets and liabilities.
Tax regulations can require items to be included in the tax return at different times than the items are reflected in the financial statements. As a result, the effective tax rate reflected in the financial statements iscan be different than that reported in the tax return. Some of these differences are permanent, such as expenses that are not deductible on the tax return, and some are timing differences, such as depreciation expense. Timing differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in the tax return in future years, for which we have already recognized the tax benefit in the financial statements. Deferred tax assets were $448$1.0 billion and $799 million and $809 million at as of December 31, 20172019 and 20162018, respectively. The reduction in deferred tax assets is primarily due to the revaluation required as part of the adoption of tax reform in the fourth quarter of 2017. We recognize a valuation allowance for deferred tax assets to reduce such assets to amounts expected to be realized. At As of December 31, 20172019 and 2016,2018, the deferred tax valuation allowance, principally attributed to foreign tax loss carryforwards, in the SCS business segment, was $19$18 million and $16$16 million,, respectively. In determining the required level of valuation allowance, we consider whether it is more likely than not that all or some portion of deferred tax assets will not be realized. This assessment is based on management’s expectations as to whether sufficient taxable income of an appropriate character will be realized within tax carryback and carryforward periods. Our assessment involves estimates and assumptions about matters that are inherently uncertain, and unanticipated events or circumstances could cause actual results to differ from these estimates. Should we change our estimate of the amount of deferred tax assets that we would be able to realize, an adjustment to the valuation allowance would result in an increase or decrease to the provision for income taxes in the period such a change in estimate was made.
As part of our calculation of the provision for income taxes, we determine whether the benefits of our tax positions are at least more likely than not of being sustained upon audit based on the technical merits of the tax position. We accrue the largest amount of the benefit that has a cumulative probability of greater than 50% of being sustained. These accruals require management to make estimates and judgments with respect to the ultimate outcome of a tax audit. Actual results could vary materially from these estimates. We adjust these reserves, including any impact on the related interest and penalties, in light of changing facts and circumstances, such as the progress of a tax audit.
A number of years may elapse before a particular matter for which we have established a reserve is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction. The tax benefit that has been previously reserved because of a failure to meet the “more likely than not” recognition threshold would be recognized in our income tax expense in the first interim period when the uncertainty is resolved under any one of the following conditions: (1) the tax position has been determined to be “more likely than not” of being sustained, (2) the tax position, amount and/or timing is ultimately settled through negotiation or litigation, or (3) the statutestatutes of limitations for the tax position has expired. Settlement of any particular issue would usually require the use of cash. See Note 13,12, “Income Taxes,” in the Notes to Consolidated Financial Statements for further discussion of the status of tax audits and uncertain tax positions.discussion.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2, “Recent Accounting Pronouncements,” in the Notes to Consolidated Financial Statements for a discussion of recent accounting pronouncements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
NON-GAAP AND SEGMENT FINANCIAL MEASURES
Non-GAAP Financial Measures. This Annual Report on Form 10-K includes information extracted from consolidated financial information that is not required by generally accepted accounting principles in the United States of America (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-K: |
| |
| Non-GAAP Financial Measure | Comparable GAAP Measure |
| Operating Revenue Measures: | |
| Operating Revenue | Total Revenue |
| FMS Operating Revenue | FMS Total Revenue |
| SCS Operating Revenue | SCS 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 |
| SCS EBT as a % of SCS Operating Revenue | SCS EBT as a % of SCS 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 RevenueComparable Earnings Measures: |
Comparable Earnings Measures: | |
Comparable Earnings(Loss) Before Income Tax | Earnings (Loss) Before Income Tax |
Comparable Earnings (Loss)
| Earnings (Loss) from Continuing Operations
|
| Comparable EPS | EPS from Continuing Operations |
| Comparable Tax Rate | Effective Tax Rate from Continuing Operations |
Adjusted Return on AverageEquity (ROE) | Not Applicable. However, non-GAAP elements of the calculation have been reconciled to the corresponding GAAP measures. A numerical reconciliation of net earnings to adjusted net earnings and average shareholders' equity to adjusted average equity is provided in the following reconciliations. |
| Adjusted Return on Capital (ROC) | Not Applicable. However, the non-GAAP elements of the calculation have been reconciled to the corresponding GAAP measures. A numerical reconciliation of net earnings to adjusted net earnings and average total debt and average shareholder'sshareholders' equity to adjusted average total capital is provided on page 63.in the following reconciliations. |
| Cash Flow Measures: | |
| Total Cash Generated and Free Cash Flow | Cash Provided by Operating Activities |
ITEM 7. 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 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
SCS Operating Revenue
DTS Operating Revenue
SCS Operating Revenue
FMS EBT as a % of FMS Operating Revenue
SCS EBT as a % of SCS 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, DTSSCS and SCS), respectively,DTS) 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, DTSSCS EBT and SCSDTS EBT, our primary measures of segment performance, are not non-GAAP measures.
Fuel: We exclude FMS, DTSSCS and SCSDTS 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 DTSSCS and SCSDTS 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 earningsEarnings (Loss) before income taxIncome Taxes (EBT)
Comparable Earnings (Loss)
Comparable earnings (loss) per diluted common share (EPS)
Comparable EarningsTax Rate
Adjusted Return on AverageEquity (ROE)
Adjusted Return on Capital (ROC) | 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
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.costs, as well as a settlement or curtailment of a plan. 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 Impacting Comparability: Our comparable and adjusted earnings measures also exclude other significant items that are not representative of our business operations as detailed in the reconciliation table below page 59.below. 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.
Adjusted ROC:ROE: Adjusted ROE is defined as adjusted net earnings divided by adjusted average shareholders' equity and represents the rate of return on shareholders' investment. Other items impacting comparability described above are excluded, as applicable, from the calculation of net earnings and average shareholders' equity. We use adjusted ROE as an internal measure of how effectively we use the owned capital invested in our operations.
Adjusted ROC: Adjusted ROC is defined as adjusted net earnings divided by average total capital and represents the rate of return generated by the capital deployed in our business. The adjustments represent the comparableOther items impacting comparability described above which are excluded, as applicable, from the calculation of net earnings and average shareholders' equity (a component of average total capital).
We.We use adjusted ROC as an internal measure of how effectively we use the capital invested (borrowed or owned) in our operations.
|
| |
ITEM 7. 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, and (3) net cash provided by the sale of operating property and equipment, (4) collections on direct finance leases and (5)(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, and (3) net cash provided by the sale of operating property and equipment, (4) collections on direct finance leases and (5)(4) other cash inflows from investing activities, less (6)(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.
|
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
The following table provides a reconciliation of GAAP earnings (loss) before taxes (EBT), earnings (loss), and earnings (loss) per diluted share (EPS)(Diluted EPS) from continuing operations to comparable EBT, comparable earnings and comparable EPS from continuing
operations for the years ended December 31, 2017, 2016, 2015, 2014 and 2013. operations. 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: |
| | | | | | | | | | | | | | | | |
| | | Continuing Operations |
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | | (Dollars in thousands, except per share amounts) |
| EBT | | $ | 313,786 |
| | 406,381 |
| | 469,215 |
| | 338,267 |
| | 369,015 |
|
| Non-operating pension costs | | 27,741 |
| | 29,943 |
| | 17,797 |
| | 5,521 |
| | 22,236 |
|
Tax reform related adjustments, net (1) | | 23,278 |
| | — |
| | — |
| | — |
| | — |
|
Restructuring charges and fees, net (2) | | 21,405 |
| | 5,074 |
| | 18,068 |
| | 2,787 |
| | (469 | ) |
| Pension lump sum settlement expense | | — |
| | — |
| | — |
| | 97,231 |
| | — |
|
Pension-related adjustments (3) | | 5,454 |
| | 7,650 |
| | (509 | ) | | 12,564 |
| | 2,820 |
|
Operating tax adjustment (1) | | 2,205 |
| | — |
| | — |
| | — |
| | — |
|
Gain on sale of property (1) | | (24,122 | ) | | — |
| | — |
| | — |
| | — |
|
| Acquisition-related tax adjustment | | — |
| | — |
| | — |
| | 1,808 |
| | — |
|
| Acquisition transaction costs | | — |
| | — |
| | — |
| | 566 |
| | — |
|
| Superstorm Sandy vehicle-related recoveries | | — |
| | — |
| | — |
| | — |
| | (600 | ) |
| Foreign currency translation benefit | | — |
| | — |
| | — |
| | — |
| | (1,904 | ) |
| Comparable EBT | | $ | 369,747 |
| | 449,048 |
| | 504,571 |
| | 458,744 |
| | 391,098 |
|
| | | | | | | | | | | |
| Earnings | | $ | 791,015 |
| | 264,640 |
| | 305,989 |
| | 220,225 |
| | 243,275 |
|
| Non-operating pension costs | | 16,034 |
| | 17,518 |
| | 10,136 |
| | 2,822 |
| | 13,046 |
|
Tax reform related adjustments, net (1), (4) | | (571,666 | ) | | — |
| | — |
| | — |
| | — |
|
Restructuring charges and fees, net (2) | | 13,371 |
| | 3,513 |
| | 12,782 |
| | 1,800 |
| | (360 | ) |
| Pension lump sum settlement expense | | — |
| | — |
| | — |
| | 61,333 |
| | — |
|
Pension-related adjustments (3) | | 3,303 |
| | 4,817 |
| | (309 | ) | | 7,623 |
| | 1,711 |
|
Operating tax adjustment (1) | | 1,677 |
| | — |
| | — |
| | — |
| | — |
|
Gain on sale of property (1) | | (14,769 | ) | | — |
| | — |
| | — |
| | — |
|
| Acquisition-related tax adjustment | | — |
| | — |
| | — |
| | 1,808 |
| | — |
|
| Acquisition transaction costs | | — |
| | — |
| | — |
| | 444 |
| | — |
|
Tax law changes (4) | | 1,844 |
| | — |
| | (2,113 | ) | | (1,776 | ) | | — |
|
| Superstorm Sandy vehicle-related recoveries | | — |
| | — |
| | — |
| | — |
| | (374 | ) |
| Foreign currency translation benefit | | — |
| | — |
| | — |
| | — |
| | (1,904 | ) |
Comparable Earnings(5) | | $ | 240,809 |
| | 290,488 |
| | 326,485 |
| | 294,279 |
| | 255,394 |
|
| | | | | | | | | | | |
| Diluted EPS | | $ | 14.87 |
| | 4.94 |
| | 5.73 |
| | 4.14 |
| | 4.63 |
|
| Non-operating pension costs | | 0.31 |
| | 0.33 |
| | 0.19 |
| | 0.05 |
| | 0.25 |
|
Tax reform related adjustments, net (1), (4) | | (10.75 | ) | | — |
| | — |
| | — |
| | — |
|
Restructuring charges and fees, net (2) | | 0.25 |
| | 0.06 |
| | 0.23 |
| | 0.03 |
| | (0.01 | ) |
| Pension lump sum settlement expense | | — |
| | — |
| | — |
| | 1.16 |
| | — |
|
Pension-related adjustments (3) | | 0.06 |
| | 0.09 |
| | (0.01 | ) | | 0.14 |
| | 0.03 |
|
Operating tax adjustment (1) | | 0.03 |
| | — |
| | — |
| | — |
| | — |
|
Gain on sale of property (1) | | (0.27 | ) | | — |
| | — |
| | — |
| | — |
|
| Acquisition-related tax adjustment | | — |
| | — |
| | — |
| | 0.03 |
| | — |
|
| Acquisition transaction costs | | — |
| | — |
| | — |
| | 0.01 |
| | — |
|
Tax law changes (4) | | 0.03 |
| | — |
| | (0.04 | ) | | (0.03 | ) | | — |
|
| Superstorm Sandy vehicle-related recoveries | | — |
| | — |
| | — |
| | — |
| | (0.01 | ) |
| Foreign currency translation benefit | | — |
| | — |
| | — |
| | — |
| | (0.04 | ) |
Comparable EPS (5) | | $ | 4.53 |
| | 5.42 |
| | 6.10 |
| | 5.53 |
| | 4.85 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Continuing Operations |
| | | Years ended December 31, |
| | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | | (In thousands, except per share amounts) |
| EBT | | $ | (42,271 | ) | | $ | 389,469 |
| | $ | 296,436 |
| | $ | 407,256 |
| | $ | 469,215 |
|
Non-operating pension costs (1) | | 60,406 |
| | 7,541 |
| | 27,741 |
| | 29,943 |
| | 17,797 |
|
Restructuring and other, net (2) | | 35,308 |
| | 5,597 |
| | 17,265 |
| | 5,074 |
| | 18,068 |
|
ERP implementation costs (2) | | 21,260 |
| | 742 |
| | — |
| | — |
| | — |
|
Goodwill impairment (3) | | — |
| | 15,513 |
| | — |
| | — |
| | — |
|
Tax reform-related and other tax adjustments, net (4), (5) | | — |
| | — |
| | 23,278 |
| | — |
| | — |
|
Pension-related adjustments (1) | | — |
| | — |
| | 5,454 |
| | 7,650 |
| | (509 | ) |
Operating tax adjustment (4) | | — |
| | — |
| | 2,205 |
| | — |
| | — |
|
Gain on sale of property (6) | | (18,614 | ) | | — |
| | (24,122 | ) | | — |
| | — |
|
| Comparable EBT | | $ | 56,089 |
| | $ | 418,862 |
| | $ | 348,257 |
| | $ | 449,923 |
| | $ | 504,571 |
|
| | | | | | | | | | | |
| Earnings (loss) | | $ | (23,272 | ) | | $ | 286,922 |
| | $ | 720,101 |
| | $ | 265,232 |
| | $ | 305,989 |
|
Non-operating pension costs (1) | | 44,852 |
| | 4,685 |
| | 16,034 |
| | 17,518 |
| | 10,136 |
|
Restructuring and other, net (2) | | 26,532 |
| | 4,475 |
| | 9,231 |
| | 3,513 |
| | 12,782 |
|
ERP implementation costs (2) | | 15,779 |
| | 550 |
| | — |
| | — |
| | — |
|
Goodwill impairment (3) | | — |
| | 15,513 |
| | — |
| | — |
| | — |
|
Tax reform-related and other tax adjustments, net (4), (5) | | 3,508 |
| | 10,038 |
| | (512,234 | ) | | — |
| | — |
|
Uncertain tax position (5) | | — |
| | (4,382 | ) | | — |
| | — |
| | — |
|
Pension-related adjustments (1) | | — |
| | — |
| | 3,303 |
| | 4,817 |
| | (309 | ) |
Operating tax adjustment (4) | | — |
| | — |
| | 1,677 |
| | — |
| | — |
|
Gain on sale of property (6) | | (13,845 | ) | | — |
| | (14,769 | ) | | — |
| | — |
|
Tax law changes (5) | | — |
| | (3,020 | ) | | 1,844 |
| | — |
| | (2,113 | ) |
Comparable Earnings (7) | | $ | 53,554 |
| | $ | 314,781 |
| | $ | 225,187 |
| | $ | 291,080 |
| | $ | 326,485 |
|
| | | | | | | | | | | |
| Diluted EPS | | $ | (0.45 | ) | | $ | 5.43 |
| | $ | 13.54 |
| | $ | 4.95 |
| | $ | 5.73 |
|
Non-operating pension costs (1) | | 0.85 |
| | 0.09 |
| | 0.31 |
| | 0.33 |
| | 0.19 |
|
Restructuring and other, net (2) | | 0.51 |
| | 0.08 |
| | 0.15 |
| | 0.06 |
| | 0.23 |
|
ERP implementation costs (2) | | 0.30 |
| | 0.01 |
| | — |
| | — |
| | — |
|
Goodwill impairment (3) | | — |
| | 0.29 |
| | — |
| | — |
| | — |
|
Tax reform-related and other tax adjustments, net (4), (5) | | 0.06 |
| | 0.19 |
| | (9.62 | ) | | — |
| | — |
|
Uncertain tax position (5) | | — |
| | (0.08 | ) | | — |
| | — |
| | — |
|
Pension-related adjustments (1) | | — |
| | — |
| | 0.06 |
| | 0.09 |
| | (0.01 | ) |
Operating tax adjustment (4) | | — |
| | — |
| | 0.03 |
| | — |
| | — |
|
Gain on sale of property (6) | | (0.26 | ) | | — |
| | (0.27 | ) | | — |
| | — |
|
Tax law changes (5) | | — |
| | (0.06 | ) | | 0.03 |
| | — |
| | (0.04 | ) |
Comparable EPS (7) | | $ | 1.01 |
| | $ | 5.95 |
| | $ | 4.23 |
| | $ | 5.43 |
| | $ | 6.10 |
|
____________________
| |
| (1) | Refer to Note 24, “Other Items Impacting Comparability,20, “Employee Benefit Plans,” in the Notes to Consolidated Financial Statements for further discussion.additional information. |
| |
| (2) | Refer to Note 4,5, “Restructuring Charges and Fees,Other Items, Net,” in the Notes to Consolidated Financial Statements for additional information. |
| |
| (3) | Refer toNote 22, “Employee Benefit Plans,” in the Notes to Consolidated Financial Statements for further discussion
|
| |
(4) | Refer to Note 13, “Income Taxes,” in the Notes to Consolidated Financial Statements for further discussion. |
| |
(5) | Refer to page 60 for information on the tax impact on our comparable earnings measures. |
ITEM 7. 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.
Certain items included in EBT, earnings and diluted EPS from continuing operations in the three and twelve months ended December 31, 2017 and 2016, respectively, included certain items we do not consider indicative of our business operations and 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 Financial Statements. EPS amounts may not be additive due to rounding.
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Continuing Operations |
| | | EBT | | Earnings | | Diluted EPS |
| | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| | | (Dollars in thousands except per share amounts) |
| Three months ended December 31 | | | | | | | | | | | | |
EBT/Earnings/EPS (1) | | $ | 78,795 |
| | 69,196 |
| | $ | 642,480 |
| | 49,275 |
| | $ | 12.10 |
| | 0.92 |
|
Non-operating pension costs (2) | | 6,865 |
| | 7,895 |
| | 3,969 |
| | 4,647 |
| | 0.07 |
| | 0.09 |
|
Restructuring charges and fees, net (3) | | 19,724 |
| | 5,074 |
| | 12,716 |
| | 3,513 |
| | 0.24 |
| | 0.06 |
|
Tax reform related adjustments, net (4) | | 23,278 |
| | — |
| | (571,666 | ) | | — |
| | (10.77 | ) | | — |
|
| Gain on sale of property | | (24,122 | ) | | — |
| | (14,769 | ) | | — |
| | (0.27 | ) | | — |
|
| Comparable | | $ | 104,540 |
| | 82,165 |
| | $ | 72,730 |
| | 57,435 |
| | $ | 1.37 |
| | 1.07 |
|
_________________ | |
(1) | 2017 amounts reflect tax benefit as a result of the 2017 Tax Cuts and Jobs Act. Refer to Note 13 , "Income Taxes ," in the Notes to Consolidated Financial Statements for additional information. |
| |
(2) | Includes the amortization of actuarial loss, interest cost and expected return on plan assets components of pension and post-retirement costs, which are tied to financial market performance. |
| |
(3) | Refer to Note 4, "Restructuring Charges and Fees, Net,9, "Goodwill,” in the Notes to Consolidated Financial Statements for additional information. |
| |
| (4) | Refer to Note 22, “Other Items Impacting Comparability,” in the Notes to Consolidated Financial Statements for additional information. |
| |
| (5) | Refer to Note 12, “Income Taxes,” in the Notes to Consolidated Financial Statements for additional information. |
| |
| (6) | Refer to Note 25, "Miscellaneous Income, Net," in the Notes to Consolidated Financial Statements for additional information. |
| |
| (7) | Refer to the reconciliation of the comparable provision for income taxes table below for the information on the tax impact on our comparable earnings measures. |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
The following table provides a reconciliation of the provision for income taxes to the comparable provision for income taxes:
| | | | Three months ended December 31, | | Twelve months ended December 31, | | Years ended December 31, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | (In thousands) | (In thousands) |
Provision for income taxes (1), (2) | $ | 563,685 |
| | (19,921 | ) | | $ | 477,229 |
| | (141,741 | ) | | (163,226 | ) | | (118,042 | ) | | (125,740 | ) | |
Benefit from (provision for) income taxes (1), (2) | | | $ | 18,999 |
| | $ | (102,547 | ) | | $ | 423,665 |
| | $ | (142,024 | ) | | $ | (163,226 | ) |
Income tax effects of non-GAAP adjustments (1) | (551 | ) | | (4,809 | ) | | (11,223 | ) | | (16,819 | ) | | (14,860 | ) | | (46,423 | ) | | (9,964 | ) | | (25,042 | ) | | (11,572 | ) | | (11,223 | ) | | (16,819 | ) | | (14,860 | ) |
Tax reform related adjustments, net (1), (2) | (594,944 | ) | | — |
| | (594,944 | ) | | — |
| | — |
| | — |
| | — |
| |
Tax reform-related and other tax adjustments, net (1), (2) | | | 3,508 |
| | 10,038 |
| | (535,512 | ) | | — |
| | — |
|
Comparable provision for income taxes (1) | $ | (31,810 | ) | | (24,730 | ) | | $ | (128,938 | ) | | (158,560 | ) | | (178,086 | ) | | (164,465 | ) | | (135,704 | ) | | $ | (2,535 | ) | | $ | (104,081 | ) | | $ | (123,070 | ) | | $ | (158,843 | ) | | $ | (178,086 | ) |
_________________
| |
| (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. |
| |
| (2) | 2017 amounts reflect a tax benefit as a result of the 2017 Tax Cuts and Jobs Act. Refer to Note 1312 , "Income Taxes ," in the Notes to Consolidated Financial Statements for additional information. |
ITEM 7. 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 to free cash flow for the years ended December 31, 2017, 2016, 2015, 2014 and 2013:flow:
| | | | | | | | | | | | | | Years ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | (In thousands) | (In thousands) |
| Net cash provided by operating activities | $ | 1,547,986 |
| | 1,601,022 |
| | 1,441,788 |
| | 1,382,818 |
| | 1,251,811 |
| $ | 2,140,539 |
| | $ | 1,717,993 |
| | $ | 1,628,098 |
| | $ | 1,601,022 |
| | $ | 1,441,788 |
|
Sales of revenue earning equipment (1) | 376,743 |
| | 414,249 |
| | 423,605 |
| | 493,477 |
| | 445,589 |
| 465,705 |
| | 379,716 |
| | 376,743 |
| | 414,249 |
| | 423,605 |
|
Sales of operating property and equipment (1) | 52,257 |
| | 7,051 |
| | 3,891 |
| | 3,486 |
| | 6,782 |
| 52,276 |
| | 16,606 |
| | 52,257 |
| | 7,051 |
| | 3,891 |
|
Collections on direct finance leases (1) | 73,172 |
| | 76,510 |
| | 70,980 |
| | 65,517 |
| | 70,677 |
| |
Other, net (1) | — |
| | — |
| | — |
| | (1,250 | ) | | 8,173 |
| |
Collections on direct finance leases (2) | | — |
| | — |
| | — |
| | 76,510 |
| | 70,980 |
|
| Total cash generated | 2,050,158 |
| | 2,098,832 |
| | 1,940,264 |
| | 1,944,048 |
| | 1,783,032 |
| 2,658,520 |
| | 2,114,315 |
| | 2,057,098 |
| | 2,098,832 |
| | 1,940,264 |
|
| Purchases of property and revenue earning equipment | (1,860,436 | ) | | (1,905,157 | ) | | (2,667,978 | ) | | (2,259,164 | ) | | (2,122,628 | ) | (3,735,174 | ) | | (3,050,409 | ) | | (1,860,436 | ) | | (1,905,157 | ) | | (2,667,978 | ) |
| Free cash flow | $ | 189,722 |
| | 193,675 |
|
| (727,714 | ) | | (315,116 | ) | | (339,596 | ) | $ | (1,076,654 | ) | | $ | (936,094 | ) |
| $ | 196,662 |
| | $ | 193,675 |
| | $ | (727,714 | ) |
| | | | | | | | | | | | | | | | | | | |
| Memo: | | | | | | | | | | | | | | | | | | |
| Net cash (used in) provided by financing activities | $ | (155,115 | ) | | (185,922 | ) | | 731,485 |
| | 311,650 |
| | 347,070 |
| |
| Net cash used in investing activities | $ | (1,366,340 | ) | | (1,405,833 | ) | | (2,161,355 | ) | | (1,704,510 | ) | | (1,603,818 | ) | $ | (3,217,193 | ) | | $ | (2,821,459 | ) | | $ | (1,438,676 | ) | | $ | (1,407,347 | ) | | $ | (2,161,355 | ) |
| Net cash provided by (used in) financing activities | | $ | 1,084,139 |
| | $ | 1,085,515 |
| | $ | (162,055 | ) | | $ | (185,922 | ) | | $ | 731,485 |
|
_________________
| |
| (1) | Included in cash flows from investing activities. |
| |
| (2) | Included in cash flows from investing activities for periods prior to January 1, 2017 as a result of the adoption of the new leasing standard in 2019. |
The following table provides a numerical reconciliation of total revenue to operating revenue for the years ended December 31, 2017, 2016, 2015, 2014 and 2013:revenue:
| | | | | | | | | | | | | | | Years ended December 31, |
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | | (In thousands) | | (In thousands) |
| Total revenue | | $ | 7,329,599 |
| | 6,786,984 |
| | 6,571,893 |
| | 6,638,285 |
| | 6,419,285 |
| | $ | 8,925,801 |
| | $ | 8,413,946 |
| | $ | 7,280,074 |
| | $ | 6,758,138 |
| | $ | 6,571,893 |
|
| Subcontracted transportation | | | (854,149 | ) | | (836,991 | ) | | (546,369 | ) | | (338,716 | ) | | (288,082 | ) |
| Fuel | | (710,305 | ) | | (628,525 | ) | | (722,734 | ) | | (1,049,646 | ) | | (1,098,843 | ) | | (847,320 | ) | | (878,839 | ) | | (711,200 | ) | | (628,525 | ) | | (722,734 | ) |
| Subcontracted transportation | | (578,914 | ) | | (367,562 | ) | | (288,082 | ) | | (336,422 | ) | | (354,624 | ) | |
| Operating revenue | | $ | 6,040,380 |
| | 5,790,897 |
| | 5,561,077 |
| | 5,252,217 |
| | 4,965,818 |
| | $ | 7,224,332 |
| | $ | 6,698,116 |
| | 6,022,505 |
| | $ | 5,790,897 |
| | $ | 5,561,077 |
|
The following table provides a numerical reconciliation of total revenue to operating revenue for the three months ended December 31, 2017 and 2016: |
| | | | | | | |
| | | Three months ended December 31, |
| | | 2017 | | 2016 |
| | | (In thousands) |
| Total revenue | | $ | 1,939,693 |
| | 1,729,150 |
|
| Fuel | | (190,326 | ) | | (164,349 | ) |
| Subcontracted transportation | | (162,755 | ) | | (97,923 | ) |
| Operating revenue | | $ | 1,586,612 |
| | 1,466,878 |
|
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
The following table provides a reconciliation of FMS total revenue to FMS operating revenue, for the three months ended December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015:revenue: |
| | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| | (In thousands) |
| FMS total revenue | | $ | 5,571,403 |
| | $ | 5,258,693 |
| | $ | 4,716,541 |
|
Fuel (1) | | (816,362 | ) | | (847,655 | ) | | (689,809 | ) |
| FMS operating revenue | | $ | 4,755,041 |
| | $ | 4,411,038 |
| | $ | 4,026,732 |
|
| | | | | | | |
| FMS EBT | | $ | (70,274 | ) | | $ | 340,038 |
| | $ | 295,618 |
|
| FMS EBT as a % of FMS total revenue | | (1.3)% | | 6.5% | | 6.3% |
| FMS EBT as a % of FMS operating revenue | | (1.5)% | | 7.7% | | 7.3% |
|
| | | | | | | | | | | | | | | | |
| | Three months ended December 31, | | Twelve months ended December 31, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2015 |
| | (Dollars in thousands) |
| FMS total revenue | $ | 1,241,724 |
| | 1,151,742 |
| | $ | 4,733,571 |
| | 4,556,194 |
| | 4,545,692 |
|
Fuel (1) | (184,754 | ) | | (159,468 | ) | | (689,809 | ) | | (608,454 | ) | | (699,646 | ) |
| FMS operating revenue | $ | 1,056,970 |
| | 992,274 |
| | $ | 4,043,762 |
| | 3,947,740 |
| | 3,846,046 |
|
| | | | | | | | | | |
| FMS EBT | $ | 91,747 |
| | 64,275 |
| | $ | 312,720 |
| | 370,829 |
| | 461,314 |
|
| FMS EBT as a % of FMS total revenue | 7.4 | % | | 5.6 | % | | 6.6 | % | | 8.1 | % | | 10.1 | % |
| FMS EBT as a % of FMS operating revenue | 8.7 | % | | 6.5 | % | | 7.7 | % | | 9.4 | % | | 12.0 | % |
————————————
| |
| (1) | Includes intercompany fuel sales from FMS to DTS and SCS. |
The following table provides a reconciliation of SCS total revenue to SCS operating revenue: |
| | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| | (In thousands) |
| SCS total revenue | | $ | 2,551,271 |
| | $ | 2,398,144 |
| | $ | 1,937,352 |
|
| Subcontracted transportation | | (554,678 | ) | | (521,028 | ) | | (354,644 | ) |
| Fuel | | (116,628 | ) | | (111,780 | ) | | (75,160 | ) |
| SCS operating revenue | | $ | 1,879,965 |
| | $ | 1,765,336 |
| | $ | 1,507,548 |
|
| | | | | | | |
| SCS EBT | | $ | 145,060 |
| | $ | 130,262 |
| | $ | 98,825 |
|
| SCS EBT as a % of SCS total revenue | | 5.7% | | 5.4% | | 5.1% |
| SCS EBT as a % of SCS operating revenue | | 7.7% | | 7.4% | | 6.6% |
The following table provides a reconciliation of DTS total revenue to DTS operating revenue, for the three months ended December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015:revenue:
| | | | Three months ended December 31, | | Twelve months ended December 31, | | Years ended December 31, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
| | (Dollars in thousands) | (In thousands) |
| DTS total revenue | $ | 284,422 |
| | 256,870 |
| | $ | 1,096,042 |
| | 1,020,895 |
| | 895,538 |
| | $ | 1,417,483 |
| | $ | 1,333,313 |
| | $ | 1,095,645 |
|
| Subcontracted transportation | (55,289 | ) | | (36,606 | ) | | (192,122 | ) | | (143,502 | ) | | (61,202 | ) | | (299,471 | ) | | (315,963 | ) | | (191,725 | ) |
| Fuel | (30,884 | ) | | (27,158 | ) | | (114,626 | ) | | (103,074 | ) | | (119,883 | ) | | (145,318 | ) | | (146,813 | ) | | (114,626 | ) |
| DTS operating revenue | $ | 198,249 |
| | 193,106 |
| | $ | 789,294 |
| | 774,319 |
| | 714,453 |
| | $ | 972,694 |
| | $ | 870,537 |
| | $ | 789,294 |
|
| | | | | | | | | | | | | | | | |
| DTS EBT | $ | 15,436 |
| | 15,271 |
| | $ | 55,328 |
| | 63,571 |
| | 45,575 |
| | $ | 81,149 |
| | $ | 61,236 |
| | $ | 55,346 |
|
| DTS EBT as a % of DTS total revenue | 5.4 | % | | 5.9 | % | | 5.0 | % | | 6.2 | % | | 5.1 | % | | 5.7% | | 4.6% | | 5.1% |
| DTS EBT as a % of DTS operating revenue | 7.8 | % | | 7.9 | % | | 7.0 | % | | 8.2 | % | | 6.4 | % | | 8.3% | | 7.0% | | 7.0% |
The following table provides a reconciliation of SCS total revenue to SCS operating revenue for the three months ended December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | | | | | | | | |
| | Three months ended December 31, | | Twelve months ended December 31, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2015 |
| | (Dollars in thousands) |
| SCS total revenue | $ | 540,023 |
| | 430,185 |
| | $ | 1,969,500 |
| | 1,637,850 |
| | 1,547,763 |
|
| Subcontracted transportation | (107,466 | ) | | (61,317 | ) | | (386,792 | ) | | (224,060 | ) | | (226,880 | ) |
| Fuel | (21,908 | ) | | (16,218 | ) | | (75,160 | ) | | (61,713 | ) | | (64,574 | ) |
| SCS operating revenue | $ | 410,649 |
| | 352,650 |
| | $ | 1,507,548 |
| | 1,352,077 |
| | 1,256,309 |
|
| | | | | | | | | | |
| SCS EBT | $ | 27,743 |
| | 26,427 |
| | $ | 103,102 |
| | 105,532 |
| | 93,575 |
|
| SCS EBT as a % of SCS total revenue | 5.1 | % | | 6.1 | % | | 5.2 | % | | 6.4 | % | | 6.0 | % |
| SCS EBT as a % of SCS operating revenue | 6.8 | % | | 7.5 | % | | 6.8 | % | | 7.8 | % | | 7.4 | % |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
The following table providestables provide numerical reconciliations of net earnings to adjusted net earnings and average shareholders' equity to adjusted average shareholders' equity (Adjusted ROE), and of net earnings to adjusted net earnings and average total debt and average shareholders' equity to adjusted average total capital (Adjusted ROC), and of the non-GAAP elements used to calculate the adjusted return on averageequity and adjusted return on capital to the corresponding GAAP measures for the years ended December 31, 2017, 2016, 2015, 2014 and 2013:measures:
Adjusted Return on Equity
|
| | | | | | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | | (Dollars in thousands) |
Net earnings (1) | | $ | 790,558 |
| | 262,477 |
| | 304,768 |
| | 218,341 |
| | 237,871 |
|
Restructuring and other charges (recoveries), net and other items (2) | | 28,221 |
| | 12,585 |
| | 17,559 |
| | 114,956 |
| | (154 | ) |
| Income taxes | | (476,707 | ) | | 141,623 |
| | 163,649 |
| | 118,120 |
| | 125,693 |
|
| Adjusted earnings before income taxes | | 342,072 |
| | 416,685 |
| | 485,976 |
| | 451,417 |
| | 363,410 |
|
Adjusted interest expense (3) | | 140,584 |
| | 148,043 |
| | 150,640 |
| | 144,991 |
| | 140,738 |
|
Adjusted income taxes (4) | | (166,773 | ) | | (198,248 | ) | | (224,033 | ) | | (213,738 | ) | | (177,308 | ) |
Adjusted net earnings for adjusted return on average capital [A] | | $ | 315,883 |
| | 366,480 |
| | 412,583 |
| | 382,670 |
| | 326,840 |
|
| | | | | | | | | | | |
| Average total debt | | $ | 5,360,257 |
| | 5,549,458 |
| | 5,177,012 |
| | 4,653,476 |
| | 4,015,178 |
|
| Average off-balance sheet debt | | 1,758 |
| | 1,472 |
| | 1,467 |
| | 1,919 |
| | 961 |
|
| Average shareholders’ equity | | 2,201,219 |
| | 2,052,371 |
| | 1,894,917 |
| | 1,925,824 |
| | 1,593,942 |
|
Average adjustments to shareholders’ equity (5) | | (69,443 | ) | | 1,728 |
| | 10,843 |
| | 7,758 |
| | (2,088 | ) |
Adjusted average total capital [B] | | $ | 7,493,791 |
| | 7,605,029 |
| | 7,084,239 |
| | 6,588,977 |
| | 5,607,993 |
|
Adjusted return on average capital [A]/[B] | | 4.2 | % | | 4.8 | % | | 5.8 | % | | 5.8 | % | | 5.8 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | | (In thousands) |
Net earnings (loss) (1) | | $ | (24,410 | ) | | $ | 284,613 |
| | $ | 719,644 |
| | $ | 263,069 |
| | $ | 304,768 |
|
Other items impacting comparability, net (2) | | 37,954 |
| | 21,852 |
| | 24,080 |
| | 12,585 |
| | 17,559 |
|
| Income taxes | | (18,951 | ) | | 102,695 |
| | (423,145 | ) | | 141,906 |
| | 163,649 |
|
| Adjusted earnings (loss) before income taxes | | (5,407 | ) | | 409,160 |
| | 320,579 |
| | 417,560 |
| | 485,976 |
|
Adjusted income taxes (3) | | 12,972 |
| | (101,373 | ) | | (111,884 | ) | | (146,567 | ) | | (171,021 | ) |
Adjusted net earnings (loss) for adjusted return on equity [A] | | $ | 7,565 |
| | $ | 307,787 |
| | $ | 208,695 |
| | $ | 270,993 |
| | $ | 314,955 |
|
| | | | | | | | | | | |
| Average shareholders’ equity | | $ | 2,532,875 |
| | $ | 2,492,956 |
| | $ | 1,983,736 |
| | $ | 2,053,039 |
| | $ | 1,894,917 |
|
Average adjustments to shareholders’ equity (4) | | 14,988 |
| | (78,431 | ) | | (98,794 | ) | | 1,728 |
| | 10,843 |
|
Adjusted average shareholders’ equity [B] | | $ | 2,547,863 |
| | $ | 2,414,525 |
| | $ | 1,884,942 |
| | $ | 2,054,767 |
| | $ | 1,905,760 |
|
Adjusted return on equity [A/B] | | 0.3% | | 12.7% | | 11.1% | | 13.2% | | 16.5% |
Adjusted Return on Capital
|
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | | (In thousands) |
Net earnings (loss) (1) | | $ | (24,410 | ) | | $ | 284,613 |
| | $ | 719,644 |
| | $ | 263,069 |
| | $ | 304,768 |
|
Other items impacting comparability, net (2) | | 37,954 |
| | 21,852 |
| | 24,080 |
| | 12,585 |
| | 17,559 |
|
| Income taxes | | (18,951 | ) | | 102,695 |
| | (423,145 | ) | | 141,906 |
| | 163,649 |
|
| Adjusted earnings (loss) before income taxes | | (5,407 | ) | | 409,160 |
| | 320,579 |
| | 417,560 |
| | 485,976 |
|
Adjusted interest expense (5) | | 241,478 |
| | 180,648 |
| | 142,051 |
| | 148,043 |
| | 150,640 |
|
Adjusted income taxes (6) | | (43,164 | ) | | (146,335 | ) | | (161,891 | ) | | (198,531 | ) | | (224,033 | ) |
Adjusted net earnings (loss) for adjusted return on capital [A] | | $ | 192,907 |
| | $ | 443,473 |
| | $ | 300,739 |
| | $ | 367,072 |
| | $ | 412,583 |
|
| | | | | | | | | | | |
| Average total debt | | $ | 7,427,218 |
| | $ | 6,025,260 |
| | $ | 5,394,752 |
| | $ | 5,549,458 |
| | $ | 5,177,012 |
|
| Average off-balance sheet debt | | — |
| | — |
| | — |
| | 1,472 |
| | 1,467 |
|
| Average shareholders’ equity | | 2,532,875 |
| | 2,492,956 |
| | 1,983,736 |
| | 2,053,039 |
| | 1,894,917 |
|
Average adjustments to shareholders’ equity (4) | | 14,988 |
| | (78,431 | ) | | (98,794 | ) | | 1,728 |
| | 10,843 |
|
Adjusted average total capital [B] | | $ | 9,975,081 |
| | $ | 8,439,785 |
| | $ | 7,279,694 |
| | $ | 7,605,697 |
| | $ | 7,084,239 |
|
Adjusted return on capital [A]/[B] | | 1.9% | | 5.2% | | 4.2% | | 4.8% | | 5.8% |
________________
| |
| (1) | 2017 amounts reflect a tax benefit as a result of the 2017 Tax Cuts and Jobs Act. Refer to Note 1312 , "Income Taxes ," in the Notes to Consolidated Financial Statements for additional information. |
| |
| (2) | For 2017, 2016Refer to the table above which discusses items excluded from our segment EBT measure and 2015, see Note 4, “Restructuring Charges and Fees, Net” and Note 24, “Other Items Impacting Comparability,” in the Notes totheir classification within our Consolidated Financial Statements; 2014 includes $97 million related to a pension lump sum settlement expense for unrecognized actuarial losses as a resultStatements of the partial settlement of our pension plan liability.Earnings. |
| |
| (3) | Represents the tax provision on adjusted net earnings before income taxes. |
| |
| (4) | Represents the impact of other items impacting comparability, net of tax, to equity for the respective period. |
| |
| (5) | Represents reported interest expense plus imputed interest on off-balance sheet obligations. |
| |
(4)(6) | Represents provision for income taxes plus income taxes on restructuring and other items impacting comparability and adjusted interest expense. |
| |
(5) | Represents the impact to equity of items to arrive at comparable earnings. |
The following table provides a numerical reconciliation of forecasted earnings per diluted common share from continuing operations to forecasted comparable earnings per diluted common share from continuing operations for 2018:
|
| | | |
| | 2018 |
EPS from continuing operations forecast | | $5.34 - 5.64 |
|
Non-operating pension costs | | 0.06 |
|
Comparable EPS from continuing operations forecast | | $5.40 - 5.70 |
|
The following table provides a numerical reconciliation of total revenue to operating revenue for 2018:
|
| | | | |
| | | 2018 |
| | | (In thousands) |
| Total revenue | | $ | 7,800,000 |
|
| Fuel | | (700,000 | ) |
| Subcontracted transportation | | (600,000 | ) |
| Operating revenue | | $ | 6,500,000 |
|
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Segment Financial Measures.
The following table reconciles FMS segment revenueprovides a numerical reconciliation of forecasted net cash provided by operating activities to revenue from external customersforecasted total cash generated and forecasted free cash flow for the years ended December 31, 2017, 2016 and 2015:2020:
|
| | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| | | (In thousands) |
| ChoiceLease revenue | | $ | 2,688,717 |
| | 2,573,638 |
| | 2,406,711 |
|
| Commercial rental revenue | | 813,539 |
| | 846,331 |
| | 940,045 |
|
| ChoiceLease and commercial rental revenue | | 3,502,256 |
| | 3,419,969 |
| | 3,346,756 |
|
| Intercompany revenue | | (264,571 | ) | | (249,017 | ) | | (225,203 | ) |
| ChoiceLease and commercial rental revenue from external customers | | $ | 3,237,685 |
| | 3,170,952 |
| | 3,121,553 |
|
| | | | | | | |
| FMS services revenue | | $ | 541,506 |
| | 527,771 |
| | 499,290 |
|
| Intercompany revenue | | (35,634 | ) | | (34,222 | ) | | (30,528 | ) |
| FMS services revenue from external customers | | $ | 505,872 |
| | 493,549 |
| | 468,762 |
|
| | | | | | | |
| FMS fuel services revenue | | $ | 689,809 |
| | 608,454 |
| | 699,646 |
|
| Intercompany revenue | | (169,309 | ) | | (144,716 | ) | | (161,369 | ) |
| FMS fuel services revenue from external customers | | $ | 520,500 |
| | 463,738 |
| | 538,277 |
|
|
| | | | |
| | | 2020 |
| | | (In thousands) |
| Net cash provided by operating activities | | $ | 2,130,000 |
|
Sales of revenue earning equipment (1) | | 430,000 |
|
| Total cash generated | | 2,560,000 |
|
Purchases of property and revenue earning equipment (1) | | (2,210,000 | ) |
| Forecasted free cash flow | | $ | 350,000 |
|
————————————
| |
| (1) | Included in cash flows from investing activities. |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
SPECIAL NOTE REGARDING 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 Annual Report contains forward-looking statements including, but not limited to, statements regarding:
our expectations as toin our FMS business segment regarding anticipated ChoiceLease revenue and earningsfleet growth specifically, total revenue, operatingand commercial rental revenue and product line revenues, used vehicle sales, demand, pricing, inventory and volumes, contract revenues, ChoiceLease growth, SelectCare growth, commercial rental pricing and demand, and actual and planned new sales activity in lease, DTS and SCS;demand;
our expectations relating to further deterioration in our SCS and DTS business segments regarding anticipated operating revenue trends, sales activity and growth rates;
our expectations of the used vehicle sales market andlong-term residual values of used vehicles;revenue earning equipment;
the size and impact of strategic investments;
our expected cost savings from workforce reductions and restructuring actions;
the continuing benefits of our maintenance initiatives and a newer fleet;
our ability to successfully achieve the operational goals that are the basis of our business strategies, including driving fleet growth, delivering a consistent, industry-leading and cost-effective maintenance program, optimizing asset utilization and management, providing differentiated quality of service and best execution, developing broad-based capabilities, creating a culture of innovation, focusing on continuous improvement and standardization and successfully implementing sales and marketing strategies;
impact of losses from conditional obligations arising from guarantees;
number ofanticipated increase in NLE and used vehicles in inventory through the end of the year;
the expected pricing and the appropriate sizeinventory levels for used vehicles;
our expectations of our commercial rental fleet given commercial rental market expectations;
estimates ofoperating cash flows from operations,flow, free cash flow, and capital expenditures for 2018;through the end of 2020;
the adequacy of our accounting estimates and reserves for pension expense, compensation-relatedcompensation expense postretirementand employee benefit expense,plan obligations, depreciation and residual value guarantees, rent expense under operating leases, self-insurance reserves, goodwill impairment, accounting changes, and income taxes;
our expected future contractual cash obligations and commitments;
the adequacy of our fair value estimates of employee incentive awards under our share-based compensation plans, publicly traded debt and other debt;
our ability to meetfund all of our operating, investing and financingfinancial needs infor the foreseeable future through internally generated funds and outside funding sources;
our expected level of use and availability of outside funding sources, anticipated future payments under debt lease and purchaselease agreements, and risk of losses resulting from counterparty default under hedging and derivative agreements;
anticipated impact of exchange rate fluctuations;
the anticipated impact of fuel price fluctuations on our operations, cash flows and financial position;exchange rate fluctuations;
our expectations as to return on pension plan assets, future pension expense and contributions, as well as the continued effect of the freeze of our pension plans on our benefit funding requirements;
the anticipated deferral of tax gains on disposal of eligible revenue earning equipment under our vehicle like-kind exchange program;estimated contributions;
our expectations relatingregarding the scope and anticipated outcomes with respect to withdrawal liabilitiescertain claims, proceedings and funding levelslawsuits;
the ultimate disposition of multi-employer plans;estimated environmental liabilities;
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 expected cost savings from workforce reductions and restructuring actions;
the size and impact of our strategic investments;
our expectations regarding restructuring charges;
the status of our unrecognized tax benefits related to the U.S. federal, state and foreign tax positions;
our estimates for self-insurance loss reserves;
our expectations regarding the completion and ultimate outcome of certain tax audits; and
the ultimate disposition of legal proceedings and estimated environmental liabilities;
our expectations relating to compliance with new regulatory requirements;
our expectations regarding the effects of the adoptionanticipated impact of recent accounting pronouncements; andpronouncements.
the impact of tax reform legislation.ITEM 7. 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 Annual 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. For a detailed description of certain of theseThese risk factors please seeinclude, but are not limited to, the following:
Market Conditions:
| |
| ◦ | 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. |
| |
| ◦ | Decreases in freight demand which would impact both our transactional and variable-based contractual business. |
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| ◦ | Changes in our customers’ operations, financial condition or business environment that may limit their demand for, or ability to purchase, our services. |
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| ◦ | Decreases in market demand affecting the commercial rental market and used vehicle sales as well as global economic conditions. |
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| ◦ | Volatility in customer volumes and shifting customer demand in the industries serviced by our SCS business. |
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| ◦ | Changes in current financial, tax or regulatory requirements that could negatively impact our financial results. |
Competition:
| |
| ◦ | 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. |
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| ◦ | 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. |
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| ◦ | Continued consolidation in the markets in which we operate which may create large competitors with greater financial resources. |
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| ◦ | Our inability to maintain current pricing levels due to economic conditions, demand for services, customer acceptance or competition. |
Profitability:
| |
| ◦ | Our inability to obtain adequate profit margins for our services. |
| |
| ◦ | Lower than expected sales volumes or customer retention levels. |
| |
| ◦ | Decreases in commercial rental fleet utilization and pricing. |
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| ◦ | Lower than expected used vehicle sales pricing levels and fluctuations in the anticipated proportion of retail versus wholesale sales. |
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| ◦ | Loss of key customers in our DTS and SCS business segments. |
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| ◦ | Our inability to adapt our product offerings to meet changing consumer preferences on a cost-effective basis. |
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| ◦ | The inability of our legacy information technology systems to provide timely access to data. |
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| ◦ | Sudden changes in fuel prices and fuel shortages. |
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| ◦ | Higher prices for vehicles, diesel engines and fuel as a result of new environmental standards. |
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| ◦ | Higher than expected maintenance costs and lower than expected benefits associated with our maintenance initiatives. |
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| ◦ | Our inability to successfully execute our asset management initiatives, maintain our fleet at normalized levels and right-size our fleet in line with demand. |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
| |
| ◦ | Our key assumptions and pricing structure of our DTS and SCS contracts prove to be inaccurate. |
| |
| ◦ | Increased unionizing, labor strikes and work stoppages. |
| |
| ◦ | 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. |
| |
| ◦ | Our inability to manage our cost structure. |
| |
| ◦ | Our inability to limit our exposure for customer claims. |
| |
| ◦ | Unfavorable or unanticipated outcomes in legal or regulatory proceedings or uncertain positions. |
| |
| ◦ | Business interruptions or expenditures due to severe weather or natural occurrences. |
Financing Concerns:
| |
| ◦ | Unanticipated interest rate and currency exchange rate fluctuations. |
| |
| ◦ | Negative funding status of our pension plans caused by lower than expected returns on invested assets and unanticipated changes in interest rates. |
| |
| ◦ | Withdrawal liability as a result of our participation in multi-employer plans. |
| |
| ◦ | Instability in U.S. and worldwide credit markets, resulting in higher borrowing costs and/or reduced access to credit. |
Accounting Matters:
| |
| ◦ | Reductions in residual values or useful lives of revenue earning equipment. |
| |
| ◦ | Increases in compensation levels, retirement rate and mortality resulting in higher pension expense; regulatory changes affecting pension estimates, accruals and expenses. |
| |
| ◦ | Changes in accounting rules, assumptions and accruals. |
| |
| ◦ | Difficulties and delays in implementing our Enterprise Resource Planning system and related processes. |
Other risks detailed from time to time in our SEC filings, including in “Item 1A—Risk1A.-Risk Factors” of this Annual Report.
The risks included in the Annual Report are not exhaustive. 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 Annual Report. We do not intend, or assume any obligation, to update or revise any forward-looking statements contained in this Annual Report, whether as a result of new information, future events or otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by ITEM 7A is included in ITEM 7 of PART II of this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
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Consolidated Financial Statement Schedule for the Years Ended December 31, 2017, 20162019, 2018 and 2015:2017: | | |
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All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
TO THE SHAREHOLDERS OF RYDER SYSTEM, INC.:
Management of Ryder System, Inc., together with its consolidated subsidiaries (Ryder), is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a- 15(f)13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Ryder’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Ryder’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Ryder; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of Ryder’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Ryder’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Ryder’s internal control over financial reporting as of December 31, 20172019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control — Integrated Framework (2013).” Based on our assessment and those criteria, management determined that Ryder maintained effective internal control over financial reporting as of December 31, 2017.2019.
Ryder’s independent registered certified public accounting firm, PricewaterhouseCoopers LLP, has audited the effectiveness of Ryder’s internal control over financial reporting.reporting as of December 31, 2019. Their report appears on the subsequent page.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of Ryder System, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Ryder System, Inc. and its subsidiaries (the “Company”) as of December 31, 20172019 and 2016,2018, and the related consolidated statements of earnings, of comprehensive income, of shareholders’ equity and of cash flows for each of the three years in the period ended December 31, 2017,2019, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidatedfinancial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20172019 and 2016, 2018, and the results of theirits operations and theirits cash flows for each of the three years in the period ended December 31, 20172019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control - Integrated Framework(2013)issued by the COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanyingManagement’s Report on Internal Control overOver Financial Reporting. Our responsibility is to express opinions on the Company’s consolidatedfinancial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidatedfinancial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Earning Equipment - Residual Values
As described in Notes 1 and 7 to the consolidated financial statements, the net carrying amount of revenue earning equipment was $10.4 billion as of December 31, 2019. Depreciation expense was $1.9 billion primarily related to Fleet Management Solutions (FMS) revenue earning equipment. Revenue earning equipment, comprised of vehicles, is initially recorded at cost inclusive of vendor rebates. The provision for depreciation is computed using the straight-line method. Management periodically reviews and adjusts, as appropriate, the estimated residual values and useful lives of revenue earning equipment. Management’s review of the estimated residual values and useful lives is established with a long-term view based on vehicle class, generally subcategories of trucks, tractors and trailers by weight and usage, as well as other factors, including but not limited to historical market price trends, current and expected future market prices, expected lives of vehicles, and expected sales of used vehicles in the wholesale and retail markets.
The principal considerations for our determination that performing procedures relating to revenue earning equipment - residual values is a critical audit matter are there was significant judgment by management when estimating residual values. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and in evaluating the significant judgment by management in estimating residual values, including the Company’s historical market price trends, current and expected future market prices, and expected sales of used vehicles in the wholesale and retail markets.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s assessment of, and related adjustments to, the estimated residual values of revenue earning equipment. These procedures also included, among others (i) testing management’s process for developing the estimated residual values of revenue earning equipment, (ii) testing the accuracy of the Company’s historical used vehicle sales data, (iii) assessing management’s estimates of current and expected future market prices of used vehicles and management’s assumptions about the expected sales of used vehicles in the wholesale and retail markets, and (iv) testing the calculation of the adjustment to depreciation expense based on updated estimated residual values. Evaluating management’s assumptions related to expected future market prices of used vehicles and the expected sales of used vehicles in the wholesale and retail markets involved evaluating whether the assumptions used were reasonable considering (i) past trends in the used vehicle sales market, (ii) the consistency with external market and industry data, and (iii) whether they were consistent with evidence obtained in other areas of the audit.
Goodwill Impairment Assessment - FMS North America Reporting Unit
As described in Notes 1 and 9 to the consolidated financial statements, the Company’s consolidated goodwill balance was $475 million as of December 31, 2019, and the goodwill associated with the FMS North America (FMS NA) reporting unit was $244 million. Goodwill is tested for impairment at least annually as of October 1 of each year, or more frequently if events or circumstances indicate the carrying value of goodwill may be impaired. If management concludes that it is more likely than not that a reporting unit's fair value is less than its carrying value or if management bypasses the optional qualitative assessment, recoverability of goodwill is assessed by comparing the fair value of the reporting unit with its carrying amount. If a reporting unit’s carrying value exceeds its fair value, management will measure any goodwill impairment loss as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. In both the third and fourth quarter of 2019, management performed impairment tests of the FMS NA reporting unit. Fair
value for the FMS NA reporting unit was determined based on a discounted future cash flow model (income approach) and the application of current market multiples for comparable publicly-traded companies (market approach). Under the income approach, the fair value of the FMS NA reporting unit is estimated based on the discounted present value of the projected future cash flows. Management’s cash flow projections for the FMS NA reporting unit included significant judgments and assumptions, including revenue growth rates, margins, long-term growth rates, capital requirements, proceeds from the sale of used vehicles, the ability to utilize tax net operating losses, and the discount rate. Under the market approach, management uses a selection of comparable publicly-traded companies that correspond to the FMS NA reporting unit to derive a market-based multiple.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the FMS NA reporting unit is a critical audit matter are there was significant judgment by management when developing the fair value measurement of the reporting unit. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating the audit evidence obtained relating to management’s valuation models and significant assumptions, including revenue growth rates, margins, and the discount rate. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the Company’s FMS NA reporting unit. These procedures also included, among others (i) testing management’s process for developing the fair value estimate, (ii) evaluating the appropriateness of the valuation models, (iii) testing the completeness and accuracy of underlying data used in the models, and (iv) evaluating the significant assumptions used by management, including the revenue growth rates, margins, and discount rate. Evaluating management’s assumptions related to revenue growth rates and margins involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s valuation models and certain significant assumptions, including the discount rate.
Revenue Recognition - Stand-alone Selling Price of the Lease Component of the ChoiceLease Product Line
Revenue from the ChoiceLease product line makes up a significant portion of the lease & related maintenance and rental revenues of $3.8 billion. As described in Note 1 to the consolidated financial statements, contract consideration for the ChoiceLease product line arrangements is allocated between the lease component and non-lease component based on management’s best estimate of the relative stand-alone selling price of each component. The ChoiceLease product line includes the lease of a vehicle (lease component) and the maintenance and other services (non-lease component). The Company does not sell the components of their ChoiceLease product offering on a stand-alone basis; therefore, significant judgment is required to determine the stand-alone selling prices of the lease and maintenance components in order to allocate the consideration on a relative stand-alone selling price basis. The stand-alone selling price of the lease component is estimated using the projected cash outflows related to the underlying leased vehicle, net of the estimated disposal proceeds, and a certain targeted return considering the weighted average cost of capital.
The principal considerations for our determination that performing procedures relating to revenue recognition - stand-alone selling price of the lease component of the ChoiceLease product line is a critical audit matter are there was significant judgment by management when developing the estimated stand-alone selling price of the lease component. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating the audit evidence obtained relating to management’s estimated projected cash outflows related to the underlying leased vehicle, specifically the estimated disposal proceeds and the weighted average cost of capital. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process for the ChoiceLease product line, including controls over the estimation of the stand-alone selling price of the lease component. These procedures also included, among others, testing management’s process for estimating the stand-alone selling price of the lease component, which included evaluating the reasonableness of significant assumptions used in the estimated projected cash outflows at contract initiation, specifically the estimated disposal proceeds of the underlying leased vehicle and the weighted average cost of capital. Evaluating management’s assumptions related to estimated disposal proceeds of the underlying leased vehicle involved evaluating whether the assumptions used by management were reasonable considering (i) past trends in the used vehicle sales market, (ii) the consistency with external market and industry data, and (iii)
whether they were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the weighted average of cost of capital assumption.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Certified Public Accountants
Miami, Florida
February 16, 201827, 2020
We have served as the Company’s auditor since 2006.
RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
| | | | | Years ended December 31, | | Years ended December 31, |
| | | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
| | | (In thousands, except per share amounts) | | (In thousands, except per share amounts) |
| Lease and rental revenues | | $ | 3,237,685 |
| | 3,170,952 |
| | 3,121,553 |
| |
| Lease & related maintenance and rental revenues | | | $ | 3,784,744 |
| | $ | 3,512,867 |
| | $ | 3,220,705 |
|
| Services revenue | | 3,571,414 |
| | 3,152,294 |
| | 2,912,063 |
| | 4,555,692 |
| | 4,280,834 |
| | 3,538,869 |
|
| Fuel services revenue | | 520,500 |
| | 463,738 |
| | 538,277 |
| | 585,365 |
| | 620,245 |
| | 520,500 |
|
| Total revenues | | 7,329,599 |
| | 6,786,984 |
| | 6,571,893 |
| | 8,925,801 |
| | 8,413,946 |
| | 7,280,074 |
|
| | | | | | | | | | | | | |
| Cost of lease and rental | | 2,355,043 |
| | 2,234,284 |
| | 2,153,450 |
| |
| Cost of lease & related maintenance and rental | | | 3,103,703 |
| | 2,555,358 |
| | 2,353,209 |
|
| Cost of services | | 3,003,348 |
| | 2,602,978 |
| | 2,413,156 |
| | 3,879,863 |
| | 3,663,348 |
| | 2,977,426 |
|
| Cost of fuel services | | 507,440 |
| | 448,306 |
| | 519,843 |
| | 571,658 |
| | 605,613 |
| | 507,440 |
|
| Other operating expenses | | 115,507 |
| | 113,461 |
| | 117,082 |
| | 121,980 |
| | 123,964 |
| | 115,019 |
|
| Selling, general and administrative expenses | | 871,983 |
| | 805,104 |
| | 822,857 |
| | 907,449 |
| | 849,410 |
| | 870,918 |
|
| Non-operating pension costs | | 27,741 |
| | 37,593 |
| | 17,797 |
| | 60,406 |
| | 7,541 |
| | 27,741 |
|
| Used vehicle sales, net | | 17,241 |
| | (972 | ) | | (99,853 | ) | | 58,706 |
| | 22,325 |
| | 16,989 |
|
| Interest expense | | 140,350 |
| | 147,843 |
| | 150,434 |
| | 241,381 |
| | 180,488 |
| | 141,876 |
|
| Miscellaneous income, net | | (44,245 | ) | | (13,068 | ) | | (10,156 | ) | |
| Restructuring charges and fees, net | | 21,405 |
| | 5,074 |
| | 18,068 |
| |
| Miscellaneous (income) loss, net | | | (33,642 | ) | | (5,422 | ) | | (44,245 | ) |
| Restructuring and other items, net | | | 56,568 |
| | 21,852 |
| | 17,265 |
|
| | | 7,015,813 |
| | 6,380,603 |
| | 6,102,678 |
| | 8,968,072 |
| | 8,024,477 |
| | 6,983,638 |
|
| | | | | | | | | | | | | |
| Earnings from continuing operations before income taxes | | 313,786 |
| | 406,381 |
| | 469,215 |
| |
| (Benefit from) provision for income taxes | | (477,229 | ) | | 141,741 |
| | 163,226 |
| |
| Earnings from continuing operations | | 791,015 |
| | 264,640 |
| | 305,989 |
| |
| Earnings (loss) from continuing operations before income taxes | | | (42,271 | ) | | 389,469 |
| | 296,436 |
|
| Provision for (benefit from) income taxes | | | (18,999 | ) | | 102,547 |
| | (423,665 | ) |
| Earnings (loss) from continuing operations | | | (23,272 | ) | | 286,922 |
| | 720,101 |
|
| Loss from discontinued operations, net of tax | | (457 | ) | | (2,163 | ) | | (1,221 | ) | | (1,138 | ) | | (2,309 | ) | | (457 | ) |
| Net earnings | | $ | 790,558 |
| | 262,477 |
| | 304,768 |
| |
| Net earnings (loss) | | | $ | (24,410 | ) | | $ | 284,613 |
| | $ | 719,644 |
|
| | | | | | | | | | | | | |
| Earnings (loss) per common share — Basic | | | | | | | | | | | | |
| Continuing operations | | $ | 14.98 |
| | 4.98 |
| | 5.78 |
| | $ | (0.45 | ) | | $ | 5.46 |
| | $ | 13.64 |
|
| Discontinued operations | | (0.01 | ) | | (0.04 | ) | | (0.02 | ) | | (0.03 | ) | | (0.04 | ) | | (0.01 | ) |
| Net earnings | | $ | 14.97 |
| | 4.94 |
| | 5.75 |
| |
| Net earnings (loss) | | | $ | (0.47 | ) | | $ | 5.41 |
| | $ | 13.63 |
|
| Earnings (loss) per common share — Diluted | | | | | | | | | | | | |
| Continuing operations | | $ | 14.87 |
| | 4.94 |
| | 5.73 |
| | $ | (0.45 | ) | | $ | 5.43 |
| | $ | 13.54 |
|
| Discontinued operations | | (0.01 | ) | | (0.04 | ) | | (0.02 | ) | | (0.03 | ) | | (0.04 | ) | | (0.01 | ) |
| Net earnings | | $ | 14.87 |
| | 4.90 |
| | 5.71 |
| |
| Net earnings (loss) | | | $ | (0.47 | ) | | $ | 5.38 |
| | $ | 13.53 |
|
See accompanying notes to consolidated financial statements.
Note: EPS amounts may not be additive due to rounding.
RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | | Years ended December 31, | | Years ended December 31, |
| | | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
| | | (In thousands) | | (In thousands) |
| Net earnings | | $ | 790,558 |
| | 262,477 |
| | 304,768 |
| |
| Net earnings (loss) | | | $ | (24,410 | ) | | $ | 284,613 |
| | $ | 719,644 |
|
| | | | | | | | | | | | | |
| Other comprehensive income (loss): | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Changes in cumulative translation adjustment and other | | 66,172 |
| | (70,590 | ) | | (99,933 | ) | | 30,681 |
| | (55,940 | ) | | 62,837 |
|
| | | | | | | | | | | | | |
| Amortization of pension and postretirement items | | 31,520 |
| | 29,493 |
| | 27,731 |
| | 30,305 |
| | 27,499 |
| | 31,520 |
|
| Income tax expense related to amortization of pension and postretirement items | | (11,034 | ) | | (10,452 | ) | | (9,637 | ) | | (7,059 | ) | | (6,422 | ) | | (11,034 | ) |
| Amortization of pension and postretirement items, net of tax | | 20,486 |
| | 19,041 |
| | 18,094 |
| | 23,246 |
| | 21,077 |
| | 20,486 |
|
| | |
| |
| |
| | | | | | |
| Change in net actuarial loss and prior service credit | | 49,680 |
| | (98,092 | ) | | (23,979 | ) | |
| Income tax (expense) benefit related to change in net actuarial loss and prior service credit | | (9,807 | ) | | 28,344 |
| | 13,353 |
| |
| Change in net actuarial loss and prior service credit, net of taxes | | 39,873 |
| | (69,748 | ) | | (10,626 | ) | |
| Reclassification of net actuarial loss due to pension settlement | | | 34,974 |
| | — |
| | — |
|
| Change in net actuarial loss and prior service cost | | | (7,609 | ) | | (83,695 | ) | | 49,680 |
|
| Income tax benefit (expense) related to pension settlement and change in net actuarial loss and prior service cost | | | (6,149 | ) | | 18,327 |
| | (9,807 | ) |
| Change in net actuarial loss and prior service cost, net of taxes | | | 21,216 |
| | (65,368 | ) | | 39,873 |
|
| | | | | | | | | | | | | |
| Other comprehensive income (loss), net of taxes | | 126,531 |
| | (121,297 | ) | | (92,465 | ) | | 75,143 |
| | (100,231 | ) | | 123,196 |
|
| | | | | | | | | | | | | |
| Comprehensive income | | $ | 917,089 |
| | 141,180 |
| | 212,303 |
| | $ | 50,733 |
| | $ | 184,382 |
| | $ | 842,840 |
|
See accompanying notes to consolidated financial statements.
RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | | December 31, | | December 31, |
| | | 2017 | | 2016 | | 2019 | | 2018 |
| | | (Dollars in thousands, except share amounts) | | (In thousands, except share amounts) |
| Assets: | | | | | | | | |
| Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 78,348 |
| | 58,801 |
| | $ | 73,584 |
| | $ | 68,111 |
|
| Receivables, net | | 1,010,908 |
| | 831,947 |
| | 1,228,490 |
| | 1,242,058 |
|
| Inventories | | 73,543 |
| | 69,529 |
| | 80,822 |
| | 79,228 |
|
| Prepaid expenses and other current assets | | 159,483 |
| | 141,280 |
| | 179,155 |
| | 178,313 |
|
| Total current assets | | 1,322,282 |
| | 1,101,557 |
| | 1,562,051 |
| | 1,567,710 |
|
| Revenue earning equipment, net | | 8,355,262 |
| | 8,147,722 |
| | 10,427,664 |
| | 9,415,961 |
|
| Operating property and equipment, net | | 776,704 |
| | 745,870 |
| | 917,799 |
| | 862,054 |
|
| Goodwill | | 395,504 |
| | 386,772 |
| | 475,025 |
| | 475,206 |
|
| Intangible assets | | 42,930 |
| | 48,249 |
| |
| Direct financing leases and other assets | | 559,549 |
| | 472,284 |
| |
| Intangible assets, net | | | 50,905 |
| | 59,075 |
|
| Sales-type leases and other assets | | | 1,041,890 |
| | 967,802 |
|
| Total assets | | $ | 11,452,231 |
| | 10,902,454 |
| | $ | 14,475,334 |
| | $ | 13,347,808 |
|
| | | | | | | | | |
| Liabilities and shareholders’ equity: | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Short-term debt and current portion of long-term debt | | $ | 826,069 |
| | 791,410 |
| | $ | 1,154,564 |
| | $ | 937,131 |
|
| Accounts payable | | 599,303 |
| | 445,470 |
| | 594,712 |
| | 731,876 |
|
| Accrued expenses and other current liabilities | | 587,406 |
| | 507,189 |
| | 876,077 |
| | 847,739 |
|
| Total current liabilities | | 2,012,778 |
| | 1,744,069 |
| | 2,625,353 |
| | 2,516,746 |
|
| Long-term debt | | 4,583,582 |
| | 4,599,864 |
| | 6,770,224 |
| | 5,712,146 |
|
| Other non-current liabilities | | 812,089 |
| | 817,565 |
| | 1,442,003 |
| | 1,402,625 |
|
| Deferred income taxes | | 1,208,766 |
| | 1,688,681 |
| | 1,161,444 |
| | 1,179,723 |
|
| Total liabilities | | 8,617,215 |
| | 8,850,179 |
| | 11,999,024 |
| | 10,811,240 |
|
| | | | | | | | | |
| Commitments and contingencies (Note 23) | | |
| |
|
| Shareholders’ equity: | | | | | | | | |
| Preferred stock, no par value per share — authorized, 3,800,917; none outstanding, December 31, 2017 or 2016 | | — |
| | — |
| |
| Common stock, $0.50 par value per share — authorized, 400,000,000; outstanding, December 31, 2017 — 52,955,314; December 31, 2016 — 53,463,118 | | 26,478 |
| | 26,732 |
| |
| Preferred stock, no par value per share — authorized, 3,800,917; none outstanding, December 31, 2019 and 2018 | | | — |
| | — |
|
| Common stock, $0.50 par value per share — authorized, 400,000,000; outstanding, December 31, 2019 — 53,278,316 and December 31, 2018 — 53,116,485 | | | 26,639 |
| | 26,559 |
|
| Additional paid-in capital | | 1,051,017 |
| | 1,032,549 |
| | 1,108,649 |
| | 1,084,391 |
|
| Retained earnings | | 2,465,022 |
| | 1,827,026 |
| | 2,177,513 |
| | 2,337,252 |
|
| Accumulated other comprehensive loss | | (707,501 | ) | | (834,032 | ) | | (836,491 | ) | | (911,634 | ) |
| Total shareholders’ equity | | 2,835,016 |
| | 2,052,275 |
| | 2,476,310 |
| | 2,536,568 |
|
| Total liabilities and shareholders’ equity | | $ | 11,452,231 |
| | 10,902,454 |
| | $ | 14,475,334 |
| | $ | 13,347,808 |
|
See accompanying notes to consolidated financial statements.
RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | Years ended December 31, | | Years ended December 31, |
| | | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
| | | (In thousands) | | (In thousands) |
| | | | | | | | |
| Net earnings | | $ | 790,558 |
| | 262,477 |
| | 304,768 |
| |
| Cash flows from operating activities from continuing operations: | | | | | | | |
| Net earnings (loss) | | | $ | (24,410 | ) | | $ | 284,613 |
| | $ | 719,644 |
|
| Less: Loss from discontinued operations, net of tax | | (457 | ) | | (2,163 | ) | | (1,221 | ) | | (1,138 | ) | | (2,309 | ) | | (457 | ) |
| Earnings from continuing operations | | 791,015 |
| | 264,640 |
| | 305,989 |
| |
| Earnings (loss) from continuing operations | | | (23,272 | ) | | 286,922 |
| | 720,101 |
|
| Depreciation expense | | 1,255,175 |
| | 1,187,050 |
| | 1,121,966 |
| | 1,878,929 |
| | 1,388,570 |
| | 1,257,681 |
|
| Goodwill impairment charge | | | — |
| | 15,513 |
| | — |
|
| Used vehicle sales, net | | 17,241 |
| | (972 | ) | | (99,853 | ) | | 58,706 |
| | 22,325 |
| | 16,989 |
|
| Amortization expense and other non-cash charges, net | | 12,114 |
| | 30,667 |
| | 52,965 |
| | 101,289 |
| | 67,936 |
| | 41,039 |
|
| Non-cash lease expense | | | 85,835 |
| | 81,070 |
| | 67,783 |
|
| Non-operating pension costs and share-based compensation expense | | 46,708 |
| | 56,257 |
| | 38,978 |
| | 86,234 |
| | 32,493 |
| | 46,708 |
|
| Deferred income tax (benefit) expense | | (499,783 | ) | | 124,886 |
| | 154,042 |
| |
| Deferred income tax expense (benefit) | | | (32,331 | ) | | 108,895 |
| | (446,219 | ) |
| Collections on sales-type leases | | | 121,201 |
| | 82,803 |
| | 81,015 |
|
| Changes in operating assets and liabilities, net of acquisitions: | | | | | | | | | | | | |
| Receivables | | (173,840 | ) | | (51,754 | ) | | (40,323 | ) | | 27,149 |
| | (193,144 | ) | | (178,861 | ) |
| Inventories | | (3,296 | ) | | (5,906 | ) | | 1,448 |
| | (1,334 | ) | | (5,782 | ) | | (3,296 | ) |
| Prepaid expenses and other assets | | (38,878 | ) | | (14,211 | ) | | (292 | ) | | (65,185 | ) | | (84,727 | ) | | (95,809 | ) |
| Accounts payable | | 66,149 |
| | 94,320 |
| | (74,381 | ) | | (26,596 | ) | | 16,869 |
| | 66,149 |
|
| Accrued expenses and other non-current liabilities | | 75,381 |
| | (83,955 | ) | | (18,751 | ) | | (70,086 | ) | | (101,750 | ) | | 54,818 |
|
| Net cash provided by operating activities from continuing operations | | 1,547,986 |
| | 1,601,022 |
| | 1,441,788 |
| | 2,140,539 |
| | 1,717,993 |
| | 1,628,098 |
|
| | | | | | | | | | | | | |
| Cash flows from investing activities from continuing operations: | | | | | | | |
| Purchases of property and revenue earning equipment | | | (3,735,174 | ) | | (3,050,409 | ) | | (1,860,436 | ) |
| Sales of revenue earning equipment | | | 465,705 |
| | 379,716 |
| | 376,743 |
|
| Sales of operating property and equipment | | | 52,276 |
| | 16,606 |
| | 52,257 |
|
| Acquisitions, net of cash acquired | | | — |
| | (167,372 | ) | | (7,240 | ) |
| Net cash used in investing activities from continuing operations | | | (3,217,193 | ) | | (2,821,459 | ) | | (1,438,676 | ) |
| | | | | | | | |
| Cash flows from financing activities from continuing operations: | | | | | | | | | | | | |
| Net change in commercial paper borrowings and revolving credit facilities | | 89,519 |
| | (77,798 | ) | | 323,359 |
| |
| Net borrowings (repayments) of commercial paper and revolving credit facilities | | | (18,033 | ) | | 51,888 |
| | 89,519 |
|
| Debt proceeds | | 873,302 |
| | 674,928 |
| | 1,283,223 |
| | 2,636,095 |
| | 1,970,620 |
| | 873,302 |
|
| Debt repaid | | (962,577 | ) | | (669,047 | ) | | (798,311 | ) | | (1,392,891 | ) | | (805,739 | ) | | (969,517 | ) |
| Dividends on common stock | | (95,813 | ) | | (91,043 | ) | | (83,201 | ) | | (116,469 | ) | | (111,864 | ) | | (95,813 | ) |
| Common stock issued | | 20,508 |
| | 18,087 |
| | 23,635 |
| | 8,216 |
| | 17,020 |
| | 20,508 |
|
| Common stock repurchased | | (78,316 | ) | | (37,274 | ) | | (6,141 | ) | | (27,686 | ) | | (30,810 | ) | | (78,316 | ) |
| Debt issuance costs and other items | | (1,738 | ) | | (3,775 | ) | | (11,079 | ) | | (5,093 | ) | | (5,600 | ) | | (1,738 | ) |
| Net cash (used in) provided by financing activities from continuing operations | | (155,115 | ) | | (185,922 | ) | | 731,485 |
| |
| Net cash provided by (used in) financing activities from continuing operations | | | 1,084,139 |
| | 1,085,515 |
| | (162,055 | ) |
| | | | | | | | | | | | | |
| Cash flows from investing activities from continuing operations: | | | | | | | |
| Purchases of property and revenue earning equipment | | (1,860,436 | ) | | (1,905,157 | ) | | (2,667,978 | ) | |
| Sales of revenue earning equipment | | 376,743 |
| | 414,249 |
| | 423,605 |
| |
| Sales of operating property and equipment | | 52,257 |
| | 7,051 |
| | 3,891 |
| |
| Acquisitions | | (7,240 | ) | | — |
| | — |
| |
| Collections on direct finance leases and other items | | 73,172 |
| | 76,510 |
| | 70,980 |
| |
| Changes in restricted cash | | (836 | ) | | 1,514 |
| | 8,147 |
| |
| Net cash used in investing activities from continuing operations | | (1,366,340 | ) | | (1,405,833 | ) | | (2,161,355 | ) | |
| Effect of exchange rates on cash, cash equivalents, and restricted cash | | | (4,272 | ) | | 4,694 |
| | (5,539 | ) |
| Increase (decrease) increase in cash, cash equivalents, and restricted cash from continuing operations | | | 3,213 |
| | (13,257 | ) | | 21,828 |
|
| Increase (decrease) in cash, cash equivalents, and restricted cash from discontinued operations | | | 2,260 |
| | (1,654 | ) | | (1,445 | ) |
| Increase (decrease) in cash, cash equivalents, and restricted cash | | | 5,473 |
| | (14,911 | ) | | 20,383 |
|
| Cash, cash equivalents, and restricted cash at January 1 | | | 68,111 |
| | 83,022 |
| | 62,639 |
|
| Cash, cash equivalents, and restricted cash at December 31 | | | $ | 73,584 |
| | $ | 68,111 |
| | $ | 83,022 |
|
| | | | | | | | | | | | | |
| Effect of exchange rates on cash | | (5,539 | ) | | (9,482 | ) | | 37 |
| |
| Increase (decrease) in cash and cash equivalents from continuing operations | | 20,992 |
| | (215 | ) | | 11,955 |
| |
| Decrease in cash and cash equivalents from discontinued operations | | (1,445 | ) | | (1,929 | ) | | (1,102 | ) | |
| Increase (decrease) increase in cash and cash equivalents | | 19,547 |
| | (2,144 | ) | | 10,853 |
| |
| Cash and cash equivalents at January 1 | | 58,801 |
| | 60,945 |
| | 50,092 |
| |
| Cash and cash equivalents at December 31 | | $ | 78,348 |
| | 58,801 |
| | 60,945 |
| |
See accompanying notes to consolidated financial statements.
RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
| | | | | Preferred Stock | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | | | Preferred Stock | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | |
| | | Amount | | Shares | | Par | | Total | | Amount | | Shares | | Par | | Total |
| | | (Dollars in thousands, except share amounts) | | (In thousands, except share amounts) |
| Balance at January 1, 2015 | | $ | — |
| | 53,039,688 |
| | $ | 26,520 |
| | 962,328 |
| | 1,450,509 |
| | (620,270 | ) | | 1,819,087 |
| |
| Balance at January 1, 2017 | | | $ | — |
| | 53,463,118 |
| | $ | 26,732 |
| | $ | 1,032,549 |
| | $ | 1,832,407 |
| | $ | (834,032 | ) | | $ | 2,057,656 |
|
| Adoption of new lease accounting standard (see Note 2) | | | — |
| | — |
| | — |
| | — |
| | (312,571 | ) | | — |
| | (312,571 | ) |
| Comprehensive income | | — |
| | — |
| | — |
| | — |
| | 304,768 |
| | (92,465 | ) | | 212,303 |
| | — |
| | — |
| | — |
| | — |
| | 719,644 |
| | 123,196 |
| | 842,840 |
|
| Common stock dividends declared and paid—$1.56 per share | | — |
| | — |
| | — |
| | — |
| | (83,306 | ) | | — |
| | (83,306 | ) | |
| Common stock dividends declared —$1.80 per share | | | — |
| | — |
| | — |
| | — |
| | (95,507 | ) | | — |
| | (95,507 | ) |
Common stock issued under employee stock option and stock purchase plans (1) | | — |
| | 519,271 |
| | 260 |
| | 23,292 |
| | — |
| | — |
| | 23,552 |
| | — |
| | 578,847 |
| | 289 |
| | 20,200 |
| | — |
| | — |
| | 20,489 |
|
Benefit plan stock purchases (2) | | — |
| | 751 |
| | — |
| | 83 |
| | — |
| | — |
| | 83 |
| |
Benefit plan stock (purchases) sales (2) | | | — |
| | 250 |
| | — |
| | 19 |
| | — |
| | — |
| | 19 |
|
| Common stock repurchases | | — |
| | (69,107 | ) | | (35 | ) | | (1,215 | ) | | (4,891 | ) | | — |
| | (6,141 | ) | | — |
| | (1,086,901 | ) | | (543 | ) | | (20,718 | ) | | (57,055 | ) | | — |
| | (78,316 | ) |
| Share-based compensation | | — |
| | — |
| | — |
| | 21,181 |
| | — |
| | — |
| | 21,181 |
| | — |
| | — |
| | — |
| | 18,967 |
| | — |
| | — |
| | 18,967 |
|
| Tax benefits from share-based compensation | | — |
| | — |
| | — |
| | 352 |
| | — |
| | — |
| | 352 |
| |
| Balance at December 31, 2015 | | — |
| | 53,490,603 |
| | 26,745 |
| | 1,006,021 |
| | 1,667,080 |
| | (712,735 | ) | | 1,987,111 |
| |
| Balance at December 31, 2017 | | | — |
| | 52,955,314 |
| | 26,478 |
| | 1,051,017 |
| | 2,086,918 |
| | (710,836 | ) | | 2,453,577 |
|
| Comprehensive income | | — |
| | — |
| | — |
| | — |
| | 262,477 |
| | (121,297 | ) | | 141,180 |
| | — |
| | — |
| | — |
| | — |
| | 284,613 |
| | (100,231 | ) | | 184,382 |
|
| Common stock dividends declared and paid—$1.70 per share | | — |
| | — |
| | — |
| | — |
| | (91,100 | ) | | — |
| | (91,100 | ) | |
| Common stock dividends declared —$2.12 per share | | | — |
| | — |
| | — |
| | — |
| | (112,553 | ) | | — |
| | (112,553 | ) |
Common stock issued under employee stock option and stock purchase plans (1) | | — |
| | 507,104 |
| | 254 |
| | 17,752 |
| | — |
| | — |
| | 18,006 |
| | — |
| | 585,290 |
| | 293 |
| | 16,659 |
| | — |
| | — |
| | 16,952 |
|
Benefit plan stock sales (2) | | — |
| | 1,709 |
| | 1 |
| | 80 |
| | — |
| | — |
| | 81 |
| |
Benefit plan stock (purchases) sales (2) | | | — |
| | 700 |
| | — |
| | 68 |
| | — |
| | — |
| | 68 |
|
| Common stock repurchases | | — |
| | (536,298 | ) | | (268 | ) | | (9,968 | ) | | (27,038 | ) | | — |
| | (37,274 | ) | | — |
| | (424,819 | ) | | (212 | ) | | (8,305 | ) | | (22,293 | ) | | — |
| | (30,810 | ) |
| Share-based compensation | | — |
| | — |
| | — |
| | 18,664 |
| | — |
| | — |
| | 18,664 |
| | — |
| | — |
| | — |
| | 24,952 |
| | — |
| | — |
| | 24,952 |
|
| Adoption of new accounting standard | | — |
| | — |
| | — |
| | — |
| | 15,607 |
| | | | 15,607 |
| | — |
| | — |
| | — |
| | — |
| | 100,567 |
| | (100,567 | ) | | — |
|
| Balance at December 31, 2016 | | — |
| | 53,463,118 |
| | 26,732 |
| | 1,032,549 |
| | 1,827,026 |
| | (834,032 | ) | | 2,052,275 |
| |
| Balance at December 31, 2018 | | | — |
| | 53,116,485 |
| | 26,559 |
| | 1,084,391 |
| | 2,337,252 |
| | (911,634 | ) | | 2,536,568 |
|
| Comprehensive income | | — |
| | — |
| | — |
| | — |
| | 790,558 |
| | 126,531 |
| | 917,089 |
| | — |
| | — |
| | — |
| | — |
| | (24,410 | ) | | 75,143 |
| | 50,733 |
|
| Common stock dividends declared and paid—$1.80 per share | | — |
| | — |
| | — |
| | — |
| | (95,507 | ) | | — |
| | (95,507 | ) | |
| Common stock dividends declared —$2.20 per share | | | — |
| | — |
| | — |
| | — |
| | (117,349 | ) | | — |
| | (117,349 | ) |
Common stock issued under employee stock option and stock purchase plans (1) | | — |
| | 578,847 |
| | 289 |
| | 20,200 |
| | — |
| | — |
| | 20,489 |
| | — |
| | 632,711 |
| | 316 |
| | 7,877 |
| | — |
| | — |
| | 8,193 |
|
Benefit plan stock sales (2) | | — |
| | 250 |
| | — |
| | 19 |
| | — |
| | — |
| | 19 |
| |
Benefit plan stock (purchases) sales (2) | | | — |
| | 550 |
| | — |
| | 23 |
| | — |
| | — |
| | 23 |
|
| Common stock repurchases | | — |
| | (1,086,901 | ) | | (543 | ) | | (20,718 | ) | | (57,055 | ) | | — |
| | (78,316 | ) | | — |
| | (471,430 | ) | | (236 | ) | | (9,470 | ) | | (17,980 | ) | | — |
| | (27,686 | ) |
| Share-based compensation | | — |
| | — |
| | — |
| | 18,967 |
| | — |
| | — |
| | 18,967 |
| | — |
| | — |
| | — |
| | 25,828 |
| | — |
| | — |
| | 25,828 |
|
| Balance at December 31, 2017 | | $ | — |
| | 52,955,314 |
| | $ | 26,478 |
| | 1,051,017 |
| | 2,465,022 |
| | (707,501 | ) | | 2,835,016 |
| |
| Balance at December 31, 2019 | | | $ | — |
| | 53,278,316 |
| | $ | 26,639 |
| | $ | 1,108,649 |
| | $ | 2,177,513 |
| | $ | (836,491 | ) | | $ | 2,476,310 |
|
__________________
| |
| (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. |
See accompanying notes to consolidated financial statements.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation and Presentation
The consolidated financial statements include the accounts of Ryder System, Inc. (Ryder) and all entities in which Ryder has a controlling voting interest (“subsidiaries”)(subsidiaries) and variable interest entities (“VIEs”)(VIEs) where Ryder is determined to be the primary beneficiary. Ryder is deemed to be the primary beneficiary if we have the power to direct the activities that most significantly impact the entity’s economic performance and we share in the significant risks and rewards of the entity. All significant intercompany accounts and transactions have been eliminated in consolidation. Prior year amounts relatedWe report our financial performance based on 3 business segments: (1) Fleet Management Solutions (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 consulting fees associated with cost-savings programs have been reclassified to conform tocustomers principally in the current period presentation.U.S., Canada and the U.K.; (2) Supply Chain Solutions (SCS), which provides integrated logistics solutions, including distribution, management, dedicated transportation and professional services in North America; and (3) Dedicated Transportation Solutions (DTS), which provides turnkey transportation solutions in the U.S. that includes dedicated vehicles, drivers and engineering and administrative support.
Use of Estimates
The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates are based on management’s best knowledge of historical trends, actions that we may take in the future, and other information available when the consolidated financial statements are prepared. Changes in estimates are recognized in accordance with the accounting rules for the estimate, which is typically in the period when new information becomes available. Areas where the nature of the estimate make it reasonably possible that actual results could materially differ from the amounts estimated include: depreciation and residual value guarantees,values, employee benefit plan obligations, self-insurance accruals, impairment assessments on long-lived assets (including goodwill and indefinite-lived intangible assets), allowance for accounts receivable, income tax liabilities and contingent liabilities.
Cash Equivalents
Cash equivalents represent cash in excess of current operating requirements investedinvestments in short-term, interest-bearing instruments with maturities of three months or less at the date of purchase and are stated at cost.
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, the services have been rendered to customers or delivery has occurred, the pricing is fixed or determinable, and collectibility is reasonably assured. In our evaluation of whether the price is fixed or determinable, we determine whether the total contract consideration in the arrangement could change based on one or more factors. These factors, which vary among each of our segments, are further discussed below. Generally, the judgments made for these purposes do not materially impact the revenue recognized in any period. Sales tax collected from customers and remitted to the applicable taxing authorities is accounted for on a net basis, with no impact on revenue.
Our judgments on collectibility are initially established when a business relationship with a customer is initiated and is continuously monitored as services are provided. We have a credit rating system based on internally developed standards and ratings provided by third parties. Our credit rating system, along with monitoring for delinquent payments, allows us to make decisions as to whether collectibility may not be reasonably assured. Factors considered during this process include historical payment trends, industry risks, liquidity of the customer, years in business, and judgments, liens or bankruptcies. When collectibility is not considered reasonably assured (typically when a customer is 120 days past due), revenue is not recognized until cash is collected from the customer.
We generate revenue primarily through thecontracts with customers to lease, rentalrent and maintenance ofmaintain revenue earning equipment and by providingto provide logistics management and dedicated transportation services. We classify our revenues in oneenter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. We account for a contract when it has approval and commitment from both parties, the rights of the following categories:parties are identified, payment terms are identified, the contract has commercial substance and collectibility of consideration is probable. We recognize revenue upon the transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We generally recognize revenue over time as we perform because of continuous transfer of control to our customers. Revenue is recognized net of amounts collected from customers for taxes, such as sales tax, that are remitted to the applicable taxing authorities.
Our lease and rental revenues are recognized in accordance with the new lease guidance retrospectively adopted in 2019 (refer to Note 2 for further information) and our services and fuel revenues are recognized in accordance with the new revenue recognition guidance adopted in 2018.
Lease & related maintenance and rental
Lease & related maintenance and rental includesrevenues include ChoiceLease and commercial rental revenues from our 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 services, that include the equipment lease, arrangements,maintenance and include equipment, service and financing components.other related services. We do not offer a stand-alone unbundled finance lease of vehicles. For these reasons, both the lease and service componentsa vehicle. We offer rental of vehicles under our leases are included within lease andcommercial rental revenues.product line, which allows customers to supplement their fleet of vehicles on a short-term basis.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Our ChoiceLease arrangements include lease deliverables such asproduct line includes the lease of a vehicle (lease component) and the executory agreement for the maintenance insurance, taxes and other services related(non-lease component). We generally lease new vehicles to the leased vehicles during the lease term. Arrangementour customers. Contract consideration is allocated between the lease deliverablescomponent and non-lease deliverablescomponent based on management’smanagement's best estimate of the relative fair valuestand-alone selling price of each deliverable. The arrangementcomponent. Allocating consideration allocatedbetween the lease and maintenance components in our ChoiceLease product requires significant judgment. We do not sell the components of our ChoiceLease product offering on a stand-alone basis, therefore significant judgment is required to determine the stand-alone selling prices of the lease deliverables is accounted for pursuantand maintenance components in order to accounting guidanceallocate the consideration on leases. a relative stand-alone selling price basis. For further information regarding our stand-alone selling price estimation process, refer to the "Significant Judgments and Estimates" section below.
Our ChoiceLease arrangements provideproduct provides 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 for the services to be provided that month. Variableand variable charges are typically billed a month in arrears. Costs associated with the activities performed under our leasing arrangements are primarily comprised of labor, parts, outside work, depreciation, licenses, insurance, operating taxes and vehicle financing. These costs are expensed as incurred except for depreciation. Refer to “Summary of Significant Accounting Policies – Revenue Earning Equipment, Operating Property and Equipment, and Depreciation” for information regarding our depreciation policies. Non-chargeable maintenance costs have been allocated and reflected within “Cost of lease and rental” based on the maintenance-related labor costs relative to all product lines.
Revenue from the lease component of ChoiceLease and rental agreements is recognized based on the classification of the arrangement, typically as either an operating or direct financing lease (DFL).
The majoritya sales-type lease. Our commercial rental product includes the short-term rental of our leases and alla vehicle (one day up to one year in length). All of our rental arrangements are classified as operating leases and therefore, we recognize lease and commercial rental revenue is recognized on a straight-line basisbasis.
The majority of our leases are classified as it becomes receivableoperating leases and we recognize revenue for the lease component of these agreements on a straight-line basis. The non-lease component for maintenance services are not typically performed evenly over the termlife of a ChoiceLease contract as the level of maintenance provided generally increases as vehicles age. Therefore, we recognize maintenance revenue consistent with the estimated pattern of the costs to maintain the underlying vehicles. This generally results in the recognition of a contract liability for the portion of the customer's bill allocated to the maintenance service component of the agreement. The non-lease component for maintenance included in lease or& related maintenance and rental arrangement. revenues was $950 million, $909 million and $832 million in 2019, 2018 and 2017, respectively.
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). ChoiceLeaseLease and rental agreements also provide for vehicle usage charges based on a time charge and/or a fixed per-mile charge. The fixed time charge, the fixed 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 effect of CPI changes is implemented or the equipment usage or CPI change occurs.
The non-lease deliverables of our ChoiceLease arrangements are comprised of access This consideration is allocated to substitute vehicles, emergency road service, and safety services. These services are available to our customers throughout the lease term. Accordingly, revenueand 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 overfor 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.
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 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 term.and maintenance components based on the same allocation percentages at contract inception (or the most recent contract modification) when earned.
Leases not classified as operating leases are generally considered direct financingsales-type leases. We recognize revenue for direct financingsales-type leases using the effective interest method, which provides a constant periodic rate of return on the outstanding investment onin the lease. Cash receipts on impaired direct financingWe generally lease receivables are first applied tonew vehicles under our sales-type lease arrangements. Therefore, there is generally not a difference between the direct financingnet investment in the lease receivable and then to any unrecognized income. A direct financing lease receivable is considered impaired, based on current information and events, if it is probable that we will be unable to collect all amounts due according to the contractual termscarrying value of the lease.vehicles. As a result, there is no selling profit or loss at lease commencement.
Services
Services include SelectCare and other revenues from our FMS business segment and all SCS and DTS and SCS revenues.
Under our SelectCare arrangements, we provide maintenance and repairs required to keep a vehicle in good operating condition, scheduleperform preventive maintenance inspections, and provide access to emergency road service, and substitute vehicles. The vast majority of our services are routine services performed on a recurring basis throughout the term of the arrangement. From time to time, we provide non-routine major repair services in order to place a vehicle back in service. Revenue from SelectCare contracts is recognized on a straight-line basis as maintenance services are rendered over the terms of the related arrangements.
Through our SelectCare product line, we provide maintenance services to customers who do not choose to lease vehicles from us. SelectCare maintenance arrangements are generally cancelable, without penalty, after one year with 60 days prior written notice. Our maintenance service arrangement provides for a monthly fixed charge and a monthly variable charge based on
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
mileage or time usage. Fixed charges are typically billed at the beginning of the month for the services to be provided that month. Variable charges are typically billed a month in arrears. Most maintenance agreements allow for rate changes based upon changes in the CPI. The fixed per-mile charge and the changes in rates attributed to changes in the CPI are recognized as earned.
The maintenance service is the only performance obligation in SelectCare contracts. This single performance obligation is satisfied at a point in time for transactional maintenance services or over time for contract maintenance agreements. For contract maintenance agreements, the maintenance performance obligation is satisfied as services are performed during the contract period. Revenue from SelectCare contracts is recognized as maintenance services are rendered over the terms of the related arrangements. We generally account for long-term maintenance contracts as one-year contracts since our maintenance arrangements are generally cancelable, without penalty, after one year. We do not disclose information about remaining performance obligations for these contracts as the contract terms are generally deemed to be less than a year.
Costs associated with the activities performed under our maintenance arrangements are primarily comprised of labor, parts and outside repair work. These costs are expensed as incurred. Non-chargeable maintenance costs have been allocated and reflected within “Cost of services” based on the proportionate maintenance-related labor costs relative to all product lines.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In our SCS business segment, we offer a broad range of logistics management services designed to optimize the supply chain and address the key business requirements of our customers supported by a variety of technology and engineering solutions. SCS operates by industry verticals (Automotive, Technology and Healthcare, Consumer Packaged Goods and Retail, and Industrial) to enable our teams to focus on the specific needs of their customers. In our DTS business segment, we combine equipment, maintenance, drivers, administrative services and additional services to provide customers with a single integrated dedicated transportation solution. DTS transportation solutions are customized for our customers based on a transportation analysis to create a logistics design that includes the routing and scheduling of vehicles, the efficient use of vehicle capacity and overall asset utilization.
RevenueRevenues from DTSSCS and SCSDTS service contracts isare recognized as services are rendered in accordance with contract terms, which typically include discrete(1) fixed and variable billing rates, (2) cost-plus billing rates (input method based on actual costs incurred to perform services and a contracted mark-up), or (3) variable only or fixed only billing rates for the services. In certainOur billing structure aligns with the value transferred to our customers. As a practical expedient, we do not disclose information about remaining performance obligations for these contracts since the revenue recognized corresponds to the amount we have the right to invoice for services performed.
Our customers contract us to provide an integrated service of transportation or supply chain logistical services into a portion ofsingle transportation or supply chain solution. Therefore, we typically recognize SCS and DTS service contracts as one performance obligation satisfied over time. Less commonly, however, we may promise to provide distinct services within a contract, in which case we separate the contract consideration may be contingent uponinto more than one performance obligation. If a contract is separated into more than one performance obligation, we allocate the satisfactiontotal transaction price to each performance obligation in relation to the estimated stand-alone selling prices of each performance criteria, attainment of pain/gain share thresholds or volume thresholds. The contingent portion of the revenueobligation. We infrequently sell standard products with observable stand-alone selling prices. More frequently, we sell a customized customer-specific solution, and in these arrangements is not considered fixed or determinable untilcases we use the expected cost plus a margin approach to estimate the stand-alone selling price of each performance criteria or thresholds have been met. In transportation management arrangements where we act as principal,obligation.
Fuel Services
Fuel services revenue is reported on a gross basis, without deducting third-party purchased transportation costs. To the extent that we are acting as an agent in the arrangement, revenue is reported on a net basis, after deducting purchased transportation costs.
Fuel
Fuel services include fuel services revenue from our FMS business segment. We provide our FMS customers with access to fuel at our maintenance facilities across the United States and Canada. Fuel services revenue is invoiced to customers at contracted rates separate from other services being provided in other contracts, or at retail prices. Revenue from fuel services is recognized when fuel is delivered to customers. Fuel is largely a pass-through to our customers, for which we realize minimal changes in profitability during periods of steady market fuel prices. However, profitability may be positively or negatively impacted by sudden increases or decreases in market fuel prices during a short period of time as customer pricing for fuel services is established based on trailing market fuel costs.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Significant Judgments and Estimates
We allocate the contract consideration from our ChoiceLease arrangements between the lease and maintenance components based on the relative stand-alone selling prices of each of those services. We do not sell the components of our ChoiceLease product offering on a stand-alone basis, therefore significant judgment is required to determine the stand-alone selling price of the lease component to allocate the consideration on a relative stand-alone selling price basis. We sell maintenance services separately through our SelectCare arrangements.
For the lease component, we estimate the stand-alone selling price using the projected cash outflows related to the underlying leased vehicle, net of the estimated disposal proceeds, and a certain targeted return considering the weighted average cost of capital. For the non-lease component of the contract, we estimate the stand-alone selling 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 the 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.
Our SCS and DTS contracts with customers often include promises to transfer multiple services to a customer. Determining whether these services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Our SCS and DTS services depend on a significant level of integration and interdependency between the services provided within a contract. Judgment is required to determine whether each service is considered distinct and accounted for as a separate performance obligation, or accounted for together as a significant integrated service and recognized over time. In making this judgment, we consider whether the services provided, within the context of the contract, represent the transfer of individual services or a combined bundle of services to the customer. This involves evaluating the promises to a customer within a contract to identify the services that need to be performed in order for the promise to be satisfied. Since multiple services that occur at different points in time during a contract may be accounted for as an integrated service, judgment is required to assess the pattern of delivery to our customers.
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 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 primarily of the portion of our ChoiceLease billings allocated to maintenance services that have not yet been performed. 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. Refer to Note 4, "Revenue," for further information.
Costs to Obtain and Fulfill a Contract
Our incremental direct costs of obtaining and fulfilling a contract, which primarily consist of sales commissions and start-up costs, are capitalized and amortized over the period of contract performance or a longer period, generally the estimated life of the customer relationship if renewals are expected and the renewal commission is not commensurate with the initial commission. We capitalize incremental direct costs of obtaining a contract that i) relate directly to the contract and ii) are expected to be recovered through revenue generated under the contract. This requires an evaluation of whether the costs are incremental and would not have occurred absent the customer contract.
The current and non-current portions of incremental costs to obtain and fulfill a contract are included in “Prepaid expenses and other current assets” and “Sales-type leases and other assets,” respectively, in the Consolidated Balance Sheets. Costs are amortized in “Selling, general and administrative expenses” in the Consolidated Statements of Earnings on a straight-line basis over the expected period of benefit. Refer to Note 4, "Revenue," for further information.
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Leases
Leases as Lessor
We lease revenue earning equipment to customers for periods generally 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. Refer to Note 7, "Revenue Earning Equipment, Net" for further information on our estimates of residual values and useful lives of revenue earning equipment which impact our sales-type leases.
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 the new lease accounting standard, 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 to property taxes, insurance and maintenance as well as changes in CPI for leased facilities; usage-based fees 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 do not recognize a ROU asset or liability and 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 facilities are generally three to five years with 1 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 with 0 extension options. For purposes of calculating operating lease 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. Refer to Note 13, "Leases," for additional information.
Accounts Receivable Allowance
We maintain an allowance for uncollectible customer receivables and an allowance for billing adjustments related to certain discounts and billing corrections.other customer concessions. Estimates are updated regularly based on historical experience of bad debts and billing adjustments processed, current collection trends, and aging analysis. Accounts are charged against the allowance when determined to be uncollectible.
Inventories
Inventories, which consist primarily of fuel, tires and vehicle parts, are valued usingat the lower of cost andusing the weighted-average cost basis, or net realizable value.
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Revenue Earning Equipment, Operating Property and Equipment, and Depreciation
Revenue earning equipment, comprised of vehicles, and operating property and equipment are initially recorded at cost inclusive of vendor rebates. Revenue earning equipment and operating property and equipment under capital leaserecognized as finance leases are initially generally recorded at the lower of the present value of minimumthe lease payments to be made over the lease term or fair value. Vehicle repairs and maintenance that extend the life or increase the value of a vehicle are capitalized, whereas ordinary maintenancerepairs and repairsmaintenance (including tire replacement or repair) are expensed as incurred. Direct costs incurred in connection with developing or obtaining internal-use software are capitalized. Costs incurred during the preliminary stage of a software development project, stage, as well as maintenance and training costs, are expensed as incurred.
Provision for depreciation is computed using the straight-line method on all depreciable assets. Depreciation expense has been recognized throughout the Consolidated Statement of Earnings depending on the nature of the related asset. We periodically review and adjust, as appropriate, the estimated residual values and useful lives of revenue earning equipment for purposes of recording depreciation expense as described in Note 7, “Revenue Earning Equipment, Net”.
Leasehold improvements are depreciated over the shorter of their estimated useful lives or the term of the related lease, which may include one or more option renewal periods where failure to exercise such options would result in an economic penalty in such amount that renewal appears, at the inception of the lease, to be reasonably assured.lease. If a substantial additional investment is made in a leased property during the term of the lease, we re-evaluate the lease term to determine whether the investment, together with any penalties related to non-renewal, would constitute an economic penalty in such amount that renewal appears to be reasonably assured.
Provision for depreciation is computed using the straight-line method on all depreciable assets. Depreciation expense has been recognized throughout the Consolidated Statement of Earnings depending on the nature of the related asset. We periodically review and adjust, as appropriate, the residual values and useful lives of revenue earning equipment. Our review of the residual values and useful lives 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. 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.
We routinely dispose of used revenue earning equipment as part of our FMS business. Revenue earning equipment heldRefer to Note 7, “Revenue Earning Equipment, Net” for sale is stated at the lower of carrying amount or fair value less costs to sell. 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. Fair value is determined based upon recent market prices obtained from our own sales experience for sales of each class of similar assets and vehicle condition, as well as anticipated market price changes. Losses on vehicles held for sale for which carrying values exceeded fair value are recognized at the time they arrive at our used truck centers and are presented within "Used vehicle sales, net" in the Consolidated Statements of Earnings.
more information. Gains and losses on sales of operating property and equipment are reflected in “Miscellaneous income, net.”net” in the Consolidated Statement of Earnings.
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Goodwill and Other Intangible Assets
Goodwill on acquisitions represents the excess of the purchase price over the fair value of the underlying acquired net tangible and intangible assets. Factors that contribute to the recognition of goodwill in our acquisitions include (i) expected growth rates and profitability of the acquired companies, (ii) securing buyer-specific synergies that increase revenue and profits and are not otherwise available to market participants, (iii) significant cost savings opportunities, (iv) experienced workforce and (v) our strategies for growth in sales, income and cash flows.
Goodwill and other intangible assets with indefinite useful lives are not amortized, but rather, are tested for impairment at least annually. We have historically performed the annual impairment testannually as of April 1 for all of our reporting units. During the three months ended December 31, 2017, we elected to change our annual impairment assessment date from April 1 to October 1 for all of our reporting units. We believe this change, which represents a change in methodeach year, or more frequently if events or circumstances indicate the carrying value of applying an accounting principle, is preferable under our circumstances. The change was made to align the annual goodwill impairment test date with our strategic and business plan time lines and to reduce the risk that an interim impairment triggering event might occur between the annual goodwill impairment test date and the year-end balance sheet date.
may be impaired. In evaluating goodwill for impairment, we have the option to first assess qualitative factors to determine whether further impairment testing is necessary. Among other relevant events and circumstances that affect the fair value of reporting units, we consider individual factorsnecessary, such as macroeconomic conditions, changes in our industry and the markets in which we operate, and our market capitalization as well as our reporting units' historical and expected future financial performance. Prior to January 1, 2017, if
If we concludedconclude that it is more likely than not that a reporting unit's fair value is less than its carrying value or we bypass the optional qualitative assessment, recoverability of goodwill was evaluated using a two-step process. The first step involved a comparison ofis assessed by comparing the fair value of each of ourthe reporting unitsunit with its carrying amount. If a reporting unit’sunit's carrying amount exceeded its fair value the second step was performed. The second step involved a comparison of the implied fair value and carrying value of that reporting unit’s goodwill. To the extent that a reporting unit’s carrying amount exceeded the implied fair value of its goodwill, an impairment loss was recognized.
Effective January 1, 2017, we prospectively adopted the provisions of ASU 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350), whicheliminates the second step of the goodwill impairment test. Therefore, for goodwill impairment tests occurring after January 1, 2017, if the carrying value of a reporting unit exceeds its fair value, we will measure any goodwill impairment losses as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit.
Our valuationestimate of fair value for certain reporting units is determined based on a discounted future cash flow modelcombination of both an income and market approach. Under the market approach, we use a selection of comparable publicly-traded companies that uses five years of projected cash flows andcorrespond to the reporting unit to derive a terminal value based on growth assumptions. For certain reporting units,market-based multiple. Under the income approach, the fair value of the reporting unit is determinedestimated based on the applicationdiscounted present value of current trading multiples for comparable publicly-traded companies and the historical pricing multiples for comparable merger and acquisition transactions that have occurred in our industry.projected future cash flows. Rates used to discount cash flows are dependent upon interest rates and the cost of capital based on our industry and capital structure, adjusted for equity and size risk premiums based on market capitalization. Estimates of future cash flows are dependent on our knowledge and experience about past and current events and significant judgments and assumptions about conditions we expect to exist, including revenue growth rates, margins, long-term growth rates, capital requirements, proceeds from the sale of used vehicles, the ability to utilize our tax net operating losses, and useful lives.the discount rate. Our estimates of cash flows are also based on historical and future operating performance, economic conditions and actions we expect to take. In addition to these factors, our DTSSCS and SCSDTS reporting units are dependent on several key customers or industry sectors. The loss of a key customer may have a significant impact to our DTSSCS or SCSDTS reporting units, causing us to assess whether or not the event resulted in a goodwill impairment loss.
In making our assessments of fair value, we rely on our knowledge and experience about past and current events and assumptions about conditions we expect to exist in the future. These assumptions are based on a number of factors, including future operating performance, economic conditions, actions we expect to take and present value techniques. There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of goodwill impairment. It is
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possible that assumptions underlying the impairment analysis will change in such a manner that impairment in value may occur in the future.
Identifiable intangible assets not subject to amortization are assessed for impairment using a similar process used to evaluate goodwill as described above. Intangible assets with finite lives are amortized over their respective estimated useful lives. Identifiable intangible assets that are subject to amortization are evaluated for impairment using a similar process used to evaluate long-lived assets described below.
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Impairment of Long-Lived Assets Other than Goodwill and Indefinite-Lived Intangible Assets
Long-lived assets held and used, including revenue earning equipment, operating property and equipment, and intangible assets with finite lives, are tested for recoverability when circumstances indicate that the carrying amount of assets may not be recoverable. Recoverability of long-lived assets is evaluated by comparing the carrying value of an asset or asset group to management’s best estimate of the undiscounted future operating cash flows (excluding interest charges) expected to be generated by the asset or asset group. If these comparisons indicate that the carrying value of the asset or asset group is not recoverable, an impairment loss is recognized for the amount by which the carrying value of the asset or asset group exceeds fair value. Fair value is determined by a quoted market price, if available, or an estimate of projected future operating cash flows, discounted using a rate that reflects the related operating segment’s average cost of funds. Long-lived assets to be disposed of, including revenue earning equipment and operating property and equipment, and indefinite-lived intangible assets, are reported at the lower of carrying amount or fair value less costs to sell.
Self-Insurance Accruals
We retain a portion of the accident risk under auto liability, workers’ compensation and other insurance programs. Under our insurance programs, we retain the risk of loss in various amounts, generally up to $3$3 million on a per occurrence basis. Self-insurance accruals are based primarily on an actuarially estimated, undiscounted cost of claims, which includes claims incurred but not reported. Such liabilities are based on estimates. Historical loss development factors are utilized to project the future development of incurred losses, and these amounts are adjusted based upon actual claim experience and settlements. While we believe that the amounts are adequate, there can be no assurance that changes to our actuarial estimates may not occur due to limitations inherent in the estimation process. Changes in the actuarial estimates of these accrualsliabilities are charged or credited to earnings in the period determined. Amounts estimated to be paid within the next year have been classified as “Accrued expenses and other current liabilities” with the remainder included in “Other non-current liabilities” in our Consolidated Balance Sheets.
We also maintain additional insurance at certain amounts in excess of our respective underlying retention. Amounts recoverable from insurance companies are not offset against the related accrualliability as our insurance policies do not extinguish or provide legal release from the obligation to make payments related to such risk-related losses. Amounts expected to be received within the next year from insurance companies have been included within “Receivables, net” with the remainder included in “Direct financing“Sales-type leases and other assets” and are recognized only when realization of the claim for recovery is considered probable. The accrual for the related claim has been classified within “Accrued expenses and other current liabilities” if it is estimated to be paid within the next year, otherwise it has been classified in “Other non-current liabilities” in our Consolidated Balance Sheets.
Income Taxes
Our provision for income taxes is based on reported earnings before income taxes. Deferred taxes are recognized for the future tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, using tax rates in effect for the years in which the differences are expected to reverse.
The effects of changes in tax laws on deferred tax balances are recognized in the period the new legislation is enacted.
Valuation allowances are recognized to reduce deferred tax assets to the amount that is more likely than not to be realized. In assessing the likelihood of realization, management considers estimates of future sources of taxable income. We calculate our current and deferred tax position based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years. Adjustments based on filed returns are recorded when identified.
We are subject to tax audits in numerous jurisdictions in the U.S. and around the world. Tax audits by their very nature are often complex and can require several years to complete. In the normal course of business, we are subject to challenges from the Internal Revenue Service (IRS) and other tax authorities regarding amounts of taxes due. These challenges may alter the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions. As part of our calculation of the provision for income taxes on earnings, we determine whether the benefits of our tax positions are at least more likely than not of being sustained upon audit based on the technical merits of the tax position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Such accruals require management to make estimates and judgments with respect to the ultimate outcome of a tax
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audit. Actual results could vary materially from these estimates. We adjust these reserves as well as the impact of any related interest and penalties in light of changing facts and circumstances, such as the progress of a tax audit.
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Interest and penalties related to income tax exposures are recognized as incurred and included in “(Benefits"Provision for (benefit from) provision for income taxes” in our Consolidated Statements of Earnings. Accruals for income tax exposures, including penalties and interest, expected to be settled within the next year are included in “Accrued expenses and other current liabilities” with the remainder included in “Other non-current liabilities” in our Consolidated Balance Sheets. The federal benefit from state income tax exposures is included in “Deferred income taxes” in our Consolidated Balance Sheets.
Severance and Contract Termination Costs
We recognize liabilities for severance and contract termination costs based upon the nature of the cost to be incurred. For involuntary separation plans that are completed within the guidelines of our written involuntary separation plan, we recognize the liability when it is probable and reasonably estimable. For one-time termination benefits, such as additional severance pay or benefit payouts, and other exit costs, such as contract termination costs, the liability is measured and recognized initially at fair value in the period in which the liability is incurred, with subsequent changes to the liability recognized as adjustments in the period of change. Severance related to position eliminations that are part of a restructuring plan is included in "Restructuring charges and fees,other items, net” in the Consolidated Statements of Earnings. Severance costs that are not part of a restructuring plan are recognized in the period incurred as a direct cost of revenue or within “Selling, general and administrative expenses,”expenses” in the Consolidated Statements of Earnings depending upon the nature of the eliminated position.
Environmental Expenditures
We recognize liabilities for environmental assessments and/or cleanupmatters when it is probable a loss has been incurred and the costs can be reasonably estimated. Environmental liability estimates may include costs such as anticipated site testing, consulting, remediation, disposal, post-remediation monitoring and legal fees, as appropriate. The liability does not reflect possible recoveries from insurance companies or reimbursement of remediation costs by state agencies, but does include estimates of cost sharing with other potentially responsible parties. Estimates are not discounted, as the timing of the anticipated cash payments is not fixed or readily determinable. Subsequent adjustments to initial estimates are recognized as necessary based upon additional information developed in subsequent periods. In future periods, new laws or regulations, advances in remediation technology, andor additional information about the ultimate remediation methodology to be used could significantly change our estimates. Claims for reimbursement of remediation costs are recognized when recovery is deemed probable.
Derivative Instruments and Hedging Activities
We use financial instruments, including forward exchange contracts and swaps, to manage our exposures to movements in interest rates and foreign currency exchange rates. The use of these financial instruments modifies the exposure of these risks with the intent to reduce the risk or cost to us. We do not enter into derivative financial instruments for trading purposes. We limit our risk that counterparties to the derivative contracts will default and not make payments by entering into derivative contracts only with counterparties comprised of large banks and financial institutions that meet established credit criteria. We do not expect to incur any losses as a result of counterparty default.
On the date a derivative contract is executed, we formally document, among other items, the intended hedging designation and relationship, along with the risk management objectives and strategies for entering into the derivative contract. We also formally assess, both at inception and on an ongoing basis, whether the derivatives we used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Cash flows from derivatives that are accounted for as hedges are classified in the Consolidated Statements of Cash Flows in the same category as the items being hedged. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, we discontinue hedge accounting prospectively. The fair value of our derivatives was not material as of December 31, 2019 and 2018.
The hedging designation may be classified as one of the following:
No Hedging Designation. The unrealized gain or loss on a derivative instrument not designated as an accounting hedging instrument is recognized immediately in earnings.
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Fair Value Hedge. A hedge of a recognized asset or liability or an unrecognized firm commitment is considered a fair value hedge. For fair value hedges, both the effective and ineffective portions of the changes in the fair value of the derivative, along with the gain or loss on the hedged item that is attributable to the hedged risk, are both recognized in earnings.
Cash Flow Hedge. A hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability is considered a cash flow hedge. The effective portion of the change in the fair value of a derivative that is declared as a cash flow hedge is recognized net of tax in “Accumulated other comprehensive loss” in the Consolidated Balance Sheets until earnings are affected by the variability in cash flows of the designated hedged item.
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Net Investment Hedge. A hedge of a net investment in a foreign operation is considered a net investment hedge. The effective portion of the change in the fair value of the derivative used as a net investment hedge of a foreign operation is recognized in the currency translation adjustment account within “Accumulated other comprehensive loss.” The ineffective portion, if any, on the hedged item that is attributable to the hedged risk is recognized in earnings and reported in “Miscellaneous income, net” in the Consolidated Statements of Earnings.
Foreign Currency Translation
Our foreign operations generally use local currency as their functional currency. Assets and liabilities of these operations are translated at the exchange rates in effect on the balance sheet date. Items in the Consolidated Statements of Earnings are translated at the average exchange rates for the year. The impact of currency fluctuations on our balance sheet is presented in “Changes in cumulative translation adjustment and other” in the Consolidated Statements of Comprehensive Income. Upon sale, or upon complete or substantially complete liquidation of an investment in a foreign operation, the currency translation adjustment attributable to that operation is removed from accumulated other comprehensive loss and is reported as part of the gain or loss on sale or liquidation of the investment for the period during which the sale or liquidation occurs. Gains and losses resulting from foreign currency transactions are recognized in “Miscellaneous income, net” in the Consolidated Statements of Earnings.
Share-Based Compensation
The fair value of stock option awards and nonvested stock awards other than restricted stock units (RSUs), is expensed on a straight-line basis over the vesting period of the awards. RSUs are expensed in the year they are granted. Windfall tax benefits and tax shortfalls are charged directly to income tax expense.
Earnings Per Share
Earnings per share is computed using the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. Restricted stock unitsRSUs are considered participating securities since the share-based awards contain a non-forfeitable right to dividend equivalents irrespective of whether the awards ultimately vest. Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities based on the weighted average shares outstanding during the period.
Diluted earnings per common share reflect the dilutive effect of potential common shares from stock options and other nonparticipating nonvested stock. The dilutive effect of stock options is computed using the treasury stock method, which assumes any proceeds that could be obtained upon the exercise of stock options or vesting of stock awards would be used to purchase common shares at the average market price for the period. The assumed proceeds include the purchase price the grantee pays and the unrecognized compensation expense at the end of each period.
Share Repurchases
Repurchases of shares of common stock are made periodically in open-market transactions and are subject to market conditions, legal requirements and other factors. The cost of share repurchases is allocated between common stockadditional paid-in capital and retained earnings based on the amount of additional paid-in capital at the time of the share repurchase.
Defined Benefit Pension and Postretirement Benefit Plans
The funded status of our defined benefit pension plans and postretirement benefit plans are recognized in the Consolidated Balance Sheets. The funded status is measured as the difference between the fair value of plan assets and the benefit obligation at December 31, the measurement date. The fair value of plan assets represents the current market value of contributions made to irrevocable trusts, held for the sole benefit of participants, which are invested by the trusts. For defined benefit pension plans, the benefit obligation represents the actuarial present value of benefits expected to be paid upon retirement based on estimated
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future compensation levels. For postretirement benefit plans, the benefit obligation represents the actuarial present value of postretirement benefits attributed to employee services already rendered. Overfunded plans, with the fair value of plan assets exceeding the benefit obligation, are aggregated and reported as a prepaid pension asset. Underfunded plans, with the benefit obligation exceeding the fair value of plan assets, are aggregated and reported as a pension and postretirement benefit liability.
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The current portion of pension and postretirement benefit liabilities represents the actuarial present value of benefits payable within the next year exceeding the fair value of plan assets (if funded), measured on a plan-by-plan basis. These liabilities are recognized in “Accrued expenses and other current liabilities” in the Consolidated Balance Sheets.
Pension and postretirement benefit expense includes service cost, interest cost, and expected return on plan assets (if funded). Pension costs include amortization of net prior service costs loss and net actuarial loss. Postretirement costs include amortization of net prior service credit and net actuarial gain. Service cost represents the actuarial present value of participant benefits earned in the current year. The expected return on plan assets represents the average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the obligation. Prior service creditcost represents the impact of negative plan amendments. Net actuarial losses arise as a result of differences between actual experience and assumptions or as a result of changes in actuarial assumptions. Net actuarial gain/loss and prior service cost/credit not recognized as a component of pension and postretirement benefit expense as they arise are recognized as "Change in net actuarial loss and prior service credit,cost, net of tax" in the Consolidated Statements of Comprehensive Income. These pension and postretirement items are subsequently amortized as a component of pension and postretirement benefit expense over the remaining service period if the majority of the employees are active, otherwise over the remaining life expectancy, provided such amounts exceed thresholds based upon the benefit obligation or the value of plan assets.
The measurement of benefit obligations and pension and postretirement benefit expense is based on estimates and assumptions approved by management. These valuations reflect the terms of the plans and use participant-specific information such as compensation, age and years of service, as well as certain assumptions, including estimates of discount rates, expected return on plan assets, rate of compensation increases, interest rates and mortality rates.
Fair Value Measurements
We carry various assets and liabilities at fair value in the Consolidated Balance Sheets. The most significant assets and liabilities areSheets, including vehicles held for sale, which are stated at the lower of carrying amount or fair value less costs to sell, investments held in Rabbi Trusts and derivatives.pension assets.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurements are classified based on the following fair value hierarchy:
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| Level 1 | Quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. |
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| Level 2 | Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or model-derived valuations or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
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| Level 3 | Unobservable inputs for the asset or liability. These inputs reflect our own assumptions about the assumptions a market participant would use in pricing the asset or liability. |
When available, we use unadjusted quoted market prices to measure fair value and classify such measurements within Level 1. If quoted prices are not available, fair value is based upon model-driven valuations that use current market-based or independently sourced market parameters such as interest rates and currency rates. Items valued using these models are classified according to the lowest level input or value driver that is significant to the valuation.
The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the immediate or short-term maturities of these financial instruments. Revenue earning equipment held for sale is measured at fair value on a nonrecurring basis and is stated at the lower of carrying amount or fair value less costs to sell. Investments held in Rabbi Trusts and derivatives are carried at fair value on a recurring basis.
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Investments held in Rabbi Trusts include exchange-traded equity securities and mutual funds. Fair values for these investments are based on quoted prices in active markets. For derivatives, fair valueRefer to Note 20, "Employee Benefit Plans," for further information regarding pension assets.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Income Taxes
In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This pronouncement enhances and simplifies various aspects of income tax accounting guidance. Among other things, the amendment removes the year-to-date loss limitation in interim-period tax accounting and requires entities to reflect the effect of an enacted change in tax laws in the interim period that includes the enactment date of the new legislation. The standard is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact of the adoption of this update on our consolidated financial position, results of operations, and cash flows.
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 addresses 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.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326). This pronouncement, along with subsequent ASUs issued to clarify certain provisions of ASU 2016-13, modifies the measurement of expected credit losses of certain financial instruments, including accounts receivable (excluding those related to operating leases) and net investments in sales-type leases. Among other things, these amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on model-driven valuations usinghistorical experience, current conditions, and reasonable and supportable forecasts. The standard is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The standard requires a cumulative-effect adjustment to the LIBOR rate or observable forward foreign exchange rates, which are observable at commonly quoted intervals for the full termstatement of financial position as of the beginning of the first reporting period in which the guidance is effective. Periods prior to the adoption date that are presented for comparative purposes are not adjusted. We are currently evaluating the impact of the adoption of this update on our consolidated financial instrument.position, results of operations, and cash flows.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. RECENT ACCOUNTING PRONOUNCEMENTS
DerivativesLeases as Lessor
We lease revenue earning equipment to customers for periods generally ranging from three to seven years for trucks and Hedgingtractors 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. Refer to Note 7, "Revenue Earning Equipment, Net" for further information on our estimates of residual values and useful lives of revenue earning equipment which impact our sales-type leases.
In August 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-12, DerivativesLeases as Lessee
We lease facilities, revenue earning equipment, material handling equipment, automated washing machines, vehicles 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 accountingoffice equipment. We determine if an arrangement is or contains a lease at inception. Effective with the risk management activitiesadoption of the new lease accounting standard, we have established right-of-use (ROU) assets, which represent our right to use an entity. The amendments in this updateunderlying 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 effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. Werecognized based on the present value of lease payments over the lease term at commencement date. As most of our leases do not expect this standardprovide 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 to have an impact onproperty taxes, insurance and maintenance as well as changes in CPI for leased facilities; usage-based fees 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 consolidated financial position, results of operationsreal estate leases, we do not recognize a ROU asset or cash flows.
Share-Based Compensation
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The amendmentsliability and recognize lease payments in this update are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. We will adopt the standard as of January 1, 2018,our income statement on a prospective basis. We do not expect this standard to have an impact on our consolidated financial position, results of operations or cash flows.
Employee Benefits Plans
In March 2017,straight-line basis over the FASB issued ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Costlease term and Net Periodic Postretirement Benefit Cost, which requires an employer to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The standard is effective January 1, 2018, with early adoption as of January 1, 2017 permitted. We adopted the standard during the first quarter of 2017 and recorded the other components of net benefit cost within "Non-operating pension costs" in the Consolidated Statements of Earnings for both the current and prior year periods.
Intangibles - Goodwill and Other
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350), which requires an entity to perform a one-step quantitative impairment test, whereby a goodwill impairment loss will be measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). It eliminates the current two-step goodwill impairment test, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The standard is effective January 1, 2020, with early adoption as of January 1, 2017 permitted. We adopted the standard during the first quarter of 2017 and it did not have an impact on our consolidated financial position, results of operations or cash flows.
Statement of Cash Flows
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), which clarifies how companies present and classify certain cash receipts and cashvariable lease payments in the statementperiod in which the obligation for those payments is incurred.
Lease terms for facilities are generally three to five years with 1 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 with 0 extension options. For purposes of cash flows. In November 2016,calculating operating lease ROU assets and operating lease liabilities, lease terms may be deemed to include options to extend or terminate the FASB issuedlease 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. Refer to Note 13, "Leases," for additional guidanceinformation.
Accounts Receivable Allowance
We maintain an allowance for uncollectible customer receivables and an allowance for billing adjustments related to certain discounts and other customer concessions. Estimates are updated regularly based on historical experience of bad debts and billing adjustments processed, current collection trends, and aging analysis. Accounts are charged against the statementallowance when determined to be uncollectible.
Inventories
Inventories, which consist primarily of cash flows, which requires companies to explainfuel, tires and vehicle parts, are valued at the change duringlower of cost using the period in the total of cash, cash equivalents, and restricted cashweighted-average cost basis, or restricted cash equivalents. The standard is effective January 1, 2018, with early adoption permitted. We will adopt the standard as of January 1, 2018, on a retrospective basis. We do not expect this standard to have a material impact on the presentation of our consolidated cash flows.net realizable value.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Revenue Earning Equipment, Operating Property and Equipment, and Depreciation
Leases
In February 2016,Revenue earning equipment, comprised of vehicles, and operating property and equipment are initially recorded at cost inclusive of vendor rebates. Revenue earning equipment and operating property and equipment recognized as finance leases are initially generally recorded at the FASB issued ASU No. 2016-02, Leases (Topic 842), which sets outlower of the principles forpresent value of the recognition, measurement, presentation and disclosure of leases. The standard requires lesseeslease payments to classify leases as either finance or operating leases. This classification will determine whether the related expense will be recognized based on asset amortization and interest on the obligation or on a straight-line basismade over the lease term ofor fair value. Vehicle repairs and maintenance that extend the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a termlife or increase the value of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. We do not expect the lessee requirements to have a material impact on our consolidated financial position, results of operations or cash flows.
The new standard continues to require lessors to separate the lease component from the non-lease component; however, it provides clarification on the scope of non-lease components (e.g., maintenance services). The new standard also provides more guidance on how to identify and separate the components. The lease component will be accounted for using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The non-lease component will be accounted for in accordance with the revenue recognition guidance, see below section "Revenue Recognition." The adoption of the new lease standard will primarily impact our ChoiceLease product line, which includes a vehicle leaseare capitalized, whereas ordinary repairs and maintenance (including tire replacement or repair) are expensed as incurred. Direct costs incurred in connection with developing or obtaining internal-use software are capitalized. Costs incurred during the preliminary stage of a software development project, as well as maintenance and other servicestraining costs, are expensed as incurred.
Provision for depreciation is computed using the straight-line method on all depreciable assets. Depreciation expense has been recognized throughout the Consolidated Statement of Earnings depending on the nature of the related asset. We periodically review and adjust, as appropriate, the estimated residual values and useful lives of revenue earning equipment for purposes of recording depreciation expense as described in Note 7, “Revenue Earning Equipment, Net”.
Leasehold improvements are depreciated over the shorter of their estimated useful lives or the term of the related lease. If a substantial additional investment is made in a leased property during the term of the lease, we re-evaluate the lease term to determine whether the investment, together with any penalties related to non-renewal, would constitute an economic penalty in such amount that renewal appears to be reasonably assured.
We routinely dispose of used revenue earning equipment as part of our FMS business. Refer to Note 7, “Revenue Earning Equipment, Net” for more information. Gains and losses on sales of operating property and equipment are reflected in “Miscellaneous income, net” in the vehicle. We will generally continue to recognize revenue forConsolidated Statement of Earnings.
Goodwill and Other Intangible Assets
Goodwill represents the lease portionexcess of the product linepurchase price over the fair value of the underlying acquired net tangible and intangible assets. Goodwill and other intangible assets with indefinite useful lives are not amortized, but rather, are tested for impairment at least annually as of October 1 of each year, or more frequently if events or circumstances indicate the carrying value of goodwill may be impaired. In evaluating goodwill for impairment, we have the option to first assess qualitative factors to determine whether further impairment testing is necessary, such as macroeconomic conditions, changes in our industry and the markets in which we operate, and our market capitalization as well as our reporting units' historical and expected future financial performance.
If we conclude that it is more likely than not that a reporting unit's fair value is less than its carrying value or we bypass the optional qualitative assessment, recoverability is assessed by comparing the fair value of the reporting unit with its carrying amount. If a reporting unit's carrying value exceeds its fair value, we will measure any goodwill impairment losses as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit.
Our estimate of fair value for reporting units is determined based on a straight-line basis. Revenue from maintenance services will be recognized atcombination of both an income and market approach. Under the timemarket approach, we use a selection of comparable publicly-traded companies that correspond to the maintenance services are performed, which will generally requirereporting unit to derive a market-based multiple. Under the deferral of some portionincome approach, the fair value of the customer's lease payments when received, as maintenance servicesreporting unit is estimated based on the discounted present value of the projected future cash flows. Rates used to discount cash flows are not performed evenly overdependent upon interest rates and the lifecost of capital based on our industry and capital structure, adjusted for equity and size risk premiums based on market capitalization. Estimates of future cash flows are dependent on our knowledge and experience about past and current events and significant judgments and assumptions about conditions we expect to exist, including revenue growth rates, margins, long-term growth rates, capital requirements, proceeds from the sale of used vehicles, the ability to utilize our tax net operating losses, and the discount rate. Our estimates of cash flows are also based on historical and future operating performance, economic conditions and actions we expect to take. In addition to these factors, our SCS and DTS reporting units are dependent on several key customers or industry sectors. The loss of a ChoiceLease contract.
We will adopt the standard effective January 1, 2019, using the modified retrospective transition method. Upon adoption, we will record a cumulative-effect adjustment to recognize deferred revenue related to the maintenance services on the opening balance sheet for 2017 and restate all prior periods presented (2017 and 2018). We expect the cumulative-effect adjustment willkey customer may have a significant impact to our SCS or DTS reporting units, causing us to assess whether or not the event resulted in a goodwill impairment loss.
In making our assessments of fair value, we rely on our consolidated financial position. We continueknowledge and experience about past and current events and assumptions about conditions we expect to evaluateexist in the impactfuture. These assumptions are based on a number of adoption of this standard on our results of operations. We do notfactors, including future operating performance, economic conditions, actions we expect the adoption of this standard to have an impact on our cash flows.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which together withtake and present value techniques. There are inherent uncertainties related subsequently issued guidance, requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. We will adopt the revenue standard on January 1, 2018, using the full retrospective transition method.
This standard will primarily impact lease revenue from our ChoiceLease product line, specifically the non-lease component (primarily maintenance services). However, we will continue to apply the existing lease accounting guidance to our lease revenue, which includes maintenance revenue as a part of the lease, until the adoption of the lease standard on January 1, 2019.
With respect to other revenue sources, we completed our final assessment of the impact, including the timing of recognition of variable consideration, principal versus agent considerationsthese factors and accounting for costs to obtain and fulfill contracts. The adoption of this standard on these items and as it relates to revenue sources other than the maintenance component of our ChoiceLease product line will not have a material impact on our consolidated financial position or results of operations. The adoption of this standard will have no effect on our cash flows.
3. ACQUISITIONS
On September 29, 2017, we completed the acquisition of Dallas Service Center, Inc., an independent truck repair facility, for a purchase price of approximately $8 million, net of cash acquired, which includes $0.8 millionmanagement’s judgment in contingent consideration to be paidapplying them to the seller provided certain conditions are met.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. RESTRUCTURING CHARGES AND FEES, NET
In the fourth quartersanalysis of 2017, 2016 and 2015, we approved plans to reduce our workforce in multiple locations as a result of cost containment actions, resulting in charges of $13 million, $5 million and $9 million in each of the respective years. In addition, in the fourth quarter of 2015, we committed to a plan to divest our Ryder Canadian Retail Shippers Association Logistics (CRSAL) operations and shutdown our Ryder Container Terminals (RCT) business in Canada. We recognized charges for employee termination costs of $3 million and asset impairment of $2 million to adjust assets held for sale, including goodwill and intangible assets, to fair value less costs to sell. We sold CRSAL to a third party for approximately $2 million during 2016.
The following table summarizes the activities within, and components of, restructuring liabilities for 2017, 2016 and 2015 (in thousands):
|
| | | | |
| | | Employee Termination Costs |
| Balance as of December 31, 2014 | | $ | 2,486 |
|
| Workforce reduction charges | | 8,830 |
|
| CRSAL divestiture and RCT shut-down | | 3,225 |
|
Utilization (1) | | (2,208 | ) |
| Balance as of December 31, 2015 | | 12,333 |
|
| Workforce reduction charges | | 5,074 |
|
Utilization (1) | | (10,129 | ) |
| Balance as of December 31, 2016 | | 7,278 |
|
| Workforce reduction charges | | 13,320 |
|
Utilization (1) | | (7,524 | ) |
Balance as of December 31, 2017 (2) | | $ | 13,074 |
|
_________________
Note: The restructuring liabilities shown above are included in "Accrued expenses and other current liabilities" in the Consolidated Balance Sheets.
(1) Principally represents cash payments.
(2) The majority of the balance remaining for employee termination costsimpairment. It is expected to be paid by the end of 2018.
As discussed in Note 28, “Segment Reporting,” our primary measure of segment financial performance excludes, among other items, restructuring charges and fees, net. However, the applicable portion of the restructuring charges and fees, net that related to each segment in 2017, 2016 and 2015 were as follows:
|
| | | | | | | | | | |
| | | Years ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| | | (In thousands) |
| Fleet Management Solutions | | $ | 2,995 |
| | 3,550 |
| | 4,817 |
|
| Dedicated Transportation Solutions | | 771 |
| | 22 |
| | 250 |
|
| Supply Chain Solutions | | 2,278 |
| | 278 |
| | 7,033 |
|
| Central Support Services | | 15,361 |
| | 1,224 |
| | 5,968 |
|
| Total | | $ | 21,405 |
| | 5,074 |
| | 18,068 |
|
During 2017 and 2015, we also incurred charges of $11 million and $4 million, respectively, related to consulting fees associated with cost-savings programs and during 2017 we recognized restructuring credits of $3 million related to the gains on sales of certain UK facilities that were closed as part of prior year restructuring activities. All of these items were included within "Restructuring charges and fees, net" in our Consolidated Statement of Earnings.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. RECEIVABLES
|
| | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 |
| | | (In thousands) |
| Trade | | $ | 898,876 |
| | 739,743 |
|
| Direct financing leases | | 81,996 |
| | 76,322 |
|
| Other, primarily warranty and insurance | | 43,883 |
| | 30,797 |
|
| | | 1,024,755 |
| | 846,862 |
|
| Allowance | | (13,847 | ) | | (14,915 | ) |
| Total | | $ | 1,010,908 |
| | 831,947 |
|
6. PREPAID EXPENSES AND OTHER CURRENT ASSETS
|
| | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 |
| | | (In thousands) |
| Restricted cash | | $ | 4,674 |
| | 3,838 |
|
| Prepaid vehicle licenses | | 62,772 |
| | 50,343 |
|
| Prepaid operating taxes | | 14,320 |
| | 20,242 |
|
| Prepaid sales commission | | 12,988 |
| | 9,731 |
|
| Prepaid insurance | | 15,688 |
| | 12,074 |
|
| Start-up costs | | 8,001 |
| | 5,284 |
|
| Other | | 41,040 |
| | 39,768 |
|
| Total | | $ | 159,483 |
| | 141,280 |
|
7. REVENUE EARNING EQUIPMENT |
| | | | | | | | | | | | | | | | | | | | | |
| | | Estimated Useful Lives | | December 31, 2017 | | December 31, 2016 |
| Cost | | Accumulated Depreciation | | Net (1) | | Cost | | Accumulated Depreciation | | Net (1) |
| (In years) | | (In thousands) |
| Held for use: | | | | | | | | | | | | | | |
| ChoiceLease | | 3 — 12 | | $ | 10,002,981 |
| | (3,367,431 | ) | | 6,635,550 |
| | 9,486,977 |
| | (3,031,937 | ) | | 6,455,040 |
|
| Commercial rental | | 4.5 — 12 | | 2,616,706 |
| | (1,001,965 | ) | | 1,614,741 |
| | 2,499,010 |
| | (935,346 | ) | | 1,563,664 |
|
| Held for sale | | | | 403,229 |
| | (298,258 | ) | | 104,971 |
| | 494,355 |
| | (365,337 | ) | | 129,018 |
|
| Total | | | | $ | 13,022,916 |
| | (4,667,654 | ) | | 8,355,262 |
| | 12,480,342 |
| | (4,332,620 | ) | | 8,147,722 |
|
_______________
| |
(1) | Revenue earning equipment, net includes vehicles under capital leases of $29 million, less accumulated depreciation of $14 million, at December 31, 2017 and $43 million, less accumulated depreciation of $22 million, at December 31, 2016.
|
Depreciation expense was $1.16 billion, $1.10 billion and $1.04 billion in 2017, 2016 and 2015, respectively.
In 2017, based on current and expected market conditions, we accelerated depreciation on certain classes of vehicles expected to be made available for sale through June 2019. The impact of the change increased depreciation by $21 million in 2017.
In 2016, based on current and expected market conditions, we accelerated depreciation on certain classes of vehicles expected to be made available for sale through June 2018. The impact of the change increased depreciation by $10 million in 2016.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
possible that assumptions underlying the impairment analysis will change in such a manner that impairment in value may occur in the future.
Revenue
Identifiable intangible assets not subject to amortization are assessed for impairment using a similar process used to evaluate goodwill as described above. Intangible assets with finite lives are amortized over their respective estimated useful lives. Identifiable intangible assets that are subject to amortization are evaluated for impairment using a similar process used to evaluate long-lived assets described below.
Impairment of Long-Lived Assets Other than Goodwill and Indefinite-Lived Intangible Assets
Long-lived assets held and used, including revenue earning equipment, heldoperating property and equipment, and intangible assets with finite lives, are tested for salerecoverability when circumstances indicate that the carrying amount of assets may not be recoverable. Recoverability of long-lived assets is statedevaluated by comparing the carrying value of an asset or asset group to management’s best estimate of the undiscounted future operating cash flows (excluding interest charges) expected to be generated by the asset or asset group. If these comparisons indicate that the carrying value of the asset or asset group is not recoverable, an impairment loss is recognized for the amount by which the carrying value of the asset or asset group exceeds fair value. Fair value is determined by a quoted market price, if available, or an estimate of projected future operating cash flows, discounted using a rate that reflects the related operating segment’s average cost of funds. Long-lived assets to be disposed of, including revenue earning equipment and operating property and equipment, are reported at the lower of net book valuecarrying 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 centers and are presented within "Used vehicle sales, net" in the Consolidated 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 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. During 2017, 2016, and 2015, we recognized losses to reflect changes in fair value of $58 million, $67 million and $18 million, respectively.
The following table presents our assets that are measured at fair value on a nonrecurring basis and considered a Level 3 fair value measurement:Self-Insurance Accruals |
| | | | | | | | | | | | | | |
| | | | | | | Total Losses (2) |
| | | December 31, | | Year ended December 31, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Assets held for sale: | | (In thousands) | | (In thousands) |
Revenue earning equipment: (1) | | | | | | | | |
| Trucks | | $ | 33,208 |
| | 24,178 |
| | $ | 30,812 |
| | 14,645 |
|
| Tractors | | 27,976 |
| | 57,348 |
| | 21,261 |
| | 47,597 |
|
| Trailers | | 2,100 |
| | 2,532 |
| | 5,992 |
| | 5,173 |
|
| Total assets at fair value | | $ | 63,284 |
| | 84,058 |
| | $ | 58,065 |
| | 67,415 |
|
______________
| |
(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 not exceeding fair value was $42 million and $45 million as of December 31, 2017 and 2016, respectively. We have revised prior year amounts to reflect only the portion of revenue earning equipment held for sale where fair value adjustments were recorded. |
| |
(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. |
For the twelve months ended December 31, 2017, the components of used vehicle sales, net were as follows:
|
| | | | | | | | | |
| | Twelve months ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
| Gains on vehicle sales, net | $ | (40,824 | ) | | (68,387 | ) | | (117,809 | ) |
| Losses from fair value adjustments | 58,065 |
| | 67,415 |
| | 17,956 |
|
| Used vehicle sales, net | $ | 17,241 |
| | (972 | ) | | (99,853 | ) |
8. OPERATING PROPERTY AND EQUIPMENT
|
| | | | | | | | | |
| | | Estimated Useful Lives | | December 31, |
| | | 2017 | | 2016 |
| | | (In years) | | (In thousands) |
| Land | | — | | $ | 217,885 |
| | 212,660 |
|
| Buildings and improvements | | 10 — 40 | | 822,931 |
| | 808,909 |
|
| Machinery and equipment | | 3 — 10 | | 797,084 |
| | 737,899 |
|
| Other | | 3 — 10 | | 131,181 |
| | 114,442 |
|
| | | | | 1,969,081 |
| | 1,873,910 |
|
| Accumulated depreciation | | | | (1,192,377 | ) | | (1,128,040 | ) |
| Total | | | | $ | 776,704 |
| | 745,870 |
|
Depreciation expense was $94 million, $88 million and $84 million in 2017, 2016 and 2015, respectively.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. GOODWILL
The carrying amount of goodwill attributable to each reportable business segment with changes therein was as follows:
|
| | | | | | | | | | | | | |
| | | Fleet Management Solutions | | Dedicated Transportation Solutions | | Supply Chain Solutions | | Total |
| | | (In thousands) |
| Balance at January 1, 2016 | | | | | | | | |
| Goodwill | | $ | 231,358 |
| | 40,808 |
| | 146,190 |
| | 418,356 |
|
| Accumulated impairment losses | | (10,322 | ) | | — |
| | (18,899 | ) | | (29,221 | ) |
| | | 221,036 |
| | 40,808 |
| | 127,291 |
| | 389,135 |
|
| Foreign currency translation adjustment | | (2,526 | ) | | — |
| | 163 |
| | (2,363 | ) |
| Balance at December 31, 2016 | |
| | | | | | |
| Goodwill | | 228,832 |
| | 40,808 |
| | 146,353 |
| | 415,993 |
|
| Accumulated impairment losses | | (10,322 | ) | | — |
| | (18,899 | ) | | (29,221 | ) |
| | | 218,510 |
| | 40,808 |
| | 127,454 |
| | 386,772 |
|
| Acquisitions | | 6,506 |
| | — |
| | — |
| | 6,506 |
|
| Foreign currency translation adjustment and other | | 1,838 |
| |
|
| | 388 |
| | 2,226 |
|
| Balance at December 31, 2017 | | | |
| | | | |
| Goodwill | | 237,176 |
| | 40,808 |
| | 146,741 |
| | 424,725 |
|
| Accumulated impairment losses | | (10,322 | ) | | — |
| | (18,899 | ) | | (29,221 | ) |
| | | $ | 226,854 |
| | 40,808 |
| | 127,842 |
| | 395,504 |
|
We historically assessed goodwill for impairment on April 1st of each year or more often if deemed necessary. As described in Note 1, during 2017, we changed our goodwill impairment assessment date to October 1.
We performed quantitative assessments on two reporting units as of April 1, 2017, and on one reporting unit as of October 1, 2017, and determined there was no impairment as of both assessment dates. We performed qualitative assessments for three of our reporting units as of April 1, 2017, and on four reporting units as of October 1, 2017, which considered individual factors such as macroeconomic conditions, changes in our industry and the markets in which we operate, as well as our historical and expected future financial performance. After performing the qualitative assessments, we concluded it was more likely than not that fair value is greater than the carrying value and determined there was no impairment as of both assessment dates.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
10. INTANGIBLE ASSETS
|
| | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 |
| | | (In thousands) |
| Indefinite lived intangible assets — Trade name | | $ | 8,731 |
| | 8,731 |
|
| Finite lived intangible assets: | | | | |
| Customer relationship intangibles | | 91,523 |
| | 91,523 |
|
| Other intangibles, primarily trade name | | 2,367 |
| | 2,367 |
|
| Accumulated amortization | | (57,420 | ) | | (51,578 | ) |
| | | 36,470 |
| | 42,312 |
|
| Foreign currency translation adjustment | | (2,271 | ) | | (2,794 | ) |
| Total | | $ | 42,930 |
| | 48,249 |
|
The Ryder trade name has been identified as having an indefinite useful life. Customer relationship intangibles are being amortized on a straight-line basis over their estimated useful lives, generally 7-19 years. We recognized amortization expense associated with finite lived intangible assets of approximately $6 million in both 2017 and 2016, and $7 million in 2015. The future amortization expense for each of the five succeeding years related to all intangible assets that are currently reported in the Consolidated Balance Sheets is estimated to range from $3 - $5 million per year for 2018 - 2022.
11. DIRECT FINANCING LEASES AND OTHER ASSETS
|
| | | | | | | |
| |
| December 31, |
| |
| 2017 |
| 2016 |
| |
| (In thousands) |
| Direct financing leases, net |
| $ | 364,847 |
|
| 333,152 |
|
| Investments held in Rabbi Trusts |
| 61,425 |
|
| 48,451 |
|
| Lease incentives |
| 14,857 |
|
| 15,741 |
|
| Insurance receivables |
| 15,545 |
|
| 18,402 |
|
| Start-up costs | | 13,750 |
| | 7,422 |
|
| Prepaid pension asset | | 58,708 |
| | 14,049 |
|
| Lease origination costs | | 9,387 |
| | 9,227 |
|
| Deferred tax asset | | 6,736 |
| | 9,009 |
|
| Other | | 14,294 |
| | 16,831 |
|
| Total | | $ | 559,549 |
| | 472,284 |
|
Investments held in Rabbi Trusts are assets measured at fair value on a recurring basis, all of which are considered Level 1 of the fair value hierarchy. The following table presents the asset classes at December 31, 2017 and 2016:
|
| | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 |
| | | (In thousands) |
| Cash and cash equivalents | | $ | 4,956 |
| | 5,391 |
|
| U.S. equity mutual funds | | 39,958 |
| | 30,229 |
|
| Foreign equity mutual funds | | 8,001 |
| | 5,232 |
|
| Fixed income mutual funds | | 8,510 |
| | 7,599 |
|
| Total Investments held in Rabbi Trusts | | $ | 61,425 |
| | 48,451 |
|
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12. ACCRUED EXPENSES AND OTHER LIABILITIES
|
| | | | | | | | | | | | | | | | | | | |
| | | December 31, 2017 | | December 31, 2016 |
| | | Accrued Expenses | | Non-Current Liabilities | | Total | | Accrued Expenses | | Non-Current Liabilities | | Total |
| | | (In thousands) |
| Salaries and wages | | $ | 133,733 |
| | — |
| | 133,733 |
| | 90,913 |
| | — |
| | 90,913 |
|
| Deferred compensation | | 4,269 |
| | 58,411 |
| | 62,680 |
| | 2,992 |
| | 46,541 |
| | 49,533 |
|
| Pension benefits | | 3,863 |
| | 412,417 |
| | 416,280 |
| | 3,796 |
| | 451,940 |
| | 455,736 |
|
| Other postretirement benefits | | 1,481 |
| | 19,760 |
| | 21,241 |
| | 1,506 |
| | 19,459 |
| | 20,965 |
|
| Other employee benefits | | 28,636 |
| | 3,279 |
| | 31,915 |
| | 29,358 |
| | 5,854 |
| | 35,212 |
|
Insurance obligations (1) | | 130,848 |
| | 242,473 |
| | 373,321 |
| | 127,470 |
| | 234,336 |
| | 361,806 |
|
| Operating taxes | | 95,848 |
| | — |
| | 95,848 |
| | 92,150 |
| | — |
| | 92,150 |
|
| Income taxes | | 8,550 |
| | 24,160 |
| | 32,710 |
| | 4,197 |
| | 23,174 |
| | 27,371 |
|
| Interest | | 30,003 |
| | — |
| | 30,003 |
| | 27,277 |
| | — |
| | 27,277 |
|
| Deposits, mainly from customers | | 69,903 |
| | 3,638 |
| | 73,541 |
| | 61,225 |
| | 4,569 |
| | 65,794 |
|
| Deferred revenue | | 14,004 |
| | — |
| | 14,004 |
| | 14,064 |
| | — |
| | 14,064 |
|
Restructuring liabilities (2) | | 13,074 |
| | — |
| | 13,074 |
| | 7,278 |
| | — |
| | 7,278 |
|
| Other | | 53,194 |
| | 47,951 |
| | 101,145 |
| | 44,963 |
| | 31,692 |
| | 76,655 |
|
| Total | | $ | 587,406 |
| | 812,089 |
| | 1,399,495 |
| | 507,189 |
| | 817,565 |
| | 1,324,754 |
|
_________________
(1) Insurance obligations are primarily comprised of self-insured claim liabilities.
(2) The increase in restructuring liabilities from December 31, 2016 principally represents an accrual for employee termination costs. The majority of the balance remaining in restructuring liabilities is expected to be paid by the end of 2018.
We retain a portion of the accident risk under vehicleauto liability, and workers’ compensation and other insurance programs. Under our insurance programs, we retain the risk of loss in various amounts, generally up to $3 million on a per occurrence basis. Self-insurance accruals are based primarily based on an actuarially estimated, undiscounted cost of claims, and includewhich includes claims incurred but not reported. Such liabilities are based on estimates. Historical loss development factors are utilized to project the future development of incurred losses, and these amounts are adjusted based upon actual claim experience and settlements. While we believe that the amounts are adequate, there can be no assurance that changes to our actuarial estimates may not occur due to limitations inherent in the estimation process. During 2017, we recognized a benefitChanges in the actuarial estimates of these liabilities are charged or credited to earnings in the period determined. Amounts estimated to be paid within earningsthe next year have been classified as “Accrued expenses and other current liabilities” with the remainder included in “Other non-current liabilities” in our Consolidated Balance Sheets.
We also maintain additional insurance at certain amounts in excess of our respective underlying retention. Amounts recoverable from continuing operations of $9 millioninsurance companies are not offset against the related liability as our insurance policies do not extinguish or provide legal release from the favorable developmentobligation to make payments related to such risk-related losses. Amounts expected to be received within the next year from insurance companies have been included within “Receivables, net” with the remainder included in “Sales-type leases and other assets” and are recognized only when realization of estimated prior years' self-insured loss reservesthe claim for the reasons noted above. During 2016 and 2015, we recognized charges within earnings from continuing operations of $9 million and $4 million from the unfavorable development of prior year claims where costs exceeded self-insured loss reserves for the reasons noted above, as well as a settlement of a customer-extended insurance claim.
RYDER SYSTEM, INC. AND SUBSIDIARIESrecovery is considered probable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Income Taxes
13. INCOME TAXES
The components of earnings from continuing operations before income taxes and the (benefit from)Our provision for income taxes from continuing operations were as follows:
|
| | | | | | | | | | |
| | | Years ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| | | (In thousands) |
| Earnings from continuing operations before income taxes: | | | | | | |
| United States | | $ | 254,327 |
| | 344,614 |
| | 408,757 |
|
| Foreign | | 59,459 |
| | 61,767 |
| | 60,458 |
|
| Total | | $ | 313,786 |
| | 406,381 |
| | 469,215 |
|
| Current tax expense (benefit) from continuing operations: | | | | | | |
Federal (1) | | $ | 6,752 |
| | 2,731 |
| | (1,836 | ) |
State (1) | | 9,360 |
| | 7,713 |
| | 5,748 |
|
| Foreign | | 6,442 |
| | 6,411 |
| | 5,272 |
|
| | | 22,554 |
| | 16,855 |
| | 9,184 |
|
| Deferred tax (benefit) expense from continuing operations: | | | | | | |
| Federal | | (509,573 | ) | | 106,513 |
| | 135,585 |
|
| State | | 7,985 |
| | 16,259 |
| | 20,111 |
|
| Foreign | | 1,805 |
| | 2,114 |
| | (1,654 | ) |
| | | (499,783 | ) | | 124,886 |
| | 154,042 |
|
| (Benefit from) provision for income taxes from continuing operations | | $ | (477,229 | ) | | 141,741 |
| | 163,226 |
|
______________
| |
(1) | Excludes federal and state tax benefits resulting from the exercise of stock options and vesting of restricted stock awards, which were credited directly to “Additional paid-in capital”is based on reported earnings before income taxes. Deferred taxes are recognized for the year ended December 31, 2015. |
A reconciliation of the federal statutory tax rate with the effective tax rate from continuing operations follows:
|
| | | | | | | | | |
| | | Years ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| | | (Percentage of pre-tax earnings) |
| Federal statutory tax rate | | 35.0 |
| | 35.0 |
| | 35.0 |
|
| Impact of one-time deemed repatriation | | 10.7 |
| | — |
| | — |
|
| Impact on deferred taxes for changes in tax rates | | (197.5 | ) | | (0.7 | ) | | (0.9 | ) |
| State income taxes, net of federal income tax benefit | | 4.5 |
| | 5.0 |
| | 5.0 |
|
| Foreign rates varying from federal statutory tax rate | | (4.0 | ) | | (3.3 | ) | | (3.3 | ) |
| Tax reviews and audits | | (1.0 | ) | | (0.7 | ) | | (1.3 | ) |
| Other, net | | 0.2 |
| | (0.4 | ) | | 0.3 |
|
| Effective tax rate | | (152.1 | ) | | 34.9 |
| | 34.8 |
|
Tax Law Changes
On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act makes broad and complex changes to the U.S. tax code and it will take time to fully interpret the changes. The Act significantly impacted our fourth quarter and full year 2017 earnings, and will impact earnings in future periods; however, we were not able to fully complete the accounting under ASC 740 for certain of the Act’s new provisions. In accordance with SEC Staff Accounting Bulletin No.118, to the extent the accounting for certain income tax effects of temporary differences between the Act was incomplete, butfinancial statement carrying amounts of existing assets and liabilities and their respective tax bases, using tax rates in effect for the years in which the differences are expected to reverse.
Valuation allowances are recognized to reduce deferred tax assets to the amount that is more likely than not to be realized. In assessing the likelihood of realization, management considers estimates of future sources of taxable income. We calculate our current and deferred tax position based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years. Adjustments based on filed returns are recorded when identified.
We are subject to tax audits in numerous jurisdictions in the U.S. and around the world. Tax audits by their very nature are often complex and can require several years to complete. In the normal course of business, we were ableare subject to challenges from the Internal Revenue Service (IRS) and other tax authorities regarding amounts of taxes due. These challenges may alter the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions. As part of our calculation of the provision for income taxes on earnings, we determine a reasonable estimatewhether the benefits of those effects, a provisional amount (“provisional amount”) has been included in our financial statements. Conversely, where a reasonable estimatetax positions are at least more likely than not of being sustained upon audit based on the technical merits of the tax effectsposition. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Such accruals require management to make estimates and judgments with respect to the Act cannot be determined, no related provisional amounts have been included in the financial statements. We intend to adjust theultimate outcome of a tax effects for the relevant items during the allowed 2018 measurement period.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Among other changes,audit. Actual results could vary materially from these estimates. We adjust these reserves as well as the Act reducesimpact of any related interest and penalties in light of changing facts and circumstances, such as the federal corporateprogress of a tax rate from 35%audit.
Interest and penalties related to 21%. Theincome tax rate change will decreaseexposures are recognized as incurred and included in "Provision for (benefit from) income taxes” in our effectiveConsolidated Statements of Earnings. Accruals for income tax rate going forward. Under generally accepted accounting principles, deferred tax assetsexposures, including penalties and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences areinterest, expected to be recoveredsettled within the next year are included in “Accrued expenses and other current liabilities” with the remainder included in “Other non-current liabilities” in our Consolidated Balance Sheets. The federal benefit from state income tax exposures is included in “Deferred income taxes” in our Consolidated Balance Sheets.
Severance and Contract Termination Costs
We recognize liabilities for severance and contract termination costs based upon the nature of the cost to be incurred. For involuntary separation plans that are completed within the guidelines of our written involuntary separation plan, we recognize the liability when it is probable and reasonably estimable. For one-time termination benefits, such as additional severance pay or settled. Asbenefit payouts, and other exit costs, such as contract termination costs, the liability is measured and recognized initially at fair value in the period in which the liability is incurred, with subsequent changes to the liability recognized as adjustments in the period of change. Severance related to position eliminations that are part of a restructuring plan is included in "Restructuring and other items, net” in the Consolidated Statements of Earnings. Severance costs that are not part of a restructuring plan are recognized in the period incurred as a direct cost of revenue or within “Selling, general and administrative expenses” in the Consolidated Statements of Earnings depending upon the nature of the eliminated position.
Environmental Expenditures
We recognize liabilities for environmental matters when it is probable a loss has been incurred and the costs can be reasonably estimated. Environmental liability estimates may include costs such as anticipated site testing, consulting, remediation, disposal, post-remediation monitoring and legal fees, as appropriate. The liability does not reflect possible recoveries from insurance companies or reimbursement of remediation costs by state agencies, but does include estimates of cost sharing with other potentially responsible parties. Estimates are not discounted, as the timing of the anticipated cash payments is not fixed or readily determinable. Subsequent adjustments to initial estimates are recognized as necessary based upon additional information developed in subsequent periods. In future periods, new laws or regulations, advances in remediation technology, or additional information about the ultimate remediation methodology to be used could significantly change our estimates. Claims for reimbursement of remediation costs are recognized when recovery is deemed probable.
Derivative Instruments and Hedging Activities
We use financial instruments, including forward exchange contracts and swaps, to manage our exposures to movements in interest rates and foreign currency exchange rates. The use of these financial instruments modifies the exposure of these risks with the intent to reduce the risk or cost to us. We do not enter into derivative financial instruments for trading purposes. We limit our risk that counterparties to the derivative contracts will default and not make payments by entering into derivative contracts only with counterparties comprised of large banks and financial institutions that meet established credit criteria. We do not expect to incur any losses as a result of counterparty default.
On the federal tax rate reduction,date a derivative contract is executed, we remeasured our net deferred tax liabilityformally document, among other items, the intended hedging designation and relationship, along with the risk management objectives and strategies for entering into the derivative contract. We also formally assess, both at December 31, 2017. The remeasurement, which is a provisional estimate, resultedinception and on an ongoing basis, whether the derivatives we used in a reductionhedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Cash flows from derivatives that are accounted for as hedges are classified in the Consolidated Statements of Cash Flows in the same category as the items being hedged. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, we discontinue hedge accounting prospectively. The fair value of our net deferred tax liabilityderivatives was not material as of $619 million, which was recordedDecember 31, 2019 and 2018.
The hedging designation may be classified as one of the following:
No Hedging Designation. The unrealized gain or loss on a derivative instrument not designated as an income tax benefitaccounting hedging instrument is recognized immediately in our consolidated statement of income for the three months ended December 31, 2017.
The Act also requires companies to pay a one-time transition tax on unremitted earnings of certain foreign subsidiaries that had not been subject to U.S. income tax and creates new taxes on certain foreign earnings. We have included a provisional estimate of $33 million for the transition tax in the December 31, 2017 financial statements. The estimate will be adjusted during the measurement period as we refine our determination of historical earnings and profits and the amount of cash and cash equivalents held in foreign entities.
The following provides a summary of the increases to net earnings from continuing operations from changes in tax laws by tax jurisdiction:
|
| | | | |
Tax Jurisdiction | | Enactment Date | | Net Earnings |
| | | | (in thousands) |
2017 | | | | |
United States | | December 22, 2017 | | $585,912 |
Illinois | | July 1, 2017 | | $(1,844) |
| | | | |
2016 | | | | |
North Carolina | | August 4, 2016 | | $585 |
| | | | |
2015 | | | | |
Connecticut | | June 30, 2015 | | $1,616 |
Other Jurisdictions | | April 13, 2015 - November 18, 2015 | | $497 |
Deferred Income Taxes
The components of the net deferred income tax liability were as follows:
|
| | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 |
| | | (In thousands) |
| Deferred income tax assets: | | | | |
| Self-insurance accruals | | $ | 75,198 |
| | 107,252 |
|
| Net operating loss carryforwards | | 171,053 |
| | 396,313 |
|
| Alternative minimum taxes | | 22,552 |
| | 13,901 |
|
| Accrued compensation and benefits | | 65,532 |
| | 81,454 |
|
| Federal benefit on state tax positions | | 11,950 |
| | 19,247 |
|
| Pension benefits | | 82,547 |
| | 162,141 |
|
| Miscellaneous other accruals | | 19,608 |
| | 28,313 |
|
| | | 448,440 |
| | 808,621 |
|
| Valuation allowance | | (18,667 | ) | | (16,387 | ) |
| | | 429,773 |
| | 792,234 |
|
| Deferred income tax liabilities: | | | | |
| Property and equipment basis difference | | (1,614,963 | ) | | (2,451,151 | ) |
| Other | | (16,857 | ) | | (20,735 | ) |
| | | (1,631,820 | ) | | (2,471,886 | ) |
Net deferred income tax liability (1) | | $ | (1,202,047 | ) | | (1,679,652 | ) |
______________
| |
(1) | Deferred tax assets of $7 million and $9 million have been included in "Direct financing leases and other assets" at December 31, 2017 and 2016. |
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Fair Value Hedge. A hedge of a recognized asset or liability or an unrecognized firm commitment is considered a fair value hedge. For fair value hedges, both the effective and ineffective portions of the changes in the fair value of the derivative, along with the gain or loss on the hedged item that is attributable to the hedged risk, are both recognized in earnings.
Cash Flow Hedge. A hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability is considered a cash flow hedge. The effective portion of the change in the fair value of a derivative that is declared as a cash flow hedge is recognized net of tax in “Accumulated other comprehensive loss” in the Consolidated Balance Sheets until earnings are affected by the variability in cash flows of the designated hedged item.
As
Foreign Currency Translation
Our foreign operations generally use local currency as their functional currency. Assets and liabilities of December 31, 2017, we havethese operations are translated at the exchange rates in effect on the balance sheet date. Items in the Consolidated Statements of Earnings are translated at the average exchange rates for the year. The impact of currency fluctuations on our balance sheet is presented in “Changes in cumulative translation adjustment and other” in the Consolidated Statements of Comprehensive Income. Upon sale, or upon complete or substantially complete liquidation of an investment in a foreign operation, the currency translation adjustment attributable to that operation is removed from accumulated other comprehensive loss and is reported as part of the gain or loss on sale or liquidation of the investment for the period during which the sale or liquidation occurs. Gains and losses resulting from foreign currency transactions are recognized in “Miscellaneous income, net” in the Consolidated Statements of Earnings.
Share-Based Compensation
The fair value of stock option awards and nonvested stock awards other than restricted stock units (RSUs) is expensed on a straight-line basis over the vesting period of the awards. RSUs are expensed in the year they are granted. Windfall tax benefits and tax shortfalls are charged directly to income tax expense.
Earnings Per Share
Earnings per share is computed using the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. RSUs are considered participating securities since the share-based awards contain a non-forfeitable right to dividend equivalents irrespective of whether the awards ultimately vest. Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of foreign subsidiaries of $774 million,common shares outstanding for the majority of which were reinvested into non-cash property, plant and equipment. The provisional estimate ofperiod. In applying the transition tax incurred in connection with the Act will result in U.S. federal income taxes on approximately $345 million of earnings and profit for U.S. federal income tax purposes. We have historically reinvested such earnings overseas indefinitely and may continue to reinvest future foreign earnings overseas indefinitely. As such, deferred income taxes have not been provided ontwo-class method, undistributed earnings are allocated to both common shares and participating securities based on the weighted average shares outstanding during the period.
Diluted earnings per common share reflect the dilutive effect of foreign subsidiaries. However, becausepotential common shares from stock options and other nonparticipating nonvested stock. The dilutive effect of stock options is computed using the Act implements a territorial tax system, whereby certain foreign subsidiarytreasury stock method, which assumes any proceeds that could be obtained upon the exercise of stock options or vesting of stock awards would be used to purchase common shares at the average market price for the period. The assumed proceeds include the purchase price the grantee pays and the unrecognized compensation expense at the end of each period.
Share Repurchases
Repurchases of shares of common stock are made periodically in open-market transactions and are subject to market conditions, legal requirements and other factors. The cost of share repurchases is allocated between additional paid-in capital and retained earnings can be repatriated to the U.S. with no federal tax, we are reassessing whether to indefinitely reinvest our overseas earnings. The determination ofbased on the amount of any additional unrecognized deferred tax liability is not practicable becausepaid-in capital at the time of the complexities associated withshare repurchase.
Defined Benefit Pension and Postretirement Benefit Plans
The funded status of our defined benefit pension plans and postretirement benefit plans are recognized in the hypothetical calculations used in evaluating whether we will maintainConsolidated Balance Sheets. The funded status is measured as the indefinite reinvestment assertion.
At December 31, 2017, we had U.S. federal tax effected net operating loss carryforwardsdifference between the fair value of $128 millionplan assets and various U.S. subsidiaries had state tax effected net operating loss carryforwards of $29 million both expiring through tax year 2037. We also had foreign tax effected net operating losses of $14 million that are available to reduce future income tax payments in several countries, subject to varying expiration rules. A valuation allowance has been established to reduce deferred income tax assets, principally foreign tax loss carryforwards, to amounts more likely than not to be realized. We had unused alternative minimum tax credits of $23 millionthe benefit obligation at December 31, 2017, which may be refundable under the Act.
Uncertain Tax Positions
measurement date. The following is a summaryfair value of tax years that are no longer subjectplan assets represents the current market value of contributions made to examination:
Federal — audits of our U.S. federal income tax returns are closed through fiscal year 2009.
State —irrevocable trusts, held for the majoritysole benefit of states, tax returns are closed through fiscal year 2009.
Foreign — we are no longer subject to foreign tax examinations by tax authorities for tax years before 2010 in Canada, 2011 in Brazil, 2011 in Mexico and 2012 in the U.K.,participants, which are our major foreign tax jurisdictions.
The following table summarizesinvested by the activity related to unrecognized tax benefits (excludingtrusts. For defined benefit pension plans, the federal benefit received from state positions):
|
| | | | | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 | | 2015 |
| | | (In thousands) |
| Balance at January 1 | | $ | 61,649 |
| | 60,740 |
| | 60,482 |
|
| Additions based on tax positions related to the current year | | 3,971 |
| | 3,855 |
| | 4,220 |
|
| Reductions due to lapse of applicable statutes of limitation | | (3,332 | ) | | (2,946 | ) | | (3,962 | ) |
| Gross balance at December 31 | | 62,288 |
| | 61,649 |
| | 60,740 |
|
| Interest and penalties | | 5,860 |
| | 5,219 |
| | 4,912 |
|
| Balance at December 31 | | $ | 68,148 |
| | 66,868 |
| | 65,652 |
|
Of the total unrecognized tax benefits, $56 million (net of the federal benefit on state issues)obligation represents the amountactuarial present value of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate in future periods. The total includes $5 million of interest and penalties at both, December 31, 2017 and 2016, net of the federal benefitexpected to be paid upon retirement based on state issues. Unrecognized tax benefits related to federal, state and foreign tax positions may decrease by $3 million by December 31, 2018, if audits are completed or tax years close during 2018.estimated
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
future compensation levels. For postretirement benefit plans, the benefit obligation represents the actuarial present value of postretirement benefits attributed to employee services already rendered. Overfunded plans, with the fair value of plan assets exceeding the benefit obligation, are aggregated and reported as a pension asset. Underfunded plans, with the benefit obligation exceeding the fair value of plan assets, are aggregated and reported as a pension and postretirement benefit liability.
Like-Kind Exchange Program
The current portion of pension and postretirement benefit liabilities represents the actuarial present value of benefits payable within the next year exceeding the fair value of plan assets (if funded), measured on a plan-by-plan basis. These liabilities are recognized in “Accrued expenses and other current liabilities” in the Consolidated Balance Sheets.
Pension and postretirement benefit expense includes service cost, interest cost, and expected return on plan assets (if funded). Pension costs include amortization of net prior service costs loss and net actuarial loss. Postretirement costs include amortization of net prior service credit and net actuarial gain. Service cost represents the actuarial present value of participant benefits earned in the current year. The expected return on plan assets represents the average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the obligation. Prior service cost represents the impact of plan amendments. Net actuarial losses arise as a result of differences between actual experience and assumptions or as a result of changes in actuarial assumptions. Net actuarial gain/loss and prior service cost/credit not recognized as a component of pension and postretirement benefit expense as they arise are recognized as "Change in net actuarial loss and prior service cost, net of tax" in the Consolidated Statements of Comprehensive Income. These pension and postretirement items are subsequently amortized as a component of pension and postretirement benefit expense over the remaining service period if the majority of the employees are active, otherwise over the remaining life expectancy, provided such amounts exceed thresholds based upon the benefit obligation or the value of plan assets.
The measurement of benefit obligations and pension and postretirement benefit expense is based on estimates and assumptions approved by management. These valuations reflect the terms of the plans and use participant-specific information such as compensation, age and years of service, as well as certain assumptions, including estimates of discount rates, expected return on plan assets, rate of compensation increases, interest rates and mortality rates.
Fair Value Measurements
We havecarry various assets and liabilities at fair value in the Consolidated Balance Sheets, including vehicles held for sale, investments held in Rabbi Trusts and pension assets.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a like-kind exchange programliability (an exit price) in the principal or most advantageous market for certain of our U.S.-based revenue earning equipment. Pursuantthe asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurements are classified based on the following fair value hierarchy:
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| Level 1 | Quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. |
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| Level 2 | Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or model-derived valuations or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
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| Level 3 | Unobservable inputs for the asset or liability. These inputs reflect our own assumptions about the assumptions a market participant would use in pricing the asset or liability. |
When available, we use unadjusted quoted market prices to measure fair value and classify such measurements within Level 1. If quoted prices are not available, fair value is based upon model-driven valuations that use current market-based or independently sourced market parameters such as interest rates and currency rates. Items valued using these models are classified according to the program, we dispose of vehicles and acquire replacement vehicles in a form whereby tax gains on disposal of eligible vehicles are deferred. To qualify for like-kind exchange treatment, we exchange through a qualified intermediary eligible vehicles being disposed of with vehicles being acquired, allowing us to generally carryover the tax basis of the vehicles sold (“like-kind exchanges”). The program results in a material deferral of federal and state income taxes, and a decrease in cash taxes in periods when we are not in a net operating loss (NOL) position. As part of the program, the proceeds from the sale of eligible vehicles are restricted for the acquisition of replacement vehicles and other specified applications. Duelowest level input or value driver that is significant to the structure utilized to facilitate the like-kind exchanges, the qualified intermediary that holds the proceeds from the sales of eligible vehicles and the entity that holds the vehicles to be acquired under the program are required to be consolidatedvaluation.
The carrying amounts reported in the accompanying Consolidated Financial Statements in accordance with U.S. GAAP. The total assets, primarily revenueBalance Sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the immediate or short-term maturities of these financial instruments. Revenue earning equipment held for sale is measured at fair value on a nonrecurring basis and is stated at the total liabilities, primarily vehicle accounts payable,lower of carrying amount or fair value less costs to sell. Investments held byin Rabbi Trusts and derivatives are carried at fair value on a recurring basis.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Investments held in Rabbi Trusts include exchange-traded equity securities and mutual funds. Fair values for these consolidated entitiesinvestments are equalbased on quoted prices in value as these entities are solely structuredactive markets. Refer to facilitate the like-kind exchanges. At December 31, 2017 and 2016, these consolidated entities had total assets, primarily revenue earning equipment, and total liabilities, primarily accounts payable, of $232 million and $140 million, respectively. The Act repeals like-kind exchange treatmentNote 20, "Employee Benefit Plans," for revenue earning equipment after December 31, 2017.further information regarding pension assets.
14. LEASES2. RECENT ACCOUNTING PRONOUNCEMENTS
Income Taxes
In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This pronouncement enhances and simplifies various aspects of income tax accounting guidance. Among other things, the amendment removes the year-to-date loss limitation in interim-period tax accounting and requires entities to reflect the effect of an enacted change in tax laws in the interim period that includes the enactment date of the new legislation. The standard is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact of the adoption of this update on our consolidated financial position, results of operations, and cash flows.
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 addresses 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.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326). This pronouncement, along with subsequent ASUs issued to clarify certain provisions of ASU 2016-13, modifies the measurement of expected credit losses of certain financial instruments, including accounts receivable (excluding those related to operating leases) and net investments in sales-type leases. Among other things, these amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The standard is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The standard requires a cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is effective. Periods prior to the adoption date that are presented for comparative purposes are not adjusted. We are currently evaluating the impact of the adoption of this update on our consolidated financial position, results of operations, and cash flows.
Leases as Lessor
We lease revenue earning equipment to customers for periods generally 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 direct financing leases and, to a lesser extent, sales-type leases. The net investment in direct financingRefer to Note 7, "Revenue Earning Equipment, Net" for further information on our estimates of residual values and useful lives of revenue earning equipment which impact our sales-type leases consisted of:leases.
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| | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 |
| | | (In thousands) |
| Total minimum lease payments receivable | | $ | 713,857 |
| | 647,111 |
|
| Less: Executory costs | | (216,754 | ) | | (196,469 | ) |
| Minimum lease payments receivable | | 497,103 |
| | 450,642 |
|
| Less: Allowance for uncollectibles | | (327 | ) | | (248 | ) |
| Net minimum lease payments receivable | | 496,776 |
| | 450,394 |
|
| Unguaranteed residuals | | 41,937 |
| | 45,748 |
|
| Less: Unearned income | | (91,870 | ) | | (86,668 | ) |
| Net investment in direct financing and sales-type leases | | 446,843 |
| | 409,474 |
|
| Current portion | | (81,996 | ) | | (76,322 | ) |
| Non-current portion | | $ | 364,847 |
| | 333,152 |
|
Our direct financing
We lease customers operate infacilities, revenue earning equipment, material handling equipment, automated washing machines, vehicles and office equipment. We determine if an arrangement is or contains a wide varietylease at inception. Effective with the adoption of industries, andthe new lease accounting standard, we have no significant customer concentrations in any one industry. We assess credit riskestablished right-of-use (ROU) assets, which represent our right to use an underlying asset for all ofthe lease term, and lease liabilities, which represent our customers including those whoobligation to make lease equipment under direct financing leases. Credit risk is assessed using an internally developed model, which incorporates credit scorespayments arising from third party providersthe lease. Operating lease ROU assets and our own custom risk ratings and is updated on a monthly basis. The external credit scoresoperating lease liabilities are developedrecognized based on the customer’s historical payment patterns andpresent value of lease payments over the lease term at commencement date. As most of our leases do not provide an overall assessmentimplicit rate of the likelihood of delinquent payments. Our internal ratings are weightedreturn, we use our incremental borrowing rate based on the industryinformation 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 to property taxes, insurance and maintenance as well as changes in CPI for leased facilities; usage-based fees 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 do not recognize a ROU asset or liability and 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 facilities are generally three to five years with 1 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 with 0 extension options. For purposes of calculating operating lease 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. Refer to Note 13, "Leases," for additional information.
Accounts Receivable Allowance
We maintain an allowance for uncollectible customer operates in, company size, years in businessreceivables and an allowance for billing adjustments related to certain discounts and other credit-related indicators (i.e., profitability, cash flow, liquidity, tangible net worth, etc.). Any onecustomer concessions. Estimates are updated regularly based on historical experience of bad debts and billing adjustments processed, current collection trends, and aging analysis. Accounts are charged against the following factors may result in a customer being classified as high risk: i) history of late payments; ii) open lawsuits, liens or judgments; iii) in business less than three years; and iv) operates in an industry with low barriers to entry. For those customers who are designated as high risk, we typically require depositsallowance when determined to be paid in advance in order to mitigate our credit risk. Additionally, our receivablesuncollectible.
Inventories
Inventories, which consist primarily of fuel, tires and vehicle parts, are collateralized byvalued at the vehicle’s fair value, which further mitigates our credit risk.lower of cost using the weighted-average cost basis, or net realizable value.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Revenue Earning Equipment, Operating Property and Equipment, and Depreciation
The following table presents
Revenue earning equipment, comprised of vehicles, and operating property and equipment are initially recorded at cost inclusive of vendor rebates. Revenue earning equipment and operating property and equipment recognized as finance leases are initially generally recorded at the credit risk profile by creditworthiness categorylower of our direct financing lease receivables at December 31, 2017 and 2016:
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| | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| | (In thousands) |
| Very low risk to low risk | $ | 201,434 |
| | 192,853 |
|
| Moderate | 198,464 |
| | 194,234 |
|
| Moderately high to high risk | 97,205 |
| | 63,555 |
|
| | $ | 497,103 |
| | 450,642 |
|
Asthe present value ofDecember 31, 2017 and 2016, the amount of direct financing lease receivables that were past due was not significant and there were no impaired receivables. Accordingly, there was no material risk of default with respect to these receivables.
Leases as Lessee
We lease facilities and office equipment. None of our leasing arrangements contain restrictive financial covenants.
During 2017, 2016 and 2015, rent expense (including rent of facilities and contingent rentals) was $130 million, $127 million and $132 million, respectively.
Lease Payments
Future minimum payments for leases in effect at December 31, 2017 were as follows:
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| | | | | | | | | | |
| | | As Lessor (1) | | As Lessee |
| | | Operating Leases | | Direct Financing and Sales-Type Leases | | Operating Leases |
| | | (In thousands) |
| 2018 | | $ | 1,139,552 |
| | 110,692 |
| | 84,824 |
|
| 2019 | | 892,754 |
| | 95,759 |
| | 63,435 |
|
| 2020 | | 649,096 |
| | 99,470 |
| | 41,034 |
|
| 2021 | | 433,319 |
| | 68,349 |
| | 24,948 |
|
| 2022 | | 258,381 |
| | 54,603 |
| | 18,495 |
|
| Thereafter | | 210,213 |
| | 68,230 |
| | 38,288 |
|
| Total | | $ | 3,583,315 |
| | 497,103 |
| | 271,024 |
|
____________________
| |
(1) | Amounts do not include contingent rentals, which may be received under certain leases on the basis of miles or changes in the Consumer Price Index. Contingent rentals from operating leases included in revenue were $357 million in 2017 and $342 million in both 2016 and 2015. Contingent rentals from direct financing leases included in revenue were $15 million in 2017, $12 million in 2016 and $12 million in 2015 .
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The amounts in the previous table related to the lease payments to be made over the lease term or fair value. Vehicle repairs and maintenance that extend the life or increase the value of a vehicle are capitalized, whereas ordinary repairs and maintenance (including tire replacement or repair) are expensed as incurred. Direct costs incurred in connection with developing or obtaining internal-use software are capitalized. Costs incurred during the preliminary stage of a software development project, as well as maintenance and training costs, are expensed as incurred.
Provision for depreciation is computed using the straight-line method on all depreciable assets. Depreciation expense has been recognized throughout the Consolidated Statement of Earnings depending on the nature of the related asset. We periodically review and adjust, as appropriate, the estimated residual values and useful lives of revenue earning equipment for purposes of recording depreciation expense as described in Note 7, “Revenue Earning Equipment, Net”.
Leasehold improvements are based upondepreciated over the general assumptionshorter of their estimated useful lives or the term of the related lease. If a substantial additional investment is made in a leased property during the term of the lease, we re-evaluate the lease term to determine whether the investment, together with any penalties related to non-renewal, would constitute an economic penalty in such amount that renewal appears to be reasonably assured.
We routinely dispose of used revenue earning equipment as part of our FMS business. Refer to Note 7, “Revenue Earning Equipment, Net” for more information. Gains and losses on sales of operating property and equipment are reflected in “Miscellaneous income, net” in the Consolidated Statement of Earnings.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the underlying acquired net tangible and intangible assets. Goodwill and other intangible assets with indefinite useful lives are not amortized, but rather, are tested for impairment at least annually as of October 1 of each year, or more frequently if events or circumstances indicate the carrying value of goodwill may be impaired. In evaluating goodwill for impairment, we have the option to first assess qualitative factors to determine whether further impairment testing is necessary, such as macroeconomic conditions, changes in our industry and the markets in which we operate, and our market capitalization as well as our reporting units' historical and expected future financial performance.
If we conclude that it is more likely than not that a reporting unit's fair value is less than its carrying value or we bypass the optional qualitative assessment, recoverability is assessed by comparing the fair value of the reporting unit with its carrying amount. If a reporting unit's carrying value exceeds its fair value, we will remainmeasure any goodwill impairment losses as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit.
Our estimate of fair value for reporting units is determined based on leasea combination of both an income and market approach. Under the market approach, we use a selection of comparable publicly-traded companies that correspond to the reporting unit to derive a market-based multiple. Under the income approach, the fair value of the reporting unit is estimated based on the discounted present value of the projected future cash flows. Rates used to discount cash flows are dependent upon interest rates and the cost of capital based on our industry and capital structure, adjusted for equity and size risk premiums based on market capitalization. Estimates of future cash flows are dependent on our knowledge and experience about past and current events and significant judgments and assumptions about conditions we expect to exist, including revenue growth rates, margins, long-term growth rates, capital requirements, proceeds from the lengthsale of time specified byused vehicles, the respective lease agreements.ability to utilize our tax net operating losses, and the discount rate. Our estimates of cash flows are also based on historical and future operating performance, economic conditions and actions we expect to take. In addition to these factors, our SCS and DTS reporting units are dependent on several key customers or industry sectors. The loss of a key customer may have a significant impact to our SCS or DTS reporting units, causing us to assess whether or not the event resulted in a goodwill impairment loss.
In making our assessments of fair value, we rely on our knowledge and experience about past and current events and assumptions about conditions we expect to exist in the future. These assumptions are based on a number of factors, including future minimum payments presented aboveoperating performance, economic conditions, actions we expect to take and present value techniques. There are inherent uncertainties related to these factors and management’s judgment in applying them to the leaseanalysis of revenue earning equipment are not a projection of future lease revenue or expense, and no effect has been given to renewals, new business, cancellations, contingent rentals or future rate changes.goodwill impairment. It is
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
possible that assumptions underlying the impairment analysis will change in such a manner that impairment in value may occur in the future.
15. DEBT
Identifiable intangible assets not subject to amortization are assessed for impairment using a similar process used to evaluate goodwill as described above. Intangible assets with finite lives are amortized over their respective estimated useful lives. Identifiable intangible assets that are subject to amortization are evaluated for impairment using a similar process used to evaluate long-lived assets described below.
Impairment of Long-Lived Assets Other than Goodwill and Indefinite-Lived Intangible Assets
Long-lived assets held and used, including revenue earning equipment, operating property and equipment, and intangible assets with finite lives, are tested for recoverability when circumstances indicate that the carrying amount of assets may not be recoverable. Recoverability of long-lived assets is evaluated by comparing the carrying value of an asset or asset group to management’s best estimate of the undiscounted future operating cash flows (excluding interest charges) expected to be generated by the asset or asset group. If these comparisons indicate that the carrying value of the asset or asset group is not recoverable, an impairment loss is recognized for the amount by which the carrying value of the asset or asset group exceeds fair value. Fair value is determined by a quoted market price, if available, or an estimate of projected future operating cash flows, discounted using a rate that reflects the related operating segment’s average cost of funds. Long-lived assets to be disposed of, including revenue earning equipment and operating property and equipment, are reported at the lower of carrying amount or fair value less costs to sell.
Self-Insurance Accruals
We retain a portion of the accident risk under auto liability, workers’ compensation and other insurance programs. Under our insurance programs, we retain the risk of loss in various amounts, generally up to $3 million on a per occurrence basis. Self-insurance accruals are based primarily on an actuarially estimated, undiscounted cost of claims, which includes claims incurred but not reported. Historical loss development factors are utilized to project the future development of incurred losses, and these amounts are adjusted based upon actual claim experience and settlements. While we believe that the amounts are adequate, there can be no assurance that changes to our actuarial estimates may not occur due to limitations inherent in the estimation process. Changes in the actuarial estimates of these liabilities are charged or credited to earnings in the period determined. Amounts estimated to be paid within the next year have been classified as “Accrued expenses and other current liabilities” with the remainder included in “Other non-current liabilities” in our Consolidated Balance Sheets.
We also maintain additional insurance at certain amounts in excess of our respective underlying retention. Amounts recoverable from insurance companies are not offset against the related liability as our insurance policies do not extinguish or provide legal release from the obligation to make payments related to such risk-related losses. Amounts expected to be received within the next year from insurance companies have been included within “Receivables, net” with the remainder included in “Sales-type leases and other assets” and are recognized only when realization of the claim for recovery is considered probable.
Income Taxes
Our provision for income taxes is based on reported earnings before income taxes. Deferred taxes are recognized for the future tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, using tax rates in effect for the years in which the differences are expected to reverse.
Valuation allowances are recognized to reduce deferred tax assets to the amount that is more likely than not to be realized. In assessing the likelihood of realization, management considers estimates of future sources of taxable income. We calculate our current and deferred tax position based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years. Adjustments based on filed returns are recorded when identified.
We are subject to tax audits in numerous jurisdictions in the U.S. and around the world. Tax audits by their very nature are often complex and can require several years to complete. In the normal course of business, we are subject to challenges from the Internal Revenue Service (IRS) and other tax authorities regarding amounts of taxes due. These challenges may alter the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions. As part of our calculation of the provision for income taxes on earnings, we determine whether the benefits of our tax positions are at least more likely than not of being sustained upon audit based on the technical merits of the tax position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Such accruals require management to make estimates and judgments with respect to the ultimate outcome of a tax
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
audit. Actual results could vary materially from these estimates. We adjust these reserves as well as the impact of any related interest and penalties in light of changing facts and circumstances, such as the progress of a tax audit.
Interest and penalties related to income tax exposures are recognized as incurred and included in "Provision for (benefit from) income taxes” in our Consolidated Statements of Earnings. Accruals for income tax exposures, including penalties and interest, expected to be settled within the next year are included in “Accrued expenses and other current liabilities” with the remainder included in “Other non-current liabilities” in our Consolidated Balance Sheets. The federal benefit from state income tax exposures is included in “Deferred income taxes” in our Consolidated Balance Sheets.
Severance and Contract Termination Costs
We recognize liabilities for severance and contract termination costs based upon the nature of the cost to be incurred. For involuntary separation plans that are completed within the guidelines of our written involuntary separation plan, we recognize the liability when it is probable and reasonably estimable. For one-time termination benefits, such as additional severance pay or benefit payouts, and other exit costs, such as contract termination costs, the liability is measured and recognized initially at fair value in the period in which the liability is incurred, with subsequent changes to the liability recognized as adjustments in the period of change. Severance related to position eliminations that are part of a restructuring plan is included in "Restructuring and other items, net” in the Consolidated Statements of Earnings. Severance costs that are not part of a restructuring plan are recognized in the period incurred as a direct cost of revenue or within “Selling, general and administrative expenses” in the Consolidated Statements of Earnings depending upon the nature of the eliminated position.
Environmental Expenditures
We recognize liabilities for environmental matters when it is probable a loss has been incurred and the costs can be reasonably estimated. Environmental liability estimates may include costs such as anticipated site testing, consulting, remediation, disposal, post-remediation monitoring and legal fees, as appropriate. The liability does not reflect possible recoveries from insurance companies or reimbursement of remediation costs by state agencies, but does include estimates of cost sharing with other potentially responsible parties. Estimates are not discounted, as the timing of the anticipated cash payments is not fixed or readily determinable. Subsequent adjustments to initial estimates are recognized as necessary based upon additional information developed in subsequent periods. In future periods, new laws or regulations, advances in remediation technology, or additional information about the ultimate remediation methodology to be used could significantly change our estimates. Claims for reimbursement of remediation costs are recognized when recovery is deemed probable.
Derivative Instruments and Hedging Activities
We use financial instruments, including forward exchange contracts and swaps, to manage our exposures to movements in interest rates and foreign currency exchange rates. The use of these financial instruments modifies the exposure of these risks with the intent to reduce the risk or cost to us. We do not enter into derivative financial instruments for trading purposes. We limit our risk that counterparties to the derivative contracts will default and not make payments by entering into derivative contracts only with counterparties comprised of large banks and financial institutions that meet established credit criteria. We do not expect to incur any losses as a result of counterparty default.
On the date a derivative contract is executed, we formally document, among other items, the intended hedging designation and relationship, along with the risk management objectives and strategies for entering into the derivative contract. We also formally assess, both at inception and on an ongoing basis, whether the derivatives we used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Cash flows from derivatives that are accounted for as hedges are classified in the Consolidated Statements of Cash Flows in the same category as the items being hedged. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, we discontinue hedge accounting prospectively. The fair value of our derivatives was not material as of December 31, 2019 and 2018.
The hedging designation may be classified as one of the following:
No Hedging Designation. The unrealized gain or loss on a derivative instrument not designated as an accounting hedging instrument is recognized immediately in earnings.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Fair Value Hedge. A hedge of a recognized asset or liability or an unrecognized firm commitment is considered a fair value hedge. For fair value hedges, both the effective and ineffective portions of the changes in the fair value of the derivative, along with the gain or loss on the hedged item that is attributable to the hedged risk, are both recognized in earnings.
Cash Flow Hedge. A hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability is considered a cash flow hedge. The effective portion of the change in the fair value of a derivative that is declared as a cash flow hedge is recognized net of tax in “Accumulated other comprehensive loss” in the Consolidated Balance Sheets until earnings are affected by the variability in cash flows of the designated hedged item.
Foreign Currency Translation
Our foreign operations generally use local currency as their functional currency. Assets and liabilities of these operations are translated at the exchange rates in effect on the balance sheet date. Items in the Consolidated Statements of Earnings are translated at the average exchange rates for the year. The impact of currency fluctuations on our balance sheet is presented in “Changes in cumulative translation adjustment and other” in the Consolidated Statements of Comprehensive Income. Upon sale, or upon complete or substantially complete liquidation of an investment in a foreign operation, the currency translation adjustment attributable to that operation is removed from accumulated other comprehensive loss and is reported as part of the gain or loss on sale or liquidation of the investment for the period during which the sale or liquidation occurs. Gains and losses resulting from foreign currency transactions are recognized in “Miscellaneous income, net” in the Consolidated Statements of Earnings.
Share-Based Compensation
The fair value of stock option awards and nonvested stock awards other than restricted stock units (RSUs) is expensed on a straight-line basis over the vesting period of the awards. RSUs are expensed in the year they are granted. Windfall tax benefits and tax shortfalls are charged directly to income tax expense.
Earnings Per Share
Earnings per share is computed using the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. RSUs are considered participating securities since the share-based awards contain a non-forfeitable right to dividend equivalents irrespective of whether the awards ultimately vest. Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities based on the weighted average shares outstanding during the period.
Diluted earnings per common share reflect the dilutive effect of potential common shares from stock options and other nonparticipating nonvested stock. The dilutive effect of stock options is computed using the treasury stock method, which assumes any proceeds that could be obtained upon the exercise of stock options or vesting of stock awards would be used to purchase common shares at the average market price for the period. The assumed proceeds include the purchase price the grantee pays and the unrecognized compensation expense at the end of each period.
Share Repurchases
Repurchases of shares of common stock are made periodically in open-market transactions and are subject to market conditions, legal requirements and other factors. The cost of share repurchases is allocated between additional paid-in capital and retained earnings based on the amount of additional paid-in capital at the time of the share repurchase.
Defined Benefit Pension and Postretirement Benefit Plans
The funded status of our defined benefit pension plans and postretirement benefit plans are recognized in the Consolidated Balance Sheets. The funded status is measured as the difference between the fair value of plan assets and the benefit obligation at December 31, the measurement date. The fair value of plan assets represents the current market value of contributions made to irrevocable trusts, held for the sole benefit of participants, which are invested by the trusts. For defined benefit pension plans, the benefit obligation represents the actuarial present value of benefits expected to be paid upon retirement based on estimated
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
future compensation levels. For postretirement benefit plans, the benefit obligation represents the actuarial present value of postretirement benefits attributed to employee services already rendered. Overfunded plans, with the fair value of plan assets exceeding the benefit obligation, are aggregated and reported as a pension asset. Underfunded plans, with the benefit obligation exceeding the fair value of plan assets, are aggregated and reported as a pension and postretirement benefit liability.
The current portion of pension and postretirement benefit liabilities represents the actuarial present value of benefits payable within the next year exceeding the fair value of plan assets (if funded), measured on a plan-by-plan basis. These liabilities are recognized in “Accrued expenses and other current liabilities” in the Consolidated Balance Sheets.
Pension and postretirement benefit expense includes service cost, interest cost, and expected return on plan assets (if funded). Pension costs include amortization of net prior service costs loss and net actuarial loss. Postretirement costs include amortization of net prior service credit and net actuarial gain. Service cost represents the actuarial present value of participant benefits earned in the current year. The expected return on plan assets represents the average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the obligation. Prior service cost represents the impact of plan amendments. Net actuarial losses arise as a result of differences between actual experience and assumptions or as a result of changes in actuarial assumptions. Net actuarial gain/loss and prior service cost/credit not recognized as a component of pension and postretirement benefit expense as they arise are recognized as "Change in net actuarial loss and prior service cost, net of tax" in the Consolidated Statements of Comprehensive Income. These pension and postretirement items are subsequently amortized as a component of pension and postretirement benefit expense over the remaining service period if the majority of the employees are active, otherwise over the remaining life expectancy, provided such amounts exceed thresholds based upon the benefit obligation or the value of plan assets.
The measurement of benefit obligations and pension and postretirement benefit expense is based on estimates and assumptions approved by management. These valuations reflect the terms of the plans and use participant-specific information such as compensation, age and years of service, as well as certain assumptions, including estimates of discount rates, expected return on plan assets, rate of compensation increases, interest rates and mortality rates.
Fair Value Measurements
We carry various assets and liabilities at fair value in the Consolidated Balance Sheets, including vehicles held for sale, investments held in Rabbi Trusts and pension assets.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurements are classified based on the following fair value hierarchy:
|
| | | | | | | | | | | | | | | |
| | | Weighted-Average Interest Rate | | | | | | |
| | | December 31, | | | | December 31, |
| | | 2017 | | 2016 | | Maturities | | 2017 | | 2016 |
| | | | | | | | | (In thousands) |
| Short-term debt and current portion of long-term debt: | | | | | | | | | | |
| Short-term debt | | 1.79 | % | | 1.07 | % | |
| | $ | 35,509 |
| | 177,629 |
|
| Current portion of long-term debt, including capital leases | | | | | | | | 790,560 |
| | 613,781 |
|
| Total short-term debt and current portion of long-term debt | | | | | | | | 826,069 |
| | 791,410 |
|
| Total long-term debt: | | | | | | | | | | |
U.S. commercial paper (1) | | 1.56 | % | | 0.87 | % | | 2020 | | 570,218 |
| | 342,480 |
|
| Global revolving credit facility | | 2.80 | % | | 2.06 | % | | 2020 | | 17,328 |
| | 4,703 |
|
Unsecured U.S. notes – Medium-term notes (1) | | 2.73 | % | | 2.67 | % | | 2018-2025 | | 4,014,091 |
| | 4,113,421 |
|
| Unsecured U.S. obligations, principally bank term loans | | 2.79 | % | | 2.19 | % | | 2018 | | 50,000 |
| | 50,000 |
|
| Unsecured foreign obligations | | 1.50 | % | | 1.55 | % | | 2018-2020 | | 230,380 |
| | 232,092 |
|
Asset backed U.S. obligations (2) | | 1.85 | % | | 1.80 | % | | 2018-2022 | | 491,899 |
| | 459,876 |
|
| Capital lease obligations | | 3.53 | % | | 3.17 | % | | 2018-2023 | | 20,871 |
| | 24,184 |
|
| Total before fair market value adjustment | | | | | | | | 5,394,787 |
| | 5,226,756 |
|
Fair market value adjustment on notes subject to hedging (3) | | | | | | | | (7,192 | ) | | 1,110 |
|
| Debt issuance costs | | | | | | | | (13,453 | ) | | (14,221 | ) |
| | | | | | | | | 5,374,142 |
| | 5,213,645 |
|
| Current portion of long-term debt, including capital leases | | | | | | | | (790,560 | ) | | (613,781 | ) |
| Long-term debt | | | | | | | | 4,583,582 |
| | 4,599,864 |
|
| Total debt | | | | | | | | $ | 5,409,651 |
| | 5,391,274 |
|
|
| |
| Level 1 | Quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. |
|
| |
| Level 2 | Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or model-derived valuations or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
|
| |
| Level 3 | Unobservable inputs for the asset or liability. These inputs reflect our own assumptions about the assumptions a market participant would use in pricing the asset or liability. |
When available, we use unadjusted quoted market prices to measure fair value and classify such measurements within Level 1. If quoted prices are not available, fair value is based upon model-driven valuations that use current market-based or independently sourced market parameters such as interest rates and currency rates. Items valued using these models are classified according to the lowest level input or value driver that is significant to the valuation.
The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the immediate or short-term maturities of these financial instruments. Revenue earning equipment held for sale is measured at fair value on a nonrecurring basis and is stated at the lower of carrying amount or fair value less costs to sell. Investments held in Rabbi Trusts and derivatives are carried at fair value on a recurring basis.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Investments held in Rabbi Trusts include exchange-traded equity securities and mutual funds. Fair values for these investments are based on quoted prices in active markets. Refer to Note 20, "Employee Benefit Plans," for further information regarding pension assets.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Income Taxes
In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This pronouncement enhances and simplifies various aspects of income tax accounting guidance. Among other things, the amendment removes the year-to-date loss limitation in interim-period tax accounting and requires entities to reflect the effect of an enacted change in tax laws in the interim period that includes the enactment date of the new legislation. The standard is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact of the adoption of this update on our consolidated financial position, results of operations, and cash flows.
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 addresses 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.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326). This pronouncement, along with subsequent ASUs issued to clarify certain provisions of ASU 2016-13, modifies the measurement of expected credit losses of certain financial instruments, including accounts receivable (excluding those related to operating leases) and net investments in sales-type leases. Among other things, these amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The standard is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The standard requires a cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is effective. Periods prior to the adoption date that are presented for comparative purposes are not adjusted. 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 FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815). This pronouncement, along with ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, were issued to clarify certain provisions of these ASUs, 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 2019 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 and its related updates. 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
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
application date of January 1, 2017. For all 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 where we are the lessee, we have made an accounting policy election to use the incremental borrowing rate considering the remaining lease term and remaining minimum rental payments. 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 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 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.
Effective with the adoption of the new leasing accounting standard in 2019, we recorded an after-tax cumulative effect adjustment to decrease retained earnings as of January 1, 2017 primarily to recognize a contract liability (deferred revenue) related to maintenance services, which was partially offset by costs capitalized related to sales commissions and is reflected in the Consolidated Statements of Shareholders' Equity.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Adoption of the new lease standard impacted our previously reported Consolidated Statements of Earnings and Comprehensive Income results as follows (in millions, except per share amounts): |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2018 | | Year ended December 31, 2017 |
| | As Previously Reported | Lessor Adjustments (1) | Lessee and
Other Adjustments (1) | As Revised | | As Previously Reported | Lessor Adjustments (1) | Lessee and
Other Adjustments (1) | As Revised |
| | |
Lease & related maintenance and rental revenues (1) | $ | 3,508.1 |
| $ | 3.5 |
| $ | 1.3 |
| $ | 3,512.9 |
| | $ | 3,237.7 |
| $ | (17.0 | ) | $ | — |
| $ | 3,220.7 |
|
| Total revenues | 8,409.2 |
| 3.5 |
| 1.3 |
| 8,413.9 |
| | 7,297.1 |
| (17.0 | ) | — |
| 7,280.1 |
|
| | | | | | | | | | |
Cost of lease & related maintenance and rental (1) | 2,566.3 |
| (10.9 | ) | — |
| 2,555.4 |
| | 2,355.0 |
| (1.8 | ) | — |
| 2,353.2 |
|
Cost of services (2) | 3,655.8 |
| — |
| 7.6 |
| 3,663.3 |
| | 2,970.8 |
| — |
| 6.6 |
| 2,977.4 |
|
| Other operating expenses | 125.3 |
| — |
| (1.4 | ) | 124.0 |
| | 115.5 |
| — |
| (0.5 | ) | 115.0 |
|
Selling, general and administrative expenses (2) | 854.8 |
| (2.5 | ) | (2.9 | ) | 849.4 |
| | 871.2 |
| 2.1 |
| (2.4 | ) | 870.9 |
|
| Used vehicle sales, net | 21.7 |
| 0.6 |
| — |
| 22.3 |
| | 17.2 |
| (0.3 | ) | — |
| 17.0 |
|
| Interest expense | 178.6 |
| — |
| 1.9 |
| 180.5 |
| | 140.4 |
| — |
| 1.5 |
| 141.9 |
|
Restructuring and other items, net (2) | 25.1 |
| — |
| (3.3 | ) | 21.9 |
| | 21.4 |
| — |
| (4.1 | ) | 17.3 |
|
| Earnings (loss) from continuing operations before income taxes | 373.9 |
| 16.3 |
| (0.7 | ) | 389.5 |
| | 314.5 |
| (17.0 | ) | (1.1 | ) | 296.4 |
|
| Provision for (benefit from) income taxes | 98.3 |
| 4.3 |
| — |
| 102.5 |
| | (477.7 | ) | 54.1 |
| — |
| (423.7 | ) |
| Earnings (loss) from continuing operations | 275.6 |
| 12.0 |
| (0.7 | ) | 286.9 |
| | 792.3 |
| (71.1 | ) | (1.1 | ) | 720.1 |
|
| Net earnings (loss) | $ | 273.3 |
| $ | 12.0 |
| $ | (0.7 | ) | $ | 284.6 |
| | $ | 791.8 |
| $ | (71.1 | ) | $ | (1.1 | ) | $ | 719.6 |
|
| | | | | | | | | | |
| Comprehensive income | $ | 170.0 |
| $ | 14.3 |
| $ | — |
| $ | 184.4 |
| | $ | 918.4 |
| $ | (75.5 | ) | — |
| $ | 842.8 |
|
| | | | | | | | | | |
| Earnings (loss) per common share - Basic | | | | | | | | | |
| Continuing operations | $ | 5.24 |
| $ | 0.22 |
| $ | — |
| $ | 5.46 |
| | $ | 15.00 |
| $ | (1.36 | ) | $ | — |
| $ | 13.64 |
|
| Net earnings (loss) | $ | 5.20 |
| $ | 0.22 |
| $ | — |
| $ | 5.41 |
| | $ | 15.00 |
| $ | (1.36 | ) | $ | — |
| $ | 13.63 |
|
| | | | | | | | | | |
| Earnings (loss) per common share - Diluted | | | | | | | | | |
| Continuing operations | $ | 5.21 |
| $ | 0.22 |
| $ | — |
| $ | 5.43 |
| | $ | 14.90 |
| $ | (1.36 | ) | $ | — |
| $ | 13.54 |
|
| Net earnings (loss) | $ | 5.17 |
| $ | 0.22 |
| $ | — |
| $ | 5.38 |
| | $ | 14.89 |
| $ | (1.36 | ) | $ | — |
| $ | 13.53 |
|
| |
| (1) | We determined that 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. The prior period error was corrected by reducing "Lease & related maintenance and rental revenues" by approximately $19 million and $15 million during the years ended December 31, 2018 and 2017, respectively. We also reduced depreciation expense (included in "Cost of lease & related maintenance and rental") by approximately $17 million and $14 million during the years ended December 31, 2018 and 2017, respectively. We concluded these errors were not material to any of our previously issued consolidated financial statements. |
| |
| (2) | Adjustments primarily reflect the reclassification of our Singapore operations that were shut down during 2019 into "Restructuring and other items, net,". |
Note: Amounts may not be additive due to rounding.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Adoption of the new lease standard impacted our previously reported Consolidated Balance Sheet as follows (in millions): |
| | | | | | | | | | | | | | | | |
| | | December 31, 2018 |
| | | As Previously | | Lessor | | Lessee | | |
| | | Reported | | Adjustment (1) | | Adjustment (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) | We determined that in a prior period 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. The prior
period error was corrected by increasing "Receivables, net" by approximately $24 million and also increasing "sales-type leases and other assets" by approximately $65 million and reducing "Revenue earning equipment, net" by $83 million. 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.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Adoption of the new lease standard impacted our previously reported Consolidated Statements of Cash Flows as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2018 | | Year ended December 31, 2017 |
| | As Previously Reported | New Lease Standard Adjustments | As Revised | | As Previously Reported | New Lease Standard Adjustments | As Revised |
| Net earnings (loss) | $ | 273.3 |
| $ | 11.3 |
| $ | 284.6 |
| | $ | 791.8 |
| $ | (72.2 | ) | $ | 719.6 |
|
| Earnings (loss) from continuing operations | 275.6 |
| 11.3 |
| 286.9 |
| | 792.3 |
| (72.2 | ) | 720.1 |
|
| Depreciation expense | 1,395.0 |
| (6.4 | ) | 1,388.6 |
| | 1,255.2 |
| 2.5 |
| 1,257.7 |
|
| Used vehicle sales, net | 21.7 |
| 0.6 |
| 22.3 |
| | 17.2 |
| (0.3 | ) | 17.0 |
|
| Amortization expense and other non-cash charges, net | 31.2 |
| 36.8 |
| 67.9 |
| | 8.3 |
| 32.7 |
| 41.0 |
|
| Non-cash lease expense | — |
| 81.1 |
| 81.1 |
| | — |
| 67.8 |
| 67.8 |
|
| Deferred income tax expense | 104.6 |
| 4.3 |
| 108.9 |
| | (500.3 | ) | 54.1 |
| (446.2 | ) |
| Collections on sales-type leases and other items | — |
| 82.8 |
| 82.8 |
| | — |
| 81.0 |
| 81.0 |
|
| Changes in operating assets and liabilities: | | | | | | | |
| Receivables | (189.3 | ) | (3.8 | ) | (193.1 | ) | | (173.8 | ) | (5.0 | ) | (178.9 | ) |
| Prepaid expenses and other assets | (65.8 | ) | (18.9 | ) | (84.7 | ) | | (38.9 | ) | (56.9 | ) | (95.8 | ) |
| Accrued expenses and other non-current liabilities | 3.1 |
| (104.8 | ) | (101.8 | ) | | 78.4 |
| (23.6 | ) | 54.8 |
|
| Net cash provided by operating activities from continuing operations | 1,635.1 |
| 82.9 |
| 1,718.0 |
| | 1,548.0 |
| 80.1 |
| 1,628.1 |
|
| Collections on direct finance leases and other items | 75.0 |
| (75.0 | ) | — |
| | 73.2 |
| (73.2 | ) | — |
|
| Net cash used in investing activities from continuing operations | (2,746.5 | ) | (75.0 | ) | (2,821.5 | ) | | (1,365.5 | ) | (73.2 | ) | (1,438.7 | ) |
| Debt repaid | (797.8 | ) | (7.9 | ) | (805.7 | ) | | (962.6 | ) | (6.9 | ) | (969.5 | ) |
| Net cash provided by (used in) financing activities from continuing operations | 1,093.4 |
| (7.9 | ) | 1,085.5 |
| | (155.1 | ) | (6.9 | ) | (162.1 | ) |
Note: Amounts may not be additive due to rounding.
3. ACQUISITIONS
On April 2, 2018, we acquired all of the outstanding equity of MXD Group, Inc. (MXD), an e-commerce fulfillment provider with a national network of facilities, including last mile delivery capabilities, for a purchase price of $118 million. The acquisition is included in our SCS business segment. The assets, liabilities and results of operations of MXD were not material to our consolidated financial position or results of operations and therefore financial information for the acquisition is not presented.
On June 15, 2018, we acquired all of the outstanding equity of Metro Truck & Tractor Leasing (Metro), a full service leasing, rental and maintenance company for a purchase price of $52 million. The acquisition is included in our FMS business segment. The assets, liabilities and results of operations of Metro were not material to our consolidated financial position or results of operations and therefore financial information for the acquisition is not presented.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. REVENUE
Disaggregation of Revenue
The following tables disaggregate our revenue by primary geographical market and industry:
Primary Geographical Markets
|
| | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2019 |
| | FMS | | SCS | | DTS | | Eliminations | | Total |
| | (In thousands) |
| United States | $ | 4,965,461 |
| | $ | 2,110,240 |
| | $ | 1,417,483 |
| | $ | (593,170 | ) | | $ | 7,900,014 |
|
| Canada | 302,956 |
| | 215,380 |
| | — |
| | (21,186 | ) | | 497,150 |
|
| Europe | 302,986 |
| | — |
| | — |
| | — |
| | 302,986 |
|
| Mexico | — |
| | 222,358 |
| | — |
| | — |
| | 222,358 |
|
| Singapore | — |
| | 3,293 |
| | — |
| | — |
| | 3,293 |
|
| Total revenue | $ | 5,571,403 |
| | $ | 2,551,271 |
| | $ | 1,417,483 |
| | $ | (614,356 | ) | | $ | 8,925,801 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2018 |
| | FMS | | SCS | | DTS | | Eliminations | | Total |
| | (In thousands) |
| United States | $ | 4,639,494 |
| | $ | 1,990,486 |
| | $ | 1,333,313 |
| | $ | (554,764 | ) | | $ | 7,408,529 |
|
| Canada | 302,106 |
| | 185,655 |
| | — |
| | (21,440 | ) | | 466,321 |
|
| Europe | 317,093 |
| | — |
| | — |
| | — |
| | 317,093 |
|
| Mexico | — |
| | 198,147 |
| | — |
| | — |
| | 198,147 |
|
| Singapore | — |
| | 23,856 |
| | — |
| | — |
| | 23,856 |
|
| Total revenue | $ | 5,258,693 |
| | $ | 2,398,144 |
| | $ | 1,333,313 |
| | $ | (576,204 | ) | | $ | 8,413,946 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2017 |
| | FMS | | SCS | | DTS | | Eliminations | | Total |
| | (In thousands) |
| United States | $ | 4,128,814 |
| | $ | 1,566,945 |
| | $ | 1,095,645 |
| | $ | (449,896 | ) | | $ | 6,341,508 |
|
| Canada | 282,438 |
| | 169,090 |
| | — |
| | (19,568 | ) | | 431,960 |
|
| Europe | 305,289 |
| | — |
| | — |
| | — |
| | 305,289 |
|
| Mexico | — |
| | 170,525 |
| | — |
| | — |
| | 170,525 |
|
| Singapore | — |
| | 30,792 |
| | — |
| | — |
| | 30,792 |
|
| Total revenue | $ | 4,716,541 |
| | $ | 1,937,352 |
| | $ | 1,095,645 |
| | $ | (469,464 | ) | | $ | 7,280,074 |
|
Industry
We have a diversified portfolio of customers across a full array of transportation and logistics solutions and across many industries. We believe this will help to mitigate the impact of adverse downturns in specific sectors of the economy. Our portfolio of ChoiceLease and commercial rental customers is not concentrated in any one particular industry or geographic region. We derive a significant portion of our SCS revenue from the automotive industry, mostly from manufacturers and suppliers of original equipment parts.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Our SCS business segment includes revenue from the following industries:
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| | (In thousands) |
| Automotive | | $ | 1,003,508 |
| | $ | 947,408 |
| | $ | 783,642 |
|
| Technology and healthcare | | 432,107 |
| | 480,026 |
| | 387,253 |
|
| CPG and retail | | 901,344 |
| | 766,765 |
| | 535,687 |
|
| Industrial and other | | 214,312 |
| | 203,945 |
| | 230,770 |
|
| Total revenue | | $ | 2,551,271 |
| | $ | 2,398,144 |
| | $ | 1,937,352 |
|
Contract Balances
We record a receivable related to revenue recognized when we have an unconditional right to invoice. There were 0 material contract assets as of December 31, 2019 or 2018. Refer to Note 6, "Receivables, Net," for the amount of our trade receivables.
Contract liabilities relate to payments received in advance of performance under the contract. Changes in contract liabilities are due to additional billings and our performance under the contract. The amount of deferred revenue as of January 1, 2019 recognized as revenue during the year ended December 31, 2019 was $181 million. In addition, we deferred consideration of $203 million received in advance of performance during the year ended December 31, 2019 resulting in an increase in deferred revenue. Deferred revenue was $587 million and $566 million as of December 31, 2019 and 2018, respectively, related to the maintenance services component of our ChoiceLease product line.
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 recognized as revenue in future periods as we provide maintenance services to our customers. Contracted not recognized revenue excludes variable consideration as it is not included in the transaction price consideration allocated at contract inception, as well as amounts from contracts with an original duration of one year or less. Further, contracted not recognized revenue does not include amounts from remaining performance obligations when we have the right to invoice the customer for the value to the customer of our performance completed to date. Contracted not recognized revenue was $2.9 billion as of December 31, 2019.
Costs to Obtain and Fulfill a Contract
We capitalize incremental sales commissions paid as a result of obtaining ChoiceLease, SCS and DTS contracts as contract costs. Capitalized sales commissions was $105 million and $107 million as of December 31, 2019 and 2018, respectively. Capitalized sales commissions include initial direct costs of our leases of $55 million and $53 million as of December 31, 2019 and 2018, respectively. Capitalized sales commissions are presented in “Sales-type leases and other assets” in the Consolidated Balance Sheets.
Capitalized sales commissions related to our ChoiceLease product are amortized based on the same pattern as the revenue is recognized for the underlying lease or non-lease components of the contract; generally on a straight-line basis for the lease component and consistent with the estimated pattern of maintenance costs for the non-lease component. We allocate the ChoiceLease commissions to the lease and non-lease components based on the same allocation of the contract consideration. The amortization period aligns with the term of our contract, which typically ranges from three to seven years, and the expense is included in “Selling, general and administrative expenses” in the Consolidated Statements of Earnings.
Capitalized sales commissions related to our SCS and DTS service contracts are amortized based on the same pattern as the revenue is recognized for the underlying contracts. This generally results in a straight-line amortization. The amortization period aligns with the expected term of the contract, which typically ranges from three to five years, and the expense is included in “Selling, general and administrative expenses” in the Consolidated Statement of Earnings.
For the years ended December 31, 2019, 2018, and 2017, sales commission expense was $43 million, $37 million and $33 million, respectively.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. RESTRUCTURING AND OTHER ITEMS, NET
The following table presents the amounts within "Restructuring and other items, net" in the Consolidated Statements of Earnings that related to each segment in 2019, 2018 and 2017.
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| | | (In thousands) |
| Fleet Management Solutions | | $ | 33,275 |
| | $ | 16,785 |
| | $ | 2,995 |
|
| Supply Chain Solutions | | (45 | ) | | 4,413 |
| | (1,862 | ) |
| Dedicated Transportation Solutions | | — |
| | — |
| | 771 |
|
| Central Support Services | | 23,338 |
| | 654 |
| | 15,361 |
|
| Restructuring and other items, net | | $ | 56,568 |
| | $ | 21,852 |
| | $ | 17,265 |
|
In 2019, 2018 and 2017, we executed restructuring plans to reduce our workforce in multiple locations as a result of cost containment actions. During 2019, we recognized employee termination costs related to the closure of several FMS maintenance locations in the U.S. and Canada and expect to incur additional restructuring charges in 2020, but we do not expect these charges to be material to our financial statements. In addition to these restructuring charges, we also incurred charges related to cost savings initiatives, the pursuit of a commercial claim and the implementation of an enterprise resource planning system. In addition, we recognized income from our Singapore operations that were shut down during the second quarter of 2019.
During 2018, we recognized restructuring charges offset by restructuring credits related to gains on the sale of certain U.K. facilities that were closed as part of our December 2017 restructuring activities and income from our Singapore operations that were shut down during the second quarter of 2019. We also incurred charges related to cost savings initiatives, transaction costs related to the acquisitions of MXD and Metro and an impairment charge of goodwill associated with our FMS Europe reporting unit. We recognized a net benefit for an adjustment to the one-time 2017 Tax Cuts and Jobs Act-related employee bonus accrued as of December 31, 2017.
During 2017, we recognized restructuring charges offset by restructuring credits related to gains on the sale of certain U.K. facilities that were closed as part of prior year restructuring activities and income from our Singapore operations that were shut down during the second quarter of 2019. We also incurred charges related to consulting fees associated with cost savings initiatives.
The following table summarizes the activities within, and components of, restructuring liabilities as of December 31, 2019, 2018 and 2017:
|
| | | | |
| | | Employee Termination Costs |
| | | (In thousands) |
| Balance at December 31, 2016 | | $ | 7,278 |
|
| Workforce reduction charges | | 13,320 |
|
Utilization (1) | | (7,524 | ) |
| Balance at December 31, 2017 | | 13,074 |
|
| Workforce reduction charges | | 8,366 |
|
Utilization (1) | | (13,845 | ) |
| Balance at December 31, 2018 | | 7,595 |
|
| Workforce reduction charges | | 5,655 |
|
Utilization (1) | | (6,485 | ) |
Balance at December 31, 2019 (2) | | $ | 6,765 |
|
_________________
| |
| (1) | Principally represents cash payments. |
| |
| (2) | The majority of the balance remaining for employee termination costs is expected to be paid by the end of 2020. |
Note: The restructuring liabilities shown above are included in "Accrued expenses and other current liabilities" in the Consolidated Balance Sheets.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. RECEIVABLES, NET
|
| | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| | | (In thousands) |
| Trade | | $ | 1,060,298 |
| | $ | 1,087,219 |
|
| Sales-type leases | | 135,353 |
| | 106,594 |
|
| Other, primarily warranty and insurance | | 55,600 |
| | 65,427 |
|
| | | 1,251,251 |
| | 1,259,240 |
|
| Allowance | | (22,761 | ) | | (17,182 | ) |
| Total | | $ | 1,228,490 |
| | $ | 1,242,058 |
|
7. REVENUE EARNING EQUIPMENT, NET |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Estimated
Useful
Lives | | December 31, 2019 | | December 31, 2018 |
| Cost | | Accumulated Depreciation | | Net (1) | | Cost | | Accumulated Depreciation | | Net (1) |
| (In years) | | (In thousands) |
| Held for use: | | | | | | | | | | | | | | |
| ChoiceLease | | 3 — 12 | | $ | 12,223,179 |
| | $ | (4,125,342 | ) | | $ | 8,097,837 |
| | $ | 10,824,819 |
| | $ | (3,645,485 | ) | | $ | 7,179,334 |
|
| Commercial rental | | 4.5 — 12 | | 3,200,403 |
| | (1,049,850 | ) | | 2,150,553 |
| | 3,152,908 |
| | (1,047,346 | ) | | 2,105,562 |
|
| Held for sale | | | | 748,435 |
| | (569,161 | ) | | 179,274 |
| | 467,093 |
| | (336,028 | ) | | 131,065 |
|
| Total | | | | $ | 16,172,017 |
| | $ | (5,744,353 | ) | | $ | 10,427,664 |
| | $ | 14,444,820 |
| | $ | (5,028,859 | ) | | $ | 9,415,961 |
|
_______________
| |
| (1) | Revenue earning equipment, net includes vehicles under finance leases of $12 million, less accumulated depreciation of $8 million, at December 31, 2019 and $23 million, less accumulated depreciation of $13 million, at December 31, 2018. |
We periodically review and adjust, as appropriate, the estimated residual values and useful lives of revenue earning equipment for the purposes of recording depreciation expense. Our review of the estimated residual values and useful lives of revenue earning equipment is established with a long-term view based on vehicle class, generally subcategories of trucks, tractors and trailers by weight and usage, as well as other factors. We refer to this long-term view as "policy depreciation." These other factors include, but are not limited to, historical market prices, current and expected future market prices, expected lives of vehicles, and expected sales of used vehicles in the wholesale and retail markets. Factors that could cause actual results to materially differ from estimates include, but are not limited to, changes in technology; changes in supply and demand; competitor pricing; regulatory requirements; driver shortages, requirements and preferences; and changes in underlying assumption factors. We have disciplines related to the management and maintenance of our 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 estimates of residual values of vehicles expected to be made available for sale in the near-term (generally 12 to 24 months) and may adjust estimates of residual values for these vehicles to reflect current market rates, which we refer to as "accelerated depreciation."
At the end of the second quarter of 2019, we began to experience softening in used vehicle market conditions, which intensified through the third quarter of 2019 and we now expect to continue throughout 2020. In addition, our inventory of used vehicles that is expected to be made available for sale was higher than expected, which has and will impact the volume of used vehicle sales expected to be sold through our wholesale channels. Due to these dynamics and our updated outlook, management concluded that our residual value estimates likely exceeded the expected future values that would be realized upon the sale of power vehicles in our fleet. As a result, we changed the estimates of residual values for our revenue earning equipment in the third quarter of 2019 to reflect more recent multi-year trends and our outlook for the expected used vehicle market. The increase in depreciation expense, resulting from the change in estimate, reduced earnings from continuing operations before income taxes and net earnings by approximately $297 million and $219 million, respectively, in 2019. This amount included accelerated depreciation of approximately $193 million related to lower residual value estimates of vehicles expected to be sold in the near-term and additional policy depreciation of $104 million. The effect of this change in estimate decreased our diluted earnings per share by $4.19 in 2019.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The impact of the vehicle residual value estimates change that occurred in the third quarter of 2019 is in addition to the depreciation expense of $30 million related to the policy depreciation estimate change effective January 1, 2019 and additional accelerated depreciation of $30 million that was incurred throughout 2019. We recorded accelerated depreciation expense of $39 million and $30 million in 2018 and 2017, respectively. Total depreciation expense related to revenue earning equipment was $1.8 billion, $1.3 billion and $1.2 billion in 2019, 2018 and 2017, respectively.
Revenue earning equipment held for sale is stated at the lower of net book value or fair value less costs to sell. Losses on vehicles held for sale for which carrying values exceeded fair value, which we refer to as "valuation adjustments," are recognized at the time they arrive at our used truck centers and are presented within "Used vehicle sales, net" in the Consolidated 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 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.
The following table presents the revenue earning equipment held for sale that are measured at fair value on a nonrecurring basis and considered a Level 3 fair value measurement: |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | Total Losses (2) |
| | | December 31, | | Years ended December 31, |
| | | 2019 | | 2018 | | 2019 | | 2018 | | 2017 |
| Assets held for sale: | | (In thousands) | | (In thousands) |
Revenue earning equipment: (1) | | | | | | | | | | |
| Trucks | | $ | 39,009 |
| | $ | 44,325 |
| | $ | 38,701 |
| | $ | 40,220 |
| | $ | 30,812 |
|
| Tractors | | 73,359 |
| | 35,397 |
| | 40,213 |
| | 9,030 |
| | 21,261 |
|
| Trailers | | 2,206 |
| | 1,507 |
| | 4,224 |
| | 4,478 |
| | 5,992 |
|
| Total assets at fair value | | $ | 114,574 |
| | $ | 81,229 |
| | $ | 83,138 |
| | $ | 53,728 |
| | $ | 58,065 |
|
| |
| (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. Assets held for sale where fair value was higher than net book value were $65 million and $50 million as of December 31, 2019 and 2018, respectively. |
| |
| (2) | Total losses represent fair value adjustments for all vehicles held for sale throughout the period for which fair value was less than net book value. |
The components of used vehicle sales, net were as follows:
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| | | (In thousands) |
| Losses (gains) on vehicle sales, net | | $ | (24,432 | ) | | $ | (31,403 | ) | | $ | (41,076 | ) |
| Losses from fair value adjustments | | 83,138 |
| | 53,728 |
| | 58,065 |
|
| Used vehicle sales, net | | $ | 58,706 |
| | $ | 22,325 |
| | $ | 16,989 |
|
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
8. OPERATING PROPERTY AND EQUIPMENT, NET
|
| | | | | | | | | | |
| | | Estimated Useful Lives | | December 31, |
| | | 2019 | | 2018 |
| | | (In years) | | (In thousands) |
| Land | | — | | $ | 245,034 |
| | $ | 235,720 |
|
| Buildings and improvements | | 10 — 40 | | 904,567 |
| | 896,385 |
|
| Machinery and equipment | | 3 — 10 | | 866,654 |
| | 860,609 |
|
| Other | | 3 — 10 | | 125,760 |
| | 125,377 |
|
| | | | | 2,142,015 |
| | 2,118,091 |
|
| Accumulated depreciation | | | | (1,224,216 | ) | | (1,256,037 | ) |
| Total | | | | $ | 917,799 |
| | $ | 862,054 |
|
Depreciation expense related to operating property and equipment was $118 million, $103 million and $97 million in 2019, 2018 and 2017, respectively.
9. GOODWILL
The carrying amount of goodwill attributable to each reportable business segment with changes therein was as follows:
|
| | | | | | | | | | | | | | | | |
| | | Fleet Management Solutions | | Supply Chain Solutions | | Dedicated Transportation Solutions | | Total |
| | | (In thousands) |
| Balance at January 1, 2018 | | $ | 226,854 |
| | $ | 127,842 |
| | $ | 40,808 |
| | $ | 395,504 |
|
Acquisitions (1) | | 32,266 |
| | 63,424 |
| | — |
| | 95,690 |
|
| Impairment | | (15,513 | ) | | — |
| | — |
| | (15,513 | ) |
| Foreign currency translation adjustment | | (1 | ) | | (474 | ) | | — |
| | (475 | ) |
| Balance at December 31, 2018 | | 243,606 |
| | 190,792 |
| | 40,808 |
| | 475,206 |
|
| Foreign currency translation adjustment | | 96 |
| | (277 | ) | | — |
| | (181 | ) |
Balance at December 31, 2019 (2) | | $ | 243,702 |
| | $ | 190,515 |
| | $ | 40,808 |
| | $ | 475,025 |
|
———————————
| |
| (1) | See Note 3, "Acquisitions," for additional information. |
| |
| (2) | Accumulated impairment losses were $45 million as of both December 31, 2019 and 2018. |
We assess goodwill for impairment on October 1st of each year or more often if deemed necessary. In the third quarter of 2019, we performed an interim impairment test of our FMS North America reporting unit (“FMS NA”) as a result of the decline in market conditions and our updated outlook primarily in the used vehicle market, which negatively affects our forecasted cash flows from the sale of used vehicles. Our valuation of fair value for FMS NA was determined based on a discounted future cash flow model (income approach) and the application of current market multiples for comparable publicly-traded companies (market approach). Based on our analysis, we determined that FMS NA goodwill was not impaired as of September 30, 2019. The estimated fair value of the FMS NA reporting unit exceeded its carrying value by approximately 5% as of September 30, 2019.
As a result of a revised forecast and outlook for the FMS NA reporting unit as of December 31, 2019, we performed an additional impairment test. Based on our analysis, we determined that FMS NA goodwill was not impaired as of December 31, 2019. However, the fair value of FMS NA was not substantially in excess of its carrying value. The estimated fair value of the FMS NA reporting unit exceeded its carrying value by approximately 15% as of December 31, 2019.
The increase in the estimated fair value of FMS NA in excess of its carrying value as compared to September 30, 2019 is due to improved estimated future cash flows from management actions which moderate future ChoiceLease growth assumptions, lower expected future capital expenditures and improve future profit margins.
Given this level of fair value, in the event the financial performance of FMS NA does not meet our expectations in the future; we experience future prolonged market downturns, including in the used vehicle market or a sustained decline in our stock price; or other negative revisions to key assumptions, we may be required to perform additional impairment analyses and could be required to recognize a non-cash goodwill impairment charge. Subsequent to December 31, 2019, we experienced a
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
decline in our market capitalization and if this decline continues for a sustained period of time, we may also be required to perform additional impairment analyses and could be required to recognize a non-cash goodwill impairment charge. As of December 31, 2019, there was $244 million of goodwill recorded related to FMS NA.
On October 1, 2019, we completed our annual goodwill impairment test for our SCS and DTS related reporting units and determined there were no impairments.
During the first quarter of 2018, we recorded an impairment charge of $16 million for all goodwill in the FMS Europe reporting unit. This item was reflected within "Restructuring and other items, net" in our Consolidated Statements of Earnings.
10. INTANGIBLE ASSETS, NET
|
| | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| | | (In thousands) |
| Indefinite lived intangible assets — Trade name | | $ | 8,731 |
| | $ | 8,731 |
|
| Finite lived intangible assets: | | | | |
| Customer relationship intangibles | | 113,150 |
| | 113,025 |
|
| Other intangibles, primarily trade name | | 2,367 |
| | 2,367 |
|
| Accumulated amortization | | (73,343 | ) | | (65,048 | ) |
| Total | | $ | 50,905 |
| | $ | 59,075 |
|
The Ryder trade name has been identified as having an indefinite useful life. Customer relationship intangibles are being amortized on a straight-line basis over their estimated useful lives, generally 7-19 years. We recognized amortization expense associated with finite lived intangible assets in 2019, 2018 and 2017 of $8 million, $8 million and $6 million, respectively. The future amortization expense for each of the five succeeding years related to all intangible assets that are currently reported in the Consolidated Balance Sheets is estimated to range from $6 - $8 million per year for 2020 - 2024.
11. ACCRUED EXPENSES AND OTHER LIABILITIES
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2019 | | December 31, 2018 |
| | | Accrued Expenses | | Non-Current Liabilities | | Total | | Accrued Expenses | | Non-Current Liabilities | | Total |
| | | (In thousands) |
| Salaries and wages | | $ | 126,119 |
| | $ | — |
| | $ | 126,119 |
| | $ | 149,629 |
| | $ | — |
| | $ | 149,629 |
|
| Deferred compensation | | 6,436 |
| | 65,006 |
| | 71,442 |
| | 4,524 |
| | 55,279 |
| | 59,803 |
|
| Pension benefits | | 3,863 |
| | 413,829 |
| | 417,692 |
| | 3,754 |
| | 456,979 |
| | 460,733 |
|
| Other postretirement benefits | | 1,478 |
| | 20,187 |
| | 21,665 |
| | 1,387 |
| | 18,097 |
| | 19,484 |
|
| Other employee benefits | | 21,577 |
| | — |
| | 21,577 |
| | 28,370 |
| | — |
| | 28,370 |
|
Insurance obligations (1) | | 163,763 |
| | 285,838 |
| | 449,601 |
| | 139,314 |
| | 247,552 |
| | 386,866 |
|
| Operating taxes | | 116,003 |
| | — |
| | 116,003 |
| | 100,399 |
| | — |
| | 100,399 |
|
| Income taxes | | 2,873 |
| | 17,484 |
| | 20,357 |
| | 3,491 |
| | 18,477 |
| | 21,968 |
|
| Interest | | 46,032 |
| | — |
| | 46,032 |
| | 39,522 |
| | — |
| | 39,522 |
|
| Deposits, mainly from customers | | 82,573 |
| | 3,065 |
| | 85,638 |
| | 80,401 |
| | 3,390 |
| | 83,791 |
|
| Operating lease liabilities | | 72,285 |
| | 151,361 |
| | 223,646 |
| | 73,422 |
| | 137,384 |
| | 210,806 |
|
Deferred revenue (2) | | 165,205 |
| | 438,482 |
| | 603,687 |
| | 160,902 |
| | 421,176 |
| | 582,078 |
|
Restructuring liabilities (3) | | 6,765 |
| | — |
| | 6,765 |
| | 7,595 |
| | — |
| | 7,595 |
|
| Other | | 61,105 |
| | 46,751 |
| | 107,856 |
| | 55,029 |
| | 44,291 |
| | 99,320 |
|
| Total | | $ | 876,077 |
| | $ | 1,442,003 |
| | $ | 2,318,080 |
| | $ | 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) Refer to Note 5 "Restructuring and Other Items, Net" for further information.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
During 2019 and 2018, we recognized charges of $18 million and $1 million, respectively, within earnings from continuing operations from the unfavorable development of estimated prior years claims where costs exceeded self-insured loss reserves. During 2017, we recognized a benefit of $9 million within earnings from continuing operations from the favorable development of estimated prior years' self-insured loss reserves for the reasons noted above.
12. INCOME TAXES
The components of earnings (loss) from continuing operations before income taxes and the provision for (benefit from) income taxes from continuing operations were as follows:
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| | | (In thousands) |
| Earnings (loss) from continuing operations before income taxes: | | | | | | |
| United States | | $ | (44,668 | ) | | $ | 371,925 |
| | $ | 273,033 |
|
| Foreign | | 2,397 |
| | 17,544 |
| | 23,403 |
|
| Total | | $ | (42,271 | ) | | $ | 389,469 |
| | $ | 296,436 |
|
| | | | | | | |
| Provision for (benefit from) income taxes from continuing operations: | | | | | | |
| Current tax expense (benefit) from continuing operations: | | | | | | |
Federal (1) | | $ | (1,065 | ) | | $ | (23,333 | ) | | $ | 6,752 |
|
| State | | 9,187 |
| | 6,862 |
| | 9,360 |
|
| Foreign | | 5,210 |
| | 10,123 |
| | 6,442 |
|
| | | 13,332 |
| | (6,348 | ) | | 22,554 |
|
| Deferred tax expense (benefit) from continuing operations: | | | | | | |
| Federal | | (8,228 | ) | | 113,764 |
| | (455,021 | ) |
| State | | (18,790 | ) | | 1,250 |
| | 7,008 |
|
| Foreign | | (5,313 | ) | | (6,119 | ) | | 1,794 |
|
| | | (32,331 | ) | | 108,895 |
| | (446,219 | ) |
| Total | | $ | (18,999 | ) | | $ | 102,547 |
| | $ | (423,665 | ) |
_______________
(1) The current federal tax benefit in 2018 includes the anticipated $22 million alternative minimum tax refunds generated by the 2017 Tax Cuts and Jobs Act.
A reconciliation of the federal statutory tax rate with the effective tax rate from continuing operations follows:
|
| | | | | | | | | |
| | | Years ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| | | (Percentage of pre-tax earnings) |
| Federal statutory tax rate | | 21.0 | % | | 21.0 | % | | 35.0 | % |
| Impact of one-time deemed repatriation | | — | % | | 6.2 | % | | 11.3 | % |
| Impact on deferred taxes for changes in tax rates | | 20.5 | % | | (3.3 | )% | | (188.5 | )% |
| Additional deferred tax adjustments | | — | % | | (1.5 | )% | | — | % |
| State income taxes, net of federal income tax benefit | | (19.2 | )% | | 3.7 | % | | 3.3 | % |
| Foreign rates varying from federal statutory tax rate | | 3.1 | % | | 0.1 | % | | (4.2 | )% |
| Tax contingencies | | 15.7 | % | | (0.9 | )% | | 0.1 | % |
| Tax credits | | 11.3 | % | | 0.2 | % | | (0.1 | )% |
| Other permanent book-tax differences | | (8.6 | )% | | 0.8 | % | | 0.2 | % |
| Other, net | | 1.1 | % | | — | % | | — | % |
| Effective tax rate | | 44.9 | % | | 26.3 | % | | (142.9 | )% |
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Tax Reform Impact
On December 22, 2017, the 2017 Tax Cuts and Jobs Act of 2017 (2017 Tax Reform) was signed into law. The 2017 Tax Reform made broad and complex changes to the U.S. tax code which have had a significant impact on our earnings. During 2017, we recorded a $619 million benefit for the re-measurement of our net deferred tax liability and a $33 million expense for the one-time transition tax as provisional estimates. During 2018, we completed our analyses and recorded an additional $10 million benefit for the re-measurement of our net deferred tax liability and an additional $24 million expense for the transition tax.
Deferred Income Taxes
The components of the net deferred income tax liability were as follows:
|
| | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| | | (In thousands) |
| Deferred income tax assets: | | | | |
| Self-insurance accruals | | $ | 94,690 |
| | $ | 82,118 |
|
| Net operating loss carryforwards | | 619,314 |
| | 414,144 |
|
| Accrued compensation and benefits | | 31,402 |
| | 31,627 |
|
| Federal benefit on state tax positions | | 9,115 |
| | 11,027 |
|
| Pension benefits | | 78,004 |
| | 94,433 |
|
| Deferred revenue | | 146,383 |
| | 146,831 |
|
| Other accruals | | 21,635 |
| | 19,068 |
|
| | | 1,000,543 |
| | 799,248 |
|
| Valuation allowance | | (17,577 | ) | | (16,186 | ) |
| | | 982,966 |
| | 783,062 |
|
| Deferred income tax liabilities: | | | | |
| Property and equipment basis differences | | (2,121,842 | ) | | (1,937,009 | ) |
| Other | | (5,386 | ) | | (7,907 | ) |
| | | (2,127,228 | ) | | (1,944,916 | ) |
Net deferred income tax liability (1) | | $ | (1,144,262 | ) | | $ | (1,161,854 | ) |
______________
| |
| (1) | Deferred tax assets of $17 million and $18 million have been included in "Sales-type leases and other assets" as of December 31, 2019 and 2018, respectively. |
As of December 31, 2019, we have undistributed earnings of foreign subsidiaries of $826 million. We have historically reinvested such earnings overseas indefinitely and will continue to reinvest future foreign earnings overseas indefinitely. With respect to the undistributed earnings as of December 31, 2019, $635 million was included in the transition tax. The determination of the amount of any additional unrecognized deferred tax liability is not practicable because of the complexities associated with the hypothetical calculations used in evaluating whether we will maintain the indefinite reinvestment assertion.
As of December 31, 2019, we had U.S. federal tax effected net operating loss carryforwards, before unrecognized tax benefits, of $547 million, of which $137 million is expected to expire beginning 2033; the remaining $410 million has an indefinite carryforward period. Various U.S. subsidiaries had state tax effected net operating loss carryforwards, before unrecognized tax benefits and valuation allowances, of $89 million that will begin to expire as follows: $7 million in 2020, $4 million in 2021, and $73 million in 2022 and thereafter; the remaining $5 million has an indefinite carryforward period. To the extent that we do not generate sufficient state taxable income within the statutory carryforward periods to utilize the loss carryforwards in these states, the loss carryforwards will expire unused. We also had foreign tax effected net operating loss carryforwards of $19 million that are available to reduce future income tax payments in several countries, subject to varying expiration rules. We assess the realizability of our deferred tax assets and record a valuation allowance to the extent it is determined that they are not more-likely-than-not to be realized. Due to our assessment of future sources of taxable income in various states and foreign jurisdictions as of December 31, 2019 and the near-term expiration of certain net operating carryforwards, we recorded a valuation allowance of $18 million against our deferred tax assets. The valuation allowance is subject to change in future years based on the availability of future sources of taxable income to offset the net operating loss carryforwards.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
During 2018, we determined that certain deferred tax assets had been undervalued in prior periods. As the amounts were not material to our consolidated financial statements in any individual period, and the cumulative amount is not material to 2018 results, we recognized a one-time $6 million benefit in our provision for income taxes related to the correction of this error.
Uncertain Tax Positions
In many cases, our uncertain tax positions are related to tax years that remain subject to examination by the relevant taxing authorities. The following table summarizes these open tax years by jurisdiction:
|
| | |
| | |
| Jurisdiction | | Open Tax Year |
| | |
| United States (Federal) | | 2009 - 2011, 2013 - 2019 |
| Canada | | 2012 - 2019 |
| Mexico | | 2014 - 2019 |
| United Kingdom | | 2018 - 2019 |
| Brazil (in discontinued operations) | | 2014 - 2019 |
The following table summarizes the activity related to unrecognized tax benefits (excluding the federal benefit received from state positions):
|
| | | | | | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 | | 2017 |
| | | (In thousands) |
| Balance at January 1 | | $ | 58,819 |
| | $ | 62,288 |
| | $ | 61,649 |
|
| Additions based on tax positions related to the current year | | 1,422 |
| | 3,885 |
| | 3,971 |
|
| Reductions due to lapse of applicable statutes of limitation | | (11,323 | ) | | (7,354 | ) | | (3,332 | ) |
| Gross balance at December 31 | | 48,918 |
| | 58,819 |
| | 62,288 |
|
| Interest and penalties | | 4,772 |
| | 4,594 |
| | 5,860 |
|
| Balance at December 31 | | $ | 53,690 |
| | $ | 63,413 |
| | $ | 68,148 |
|
Of the total unrecognized tax benefits as of December 31, 2019, $45 million (net of the federal benefit on state issues) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate in future periods. The total includes $4 million of interest and penalties, as of both December 31, 2019 and 2018, net of the federal benefit on state interest. Unrecognized tax benefits related to federal, state and foreign tax positions may decrease by $8 million by December 31, 2020, if audits are completed or tax years close during 2020.
During 2018, we determined that reserves for certain uncertain tax positions should have been reversed in prior periods when the statutes of limitations expired. As the amounts were not material to our consolidated financial statements in any individual period, and the cumulative amount is not material to 2018 results, we recognized a one-time $4 million benefit in our provision for income taxes related to the correction of this error.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. LEASES
Leases as Lessor
The components of revenue from leases were as follows:
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| | | (In thousands) |
| Operating leases | | | | | | |
| Lease income related to ChoiceLease | | $ | 1,505,913 |
| | $ | 1,369,025 |
| | $ | 1,303,263 |
|
Lease income related to commercial rental (1) | | 952,560 |
| | 905,305 |
| | 777,270 |
|
| | | | | | | |
| Sales-type leases | | | | | | |
| Interest income related to net investment in leases | | $ | 46,801 |
| | $ | 38,385 |
| | $ | 30,169 |
|
| | | | | | | |
Variable lease income excluding commercial rental (1) | | $ | 272,065 |
| | $ | 244,911 |
| | $ | 238,905 |
|
_________________
| |
| (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. |
The components of the net investment in sales-type leases included in "Receivables, net" and "Sales-type lease and other assets" in the Consolidated Balance Sheet were as follows:
|
| | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| | | (In thousands) |
| Net investment in the lease - lease payment receivable | | $ | 553,076 |
| | $ | 505,057 |
|
| Net investment in the lease - unguaranteed residual value in assets | | 44,952 |
| | 46,209 |
|
| | | $ | 598,028 |
| | $ | 551,266 |
|
Maturities of sales-type lease receivables as of December 31, 2019 were as follows:
|
| | | |
| Years ending December 31 | (In thousands) |
| 2020 | $ | 166,300 |
|
| 2021 | 144,745 |
|
| 2022 | 117,645 |
|
| 2023 | 84,803 |
|
| 2024 | 62,292 |
|
| Thereafter | 86,417 |
|
| Total undiscounted cash flows | 662,202 |
|
| Present value of lease payments (recognized as lease receivables) | (553,076 | ) |
| Difference between undiscounted cash flows and discounted cash flows | $ | 109,126 |
|
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Payments due for operating leases as of December 31, 2019 were as follows:
|
| | | | |
| Years ending December 31 | | (In thousands) |
| 2020 | | $ | 1,316,590 |
|
| 2021 | | 1,052,096 |
|
| 2022 | | 765,195 |
|
| 2023 | | 526,845 |
|
| 2024 | | 347,258 |
|
| Thereafter | | 291,703 |
|
| Total undiscounted cash flows | | $ | 4,299,687 |
|
Leases as Lessee
The components of lease expense were as follows:
|
| | | | | | | | | | | | | |
| | | | Years ended December 31, |
| | Classification | | 2019 | | 2018 | | 2017 |
| | | | (In thousands) |
| Finance lease cost | | | | | | | |
| Amortization of right-of-use-assets | Other operating expenses, SG&A | | $ | 13,671 |
| | $ | 13,805 |
| | $ | 13,870 |
|
| Interest on lease liabilities | Interest expense | | 2,565 |
| | 2,546 |
| | 2,288 |
|
| Operating lease cost | Other operating expenses, SG&A | | 94,039 |
| | 87,741 |
| | 72,992 |
|
| Short-term lease and other | Other operating expenses, SG&A | | 10,963 |
| | 10,017 |
| | 9,877 |
|
| Variable lease cost | Other operating expenses, SG&A | | 12,459 |
| | 9,888 |
| | 8,892 |
|
| Sublease income | Lease & related maintenance and rental revenues, Other operating expenses | | (22,385 | ) | | (23,261 | ) | | (21,169 | ) |
| Total lease cost | | | $ | 111,312 |
| | $ | 100,736 |
| | $ | 86,750 |
|
Supplemental cash flow information related to leases was as follows:
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| | | (In thousands) |
| Cash paid for amounts included in measurement of liabilities: | | | | | | |
| Operating cash flows from finance leases | | $ | 2,565 |
| | $ | 2,546 |
| | $ | 2,288 |
|
| Operating cash flows from operating leases | | 93,383 |
| | 85,980 |
| | 69,379 |
|
| Financing cash flows from finance leases | | 17,922 |
| | 17,601 |
| | 17,206 |
|
| Right-of-use assets obtained in exchange for lease obligations: | | | | | | |
| Finance leases | | 21,749 |
| | 15,324 |
| | 23,095 |
|
| Operating leases | | 96,810 |
| | 114,990 |
| | 99,476 |
|
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Supplemental balance sheet information relates to leases was as follows:
|
| | | | | | | | | |
| | | | December 31, |
| | Classification | | 2019 | | 2018 |
| | | | (In thousands) |
| Assets | | | | | |
| Operating lease right-of-use assets | Sales-type leases and other assets | | $ | 214,809 |
| | $ | 203,834 |
|
| Finance lease assets | Operating property and equipment, net and revenue earning equipment, net | | 44,190 |
| | 41,647 |
|
| Total leased assets | | | $ | 258,999 |
| | $ | 245,481 |
|
| | | | | | |
| Liabilities | | | | | |
| Current | | | | | |
| Operating | Accrued expenses and other current liabilities | | $ | 72,285 |
| | $ | 73,422 |
|
| Finance | Short-term debt and current portion of long-term debt | | 12,381 |
| | 14,543 |
|
| | | | | | |
| Noncurrent | | | | | |
| Operating | Other non-current liabilities | | 151,361 |
| | 137,384 |
|
| Finance | Long-term debt | | 39,336 |
| | 32,909 |
|
| Total lease liabilities | | | $ | 275,363 |
| | $ | 258,258 |
|
|
| | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| Weighted-average remaining lease term | | | | |
| Operating | | 4 years |
| | 4 years |
|
| Finance | | 7 years |
| | 7 years |
|
| Weighted-average discount rate | | | | |
| Operating | | 4.0 | % | | 3.7 | % |
| Finance | | 6.6 | % | | 8.0 | % |
Maturities of operating and finance lease liabilities were as follows:
|
| | | | | | | | | | | | |
| | | Operating | | Finance | | |
| | | Leases | | Leases | | Total |
| Years ending December 31 | | (In thousands) |
| 2020 | | $ | 79,345 |
| | $ | 14,663 |
| | $ | 94,008 |
|
| 2021 | | 57,323 |
| | 13,377 |
| | 70,700 |
|
| 2022 | | 43,173 |
| | 9,013 |
| | 52,186 |
|
| 2023 | | 31,768 |
| | 6,716 |
| | 38,484 |
|
| 2024 | | 13,452 |
| | 4,825 |
| | 18,277 |
|
| Thereafter | | 18,455 |
| | 12,561 |
| | 31,016 |
|
| Total lease payments | | 243,516 |
| | 61,155 |
| | 304,671 |
|
| Less: Imputed Interest | | (19,870 | ) | | (9,438 | ) | | (29,308 | ) |
| Present value of lease liabilities | | $ | 223,646 |
| | $ | 51,717 |
| | $ | 275,363 |
|
As of December 31, 2019, we have entered into additional facility operating leases that have not yet commenced of $14 million. The operating leases will commence in 2020 through 2023 with lease terms of generally 3 to 5 years.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
14. DEBT
|
| | | | | | | | | | | | | | |
| | | Weighted-Average Interest Rate | | | | | | |
| | | December 31, | | | | December 31, |
| | | 2019 | | 2018 | | Maturities | | 2019 | | 2018 |
| | | | | | | | | (In thousands) |
| Short-term debt and current portion of long-term debt: | | | | | | | | | | |
| Short-term debt | | 1.98% | | 2.69% | | | | $ | 425,676 |
| | $ | 81,522 |
|
| Current portion of long-term debt, including finance leases | | | | | | | | 728,888 |
| | 855,609 |
|
| Total short-term debt and current portion of long-term debt | | | | | | | | 1,154,564 |
| | 937,131 |
|
| Total long-term debt: | | | | | | | | | | |
U.S. commercial paper (1) | | 1.99% | | 2.78% | | 2023 | | 119,690 |
| | 454,397 |
|
Canadian commercial paper (1) | | 2.04% | | 2.28% | | 2023 | | 107,128 |
| | 123,491 |
|
| Trade receivables program | | —% | | 3.15% | | 2020 | | — |
| | 200,000 |
|
| Global revolving credit facility | | 2.10% | | 3.25% | | 2023 | | 8,104 |
| | 12,581 |
|
Unsecured U.S. notes – Medium-term notes (1) (2) | | 3.17% | | 3.22% | | 2020-2026 | | 5,965,064 |
| | 4,853,496 |
|
| Unsecured U.S. obligations | | 2.79% | | 3.50% | | 2024 | | 200,000 |
| | 50,000 |
|
| Unsecured foreign obligations | | 2.18% | | 1.61% | | 2020-2024 | | 265,910 |
| | 216,719 |
|
Asset-backed U.S. obligations (3) | | 2.50% | | 2.37% | | 2020-2026 | | 807,374 |
| | 627,707 |
|
Finance lease obligations (4) | | 8.18% | | 7.97% | | 2020-2073 | | 51,717 |
| | 47,452 |
|
| Total long-term debt | | | | | | | | 7,524,987 |
| | 6,585,843 |
|
| Debt issuance costs | | | | | | | | (25,875 | ) | | (18,088 | ) |
| | | | | | | | | 7,499,112 |
| | 6,567,755 |
|
| Current portion of long-term debt, including finance leases | | | | | | | | (728,888 | ) | | (855,609 | ) |
| Long-term debt | | | | | | | | 6,770,224 |
| | 5,712,146 |
|
| Total debt | | | | | | | | $ | 7,924,788 |
| | $ | 6,649,277 |
|
_________________
| |
| (1) | Amounts are net of unamortized original issue discounts of $6$6 million and $7 million atas of December 31, 20172019 and 20162018, respectively. |
| |
| (2) | Amounts are inclusive of the fair market values of our hedging instruments on our notes of $10 million as of December 31, 2018. The fair market values of our hedging instruments were not material as of December 31, 2019. The notional amount of the interest rate swaps designated as fair value hedges was $525 million and $725 million as of December 31, 2019 and 2018, respectively. |
| |
| (3) | Asset-backed U.S. obligations are related to financing transactions backed by a portion of our revenue earning equipment. |
| |
(3)(4) | The notional amount of the executed interest rate swaps designated as fair value hedges was $825 million at December 31, 2017 and 2016. Refer to Note 16, "Derivatives,13, "Leases," for additional information. |
MaturitiesContractual maturities of total debt, excluding finance lease obligations, are as follows: |
| | | | |
| | | |
| Years ending December 31 | | (In thousands) |
| 2020 | | $ | 1,322,055 |
|
| 2021 | | 1,082,983 |
|
| 2022 | | 1,295,782 |
|
| 2023 | | 1,930,497 |
|
| 2024 | | 1,511,262 |
|
| Thereafter | | 755,905 |
|
Total (1) | | 7,898,484 |
|
| Finance lease obligations (Refer to Note 13) | | 51,717 |
|
| Debt issuance costs | | (25,875 | ) |
| Impact of fair market value adjustments on notes subject to hedging | | 462 |
|
| Total long-term debt | | $ | 7,924,788 |
|
|
| | | | | | | |
| | | Capital Leases | | Debt |
| | | (In thousands) |
| 2018 | | $ | 7,559 |
| | 818,510 |
|
| 2019 | | 7,918 |
| | 1,077,734 |
|
| 2020 | | 2,428 |
| | 1,892,344 |
|
| 2021 | | 2,620 |
| | 717,868 |
|
| 2022 | | 1,379 |
| | 699,006 |
|
| Thereafter | | — |
| | 190,510 |
|
| Total | | 21,904 |
| | 5,395,972 |
|
| Imputed interest | | (1,033 | ) | | |
| Present value of minimum capitalized lease payments | | 20,871 |
| | |
| Current portion | | (7,559 | ) | | |
| Long-term capitalized lease obligation | | $ | 13,312 |
| | |
| |
| (1) | Net of unamortized discount. |
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Debt Facilities
We maintain a $1.2$1.4 billion global revolving credit facility, which includes U.S. and Canadian commercial paper programs, with a syndicate of twelve12 lending institutions, led by Bank of America N.A., Bank of Tokyo-Mitsubishi UFJ, Ltd., BNP Paribas, Mizuho Corporate Bank, Ltd., Royal Bank of Canada, Lloyds Bank Plc, U.S. Bank National Association and Wells Fargo Bank, N.A. The facilitywhich matures in January 2020.September 2023. The agreement provides for annual facility fees which range from 7.5 basis points to 2520 basis points based on Ryder’sour long-term credit ratings. The annual facility fee is currently 10 basis points, which applies to the total facility size of $1.2 billion.
points. The credit facility is used primarily to finance working capital and vehicle purchases, but can also be used to issue up to $75 million in letters of credit (there were no0 letters of credit outstanding against the facility atas of December 31, 2017)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’sour 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 atAs of December 31, 2017,2019, the ratio was 192%226%. AtAs of December 31, 2017,2019, there was $577$744 million available under the credit facility.
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 long-term debt on a long-term basis. AtAs of December 31, 2017,2019, we classified $570$227 million of short-term commercial paper, and $16$400 million of the current portion of long-term debt and $201 million of short-term debt as long-term debt. AtAs of December 31, 2016,2018, we classified $342$578 million of short-term commercial paper, and $350$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 August 2017,2019, we issued $300 million$2.1 billion of unsecured medium-term notes maturing in September 2022. In February 2017, we issued $300 million of unsecured medium-term notes maturing in March 2022.years 2022 through 2026. 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, or 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. On February 7, 2018, we exercisedWe also executed a $50 million bank term loan at one of our call optionCanadian subsidiaries and redeemed our unsecured medium2 $100 million bank term notes that were scheduled toloans, all of which mature on March 1, 2018. The notes were redeemed at a redemption price equal to 100% of the principal amount of $350 million plus interest accrued but not paid to the date of redemption.in 2024.
In June 2017,2019, we received $98$298 million from financing transactions backed by a portion of our revenue earning equipment. The proceeds from these transactions were used for general corporate purposes. We have provided end of term guarantees for the residual value of the revenue earning equipment in these transactions. The transaction proceeds, along with the end of term residual value guarantees, have been included within "asset-backed U.S. obligations" in the preceding table.
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 $175$225 million. In October 2017,June 2019, we renewed the trade receivables purchase and sale program. In February 2020, we increased the amount of available proceeds to $300 million. If no event occurs which causes early termination, the 364-day365-day program will expire on October 22, 2018.June 11, 2020. 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
In 2020, one of our Canadian subsidiaries executed bank term loans of approximately $80 million with maturity dates that range from one- to three-years, which included the refinancing of approximately $20 million of a term loan that matured in February 2020. The remaining proceeds were outstanding under the program at December 31, 2017 and 2016.primarily used to repay intercompany debt.
The fair value of total debt (excluding capitalfinance lease asset backedand asset-backed U.S. obligationsobligations) was approximately $7.0 billion and debt issuance costs) was $4.95$6.0 billion atas of December 31, 20172019 and $4.97 billion at December 31, 2016.2018, respectively. For publicly-traded debt, estimates of fair value were based on market prices. For other debt, fair value is 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 our other debt were classified within Level 2 of the fair value hierarchy. The carrying amounts reported in the Consolidated 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.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
15. GUARANTEES
16. 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 our 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 December 31, 2017, we had interest rate swaps outstanding that are designated as fair value hedges for certain debt obligations, with a total notional value of $825 million and maturities through 2020. 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 approximately a $7 million liability and a $1 million asset as of December 31, 2017 and 2016, respectively. The amounts are presented in "Other non-current liabilities" and "Direct financing leases and other assets" in our Consolidated Balance Sheets, respectively. Changes in the fair value of our interest rate swaps were offset by changes in the fair value of the hedged debt instrument. Accordingly, there was no ineffectiveness related to the interest rate swaps.
17. GUARANTEES
We have executed various agreements with third parties that contain standard indemnifications that may require us to indemnify a third party against losses arising from a variety of matters, such as lease obligations, financing agreements, environmental matters, and agreements to sell business assets. In each of these instances, payment by Ryder is contingent on the other party bringing about a claim under the procedures outlined in the specific agreement. Normally, these procedures allow us to dispute the other party’s claim. Additionally, our obligations under these agreements may be limited in terms of the amount and/or timing of any claim. We have entered into individual indemnification agreements with each of our independent directors, through which we will indemnify such director acting in good faith against any and all losses, expenses and liabilities arising out of such director’s service as a director of Ryder. The maximum amount of potential future payments under these agreements is generally unlimited.
We cannot predict the maximum potential amount of future payments under certain of these agreements, including the indemnification agreements, due to the contingent nature of the potential obligations and the distinctive provisions that are involved in each individual agreement. Historically, no such payments made by us have had a material adverse effect on our business. We believe that if a loss were incurred in any of these matters, the loss would not have a material adverse impact on our consolidated results of operations or financial position.
At
As of December 31, 20172019 and 20162018, we had letters of credit and surety bonds outstanding, which primarily guarantee various insurance activities as noted in the following table:
|
| | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| | | (In thousands) |
| Letters of credit | | $ | 337,476 |
| | $ | 253,259 |
|
| Surety bonds | | 115,848 |
| | 121,757 |
|
|
| | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 |
| | | (In thousands) |
| Letters of credit | | $ | 238,610 |
| | 240,420 |
|
| Surety bonds | | 111,007 |
| | 113,696 |
|
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
18.16. SHARE REPURCHASE PROGRAMS
In December 2017,2019, our Board of Directors authorized a new share repurchase program intended to mitigate the dilutive impact of shares issued under our employee stock plans (the 2019 program). Under the 2019 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’sour employee stock plans from December 31, 20171, 2019 to December 13, 2019.11, 2021. 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 2019 program, which allow for share repurchases during Ryder’sour quarterly blackout periods as set forth in the trading plan. As of December 31, 2017,2019, we have not0t repurchased any shares under the 20172019 program.
During 2017, 20162019, 2018 and 2015,2017, we repurchased 1.1 million, 0.5 million, 0.4 million and 0.11.1 million shares under previous share repurchase programs for $78$28 million, $37$31 million and $6$78 million, respectively.
19.RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
17. ACCUMULATED OTHER COMPREHENSIVE LOSS
Comprehensive income (loss) presents a measure of all changes in shareholders’ equity except for changes resulting from transactions with shareholders in their capacity as shareholders. 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 Credit (1) | | Accumulated Other Comprehensive Loss | | Currency Translation Adjustments and Other | | Net Actuarial Loss (1) | | Prior Service (Cost)/Credit (1) | | Accumulated Other Comprehensive Loss |
| | | (In thousands) | | (In thousands) |
| January 1, 2015 | | $ | (36,087 | ) | | (585,941 | ) | | 1,758 |
| | (620,270 | ) | |
| Amortization | | — |
| | 19,505 |
| | (1,411 | ) | | 18,094 |
| |
| Other current period change | | (99,933 | ) | | (10,557 | ) | | (69 | ) | | (110,559 | ) | |
| December 31, 2015 | | (136,020 | ) | | (576,993 | ) | | 278 |
| | (712,735 | ) | |
| Amortization | | — |
| | 18,876 |
| | 165 |
| | 19,041 |
| |
| Other current period change | | (70,590 | ) | | (62,175 | ) | | (7,573 | ) | | (140,338 | ) | |
| December 31, 2016 | | (206,610 | ) | | (620,292 | ) | | (7,130 | ) | | (834,032 | ) | |
| January 1, 2017 | | | $ | (206,610 | ) | | $ | (620,292 | ) | | $ | (7,130 | ) | | $ | (834,032 | ) |
| Amortization | | — |
| | 20,267 |
| | 219 |
| | 20,486 |
| | — |
| | 20,267 |
| | 219 |
| | 20,486 |
|
| Other current period change | | 66,172 |
| | 39,872 |
| | 1 |
| | 106,045 |
| | 62,837 |
| | 39,872 |
| | 1 |
| | 102,710 |
|
| December 31, 2017 | | $ | (140,438 | ) | | (560,153 | ) | | (6,910 | ) | | (707,501 | ) | | (143,773 | ) | | (560,153 | ) | | (6,910 | ) | | (710,836 | ) |
| Amortization | | | — |
| | 20,773 |
| | 304 |
| | 21,077 |
|
| Other current period change | | | (55,940 | ) | | (62,017 | ) | | (3,351 | ) | | (121,308 | ) |
| Adoption of new accounting standard | | | — |
| | (98,987 | ) | | (1,580 | ) | | (100,567 | ) |
| December 31, 2018 | | | (199,713 | ) | | (700,384 | ) | | (11,537 | ) | | (911,634 | ) |
| Amortization | | | — |
| | 22,692 |
| | 554 |
| | 23,246 |
|
| Pension lump sum settlement | | | — |
| | 27,391 |
| | — |
| | 27,391 |
|
| Other current period change | | | 30,681 |
| | (6,012 | ) | | (163 | ) | | 24,506 |
|
| December 31, 2019 | | | $ | (169,032 | ) | | $ | (656,313 | ) | | $ | (11,146 | ) | | $ | (836,491 | ) |
_______________________
| |
| (1) | These amounts are included in the computation of net periodic pension cost and pension settlement charge. See Note 22,20, "Employee Benefit Plans," for further information. |
The gain from currency translation adjustments and other in 20172019 primarily consists of $66currency translation adjustments of $38 million was primarily due to the strengthening of the British Pound and Canadian Dollar against the U.S. Dollar. The loss from currency translation adjustments of $71$56 million in 20162018 was primarily due to the weakening of the British Pound against the U.S. Dollar, partially offset by the strengthening of theand Canadian Dollar against the U.S. Dollar. The lossgain from currency translations in 20152017 of $100$63 million was primarily due to the weakeningstrengthening of the British Pound and Canadian Dollar and British Pound against the U.S. Dollar. Refer to Note 20, "Employee Benefit Plans," for further information related to net actual loss and prior services cost.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
20.18. EARNINGS PER SHARE
The following table presents the calculation of basic and diluted earnings per common share from continuing operations:
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| | | (In thousands, except per share amounts) |
| Earnings (loss) per share — Basic: | | | | | | |
| Earnings (loss) from continuing operations | | $ | (23,272 | ) | | $ | 286,922 |
| | $ | 720,101 |
|
| Less: Distributed and undistributed earnings allocated to unvested stock | | (453 | ) | | (1,038 | ) | | (2,594 | ) |
| Earnings (loss) from continuing operations available to common shareholders — Basic | | $ | (23,725 | ) | | $ | 285,884 |
| | $ | 717,507 |
|
| | | | | | | |
| Weighted average common shares outstanding — Basic | | 52,348 |
| | 52,390 |
| | 52,613 |
|
| | | | | | | |
| Earnings (loss) from continuing operations per common share — Basic | | $ | (0.45 | ) | | $ | 5.46 |
| | $ | 13.64 |
|
| | | | | | | |
| Earnings (loss) per share — Diluted: | | | | | | |
| Earnings (loss) from continuing operations | | $ | (23,272 | ) | | $ | 286,922 |
| | $ | 720,101 |
|
| Less: Distributed and undistributed earnings allocated to unvested stock | | (453 | ) | | (1,038 | ) | | (2,594 | ) |
| Earnings (loss) from continuing operations available to common shareholders — Diluted | | $ | (23,725 | ) | | $ | 285,884 |
| | $ | 717,507 |
|
| | | | | | | |
| Weighted average common shares outstanding — Basic | | 52,348 |
| | 52,390 |
| | 52,613 |
|
| Effect of dilutive equity awards | | — |
| | 307 |
| | 373 |
|
| Weighted average common shares outstanding — Diluted | | 52,348 |
| | 52,697 |
| | 52,986 |
|
| | | | | | | |
| Earnings (loss) from continuing operations per common share — Diluted | | $ | (0.45 | ) | | $ | 5.43 |
| | $ | 13.54 |
|
| Anti-dilutive equity awards and market-based restrictive stock rights not included above | | 2,458 |
| | 1,330 |
| | 881 |
|
|
| | | | | | | | | | |
| | | Years ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| | | (In thousands, except per share amounts) |
| Earnings per share — Basic: | | | | | | |
| Earnings from continuing operations | | $ | 791,015 |
| | 264,640 |
| | 305,989 |
|
| Less: Distributed and undistributed earnings allocated to unvested stock | | (2,848 | ) | | (840 | ) | | (877 | ) |
| Earnings from continuing operations available to common shareholders — Basic | | $ | 788,167 |
| | 263,800 |
| | 305,112 |
|
| | | | | | | |
| Weighted average common shares outstanding— Basic | | 52,613 |
| | 53,015 |
| | 52,814 |
|
| | | | | | | |
| Earnings from continuing operations per common share — Basic | | $ | 14.98 |
| | 4.98 |
| | 5.78 |
|
| | | | | | | |
| Earnings per share — Diluted: | | | | | | |
| Earnings from continuing operations | | $ | 791,015 |
| | 264,640 |
| | 305,989 |
|
| Less: Distributed and undistributed earnings allocated to unvested stock | | (2,830 | ) | | (836 | ) | | (872 | ) |
| Earnings from continuing operations available to common shareholders — Diluted | | $ | 788,185 |
| | 263,804 |
| | 305,117 |
|
| | | | | | | |
| Weighted average common shares outstanding— Basic | | 52,613 |
| | 53,015 |
| | 52,814 |
|
| Effect of dilutive equity awards | | 375 |
| | 346 |
| | 446 |
|
| Weighted average common shares outstanding— Diluted | | 52,988 |
| | 53,361 |
| | 53,260 |
|
| | | | | | | |
| Earnings from continuing operations per common share — Diluted | | $ | 14.87 |
| | 4.94 |
| | 5.73 |
|
| Anti-dilutive equity awards and market-based restrictive stock rights not included above | | 881 |
| | 716 |
| | 392 |
|
21.19. SHARE-BASED COMPENSATION PLANS
The following table provides information on share-based compensation expense and related income tax benefits recognized in 20172019, 20162018 and 2015:2017:
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| | | (In thousands) |
| Stock option and stock purchase plans | | $ | 6,575 |
| | $ | 7,703 |
| | $ | 7,869 |
|
| Unvested stock awards | | 19,253 |
| | 17,249 |
| | 11,098 |
|
| Share-based compensation expense | | 25,828 |
| | 24,952 |
| | 18,967 |
|
| Income tax benefit | | (4,667 | ) | | (4,615 | ) | | (6,628 | ) |
| Share-based compensation expense, net of tax | | $ | 21,161 |
| | $ | 20,337 |
| | $ | 12,339 |
|
|
| | | | | | | | | | |
| | | Years ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| | | (In thousands) |
| Stock option and stock purchase plans | | $ | 7,869 |
| | 7,244 |
| | 8,048 |
|
| Unvested stock awards | | 11,098 |
| | 11,420 |
| | 13,133 |
|
| Share-based compensation expense | | 18,967 |
| | 18,664 |
| | 21,181 |
|
| Income tax benefit | | (6,628 | ) | | (6,644 | ) | | (7,271 | ) |
| Share-based compensation expense, net of tax | | $ | 12,339 |
| | 12,020 |
| | 13,910 |
|
Total unrecognized pre-tax compensation expense related to share-based compensation arrangements atas of December 31, 20172019 was $19$31 million and is expected to be recognized over a weighted-average period of approximately 1.8 years. The total fair value of equity awards vested during 2019, 2018 and 2017 2016was $20 million, $18 million and2015 were $22 million, $17 million and $16 million, respectively.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Share-Based Incentive Awards
Share-based incentive awards are provided to employees under the terms of various share-based compensation plans (collectively, the “Plans”)Plans). The Plans are administered by the Compensation Committee of the Board of Directors. Awards under
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
the Plans principally include at-the-money stock options and unvested stock and cash awards.stock. 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 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 date of grant of the award until the date the shares underlying the award are delivered. ThereAs of December 31, 2019, there are 3.84.3 million shares authorized for issuance under the Plans as of December 31, 2017. There are 2.5and 4.2 million shares remaining available for future issuance under the Plans as of December 31, 2017.issuance.
Stock options are awards that allow employees to purchase shares of our stock at a fixed price.price in the future. Stock option awards are granted at an exercise price equal to the market price of our stock at the time of grant. These awards, which generally vest one-third each year, are fully vested three years from the grant date. Stock options granted since 2013 have contractual terms of ten years.
Restricted stock awards are unvested stock rights that are granted to employees and entitle the holder to shares of common stock as the award vests. Time-vested restricted stock rights typically vest in ratably over three years regardless of company performance. The fair value of the time-vested awards is determined and fixed based on Ryder’s stock price on the date of grant.
Performance-based restricted stock awards (PBRSRs) include a performance-based vesting condition. The awardsPBRSRs are awarded based on our one-year adjusted return on capital (ROC). Beginning in 2018, PBRSRs are also awarded based on the spread between ROC and the cost of capital (COC) and strategic revenue growth (SRG).
Awards with a ROC performance-based vesting condition are segmented into three3 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)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, the awards are not considered granted until the Compensation Committee approves the annual ROC target. During 2019, 2018 and 2017, 201679,000, 98,000 and 2015, 79,000 45,000 and 42,000 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’sour 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.
Awards with a performance-based vesting condition measured by the spread between ROC and COC (ROC/COC) have a three-year performance period. For these awards, up to 200% of the awards may be earned based on ROC/COC measured against a three-year ROC/COC target. The majority of these awards include a total shareholder return (TSR) modifier. Our TSR will be compared against the TSR of each of the companies in a custom peer group to determine our TSR percentile rank versus this custom peer group. The number of ROC/COC PBRSRs will then be adjusted based on this rank. During 2019 and 2018, approximately 74,000 and 51,000 PBRSRs, respectively, with the ROC/COC condition were awarded under the Plans. 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.
Awards with a SRG performance-based condition have a three-year performance period. For these awards, up to 200% of the awards may be earned based on SRG measured against a three-year SRG target. The majority of these awards include a TSR modifier consistent with the discussion above. During 2019 and 2018, approximately 74,000 and 51,000 PBRSRs, respectively, with the SRG condition were awarded under the Plans. 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.
Market-based restricted stock awards include a market-based vesting provision. The awards, which are no longer granted since 2017, are segmented into three3 performance periods of one, two and three years. At the end of each performance period, up to 150% of the award may be earned based on Ryder's total shareholder return (TSR)our TSR compared to the target TSR of a peer group over the applicable performance period. The awards compared Ryder's TSR to the TSR of a custom peer group. If earned, employees will receive the grant of stock at the end of the relevant three-year performance period provided they continue to be employed with Ryder, subject to Compensation Committee approval. The fair value of the market-based awards was determined on the date of grant using a Monte-Carlo valuation model. Share-based compensation expense is recognized on a straight-line basis over the vesting period and is recognized regardless of whether the awards vest.
Certain employees also received cash awards prior to 2017 as part of our long-term incentive compensation program. The cash awards have the same vesting provisions as the market-based restricted stock awards granted in the respective years. The cash awards are accounted for as liability awards as they are based upon our own stock performance 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 market-based cash awards was estimated using a lattice-based option pricing valuation model that incorporates a Monte-Carlo simulation. The liability related to the cash awards was $1 million at both December 31, 2017 and 2016.
The following table is a summary of compensation expense recognized related to cash awards in addition to share-based compensation expense reported in the previous table.
|
| | | | | | | | | | |
| | | Years ended December 31 |
| | | 2017 | | 2016 | | 2015 |
| | | (In thousands) |
| Cash awards | | $ | 174 |
| | 689 |
| | 532 |
|
We also grant restricted stock units (RSUs)awards to non-management members of the Board of Directors. OnceEquity awards to new board members do not vest until the director has served a minimum of one year. Prior to 2018, board members received the awards upon separation from the Board. Beginning in 2018, each director may elect to receive his or her equity award in the form of
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
either (i) shares that are distributed at the time of grant or (ii) restricted stock units (RSUs) which will entitle the director to receive one share of Ryder stock for each RSU granted RSUsand are eligible for non-forfeitable dividend equivalents but have no voting rights.distributed upon or after separation from service on the board. The fair value of the awards is determined and fixed based on Ryder’s stock price on the date of grant. A board member receives the RSUs upon departure from the Board. The initial grant of RSUs will not vest unless the director has served a minimum of one year. When a board member receives RSUs, they are redeemed for an equivalent number of shares of our common stock. Share-based compensation expense is recognized for RSUs in the year the RSUs are granted. Ryder shares delivered upon grant have standard voting rights and rights to dividend payments. RSUs that are distributed upon or after separation from service on the board are eligible for non-forfeitable dividend equivalents until distribution but such RSUs have no voting rights.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Option Awards
The following is a summary of option activity under our stock option plans as of and for the year ended December 31, 2017:2019:
|
| | | | | | | | | | | | | |
| | | Shares | | Weighted- Average Exercise Price | | Weighted-Average Remaining Contractual Term | | Aggregate Intrinsic Value |
| | | (In thousands) | | | | (In years) | | (In thousands) |
| Options outstanding at January 1 | | 1,862 |
| | $ | 72.28 |
| | | | |
| Granted | | 220 |
| | 59.09 |
| | | | |
| Exercised | | (7 | ) | | 55.32 |
| | | | |
| Forfeited or expired | | (85 | ) | | 71.45 |
| | | | |
| Options outstanding at December 31 | | 1,990 |
| | $ | 70.92 |
| | 6.1 | | $ | — |
|
| Vested and expected to vest at December 31 | | 1,896 |
| | $ | 70.71 |
| | 5.2 | | $ | — |
|
| Exercisable at December 31 | | 1,480 |
| | $ | 71.53 |
| | 5.3 | | $ | — |
|
|
| | | | | | | | | | | | | |
| | | Shares | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term | | Aggregate Intrinsic Value |
| | | (In thousands) | | | | (In years) | | (In thousands) |
| Options outstanding at January 1 | | 1,529 |
| | $ | 66.35 |
| | | | |
| Granted | | 465 |
| | 76.43 |
| | | | |
| Exercised | | (235 | ) | | 55.41 |
| | | | |
| Forfeited or expired | | (42 | ) | | 70.56 |
| | | | |
| Options outstanding at December 31 | | 1,717 |
| | $ | 70.47 |
| | 7.3 | | $ | 26,209 |
|
| Vested and expected to vest at December 31 | | 1,649 |
| | $ | 70.61 |
| | 7.4 | | $ | 25,320 |
|
| Exercisable at December 31 | | 848 |
| | $ | 70.20 |
| | 6.0 | | $ | 13,689 |
|
The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between the close price of our stock on the last trading day of the year and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders if all options were exercised at year-end. This amount fluctuates based on the fair market value of our stock. All options were "out-of-the-money" as of December 31, 2019.
Restricted Stock Awards
The following is a summary of the status of Ryder’sactivity for unvested restricted stock awards as of and for the year ended December 31, 2017:2019: |
| | | | | | | | | | | | | | | | | | |
| | | Time-Vested | | Market-Based | | Performance-Based |
| | | Shares | | Weighted- Average Grant Date Fair Value | | Shares | | Weighted- Average Grant Date Fair Value | | Shares | | Weighted- Average Grant Date Fair Value |
| | | (In thousands) | | | | (In thousands) | | | | (In thousands) | | |
| Unvested stock outstanding at January 1 | | 488 | | $ | 66.11 |
| | 68 | | $ | 64.26 |
| | 229 | | $ | 73.41 |
|
| Granted | | 416 | | 59.48 |
| | — | | — |
| | 227 | | 59.51 |
|
Vested (1) | | (145) | | 61.97 |
| | (21) | | 54.10 |
| | (36) | | 55.32 |
|
Forfeited (2) | | (29) | | 64.68 |
| | (29) | | 67.80 |
| | (46) | | 67.78 |
|
| Unvested stock outstanding at December 31 | | 730 | | $ | 63.21 |
| | 18 | | $ | 76.49 |
| | 374 | | $ | 67.14 |
|
|
| | | | | | | | | | | | | | | | | | |
| | | Time-Vested | | Market-Based | | Performance-Based |
| | | Shares | | Weighted- Average Grant Date Fair Value | | Shares | | Weighted- Average Grant Date Fair Value | | Shares | | Weighted- Average Grant Date Fair Value |
| | | (In thousands) | | | | (In thousands) | | | | (In thousands) | | |
| Unvested stock outstanding at January 1 | | 476 | | $ | 67.31 |
| | 66 | | $ | 64.33 |
| | 72 | | $ | 70.92 |
|
| Granted | | 117 | | 75.61 |
| | 45 | | 73.43 |
| | 79 | | 76.47 |
|
Vested (1) | | (141) | | 78.18 |
| | (15) | | 61.07 |
| | (30) | | 75.62 |
|
Forfeited (2) | | (19) | | 69.95 |
| | (4) | | 81.47 |
| | (27) | | 48.71 |
|
| Unvested stock outstanding at December 31 | | 433 | | $ | 65.91 |
| | 92 | | $ | 68.26 |
| | 94 | | $ | 78.91 |
|
_________________
(1) Includes awards attained above target.
(2) Includes awards canceled due to employee terminations or performance and market conditions not being achieved.
Stock Purchase Plan
We maintain an Employee Stock Purchase Plan (ESPP) that enables eligible participants in the U.S. and Canada to purchase full or fractional shares of Ryder common stock through payroll deductions of up to 15% of eligible compensation. The ESPP provides for quarterly offering periods during which shares may be purchased at 85% of the fair market value of our stock. Beginning with the second quarter of 2015, we amended the ESPP to calculate theThe exercise price is based only on the fair market value of the stock on the last trading day of the quarter. Prior to the second quarter of 2015, the exercise price was based on the lower of the fair market value on the first or last trading day of the quarter. Stock purchased under the ESPP must be held for 90 days. There were 5.5 million shares authorized for issuance under the existing ESPP at December 31, 2017. There were 0.8 million shares remaining available to be purchased in the future under the ESPP at December 31, 2017.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
under the ESPP must be held for 90 days or one year for officers. There were 5.5 million shares authorized for issuance under the existing ESPP as of December 31, 2019. There were 0.4 million shares remaining available to be purchased in the future under the ESPP as of December 31, 2019.
The following table presents the weighted-average exercise price for shares granted and exercised under the ESPP:
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| | | |
| Shares granted and exercised | | 228,000 |
| | 199,000 |
| | 160,000 |
|
| Weighted average exercise price | | $ | 47.97 |
| | $ | 54.89 |
| | $ | 66.72 |
|
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Stock purchase plan: | | |
| Shares granted and exercised | | 160,000 |
| | 192,000 |
| | 178,000 |
|
| Weighted average exercise plan | | $ | 66.72 |
| | $ | 56.17 |
| | $ | 63.93 |
|
Share-Based Compensation Fair Value Assumptions
The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton option-pricing valuation model that uses the weighted-average assumptions noted in the table below. Expected volatility is based on historical volatility of our stock and implied volatility from traded options on our stock. The risk-free rate for periods within the contractual life of the stock option award is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the stock option award is granted with a maturity equal to the expected term of the stock option award. We use historical data to estimate stock option exercises and forfeitures within the valuation model. The expected term of stock option awards granted is derived from historical exercise experience under the share-based employee compensation arrangements and represents the period of time that stock option awards granted are expected to be outstanding. The fair value of market-based restricted stock awards is estimated using a lattice-based option-pricing valuation model that incorporates a Monte-Carlo simulation. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by Ryder.
The following table presents the weighted-average assumptions used for options granted:
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | | | | | | |
| Expected dividends | | 3.7% | | 2.8% | | 2.3% |
| Expected volatility | | 31.4% | | 29.4% | | 28.5% |
| Risk-free rate | | 2.4% | | 2.7% | | 1.9% |
| Expected term in years | | 4.4 years | | 4.4 years | | 4.4 years |
| Grant-date fair value | | $ | 11.74 |
| | $ | 15.89 |
| | $ | 15.71 |
|
|
| | | | | | |
| | | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Option plans: | | | | | | |
| Expected dividends | | 2.3% | | 3.0% | | 1.6% |
| Expected volatility | | 28.5% | | 35.2% | | 26.4% |
| Risk-free rate | | 1.9% | | 1.1% | | 1.4% |
| Expected term in years | | 4.4 years | | 4.3 years | | 4.3 years |
| Grant-date fair value | | $15.71 | | $12.53 | | $18.47 |
Exercise of Employee Stock Options and Purchase Plans
The total intrinsic value of options exercised during 2019 was 0t material. The total intrinsic value of options exercised during 2018 and 2017 2016was $3 million and 2015 was $5$5 million,, $5 million and $11 million, respectively. The total cash received from employees under all share-based employee compensation arrangements for 2019, 2018 and 2017 2016 and 2015was $21$8 million, $18$17 million and $24$21 million, respectively. In connection with these exercises, the tax benefits generated from share-based employee compensation arrangements were $0.2 million, $0.6 millionnot material for 2019, 2018 and $0.4 million for 20172016 and 2015, respectively. As discussed in Note 2, "Recent Accounting Pronouncements," excess tax benefits related to share-based payments are recorded to income tax expense beginning in 2017..
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
22.20. EMPLOYEE BENEFIT PLANS
Pension Plans
We historically sponsored several defined benefit pension plans covering most employees not covered by union-administered plans, including certain employees in foreign countries. These plans generally provided participants with benefits based on years of service and career-average compensation levels.
In past years, we made amendments to defined benefit retirement plans whichthat froze the retirement benefits for non-grandfathered and certain non-union employees in the U.S., Canada and the United Kingdom (U.K.). As a result of these amendments, non-grandfathered plan participants ceased accruing benefits under the planplans as of the respective amendment effective date and began receiving an enhanced benefit under a defined contribution plan. All retirement benefits earned as of the amendment effective date were fully preserved and will be paid in accordance with the plan and legal requirements. The funding policy for these plans is to make contributions based on annual service costs plus amortization of unfunded past service liability, but not greater than the maximum allowable contribution deductible for federal income tax purposes. We may, from time to time, make voluntary contributions to our pension plans, which exceed the amount required by statute. The majority of the plans’ assets are invested in a master trust that, in turn, is invested primarily in commingled funds whose investments are listed stocks and bonds.
We also have a non-qualified supplemental pension plan covering certain U.S. employees, which provides for incremental pension payments from our funds so that total pension payments equal the amounts that would have been payable from our principal pension plans if it were not for limitations imposed by income tax regulations. The accrued pension liability related to this plan was $55$58 million and $53 million at as of December 31, 20172019 and 20162018, respectively.
Pension Expense
Pension expense from continuing operations was as follows:
|
| | | | | | | | | | | | |
| | Years ended December 31, |
| | 2019 | | 2018 | | 2017 |
| | | (In thousands) |
| Company-administered plans: | | | | | | |
| Service cost | | $ | 11,007 |
| | $ | 12,108 |
| | $ | 12,345 |
|
| Interest cost | | 84,960 |
| | 78,234 |
| | 86,431 |
|
| Expected return on plan assets | | (91,034 | ) | | (101,980 | ) | | (91,062 | ) |
| Pension settlement expense | | 34,974 |
| | 3,061 |
| | — |
|
| Amortization of: | | | | | | |
| Net actuarial loss | | 30,708 |
| | 28,593 |
| | 32,987 |
|
| Prior service cost | | 711 |
| | 550 |
| | 579 |
|
| | | 71,326 |
| | 20,566 |
| | 41,280 |
|
| Union-administered plans | | 10,582 |
| | 9,326 |
| | 15,553 |
|
| Net pension expense | | $ | 81,908 |
| | $ | 29,892 |
| | $ | 56,833 |
|
| | | | | | | |
| Company-administered plans: | | | | | | |
| U.S. | | $ | 75,936 |
| | $ | 28,043 |
| | $ | 43,717 |
|
| Foreign | | (4,610 | ) | | (7,477 | ) | | (2,437 | ) |
| | | 71,326 |
| | 20,566 |
| | 41,280 |
|
| Union-administered plans | | 10,582 |
| | 9,326 |
| | 15,553 |
|
| | | $ | 81,908 |
| | $ | 29,892 |
| | $ | 56,833 |
|
|
| | | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | | (In thousands) |
| Company-administered plans: | | | | | | |
| Service cost | | $ | 12,345 |
| | 12,977 |
| | 13,820 |
|
| Interest cost | | 86,431 |
| | 94,476 |
| | 88,013 |
|
| Expected return on plan assets | | (91,062 | ) | | (90,588 | ) | | (98,892 | ) |
| Amortization of: | | | | | | |
| Net actuarial loss | | 32,987 |
| | 31,777 |
| | 30,741 |
|
| Prior service cost (credit) | | 579 |
| | 2,976 |
| | (306 | ) |
| | | 41,280 |
| | 51,618 |
| | 33,376 |
|
| Union-administered plans | | 15,553 |
| | 9,597 |
| | 8,328 |
|
| Net pension expense | | $ | 56,833 |
| | 61,215 |
| | 41,704 |
|
| | | | | | | |
| Company-administered plans: | | | | | | |
| U.S. | | $ | 43,717 |
| | 53,319 |
| | 34,986 |
|
| Foreign | | (2,437 | ) | | (1,701 | ) | | (1,610 | ) |
| | | 41,280 |
| | 51,618 |
| | 33,376 |
|
| Union-administered plans | | 15,553 |
| | 9,597 |
| | 8,328 |
|
| | | $ | 56,833 |
| | 61,215 |
| | 41,704 |
|
Non-operating pension costs 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, as well as any significant charges for settlements or curtailments. During 2019, we offered approximately 4,500 vested former employees in our U.S. defined benefit plan a one-time option to receive a lump sum distribution of their benefits. Approximately 1,700 former employees, or 38% of
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
During 2016,those that were offered the distribution, accepted the offer. In December 2019, we determined that certainmade payments of approximately $80 million from the U.S. defined benefit plan assets, which resulted in a settlement of $90 million, representing approximately 4% of our U.S. pension benefit improvements made in 2009 had not been fully reflected in our projected benefit obligation. Because the amounts were not material to our consolidated financial statements in any individual period, and the cumulative amount is not material to 2016 results, weplan obligations. We recognized a one-time, non-cash chargesettlement loss of $8$32 million in "Selling, general and administrative expenses" and a $13 million pre-tax increase to “Accumulated other comprehensive loss” in our consolidated financial statements to correctly stateof the pension benefit obligation and account for these 2009 benefit improvements.pro-rata share of the unrecognized actuarial losses existing at the time of the settlement.
The following table sets forth the weighted-average actuarial assumptions used for Ryder’s pension plans in determining our annual pension expense:
|
| | | | | | | | | | | | |
| | | U.S. Plans Years ended December 31, | | Foreign Plans Years ended December 31, |
| | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| Discount rate | | 4.35% | | 3.70% | | 4.20% | | 3.04% | | 2.70% | | 3.90% |
| Rate of increase in compensation levels | | 3.00% | | 3.00% | | 3.00% | | 3.08% | | 3.08% | | 3.10% |
| Expected long-term rate of return on plan assets | | 5.40% | | 5.40% | | 5.40% | | 5.36% | | 5.50% | | 5.48% |
| Gain and loss amortization period (years) | | 22 | | 21 | | 21 | | 24 | | 26 | | 26 |
|
| | | | | | | | | | | | |
| | | U.S. Plans Years ended December 31, | | Foreign Plans Years ended December 31, |
| | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| Discount rate | | 4.20% | | 4.50% | | 4.15% | | 3.90% | | 3.70% | | 3.70% |
| Rate of increase in compensation levels | | 3.00% | | 3.00% | | 3.00% | | 3.10% | | 3.10% | | 3.10% |
| Expected long-term rate of return on plan assets | | 5.40% | | 5.85% | | 5.95% | | 5.48% | | 5.44% | | 5.50% |
| Gain and loss amortization period (years) | | 21 | | 23 | | 23 | | 26 | | 27 | | 27 |
The return on plan assets assumption reflects the weighted-average of the expected long-term rates of return for the broad categories of investments held in the plans. The expected long-term rate of return is adjusted when there are fundamental changes in expected returns or in asset allocation strategies of the plan assets.
Obligations and Funded Status
The following table sets forth the benefit obligations, assets and funded status associated with our pension plans: |
| | | | | | | | |
| | | |
| | | 2019 | | 2018 |
| | | (In thousands) |
| Change in benefit obligations: | | | | |
| Benefit obligations at January 1 | | $ | 2,135,143 |
| | $ | 2,298,902 |
|
| Service cost | | 11,007 |
| | 12,108 |
|
| Interest cost | | 84,960 |
| | 78,234 |
|
| Actuarial (gain) loss | | 274,456 |
| | (120,934 | ) |
| Pension settlement | | (102,905 | ) | | — |
|
| Benefits paid | | (96,290 | ) | | (104,560 | ) |
| Foreign currency exchange rate changes | | 17,709 |
| | (28,607 | ) |
| Benefit obligations at December 31 | | 2,324,080 |
| | 2,135,143 |
|
| | | | | |
| Change in plan assets: | | | | |
| Fair value of plan assets at January 1 | | 1,725,543 |
| | 1,941,330 |
|
| Actual return on plan assets | | 348,354 |
| | (108,386 | ) |
| Employer contribution | | 72,202 |
| | 27,741 |
|
| Benefits paid | | (96,290 | ) | | (104,560 | ) |
| Pension settlement | | (93,049 | ) | | — |
|
| Foreign currency exchange rate changes | | 21,948 |
| | (30,582 | ) |
| Fair value of plan assets at December 31 | | 1,978,708 |
| | 1,725,543 |
|
| Funded status | | $ | (345,372 | ) | | $ | (409,600 | ) |
| Funded percent | | 85 | % | | 81 | % |
|
| | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 |
| | | (In thousands) |
| Change in benefit obligations: | | | | |
| Benefit obligations at January 1 | | $ | 2,228,762 |
| | 2,091,844 |
|
| Service cost | | 12,345 |
| | 12,977 |
|
| Interest cost | | 86,431 |
| | 94,476 |
|
| Actuarial loss | | 100,905 |
| | 189,523 |
|
| Pension annuity settlement | | (66,423 | ) | | — |
|
| Benefits paid | | (104,054 | ) | | (96,723 | ) |
| Foreign currency exchange rate changes | | 40,936 |
| | (63,335 | ) |
| Benefit obligations at December 31 | | 2,298,902 |
| | 2,228,762 |
|
| | | | | |
| Change in plan assets: | | | | |
| Fair value of plan assets at January 1 | | 1,787,075 |
| | 1,647,286 |
|
| Actual return on plan assets | | 244,916 |
| | 176,066 |
|
| Employer contribution | | 41,219 |
| | 127,991 |
|
| Benefits paid | | (104,054 | ) | | (96,723 | ) |
| Pension annuity settlement | | (71,299 | ) | | — |
|
| Foreign currency exchange rate changes | | 43,473 |
| | (67,545 | ) |
| Fair value of plan assets at December 31 | | 1,941,330 |
| | 1,787,075 |
|
| Funded status | | $ | (357,572 | ) | | (441,687 | ) |
| Funded percent | | 84 | % | | 80 | % |
During 2017, we completed a transfer of future retiree benefits in our U.S. defined benefit plan to a third-party annuity company. We paid $71 million in connection with this transfer, which included a $66 million reduction in our projected benefit obligation and an annuity premium. We did not record a gain or loss on this transaction as the cost of all settlements during the year, including this transaction, were less than our combined service and interest costs for the year.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The funded status of our pension plans was presented in the Consolidated Balance Sheets as follows:
|
| | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| | | (In thousands) |
| Noncurrent asset | | $ | 72,320 |
| | $ | 51,133 |
|
| Current liability | | (3,863 | ) | | (3,754 | ) |
| Noncurrent liability | | (413,829 | ) | | (456,979 | ) |
| Net amount recognized | | $ | (345,372 | ) | | $ | (409,600 | ) |
|
| | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 |
| | | (In thousands) |
| Noncurrent asset | | $ | 58,708 |
| | 14,049 |
|
| Current liability | | (3,863 | ) | | (3,796 | ) |
| Noncurrent liability | | (412,417 | ) | | (451,940 | ) |
| Net amount recognized | | $ | (357,572 | ) | | (441,687 | ) |
Amounts recognized in accumulated other comprehensive loss (pre-tax) consisted of:
|
| | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| | | (In thousands) |
| Prior service cost | | $ | 13,798 |
| | $ | 14,519 |
|
| Net actuarial loss | | 869,907 |
| | 929,995 |
|
| Net amount recognized | | $ | 883,705 |
| | $ | 944,514 |
|
|
| | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 |
| | | (In thousands) |
| Prior service cost | | $ | 11,135 |
| | 11,714 |
|
| Net actuarial loss | | 878,386 |
| | 961,010 |
|
| Net amount recognized | | $ | 889,521 |
| | 972,724 |
|
In 2018,2020, we expect to recognize $29amortize $32 million of net actuarial loss amortization as a component of pension expense.
The following table sets forth the weighted-average actuarial assumptions used in determining funded status:
|
| | | | | | | | |
| | | U.S. Plans December 31, | | Foreign Plans December 31, |
| | | 2019 | | 2018 | | 2019 | | 2018 |
| Discount rate | | 3.30% | | 4.35% | | 2.30% | | 3.04% |
| Rate of increase in compensation levels | | 3.00% | | 3.00% | | 3.11% | | 3.08% |
|
| | | | | | | | |
| | | U.S. Plans December 31, | | Foreign Plans December 31, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Discount rate | | 3.70% | | 4.20% | | 2.70% | | 3.90% |
| Rate of increase in compensation levels | | 3.00% | | 3.00% | | 3.10% | | 3.10% |
At As of December 31, 20172019 and 20162018, our total accumulated benefit obligations, as well as our pension plan obligations (accumulated(projected benefit obligations (ABO),(PBO) and projectedaccumulated benefit obligations (PBO)(ABO)), greater than in excess of the fair value of the related plan assets, for our U.S. and foreign plans were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | U.S. Plans December 31, | | Foreign Plans December 31, | | Total December 31, |
| | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
| | | (In thousands) |
| Total accumulated benefit obligations | | $ | 1,812,813 |
| | $ | 1,685,270 |
| | $ | 489,135 |
| | $ | 429,640 |
| | $ | 2,301,948 |
| | $ | 2,114,910 |
|
| Plans with pension obligations in excess of plan assets: | | | | | | | | | | | | |
| PBO | | 1,832,786 |
| | 1,703,847 |
| | 8,693 |
| | 6,912 |
| | 1,841,479 |
| | 1,710,759 |
|
| ABO | | 1,812,813 |
| | 1,685,270 |
| | 7,025 |
| | 5,788 |
| | 1,819,838 |
| | 1,691,058 |
|
| Fair value of plan assets | | 1,423,787 |
| | 1,250,032 |
| | — |
| | — |
| | 1,423,787 |
| | 1,250,032 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | | U.S. Plans December 31, | | Foreign Plans December 31, | | Total December 31, |
| | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| | | (In thousands) |
| Total accumulated benefit obligations | | $ | 1,781,882 |
| | 1,748,171 |
| | 492,864 |
| | 454,301 |
| | 2,274,746 |
| | 2,202,472 |
|
| Plans with pension obligations in excess of plan assets: | | | | | | | | | | | | |
| PBO | | 1,804,260 |
| | 1,771,968 |
| | 7,802 |
| | 7,383 |
| | 1,812,062 |
| | 1,779,351 |
|
| ABO | | 1,781,882 |
| | 1,748,171 |
| | 6,502 |
| | 5,997 |
| | 1,788,384 |
| | 1,754,168 |
|
| Fair value of plan assets | | 1,395,790 |
| | 1,323,751 |
| | — |
| | — |
| | 1,395,790 |
| | 1,323,751 |
|
Plan Assets
Our pension investment strategy is to reduce the effects of future volatility on the fair value of our pension assets relative to our pension liabilities.obligations. We increase our allocation of high quality, longer-term fixed income securities and reduce our allocation of equity investments as the funded status of the plans improve. The plans utilize several investment strategies, including actively and passively managed equity and fixed income strategies. The investment policy establishes targeted allocations for each asset class that incorporate measures of asset and liability risks. Deviations between actual pension plan asset allocations and targeted asset allocations may occur as a result of investment performance and changes in the funded status from time to time. Rebalancing of our pension plan asset portfolios is evaluated periodically and rebalanced if actual allocations exceed an acceptable range. U.S. plans account for approximately 72% of our total pension plan assets. Equity securities primarily include investments in both domestic and international common collective trusts and publicly traded equities. Fixed income securities primarily include domestic collective trusts and corporate bonds. Other types of investments
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
include private equity fund-of-funds and hedge fund-of-funds. Equity and fixed income securities in our international plans include actively and passively managed mutual funds. fund.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table presents the fair value of each major category of pension plan assets and the level of inputs used to measure fair value as of December 31, 20172019 and 20162018:
| | | | | Fair Value Measurements at
December 31, 2017 | | Fair Value Measurements at December 31, 2019 |
| Asset Category | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
| | | (In thousands) | | (In thousands) |
| Equity securities: | | | | | | | | | | | | | | | | |
| U.S. common collective trusts | | $ | 443,405 |
| | — |
| | 443,405 |
| | — |
| | $ | 384,739 |
| | $ | — |
| | $ | 384,739 |
| | $ | — |
|
| Foreign common collective trusts | | 458,111 |
| | — |
| | 458,111 |
| | — |
| | 379,717 |
| | — |
| | 379,717 |
| | — |
|
| Fixed income securities: | | | | | | | | | | | | | | | | |
| Corporate bonds | | 85,117 |
| | — |
| | 85,117 |
| | — |
| | 84,519 |
| | — |
| | 84,519 |
| | — |
|
| Common collective trusts | | 840,104 |
| | — |
| | 840,104 |
| | — |
| | 1,011,515 |
| | — |
| | 1,011,515 |
| | — |
|
| Private equity and hedge funds | | 114,593 |
| | — |
| | — |
| | 114,593 |
| | 118,218 |
| | — |
| | — |
| | 118,218 |
|
| Total | | $ | 1,941,330 |
| | — |
| | 1,826,737 |
| | 114,593 |
| | $ | 1,978,708 |
| | $ | — |
| | $ | 1,860,490 |
| | $ | 118,218 |
|
| | | | | Fair Value Measurements at
December 31, 2016 | | Fair Value Measurements at December 31, 2018 |
| Asset Category | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
| | | (In thousands) | | (In thousands) |
| Equity securities: | | | | | | | | | | | | | | | | |
| U.S. common collective trusts | | $ | 429,456 |
| | — |
| | 429,456 |
| | — |
| | $ | 315,741 |
| | $ | — |
| | $ | 315,741 |
| | $ | — |
|
| Foreign common collective trusts | | 398,282 |
| | — |
| | 398,282 |
| | — |
| | 352,040 |
| | — |
| | 352,040 |
| | — |
|
| Fixed income securities: | | | | | | | | | | | | | | | | |
| Corporate bonds | | 76,086 |
| | — |
| | 76,086 |
| | — |
| | 79,155 |
| | — |
| | 79,155 |
| | — |
|
| Common collective trusts | | 780,367 |
| | — |
| | 780,367 |
| | — |
| | 856,771 |
| | — |
| | 856,771 |
| | — |
|
| Private equity and hedge funds | | 102,884 |
| | — |
| | — |
| | 102,884 |
| | 121,836 |
| | — |
| | — |
| | 121,836 |
|
| Total | | $ | 1,787,075 |
| | — |
| | 1,684,191 |
| | 102,884 |
| | $ | 1,725,543 |
| | $ | — |
| | $ | 1,603,707 |
| | $ | 121,836 |
|
The following is a description of the valuation methodologies used for our pension assets as well as the level of input used to measure fair value:
Equity securities — These investments include common and preferred stocks and index common collective trusts that track U.S. and foreign indices. The common collective trusts were valued at the unit prices established by the funds’ sponsors based on the fair value of the assets underlying the funds. Since the units of the funds are not actively traded, the fair value measurements have been classified within Level 2 of the fair value hierarchy.
Fixed income securities — These investments include investment grade bonds of U.S. issuers from diverse industries, government issuers, index common collective trusts that track the Barclays Aggregate Index and other fixed income investments (primarily mortgage-backed securities). Fair values for the corporate bonds were valued using third-party pricing services. These sources determine prices utilizing market income models which factor in, where applicable, transactions of similar assets in active markets, transactions of identical assets in infrequent markets, interest rates, bond or credit default swap spreads and volatility. Since the corporate bonds are not actively traded, the fair value measurements have been classified within Level 2 of the fair value hierarchy. The common collective trusts were valued at the unit prices established by the funds’ sponsors based on the fair value of the assets underlying the funds. Since the units of the funds are not actively traded, the fair value measurements have been classified within Level 2 of the fair value hierarchy. The other investments are not actively traded and fair values are estimated using bids provided by brokers, dealers or quoted prices of similar securities with similar characteristics or pricing models. Therefore, the other investments have been classified within Level 2 of the fair value hierarchy.
Private equity and hedge funds — These investments represent limited partnership interests in private equity and hedge funds. The partnership interests are valued by the general partners based on the underlying assets in each fund. The limited
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
partnership interests are valued using unobservable inputs and have been classified within Level 3 of the fair value hierarchy.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table presents a summary of changes in the fair value of the pension plans’ Level 3 assets for the years ended December 31, 20172019 and 20162018:
|
| | | | | | | | |
| | | 2019 | | 2018 |
| | | (In thousands) |
| Beginning balance at January 1 | | $ | 121,836 |
| | $ | 114,593 |
|
| Return on plan assets: | | | | |
| Relating to assets still held at the reporting date | | 5,752 |
| | 6,762 |
|
| Relating to assets sold during the period | | (44 | ) | | (38 | ) |
| Purchases, sales, settlements and expenses | | (9,326 | ) | | 519 |
|
| Ending balance at December 31 | | $ | 118,218 |
| | $ | 121,836 |
|
|
| | | | | | | |
| | | 2017 | | 2016 |
| | | (In thousands) |
| Beginning balance at January 1 | | $ | 102,884 |
| | 100,631 |
|
| Return on plan assets: | | | | |
| Relating to assets still held at the reporting date | | 10,795 |
| | 1,548 |
|
| Relating to assets sold during the period | | (405 | ) | | 703 |
|
| Purchases, sales, settlements and expenses | | 1,319 |
| | 2 |
|
| Ending balance at December 31 | | $ | 114,593 |
| | 102,884 |
|
The following table details pension benefits expected to be paid in each of the next five fiscal years and in aggregate for the five fiscal years thereafter:
|
| | | |
| | (In thousands) |
| 2020 | $ | 107,940 |
|
| 2021 | 110,416 |
|
| 2022 | 114,180 |
|
| 2023 | 117,439 |
|
| 2024 | 120,585 |
|
| 2025-2029 | 628,854 |
|
|
| | | |
| | (In thousands) |
| 2018 | $ | 102,131 |
|
| 2019 | 104,563 |
|
| 2020 | 109,013 |
|
| 2021 | 113,370 |
|
| 2022 | 117,272 |
|
| 2023-2027 | 626,726 |
|
For 20182020, required pension contributions to our pension plans are estimated to be $34 million.$37 million.
Multi-employer Plans
We participate in multi-employer plans that provide defined benefits to certain employees covered by collective-bargaining agreements. Such plans are usually administered by a board of trustees comprised of the management of the participating companies and labor representatives. The net pension cost of these plans is equal to the annual contribution determined in accordance with the provisions of negotiated labor contracts. Assets contributed to such plans are not segregated or otherwise restricted to provide benefits only to our employees. The risks of participating in these multi-employer plans are different from single-employer plans in the following respects: 1) assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees and former employees of other participating employers; 2) if a participating employer is no longer able to contribute to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers at annual contribution rates under the collective bargaining agreements; 3) if there is a mass withdrawal of substantially all employers from the plan, we may be required to pay the plan an annual contribution based on historical contribution levels as prescribed by federal statute; and 4) if we choose to stop participating in some of our multi-employer plans, we may be required to pay those plans an amount based on the underfunded status of the plan, which is referred to as a withdrawal liability.
During 2017, we recorded an estimated pension settlement charge of $5 million for the exit from the Central States Southeast and Southwest Areas multi-employer pension plan. This charge was recorded within “Selling, general, and administrative expenses” in our Consolidated Statement of Earnings and is included in the Union-administered plans expense. During 2015, we recognized a benefit of $1 millionforadjustments to previously recognized estimated pension settlement charges related to our exit from U.S. multi-employer pension plans. These adjustments were included in "Selling, general, and administrative expenses" in our Consolidated Statement of Earnings and are a component of Union-administered plans expense.
Our participation in these plans is outlined in the table below. Unless otherwise noted, the most recent Pension Protection Act zone status available in 20172019 and 20162018 is for the plan years ended December 31, 20162018 and December 31, 2015,2017, respectively. The zone status is based on information that we received from the plan. Among other factors, plans in the red zone are generally less than sixty-five percent funded, plans in the yellow zone are less than eighty percent funded, and plans in the green zone are at least eighty percent funded.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| | | | | Pension Protection Act Zone Status | | Ryder Contributions | | Expiration Date(s) of Collective-Bargaining Agreement(s) | | Pension Protection Act Zone Status | | Ryder Contributions | | Expiration Date(s) of Collective-Bargaining Agreement(s) |
| Pension Fund | | Employer Identification Number | | 2017 | | 2016 | | FIP/RP Status Pending/ Implemented (1) | | 2017 | | 2016 | | 2015 | | Surcharge Imposed | | Employer Identification Number | 2019 | | 2018 | FIP/RP Status Pending/ Implemented (1) | 2019 | | 2018 | | 2017 | Surcharge Imposed |
| | | | | | | | | | | (Dollars in thousands) | | | | | | | | (In thousands) | |
Western Conference Teamsters | | 91-6145047 | | Green | | Green | | No | | $ | 3,245 |
| | 2,613 |
| | 2,430 |
| | No | | 1/12/18 to 4/1/21 | 91-6145047 | Green | | Green | No | $ | 3,971 |
| | $ | 3,488 |
| | $ | 3,245 |
| No | 01/12/18 to 03/31/21 |
IAM National | | 51-6031295 | | Green | | Green | | No | | 3,891 |
| | 4,162 |
| | 3,801 |
| | No | | 3/31/17 to 11/30/19 | 51-6031295 | Red | | Green | RP Adopted | 4,148 |
| | 3,953 |
| | 3,891 |
| Yes | 10/01/19 to 09/14/23 |
Automobile Mechanics
Local No. 701 | | 36-6042061 | | Yellow | | Yellow | | RP Adopted | | 2,048 |
| | 2,201 |
| | 1,902 |
| | Yes | | 10/31/17 to 5/31/19 | 36-6042061 | Yellow | | Yellow | FIP Adopted | 1,494 |
| | 1,435 |
| | 2,048 |
| Yes | 06/01/19 to 05/31/22 |
| Central States Southeast and Southwest Areas | | 36-6044243 | | Red | | Red | | RP Adopted | | 244 |
| | 259 |
| | 254 |
| | Yes | | 5/6/17 to 10/31/17 | |
| Other funds | | 671 |
| | 501 |
| | 450 |
| | | 969 |
| | 931 |
| | 915 |
| |
| Total contributions | | 10,099 |
| | 9,736 |
| | 8,837 |
| | | 10,582 |
| | 9,807 |
| | 10,099 |
| |
| Pension settlement charges (benefit) | | 5,454 |
| | (139 | ) | | (509 | ) | | |
| Pension settlement (benefit) charges | | | — |
| | (481 | ) | | 5,454 |
| |
| Union-administered plans | | $ | 15,553 |
| | 9,597 |
| | 8,328 |
| | | $ | 10,582 |
| | $ | 9,326 |
| | $ | 15,553 |
| |
_____________
| |
| (1) | The “FIP/RP Status Pending/Implemented” column indicates plans for which a financial improvement plan (FIP) or a rehabilitation plan (RP) is either pending or has been implemented. |
| |
| (2) | The Pension Protection Act zone status is for the plan year ended December 31, 2019. |
| |
| (3) | The Trustees voluntarily elected to put the fund in red status, even though the plan is at least eighty percent funded, and implemented a rehabilitation plan. |
Our contributions are impacted by changes in contractual contributions rates as well as changes in the number of employees covered by each plan.
Savings Plans
Employees who do not actively participate in pension plans and are not covered by union-administered plans are generally eligible to participate in enhanced savings plans. These plans provide for (i) a company contribution even if employees do not make contributions for employees hired before January 1, 2016, (ii) a company match of employee contributions of eligible pay, subject to tax limits and (iii) a discretionary company match. Savings plan costs totaled $39$39 million, in 2017 $40 million and $38$39 million in both 20162019, 2018 and 2015.2017, respectively.
Deferred Compensation and Long-Term Compensation Plans
We have deferred compensation plans that permit eligible U.S. employees, officers and directors to defer a portion of their compensation. The deferred compensation liability, including Ryder matching amounts and accumulated earnings, totaled $63$71 million and $50$60 million at as of December 31, 20172019 and 2016,2018, respectively.
We have established grantor trusts (Rabbi Trusts) to provide funding for benefits payable under the supplemental pension plan, deferred compensation plans and long-term incentive compensation plans. The assets held in the trusts were $63$72 million and $50$60 million at as of December 31, 20172019 and 2016,2018, respectively. The Rabbi Trusts’ assets consist of short-term cash investments and a managed portfolio of equity securities, including our common stock. These assets, except for the investment in our common stock, are included in “Direct financing“Sales-type leases and other assets” because they are available to our general creditors in the event of insolvency. The equity securities are classified as trading securities and stated at fair value. Both realized and unrealized gains and losses are included in “Miscellaneous income, net.” The Rabbi Trusts’ investmentinvestments of $2$1 million in our common stock atas of both December 31, 20172019 and 2016, is2018, are reflected at historical cost and included in shareholders’ equity.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Investments held in Rabbi Trusts are assets measured at fair value on a recurring basis, all of which are considered Level 1 of the fair value hierarchy. The following table presents the asset classes as of December 31, 2019 and 2018:
|
| | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| | | (In thousands) |
| Cash and cash equivalents | | $ | 18,460 |
| | $ | 15,578 |
|
| U.S. equity mutual funds | | 34,035 |
| | 29,298 |
|
| Foreign equity mutual funds | | 8,658 |
| | 6,678 |
|
| Fixed income mutual funds | | 9,800 |
| | 7,849 |
|
| Total Investments held in Rabbi Trusts | | $ | 70,953 |
| | $ | 59,403 |
|
Other Postretirement Benefits
We sponsor plans that provide retired U.S. and Canadian employees with certain healthcare and life insurance benefits. Substantially all U.S. and Canadian employees not covered by union-administered health and welfare plans are eligible for the healthcare benefits. The postretirement medical plan was closed to non-grandfathered participants in 2013. Healthcare benefits for our principal plan are generally provided to qualified retirees under age 65 and eligible dependents. This plan requires employee contributions that vary based on years of service and include provisions that limit our contributions. In prior years, we made amendments to our healthcare benefits for early retirees which modified future eligibility requirements for non-grandfathered retirees in the U.S. The post-retirement medical planbenefit obligation was closed to participants who were not at least age 52 with 12 years of service$22 million and $19 million as of December 31, 2013.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Total postretirement benefit income was as follows:
|
| | | | | | | | | | |
| | | Years ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| | | (In thousands) |
| Service cost | | $ | 191 |
| | 215 |
| | 363 |
|
| Interest cost | | 833 |
| | 906 |
| | 1,097 |
|
| Amortization of: | | | | | | |
| Net actuarial gain | | (1,796 | ) | | (1,989 | ) | | (1,773 | ) |
| Prior service credit | | (231 | ) | | (231 | ) | | (1,083 | ) |
| Postretirement benefit income | | $ | (1,003 | ) | | (1,099 | ) | | (1,396 | ) |
| | | | | | | |
| U.S. | | $ | (1,308 | ) | | (1,429 | ) | | (1,887 | ) |
| Foreign | | 305 |
| | 330 |
| | 491 |
|
| | | $ | (1,003 | ) | | (1,099 | ) | | (1,396 | ) |
2019 and 2018, respectively. The following table sets forth the weighted-average discount rates used in determining annual postretirement benefit expense:
|
| | | | | | | | | | | | |
| | | U.S. Plan Years ended December 31, | | Foreign Plan Years ended December 31, |
| | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| Discount rate | | 4.20% | | 4.50% | | 4.15% | | 4.00% | | 4.00% | | 4.00% |
Our postretirement benefit plans are not funded. The following table sets forth the benefit obligations associated with our postretirement benefit plans:
|
| | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 |
| | | (In thousands) |
| Benefit obligations at January 1 | | $ | 20,965 |
| | 21,626 |
|
| Service cost | | 191 |
| | 215 |
|
| Interest cost | | 833 |
| | 906 |
|
| Actuarial loss (gain) | | 16 |
| | (338 | ) |
| Benefits paid | | (1,182 | ) | | (1,609 | ) |
| Foreign currency exchange rate changes | | 418 |
| | 165 |
|
| Benefit obligations at December 31 | | $ | 21,241 |
| | 20,965 |
|
Amounts recognized in the Consolidated Balance Sheets consisted of:
|
| | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 |
| | | (In thousands) |
| Current liability | | $ | 1,481 |
| | 1,506 |
|
| Noncurrent liability | | 19,760 |
| | 19,459 |
|
| Amount recognized | | $ | 21,241 |
| | 20,965 |
|
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Amounts recognized in accumulated other comprehensive loss (pre-tax) consisted of:
|
| | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 |
| | | (In thousands) |
| Prior service credit | | $ | (154 | ) | | (385 | ) |
| Net actuarial gain | | (8,371 | ) | | (10,186 | ) |
| Net amount recognized | | $ | (8,525 | ) | | (10,571 | ) |
In 2018, we expect to recognize approximately $1 million of the net actuarial gain as a componentamount of postretirement benefit expense. The amount of prior service credit we expect to recognize inexpense was not material for 2019, 2018 as a component of total postretirement benefit expense is not material.and 2017.
Our annual measurement date is December 31 for both U.S. and foreign postretirement benefit plans. Assumptions used in determining accrued postretirement benefit obligations were as follows:
|
| | | | | | | | | | | | |
| | | U.S. Plan December 31, | | Foreign Plan December 31, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Discount rate | | 3.70 | % | | 4.20 | % | | 3.40 | % | | 3.90 | % |
| Rate of increase in compensation levels | | 3.00 | % | | 3.00 | % | | 3.00 | % | | 3.00 | % |
| Healthcare cost trend rate assumed for next year | | 7.25 | % | | 7.50 | % | | 5.00 | % | | 5.00 | % |
| Rate to which the cost trend rate is assumed to decline (ultimate trend rate) | | 5.00 | % | | 5.00 | % | | 5.00 | % | | 5.00 | % |
| Year that the rate reaches the ultimate trend rate | | 2027 |
| | 2027 |
| | 2017 |
| | 2018 |
|
Changing the assumed healthcare cost trend rates by 1% in each year would not have a material effect on the accumulated postretirement benefit obligation at December 31, 2017 or annual postretirement benefit expense for 2017.
The following table details other postretirement benefits expected to be paid in each of the next five fiscal years and in aggregate for the five fiscal years thereafter: |
| | | |
| | (In thousands) |
|
| 2018 | $ | 1,491 |
|
| 2019 | 1,463 |
|
| 2020 | 1,428 |
|
| 2021 | 1,443 |
|
| 2022 | 1,442 |
|
| 2023-2027 | 6,602 |
|
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
23.21. ENVIRONMENTAL MATTERS
Our operations involve storing and dispensing petroleum products, primarily diesel fuel, regulated under environmental protection laws. These laws require us to eliminate or mitigate the effect of such substances on the environment. In response to these requirements, we continually upgrade our operating facilities and implement various programs to detect and minimize contamination. In addition, we have received notices from the Environmental Protection Agency (EPA) and others that we have been identified as a potentially responsible party under the Comprehensive Environmental Response, Compensation, and Liability Act,Act; the Superfund Amendments and Reauthorization ActAct; and similar state statutes. We may be required to share in the cost of cleanup of 1921 identified disposal sites.
Our environmental expenses, which are presented within “Cost of fuel services” in our Consolidated Statements of Earnings, consist of remediation costs as well as normal recurring expenses such as licensing, testing and waste disposal fees. These expenses totaled $12$16 million,, $10 $12 million and $9$12 million in 2017, 20162019, 2018 and 2015,2017, respectively. The carrying amount of our environmental liabilities was $12 million and $10 million and $9 million atas of December 31, 20172019 and 2016,2018, respectively. Our asset retirement obligations related to fuel tanks to be removed are not included above. Asset retirement obligations totaled $26$28 million and $27 million as of December 31, 20172019 and 2016,2018, respectively. The carrying amount of our environmental liabilities and our asset retirement obligations are included in “Accrued expenses and other current liabilities” and “Other non-current liabilities” in our Consolidated Balance Sheets.
The ultimate cost of our environmental liabilities cannot presently be projected with certainty due to the presence of several unknown factors, primarily the level of contamination, the effectiveness of selected remediation methods, the stage of investigation at individual sites, the determination of our liability in proportion to other responsible parties and the recoverability of such costs from third parties. Based on information presently available, we believe that the ultimate disposition of these matters, although potentially material to the results of operations in any one year, will not have a material adverse effect on our financial condition or liquidity.
24.RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
22. OTHER ITEMS IMPACTING COMPARABILITY
Our primary measure of segment performance as shown in Note 28,26, "Segment Reporting",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:
|
| | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | | | (In thousands) | | |
Restructuring charges and fees, net (1) | $ | (21,405 | ) | | (5,074 | ) | | (18,068 | ) |
| Tax reform related bonus | (23,278 | ) | | — |
| | — |
|
| Operating tax adjustment | (2,205 | ) | | — |
| | — |
|
Pension related adjustment (2) | (5,454 | ) | | (7,650 | ) | | 509 |
|
Gain on sale of property (3) | 24,122 |
| | — |
| | — |
|
| Restructuring charges and fees, net and other items | $ | (28,220 | ) | | (12,724 | ) | | (17,559 | ) |
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| | | | | (In thousands) | | |
Restructuring and other, net (1) | | $ | 35,308 |
| | $ | 5,597 |
| | $ | 17,265 |
|
ERP implementation costs (1) | | 21,260 |
| | 742 |
| | — |
|
Goodwill impairment (2) | | — |
| | 15,513 |
| | — |
|
| Restructuring and other items, net | | 56,568 |
| | 21,852 |
| | 17,265 |
|
| Tax reform related bonus | | — |
| | — |
| | 23,278 |
|
| Operating tax adjustment | | — |
| | — |
| | 2,205 |
|
Pension related adjustment (3) | | — |
| | — |
| | 5,454 |
|
Gain on sale of property (4) | | (18,614 | ) | | — |
| | (24,122 | ) |
| Total | | $ | 37,954 |
| | $ | 21,852 |
| | $ | 24,080 |
|
_______________
(1) Refer to Note 4,5, "Restructuring Charges and Fees,Other Items, Net," for additional information.
(2) Refer to Note 22, "Employee Benefit Plans,9, "Goodwill," for additional information.
(3) Refer to Note 27, Miscellaneous Income, Net20, "Employee Benefit Plans," for additional information.
(4) Refer to Note 25,"Miscellaneous Income, Net," for additional information.
In connection with the passing of the 2017 Tax Cuts and Jobs Act,Reform, we awarded a one-time bonus, totaling $23 million in the aggregate, to allour U.S.-based non-incentive eligible employees of the Company as of December 31,in 2017. The bonus is reflected within “Selling, general and administrative expenses” in ourthe Consolidated StatementStatements of Earnings.
During 2017, we determined that certain operating tax expenses related to prior periods had not been recognized in prior period earnings. We recorded a one-time charge of $2 million within “Selling, general and administrative
expenses” in ourthe Consolidated StatementStatements of Earnings as the impact of the adjustment was not material to our
consolidated financial statements.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
25.23. 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. For matters from continuing operations, we believe that the resolution of these claims, complaints and legal proceedings will not have a material effect on our consolidated 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.
26. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information was as follows: |
| | | | | | | | | | |
| | | Years ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| | | (In thousands) |
| Interest paid | | $ | 129,559 |
| | 143,990 |
| | 144,973 |
|
| Income taxes paid | | 13,692 |
| | 14,062 |
| | 13,379 |
|
| Changes in accounts payable related to purchases of revenue earning equipment | | 80,781 |
| | (142,256 | ) | | 28,134 |
|
| Operating and revenue earning equipment acquired under capital leases | | 7,057 |
| | 1,230 |
| | 5,959 |
|
27. MISCELLANEOUS INCOME, NET
|
| | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | |
| Gains on sales of operating property and equipment | $ | 26,093 |
| | 2,475 |
| | 3,045 |
|
| Insurance proceeds/recoveries | 1,734 |
| | 966 |
| | — |
|
| Contract settlement | 1,600 |
| | — |
| | 55 |
|
| Foreign currency transaction gains | 657 |
| | 1,236 |
| | 1,945 |
|
| Rabbi trust investment income | 10,522 |
| | 2,763 |
| | 632 |
|
| Other, net | 3,639 |
| | 5,628 |
| | 4,479 |
|
| Total | $ | 44,245 |
| | 13,068 |
| | 10,156 |
|
The increase in 2017 is primarily driven by gains of sales of properties of $26 million , which includes the gain on the sale of a SCS property of $24 million, and rabbi trust investment income of $11 million. The increase in 2016 is primarily driven by increased rabbi trust investment income.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
24. SUPPLEMENTAL CASH FLOW INFORMATION
28.
Supplemental cash flow information was as follows: |
| | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| | | (In thousands) |
| Interest paid | | $ | 225,842 |
| | $ | 161,826 |
| | $ | 129,559 |
|
| Income taxes paid | | 6,325 |
| | 22,965 |
| | 13,692 |
|
| Changes in accounts payable related to purchases of revenue earning equipment | | (114,751 | ) | | 114,862 |
| | 80,781 |
|
25. MISCELLANEOUS INCOME, NET
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| | | (In thousands) |
| Gains on sales of operating property and equipment | | $ | 17,577 |
| | $ | 2,478 |
| | $ | 26,093 |
|
| Insurance recoveries | | 1,033 |
| | 1,155 |
| | 1,734 |
|
| Contract settlement | | — |
| | 817 |
| | 1,600 |
|
| Foreign currency transaction gains (losses) | | 273 |
| | (459 | ) | | 657 |
|
| Rabbi trust investment income (loss) | | 11,221 |
| | (3,247 | ) | | 10,522 |
|
| Other, net | | 3,538 |
| | 4,678 |
| | 3,639 |
|
| Total | | $ | 33,642 |
| | $ | 5,422 |
| | $ | 44,245 |
|
In 2019, we recorded a gain on the sale of certain SCS properties. In 2017, gains on sales of properties were $26 million which included the gain on the sale of a SCS property of $25 million. Refer to Note 20 "Employee Benefit Plans" for additional information on Rabbi trust investment income (loss).
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
26. 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 threebased on 3 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) SCS, which provides integrated logistics solutions, including distribution, management, dedicated transportation and professional services in North America; and (3) DTS, which provides vehicles and drivers as part of a dedicatedturnkey transportation solutionsolutions in the U.S.; that includes dedicated vehicles, drivers and (3) SCS, which provides comprehensive supply chain solutions including distributionengineering and transportation services in North America and Singapore.administrative support. Dedicated transportation services provided as part of an operationally integrated, multi-service, supply chain solution to SCS customers are primarily reported in the SCS business segment.
Our primary measurement of segment financial performance, defined as “Earnings Before Tax”from continuing operations before taxes” (EBT) from continuing operations, includes an allocation of Central Support Services (CSS) and excludes non-operating pension costs restructuring charges and fees, netcertain other items as discussed in Note 4,5, "Restructuring Charges and Fees,Other Items, Net" and items discussed in Note 24,22, "Other Items Impacting Comparability." CSS represents those costs incurred to support all business segments, including finance and procurement, corporate services, human resources, finance, corporate services,information technology, 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 business 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 theincluding costs for investor relations, public affairs and certain executive compensation. CSS costs attributable to the business segments are predominantly allocated to FMS, DTSSCS and SCSDTS as follows:
| |
| • | Finance, corporate services, and health and safety — allocated based upon estimated and planned resource utilization; |
•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 |
•Human resources — individual costs within this category are allocated under various methods, including allocation based on estimated utilization and number of personnel supported;
| |
| • | 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. |
•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.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Our FMS segment leases revenue earning equipment and provides fuel, maintenance and other ancillary services to the SCS and 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 DTSSCS and SCSDTS customers (equipment contribution) are included in both FMS and the business segment whichthat served the customer and then eliminated upon consolidation (presented as “Eliminations”). Prior amounts have been reclassifiedInter-segment EBT allocated to conformSCS and DTS includes earnings related to the current period presentation.equipment used in providing services to SCS and DTS customers.
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. Each business segment follows the same accounting policies as described in Note 1, “Summary of Significant Accounting Policies.” BusinessHowever, we do not record right-of-use assets or liabilities for our intercompany operating leases between FMS and SCS and DTS business segments. The following tables set forth financial information for each of our segments and provide a reconciliation between segment revenueEBT and EBTearnings from continuing operations is as follows:before income taxes. Prior period segment amounts have been revised to reflect the adoption of the new leasing standard (refer to Note 2 for further information).
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| | | | | Years ended December 31, | | Years ended December 31, |
| | | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
| | | (In thousands) | | (In thousands) |
| Revenue: | | | | | | | | | | | | |
| Fleet Management Solutions: | | | | | | | | | | | | |
| ChoiceLease | | $ | 2,460,424 |
| | 2,362,040 |
| | 2,220,929 |
| | $ | 3,112,311 |
| | $ | 2,860,266 |
| | $ | 2,671,687 |
|
| Commercial rental | | 777,261 |
| | 808,912 |
| | 900,624 |
| | 1,009,086 |
| | 960,606 |
| | 813,539 |
|
| ChoiceLease and commercial rental | | 3,237,685 |
| | 3,170,952 |
| | 3,121,553 |
| |
| SelectCare | | 428,422 |
| | 415,507 |
| | 391,137 |
| | 541,358 |
| | 502,835 |
| | 464,056 |
|
| Other | | 77,450 |
| | 78,042 |
| | 77,625 |
| | 92,286 |
| | 87,331 |
| | 77,450 |
|
| Fuel services revenue | | 520,500 |
| | 463,738 |
| | 538,277 |
| | 816,362 |
| | 847,655 |
| | 689,809 |
|
| Total Fleet Management Solutions from external customers | | 4,264,057 |
| | 4,128,239 |
| | 4,128,592 |
| |
| Inter-segment revenue | | 469,514 |
| | 427,955 |
| | 417,100 |
| |
| Fleet Management Solutions | | 4,733,571 |
| | 4,556,194 |
| | 4,545,692 |
| | 5,571,403 |
| | 5,258,693 |
| | 4,716,541 |
|
| Supply Chain Solutions | | | 2,551,271 |
| | 2,398,144 |
| | 1,937,352 |
|
| Dedicated Transportation Solutions | | 1,096,042 |
| | 1,020,895 |
| | 895,538 |
| | 1,417,483 |
| | 1,333,313 |
| | 1,095,645 |
|
| Supply Chain Solutions | | 1,969,500 |
| | 1,637,850 |
| | 1,547,763 |
| |
| Eliminations | | (469,514 | ) | | (427,955 | ) | | (417,100 | ) | | (614,356 | ) | | (576,204 | ) | | (469,464 | ) |
| Total revenue | | $ | 7,329,599 |
| | 6,786,984 |
| | 6,571,893 |
| | $ | 8,925,801 |
| | $ | 8,413,946 |
| | $ | 7,280,074 |
|
| | | | | | | | | | | | | |
| EBT: | | | | | | | |
| Earnings (Loss) Before Taxes: | | | | | | | |
| Fleet Management Solutions | | $ | 312,720 |
| | 370,829 |
| | 461,314 |
| | $ | (70,274 | ) | | $ | 340,038 |
| | $ | 295,618 |
|
| Supply Chain Solutions | | | 145,060 |
| | 130,262 |
| | 98,825 |
|
| Dedicated Transportation Solutions | | 55,328 |
| | 63,571 |
| | 45,575 |
| | 81,149 |
| | 61,236 |
| | 55,346 |
|
| Supply Chain Solutions | | 103,102 |
| | 105,532 |
| | 93,575 |
| |
| Eliminations | | (53,275 | ) | | (50,148 | ) | | (47,193 | ) | | (50,732 | ) | | (63,593 | ) | | (53,273 | ) |
| | | $ | 417,875 |
| | 489,784 |
| | 553,271 |
| | 105,203 |
| | 467,943 |
| | 396,516 |
|
| Unallocated Central Support Services | | (48,128 | ) | | (40,736 | ) | | (48,700 | ) | | (49,114 | ) | | (49,081 | ) | | (48,259 | ) |
Non-operating pension costs (1) | | (27,741 | ) | | (29,943 | ) | | (17,797 | ) | | (60,406 | ) | | (7,541 | ) | | (27,741 | ) |
Restructuring charges and fees, net and other items (2) | | (28,220 | ) | | (12,724 | ) | | (17,559 | ) | |
| Earnings before income taxes from continuing operations | | $ | 313,786 |
| | 406,381 |
| | 469,215 |
| |
Other items impacting comparability, net (2) | | | (37,954 | ) | | (21,852 | ) | | (24,080 | ) |
| Earnings (loss) from continuing operations before income taxes | | | $ | (42,271 | ) | | $ | 389,469 |
| | $ | 296,436 |
|
______________
| |
| (1) | Non-operating pension costs include the amortization of net actuarial loss and prior service costs, interest cost and expected return on plan assets |
components of pension and postretirement benefit costs.costs and pension settlement charges. Refer to Note 20, "Employee Benefit Plans," for a discussion on these items.
| |
| (2) | SeeRefer to Note 24,22, “Other Items Impacting Comparability,” for a discussion of items excluded from our primary measure of segment performance. |
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table sets forth non-operating pension costs and share-based compensation expense, depreciation expense, used vehicle sales, net, amortization expense and other non-cash charges, net, interest expense (income), capital expenditures paid and total assets for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, as provided to the chief operating decision-maker for each of Ryder’sour reportable business segments:
| | | | | FMS | | DTS | | SCS | | CSS | | Eliminations | | Total | | FMS | | SCS | | DTS | | CSS | | Eliminations | | Total |
| | | (In thousands) | | (In thousands) |
| 2017 | | | | | | | | | | | | | |
| Non-operating pension costs and share-based compensation expense | | $ | 5,339 |
| | 1,270 |
| | 2,982 |
| | 37,117 |
| | — |
| | 46,708 |
| |
| 2019 | | | | | | | | | | | | | |
Depreciation expense (1) | | $ | 1,218,492 |
| | 3,520 |
| | 32,255 |
| | 908 |
| | — |
| | 1,255,175 |
| | $ | 1,825,816 |
| | 42,428 |
| | 3,795 |
| | 6,890 |
| | — |
| | $ | 1,878,929 |
|
| Used vehicle sales, net | | $ | 17,553 |
| | (113 | ) | | (199 | ) | | — |
| | — |
| | 17,241 |
| |
| Amortization expense and other non-cash charges, net | | $ | 29,550 |
| | (21,967 | ) | | 1,015 |
| | 3,516 |
| | — |
| | 12,114 |
| | $ | 126,224 |
| | 55,658 |
| | 1,427 |
| | 3,815 |
| | — |
| | $ | 187,124 |
|
Interest expense (income) (2) | | $ | 144,137 |
| | (1,659 | ) | | (2,446 | ) | | 318 |
| | — |
| | 140,350 |
| | $ | 243,406 |
| | 1,038 |
| | (3,224 | ) | | 161 |
| | — |
| | $ | 241,381 |
|
| Capital expenditures paid | | $ | 1,783,917 |
| | 3,375 |
| | 50,117 |
| | 23,027 |
| | — |
| | 1,860,436 |
| | $ | 3,643,573 |
| | 49,421 |
| | 2,182 |
| | 39,998 |
| | — |
| | $ | 3,735,174 |
|
| Total assets | | $ | 10,386,613 |
| | 276,832 |
| | 864,022 |
| | 196,686 |
| | (271,922 | ) | | 11,452,231 |
| | $ | 12,991,716 |
| | 1,236,589 |
| | 327,384 |
| | 305,631 |
| | (385,986 | ) | | $ | 14,475,334 |
|
| 2016 | | | | | | | | | | | | | |
| Non-operating pension costs and share-based compensation expense | | $ | 5,464 |
| | 1,254 |
| | 2,764 |
| | 46,775 |
| | — |
| | 56,257 |
| |
| 2018 | | | | | | | | | | | | | |
Depreciation expense (1) | | $ | 1,156,888 |
| | 3,222 |
| | 25,956 |
| | 984 |
| | — |
| | 1,187,050 |
| | $ | 1,346,484 |
| | 34,631 |
| | 4,773 |
| | 2,682 |
| | — |
| | $ | 1,388,570 |
|
| Used vehicle sales, net | | $ | (724 | ) | | (90 | ) | | (158 | ) | | — |
| | — |
| | (972 | ) | |
| Amortization expense and other non-cash charges, net | | $ | 34,652 |
| | 1,027 |
| | 3,215 |
| | (8,227 | ) | | — |
| | 30,667 |
| | $ | 81,041 |
| | 65,443 |
| | 1,469 |
| | 1,053 |
| | — |
| | $ | 149,006 |
|
Interest expense (income) (2) | | $ | 151,297 |
| | (1,901 | ) | | (1,663 | ) | | 110 |
| | — |
| | 147,843 |
| | $ | 181,335 |
| | 1,171 |
| | (2,262 | ) | | 244 |
| | — |
| | $ | 180,488 |
|
| Capital expenditures paid | | $ | 1,814,146 |
| | 2,551 |
| | 64,186 |
| | 24,274 |
| | — |
| | 1,905,157 |
| | $ | 2,979,482 |
| | 45,348 |
| | 1,444 |
| | 24,135 |
| | — |
| | $ | 3,050,409 |
|
| Total assets | | $ | 9,954,452 |
| | 255,845 |
| | 713,190 |
| | 198,394 |
| | (219,427 | ) | | 10,902,454 |
| | $ | 11,854,454 |
| | 1,123,864 |
| | 324,906 |
| | 404,999 |
| | (360,415 | ) | | $ | 13,347,808 |
|
| 2015 | | | | | | | | | | | | | |
| Non-operating pension costs and share-based compensation expense | | $ | 5,672 |
| | 1,155 |
| | 3,400 |
| | 28,751 |
| | — |
| | 38,978 |
| |
| 2017 | | | | | | | | | | | | | |
Depreciation expense (1) | | $ | 1,092,750 |
| | 3,184 |
| | 25,721 |
| | 311 |
| | — |
| | 1,121,966 |
| | $ | 1,218,897 |
| | 32,245 |
| | 3,513 |
| | 3,026 |
| | — |
| | $ | 1,257,681 |
|
| Used vehicle sales, net | | $ | (99,758 | ) | | (54 | ) | | (41 | ) | | — |
| | — |
| | (99,853 | ) | |
| Amortization expense and other non-cash charges, net | | $ | 36,348 |
| | 1,878 |
| | 2,971 |
| | 11,768 |
| | — |
| | 52,965 |
| | $ | 79,252 |
| | 28,032 |
| | 1,801 |
| | (263 | ) | | — |
| | $ | 108,822 |
|
Interest expense (income) (2) | | $ | 154,276 |
| | (1,597 | ) | | (2,174 | ) | | (71 | ) | | — |
| | 150,434 |
| | $ | 145,400 |
| | (2,398 | ) | | (1,659 | ) | | 533 |
| | — |
| | $ | 141,876 |
|
Capital expenditures paid (3) | | $ | 2,595,961 |
| | 3,570 |
| | 27,841 |
| | 40,606 |
| | — |
| | 2,667,978 |
| |
| Capital expenditures paid | | | $ | 1,783,917 |
| | 50,117 |
| | 3,375 |
| | 23,027 |
| | — |
| | $ | 1,860,436 |
|
| Total assets | | $ | 10,061,092 |
| | 275,634 |
| | 636,647 |
| | 202,129 |
| | (222,922 | ) | | 10,952,580 |
| | $ | 10,528,482 |
| | 907,627 |
| | 278,863 |
| | 280,371 |
| | (269,614 | ) | | $ | 11,725,729 |
|
____________
| |
| (1) | Depreciation expense totaling $27 million, $25 million and $24 million during 2019, 2018 and 2017, respectively, associated with CSS assets was allocated to business segments based upon estimated and planned asset utilization. Depreciation expense totaling $24 million, $24 million and $22 million during 2017, 2016 and 2015, respectively, associated with CSS assets was allocated to other business segments. |
| |
| (2) | Interest expense was primarily allocated to the FMS segment since such borrowings were used principally to fund the purchase of revenue earning equipment used in FMS; however, interest income was also reflected in DTSSCS and SCSDTS based on targeted segment leverage ratios. |
| |
(3) | Excludes acquisition payments of $1 million in 2017. See Note 3, “Acquisitions,” for additional information. |
Geographic Information
|
| | | | | | | | |
| | | Years ended December 31, |
| | | 2019 | | 2018 |
| | | (In thousands) |
| Long-lived assets: | | | | |
| United States | | $ | 10,106,520 |
| | $ | 9,125,278 |
|
| Foreign: | | | | |
| Canada | | 737,037 |
| | 651,424 |
|
| Europe | | 439,772 |
| | 444,468 |
|
| Mexico | | 62,134 |
| | 56,608 |
|
| Singapore | | — |
| | 237 |
|
| | | 1,238,943 |
| | 1,152,737 |
|
| Total | | $ | 11,345,463 |
| | $ | 10,278,015 |
|
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Geographic Information
|
| | | | | | | | | | |
| | | Years ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| | | (In thousands) |
| Revenue: | | | | | | |
| United States | | $ | 6,378,784 |
| | 5,892,384 |
| | 5,603,697 |
|
| Foreign: | | | | | | |
| Canada | | 428,252 |
| | 387,713 |
| | 408,325 |
|
| Europe | | 321,375 |
| | 339,420 |
| | 391,339 |
|
| Mexico | | 170,398 |
| | 139,176 |
| | 139,583 |
|
| Singapore | | 30,790 |
| | 28,291 |
| | 28,949 |
|
| | | 950,815 |
| | 894,600 |
| | 968,196 |
|
| Total | | $ | 7,329,599 |
| | 6,786,984 |
| | 6,571,893 |
|
| Long-lived assets: | | | | | | |
| United States | | $ | 7,935,167 |
| | 7,854,845 |
| | 7,817,628 |
|
| Foreign: | | | | | | |
| Canada | | 623,576 |
| | 532,403 |
| | 504,027 |
|
| Europe | | 527,869 |
| | 472,027 |
| | 545,630 |
|
| Mexico | | 44,997 |
| | 33,979 |
| | 31,993 |
|
| Singapore | | 357 |
| | 338 |
| | 427 |
|
| | | 1,196,799 |
| | 1,038,747 |
| | 1,082,077 |
|
| Total | | $ | 9,131,966 |
| | 8,893,592 |
| | 8,899,705 |
|
Certain Concentrations
We have a diversified portfolio of customers across a full array of transportation and logistics solutions and across many industries. We believe this will help to mitigate the impact of adverse downturns in specific sectors of the economy. Our portfolio of ChoiceLease and commercial rental customers is not concentrated in any one particular industry or geographic region. We derive a significant portion of our SCS revenue from the automotive industry, mostly from manufacturers and suppliers of original equipment parts. During 2017, 2016 and 2015, the automotive industry accounted for approximately 40%, 44% and 41%, respectively, of SCS total revenue.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
29.27. QUARTERLY INFORMATION (UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Earnings (Loss) from Continuing Operations Before Income Taxes | | Earnings (Loss) from Continuing Operations | | | | Earnings (Loss) from Continuing Operations per Common Share | | Net Earnings (Loss) per Common Share |
| | | Revenue | | | | Net Earnings (Loss) | | Basic | | Diluted | | Basic | | Diluted |
| | | (In thousands, except per share amounts) |
| 2019 | | | | | | | | | | | | | | | | |
| First quarter | | $ | 2,180,327 |
| | $ | 68,151 |
| | $ | 45,890 |
| | $ | 45,316 |
| | $ | 0.87 |
| | $ | 0.87 |
| | $ | 0.86 |
| | $ | 0.86 |
|
| Second quarter | | 2,244,993 |
| | 103,069 |
| | 75,452 |
| | 75,215 |
| | 1.44 |
| | 1.43 |
| | 1.43 |
| | 1.43 |
|
| Third quarter | | 2,223,932 |
| | (91,260 | ) | | (91,538 | ) | | (91,455 | ) | | (1.75 | ) | | (1.75 | ) | | (1.75 | ) | | (1.75 | ) |
| Fourth quarter | | 2,276,549 |
| | (122,231 | ) | | (53,076 | ) | | (53,486 | ) | | (1.02 | ) | | (1.02 | ) | | (1.02 | ) | | (1.02 | ) |
| Full year | | $ | 8,925,801 |
| | $ | (42,271 | ) | | $ | (23,272 | ) | | $ | (24,410 | ) | | $ | (0.45 | ) | | $ | (0.45 | ) | | $ | (0.47 | ) | | $ | (0.47 | ) |
| | | | | | | | | | | | | | | | | |
| 2018 | | | | | | | | | | | | | | | | |
| First quarter | | $ | 1,904,205 |
| | $ | 52,699 |
| | $ | 37,313 |
| | $ | 36,886 |
| | $ | 0.71 |
| | $ | 0.70 |
| | $ | 0.70 |
| | $ | 0.70 |
|
| Second quarter | | 2,089,904 |
| | 101,894 |
| | 46,169 |
| | 44,908 |
| | 0.88 |
| | 0.87 |
| | 0.85 |
| | 0.85 |
|
| Third quarter | | 2,159,682 |
| | 118,863 |
| | 91,602 |
| | 90,842 |
| | 1.74 |
| | 1.73 |
| | 1.73 |
| | 1.72 |
|
| Fourth quarter | | 2,260,155 |
| | 116,013 |
| | 111,838 |
| | 111,977 |
| | 2.13 |
| | 2.12 |
| | 2.13 |
| | 2.12 |
|
| Full year | | $ | 8,413,946 |
| | $ | 389,469 |
| | $ | 286,922 |
| | $ | 284,613 |
| | $ | 5.46 |
| | $ | 5.43 |
| | $ | 5.41 |
| | $ | 5.38 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Earnings from Continuing Operations Before Income Taxes | | Earnings from Continuing Operations | | | | Earnings from Continuing Operations per Common Share | | Net Earnings per Common Share |
| | | Revenue | | | | Net Earnings | | Basic | | Diluted | | Basic | | Diluted |
| | | (In thousands, except per share amounts) |
| 2017 | | | | | | | | | | | | | | | | |
| First quarter | | $ | 1,748,163 |
| | 59,956 |
| | 38,279 |
| | 38,149 |
| | 0.72 |
| | 0.71 |
| | 0.72 |
| | 0.71 |
|
| Second quarter | | 1,793,214 |
| | 80,692 |
| | 51,343 |
| | 50,816 |
| | 0.97 |
| | 0.97 |
| | 0.96 |
| | 0.96 |
|
| Third quarter | | 1,848,529 |
| | 94,343 |
| | 58,913 |
| | 58,623 |
| | 1.12 |
| | 1.11 |
| | 1.11 |
| | 1.11 |
|
| Fourth quarter | | 1,939,693 |
| | 78,795 |
| | 642,480 |
| | 642,970 |
| | 12.21 |
| | 12.10 |
| | 12.22 |
| | 12.11 |
|
| Full year | | $ | 7,329,599 |
| | 313,786 |
| | 791,015 |
| | 790,558 |
| | 14.98 |
| | 14.87 |
| | 14.97 |
| | 14.87 |
|
| | | | | | | | | | | | | | | | | |
| 2016 | | | | | | | | | | | | | | | | |
| First quarter | | $ | 1,629,672 |
| | 88,708 |
| | 56,185 |
| | 55,794 |
| | 1.06 |
| | 1.05 |
| | 1.05 |
| | 1.04 |
|
| Second quarter | | 1,703,744 |
| | 116,779 |
| | 74,042 |
| | 73,750 |
| | 1.39 |
| | 1.38 |
| | 1.39 |
| | 1.38 |
|
| Third quarter | | 1,724,418 |
| | 131,698 |
| | 85,138 |
| | 84,752 |
| | 1.60 |
| | 1.59 |
| | 1.60 |
| | 1.59 |
|
| Fourth quarter | | 1,729,150 |
| | 69,196 |
| | 49,275 |
| | 48,181 |
| | 0.93 |
| | 0.92 |
| | 0.91 |
| | 0.91 |
|
| Full year | | $ | 6,786,984 |
| | 406,381 |
| | 264,640 |
| | 262,477 |
| | 4.98 |
| | 4.94 |
| | 4.94 |
| | $ | 4.90 |
|
Note: EPS amounts may not be additive due to rounding.
Quarterly and year-to-date computations of per share amounts are made independently; therefore, the sum of per-share amounts for the quarters may not equal per-share amounts for the year.
See
Refer to Note 4,5, “Restructuring Charges and Fees,Other Items, Net,” and Note 24,22, “Other Items Impacting Comparability,” for items included in earnings during 20172019 and 20162018.
Earnings from continuing operations and net earnings reflect the tax benefit related
Refer to Note 7, "Revenue Earning Equipment, Net" for further discussion on adjustments to the 2017 Tax Cutsestimated residual values on revenue earning equipment that impacted earnings in the third and Jobs Act that was signed into law in December 2017. See Note 13, "Income Taxes" for more information.fourth quarter of 2019.
RYDER SYSTEM, INC. AND SUBSIDIARES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
| | | | | | | Additions | | | | | | | | Additions | | | | |
| Description | | Balance at Beginning of Period | | Charged to Earnings | | Transferred from Other Accounts (1) | | Deductions (2) | | Balance at End of Period | | Balance at Beginning of Period | | Charged to Earnings | | Transferred from Other Accounts (1) | | Deductions (2) | | Balance at End of Period |
| | | (In thousands) | | (In thousands) |
| 2019 | | | | | | | | | | | |
| Accounts receivable allowance | | | $ | 17,182 |
| | 23,003 |
| | — |
| | 17,424 |
| | $ | 22,761 |
|
Self-insurance accruals (3) | | | $ | 357,526 |
| | 436,148 |
| | 86,832 |
| | 469,521 |
| | $ | 410,985 |
|
| Valuation allowance on deferred tax assets | | | $ | 16,186 |
| | 1,906 |
| | — |
| | 515 |
| | $ | 17,577 |
|
| 2018 | | | | | | | | | | | |
| Accounts receivable allowance | | | $ | 13,847 |
| | 10,890 |
| | — |
| | 7,555 |
| | $ | 17,182 |
|
Self-insurance accruals (3) | | | $ | 348,612 |
| | 359,528 |
| | 82,904 |
| | 433,518 |
| | $ | 357,526 |
|
| Valuation allowance on deferred tax assets | | | $ | 18,667 |
| | (534 | ) | | — |
| | 1,947 |
| | $ | 16,186 |
|
| 2017 | | | | | | | | | | | | | | | | | | | | |
| Accounts receivable allowance | | $ | 14,915 |
| | 12,335 |
| | — |
| | 13,403 |
| | 13,847 |
| | $ | 14,915 |
| | 12,335 |
| | — |
| | 13,403 |
| | $ | 13,847 |
|
Self-insurance accruals (3) | | $ | 336,901 |
| | 327,306 |
| | 74,153 |
| | 389,748 |
| | 348,612 |
| | $ | 336,901 |
| | 327,306 |
| | 74,153 |
| | 389,748 |
| | $ | 348,612 |
|
| Valuation allowance on deferred tax assets | | $ | 16,387 |
| | 2,213 |
| | — |
| | 67 |
| | 18,667 |
| | $ | 16,387 |
| | 2,213 |
| | — |
| | (67 | ) | | $ | 18,667 |
|
| 2016 | | | | | | | | | | | |
| Accounts receivable allowance | | $ | 15,560 |
| | 13,118 |
| | — |
| | 13,763 |
| | 14,915 |
| |
Self-insurance accruals (3) | | $ | 311,821 |
| | 324,673 |
| | 71,703 |
| | 371,296 |
| | 336,901 |
| |
| Valuation allowance on deferred tax assets | | $ | 14,991 |
| | 98 |
| | — |
| | (1,298 | ) | | 16,387 |
| |
| 2015 | | | | | | | | | | | |
| Accounts receivable allowance | | $ | 16,388 |
| | 11,172 |
| | — |
| | 12,000 |
| | 15,560 |
| |
Self-insurance accruals (3) | | $ | 298,853 |
| | 295,399 |
| | 68,999 |
| | 351,430 |
| | 311,821 |
| |
| Valuation allowance on deferred tax assets | | $ | 24,742 |
| | (1,150 | ) | | — |
| | 8,601 |
| | 14,991 |
| |
______________
| |
| (1) | Transferred from other accounts includes employee contributions made to the medical and dental self-insurance plans. |
| |
| (2) | Deductions represent write-offs, lease termination payments, insurance claim payments during the period and net foreign currency translation adjustments. |
| |
| (3) | Self-insurance accruals include vehicle liability, workers’ compensation, property damage, cargo and medical and dental, which comprise our self-insurance programs. Amounts charged to earnings include developments in prior years' selected loss development factors, which charged earnings by $18 million in 2019 and $1 million in 2018 and benefited earnings by $9 million in 2017 and charged earnings by $9 million and $4 million in 2016 and 2015, respectively. Prior year presentation of self-insurance accruals has been revised to reflect amounts charged to earnings and deductions consistent with current year presentation.2017. |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, 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 at December 31, 20172019, Ryder’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) were effective.
Management’s Report on Internal Control over Financial Reporting
Management’s Report on Internal Control over Financial Reporting and the Report of Independent Registered Certified Public Accounting Firm thereon are set out in Item 8 of Part II of this Form 10-K Annual Report.
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 December 31, 2017,2019, there were no changes in Ryder’s internal control over financial reporting that hashave materially affected or isare reasonably likely to materially affect such internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 with respect to executive officers is included within Item 1 in Part I under the caption “Executive Officers of the Registrant”“Information about our Executive Officers” of this Form 10-K Annual Report.
The information required by Item 10 with respect to directors, audit committee, audit committee financial experts and Section 16(a) beneficial ownership reporting compliance (to the extent applicable) is included under the captions “Election of Directors,” “Audit Committee”Committee,” and “Section“Delinquent Section 16(a) Beneficial Ownership Reporting Compliance”Reports,” respectively, in our definitive proxy statement, which will be filed with the Commission within 120 days after the close of the fiscal year, and is incorporated herein by reference.
Ryder has adopted a code of conduct applicable to all employees, including its Chief Executive Officer, Chief Financial Officer, Controller and Senior Financial Management. We will provide a copy of our code of conduct to anyone, free of charge, upon request through our Investor Relations Page, on our website at www.ryder.com.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is included under the captions “Compensation Discussion and Analysis,” “Executive Compensation,” “Compensation Committee,” “Compensation Committee Report on Executive Compensation” and “Director Compensation” in our definitive proxy statement, which will be filed with the Commission within 120 days after the close of the fiscal year, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 with respect to security ownership of certain beneficial owners and management is included under the captions “Security Ownership of Officers and Directors” and “Security Ownership of Certain Beneficial Owners” in our definitive proxy statement, which will be filed with the Commission within 120 days after the close of the fiscal year, and is incorporated herein by reference.
Securities Authorized for Issuance under Equity Compensation Plans
The following table includes information as of December 31, 2017,2019 about certain plans whichthat provide for the issuance of common stock in connection with the exercise of stock options and other share-based awards.
| | | Plans | | Number of Securities to be issued upon Exercise of Outstanding Options, Warrants and Rights | | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans Excluding Securities Reflected in Column (a) | | Number of Securities to be issued upon Exercise of Outstanding Options, Warrants and Rights | | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans Excluding Securities Reflected in Column (a) |
| | | (a) | | (b) | | (c) | | (a) | | (b) | | (c) |
| Equity compensation plans approved by security holders: | | | | | | | | | | | | |
| Broad based employee stock plans | | 2,250,700 |
| (1) | | $70.47 | (3) | | 2,528,128 |
| | 2,935,754 |
| (1) | | $69.69 | (3) | | 656,593 |
|
| Employee stock purchase plan | | — |
| | — |
| | 783,390 |
| | — |
| | — |
| | 356,649 |
|
| Non-employee directors' stock plans | | 207,066 |
| (2) | | — |
| | 38,236 |
| | 209,917 |
| (2) | | — |
| | 37,484 |
|
| Total | | 2,457,766 |
| | $70.47 | | 3,349,754 |
| | 3,145,671 |
| | $69.69 | | 1,050,726 |
|
_______________
| |
| (1) | Includes 1,717,1881,989,773 stock options, 231,900526,420 time-vested restricted stock awards, 93,16417,880 market-based restricted stock awards and 208,448401,681 performance-based restricted stock awards, which includes 109,35027,392 performance-based restricted stock rights not considered granted under accounting guidance for stock compensation. Refer to Note 21,19, "Share-Based Compensation Plans", for additional information. |
| |
| (2) | Includes 200,559204,079 time-vested restricted stock awards, as well as 6,5075,838 time-vested restricted stock awards awarded to non-executive directors and vested but not exercisable until six months after the director's retirement. |
| |
| (3) | Weighted-average exercise price of outstanding options excludes restricted stock awards and restricted stock units. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
The information required by Item 13 is included under the captions “Board of Directors” and “Related Person Transactions” in our definitive proxy statement, which will be filed with the Commission within 120 days after the close of the fiscal year, and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 is included under the caption “Ratification of Independent Auditor” in our definitive proxy statement, which will be filed with the Commission within 120 days after the close of the fiscal year, and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| |
| (a) | Items A through H and Schedule II are presented on the following pages of this Form 10-K Annual Report: |
|
| | |
| | | |
| | | Page No. |
| 1. Financial Statements for Ryder System, Inc. and Consolidated Subsidiaries: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
2. Consolidated Financial Statement Schedule for the Years Ended December 31, 2017, 20162019, 2018 and 20152017 | | |
| | |
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
Supplementary Financial Information consisting of selected quarterly financial data is included in Item 8 of this report.
3. Exhibits:
The following exhibits are filed with this report or, where indicated, incorporated by reference (Forms 10-K, 10-Q and 8-K referenced herein have been filed under the Commission’s file No. 1-4364). Ryder will provide a copy of the exhibits filed with this report at a nominal charge to those parties requesting them.
ITEM 16. FORM 10-K SUMMARY
None.
EXHIBIT INDEX
|
| | | | |
Exhibit Number | | Description |
| 3.1 | | | |
3.2 | | | |
| 3.2 | | | |
| 4.1 | | Ryder hereby agrees, pursuant to paragraph (b)(4)(iii) of Item 601 of Regulation S-K, to furnish the Commission with a copy of any instrument defining the rights of holders of long-term debt of Ryder, where such instrument has not been filed as an exhibit hereto and the total amount of securities authorized there under does not exceed 10% of the total assets of Ryder and its subsidiaries on a consolidated basis. | |
| 4.2 | | The First Supplemental Indenture between Ryder System, Inc. and The Chase Manhattan Bank (National Association) dated October 1, 1987, previously filed with the Commission as an exhibit to Ryder's Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated by reference into this report. | |
| 4.3 | | The Form of Indenture between Ryder System, Inc. and The Chase Manhattan Bank (National Association) dated as of May 1, 1987, and supplemented as of November 15, 1990 and June 24, 1992, filed with the Commission on July 30, 1992 as an exhibit to Ryder's Registration Statement on Form S-3 (No. 33-50232), is incorporated by reference into this report. | |
| 4.4 | | | |
10.1(a)4.5 | | | |
| 4.6 | | | |
| 10.1* | | | |
10.1(b)10.2* | | | |
10.1(c)10.3* | | | |
10.1(d)10.4* | | | |
10.1(e) | | | |
10.1(f) | | | |
10.1(g)10.5* | | | |
10.1(h)10.6* | | | |
10.1(i) | | | |
10.1(j) | | | |
10.1(k) | | | |
|
| | |
Exhibit Number | | Description |
10.1(l)10.7* | | |
10.1(m) | | |
10.1(n)10.8* | | |
10.1(o) | | |
10.1(p)10.9* | | |
10.1(q)10.10* | | |
10.1(r) | | |
10.1(s) | | |
10.1(t) | | |
10.1(u)10.11* | | |
10.1(v)10.12* | | |
10.1(w) | | |
10.1(x)10.13* | | |
10.1(y)10.14* | | |
10.1(z)10.15* | | |
10.1(aa)10.16* | | |
10.1(bb) | | |
|
| | |
Exhibit
Number
| | Description |
10.1(cc)10.17* | | |
10.2(a)10.18* | | |
| 10.19* | | |
| 10.20* | | |
10.2(b)10.21* | | |
10.310.22* | | |
10.410.23* | | |
10.5 |
| | |
Exhibit Number | | Description |
| 10.24* | | |
10.6(a)10.25* | | Global Revolving Credit Agreement dated as of June 8, 2011, by and among, Ryder System, Inc., certain subsidiaries of Ryder System, Inc., and the lenders and agents named therein, previously filed with the Commission as an exhibit to Ryder's Current Report on Form 8-K filed with the Commission on June 13, 2011, is incorporated by reference into this report. |
10.6(b) | | |
10.6(c) | | |
10.6(d) | | |
10.7 | | |
1210.26 | | |
| 10.27* | | |
| 10.28* | | |
| 10.29* | | |
| 10.30* | | |
| 10.31* | | |
| 10.32* | | |
| 10.33* | | |
| 10.34* | | |
| 10.35* | | |
| 10.36* | | |
| 10.37* | | |
| 10.38* | | |
| 10.39* | | |
| 21.1 | | |
| 23.1 | | |
|
| | | | |
24.1Exhibit Number | | Description |
| 24 | | |
| | Robert J. Eck | | David G. Nord |
| | Robert A. Hagemann | | Abbie J. Smith |
| | Michael F. Hilton | | E. Follin Smith |
| | Tamara L. Lundgren | | Dmitri L. Stockton |
| | Luis P. Nieto | | Hansel E. Tookes |
| | | | | |
| | Robert J. Eck | | Tamara L. Lundgren |
| | Michael F. Hilton | | Robert A. Hagemann |
| | Luis P. Nieto, Jr. | | E. Follin Smith |
| | Abbie J. Smith | | Hansel E. Tookes, II |
| | John M. Berra | | |
| |
| 31.1 | | |
| 31.2 | | |
| 32 | | |
| 101.INS | | Inline XBRL Instance Document. |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document. |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| 104 | | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101). |
| |
(b) | Executive Compensation Plans and Arrangements: |
Please refer to the description of Exhibits 10.1 through 10.6 set forth under Item 15(a)3 of this report for a listing of all management contracts and* Management contract or compensation plans and arrangements filed with this reportplan arrangement pursuant to Item 601(b)(10) of Regulation S-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
| | | |
| | | | |
| | | |
| Date: | February 16, 201827, 2020 | | RYDER SYSTEM, INC. |
| | | |
| | | | By: /s/ RobertROBERT E. SanchezSANCHEZ |
| | | | Robert E. Sanchez |
| | | | Chairman, President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | |
| | | | |
| Date: | February 16, 201827, 2020 | | By: /s/ ROBERT E. SANCHEZ |
| | | | Robert E. Sanchez |
| | | | Chairman, President and Chief Executive Officer |
| | | | (Principal Executive Officer) |
| | | |
| Date: | February 16, 201827, 2020 | | By: /s/ ART A. GARCIASCOTT T. PARKER |
| | | | Art A. GarciaScott T. Parker |
| | | | Executive Vice President and Chief Financial Officer |
| | | | (Principal Financial Officer) |
| | | | |
| Date: | February 16, 201827, 2020 | | By: /s/ FRANK MULLEN |
| | | | Frank Mullen |
| | | | Vice President and Controller |
| | | | (Principal Accounting Officer) |
| | | |
| Date: | February 16, 2018 | | By: JOHN M. BERRA * |
| | | John M. Berra |
| | | Director |
| | |
Date: | February 16, 201827, 2020 | | By: ROBERT J. ECK * |
| | | | Robert J. Eck |
| | | | Director |
| | | | |
| Date: | February 16, 201827, 2020 | | By: ROBERT A. HAGEMANN * |
| | | | Robert A. Hagemann |
| | | | Director |
| | | | |
| Date: | February 16, 201827, 2020 | | By: MICHAEL F. HILTON* |
| | | | Michael F. Hilton |
| | | | Director |
|
| | | |
| Date: | February 16, 201827, 2020 | | By: TAMARA L. LUNDGREN* |
| | | | Tamara L. Lundgren |
| | | | Director |
| | | | |
| Date: | February 16, 201827, 2020 | | By: LUIS P. NIETO, JR. * |
| | | | Luis P. Nieto, Jr. |
| | | | Director |
| | | | |
| Date: | February 16, 201827, 2020 | | By: DAVID G. NORD * |
| | | David G. Nord |
| | | Director |
| | | |
| Date: | February 27, 2020 | | By: ABBIE J. SMITH * |
| | | | Abbie J. Smith |
| | | | Director |
| | | |
| Date: | February 16, 201827, 2020 | | By: E. FOLLIN SMITH * |
| | | | E. Follin Smith |
| | | | Director |
| | | |
| Date: | February 16, 201827, 2020 | | By: DMITRI L. STOCKTON * |
| | | Dmitri L. Stockton |
| | | Director |
| | | |
| Date: | February 27, 2020 | | By: HANSEL E. TOOKES, II * |
| | | | Hansel E. Tookes, II |
| | | | Director |
| | | |
| Date: | February 16, 201827, 2020 | | *By: /s/ ALENA BRENNER |
| | | | Alena Brenner |
| | | | Attorney-in-Fact, pursuant to a power of attorney |
| | | | |
| | | | |
