UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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| |
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017MARCH 31, 2019
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)
|
| |
Florida | 59-0739250 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
11690 N.W. 105th Street | |
Miami, Florida 33178 | (305) 500-3726 |
(Address of principal executive offices, including zip code) | (Registrant’s telephone number, including area code) |
|
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock | R | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 þ NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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| | |
Large accelerated filer þ | | Accelerated filer ¨ |
Non-accelerated filer ¨(Do not check if a smaller reporting company) | | 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 Exchange Act) ¨ YES þ NO
The number of shares of Ryder System, Inc. Common Stock ($0.50 par value per share) outstanding at September 30, 2017March 31, 2019, was 52,947,715.53,300,205.
RYDER SYSTEM, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(unaudited)
| | | Three months ended September 30, | | Nine months ended September 30, | Three months ended March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 |
| (In thousands, except per share amounts) | (In thousands, except per share amounts) |
Lease and rental revenues | $ | 823,197 |
| | 803,006 |
| | $ | 2,387,801 |
| | 2,369,147 |
| |
Lease & related maintenance and rental revenues | | $ | 899,559 |
| | 824,991 |
|
Services revenue | 896,245 |
| | 801,004 |
| | 2,619,139 |
| | 2,345,922 |
| 1,132,048 |
| | 928,144 |
|
Fuel services revenue | 129,087 |
| | 120,408 |
| | 382,966 |
| | 342,765 |
| 148,720 |
| | 151,070 |
|
Total revenues | 1,848,529 |
| | 1,724,418 |
| | 5,389,906 |
| | 5,057,834 |
| 2,180,327 |
| | 1,904,205 |
|
| | | | | | | | | | |
Cost of lease and rental | 588,626 |
| | 557,901 |
| | 1,745,777 |
| | 1,665,693 |
| |
Cost of lease & related maintenance and rental | | 664,289 |
| | 615,605 |
|
Cost of services | 761,470 |
| | 658,793 |
| | 2,210,314 |
| | 1,936,636 |
| 971,690 |
| | 788,771 |
|
Cost of fuel services | 124,562 |
| | 116,904 |
| | 372,016 |
| | 331,283 |
| 143,275 |
| | 146,903 |
|
Other operating expenses | 28,445 |
| | 27,997 |
| | 87,122 |
| | 85,944 |
| 33,626 |
| | 32,975 |
|
Selling, general and administrative expenses | 216,653 |
| | 191,337 |
| | 620,041 |
| | 602,768 |
| 231,325 |
| | 207,828 |
|
Non-operating pension costs | 6,958 |
| | 7,468 |
| | 20,875 |
| | 29,698 |
| 6,462 |
| | 1,222 |
|
Used vehicle sales, net | (2,727 | ) | | (1,873 | ) | | 11,815 |
| | (33,002 | ) | 8,217 |
| | 7,431 |
|
Interest expense | 34,854 |
| | 37,440 |
| | 104,591 |
| | 112,597 |
| 55,336 |
| | 38,160 |
|
Miscellaneous income, net | (4,655 | ) | | (3,247 | ) | | (17,636 | ) | | (10,968 | ) | (8,222 | ) | | (2,510 | ) |
Restructuring and other items, net | | 6,178 |
| | 15,121 |
|
| 1,754,186 |
| | 1,592,720 |
| | 5,154,915 |
| | 4,720,649 |
| 2,112,176 |
| | 1,851,506 |
|
Earnings from continuing operations before income taxes | 94,343 |
| | 131,698 |
| | 234,991 |
| | 337,185 |
| 68,151 |
| | 52,699 |
|
Provision for income taxes | 35,430 |
|
| 46,560 |
| | 86,456 |
| | 121,820 |
| 22,261 |
|
| 15,386 |
|
Earnings from continuing operations | 58,913 |
|
| 85,138 |
| | 148,535 |
| | 215,365 |
| 45,890 |
|
| 37,313 |
|
Loss from discontinued operations, net of tax | (290 | ) | | (386 | ) | | (947 | ) | | (1,069 | ) | (574 | ) | | (427 | ) |
Net earnings | $ | 58,623 |
| | 84,752 |
| | $ | 147,588 |
| | 214,296 |
| $ | 45,316 |
| | 36,886 |
|
| | | | | | | | | | |
Earnings (loss) per common share — Basic | | | | | | | | | | |
Continuing operations | $ | 1.12 |
| | 1.60 |
| | $ | 2.81 |
| | 4.05 |
| $ | 0.87 |
| | 0.71 |
|
Discontinued operations | (0.01 | ) | | (0.01 | ) | | (0.02 | ) | | (0.02 | ) | (0.01 | ) | | (0.01 | ) |
Net earnings | $ | 1.11 |
| | 1.60 |
| | $ | 2.79 |
| | 4.03 |
| $ | 0.86 |
| | 0.70 |
|
| | | | | | | | | | |
Earnings (loss) per common share — Diluted | | | | | | | | | | |
Continuing operations | $ | 1.11 |
| | 1.59 |
| | $ | 2.79 |
| | 4.02 |
| $ | 0.87 |
| | 0.70 |
|
Discontinued operations | (0.01 | ) | | (0.01 | ) | | (0.02 | ) | | (0.02 | ) | (0.01 | ) | | (0.01 | ) |
Net earnings | $ | 1.11 |
| | 1.59 |
| | $ | 2.77 |
| | 4.00 |
| $ | 0.86 |
| | 0.70 |
|
| | | | | | | | | | |
Cash dividends declared per common share | $ | 0.46 |
| | 0.44 |
| | $ | 1.34 |
| | 1.26 |
| |
See accompanying notes to Consolidated Condensed Financial Statements.
consolidated condensed financial statements.
Note: EPS amounts may not be additive due to rounding.
RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
|
| | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In thousands) |
| | | | | | | |
Net earnings | $ | 58,623 |
| | 84,752 |
| | $ | 147,588 |
| | 214,296 |
|
| | | | | | | |
Other comprehensive income (loss): | | | | | | | |
| | | | | | | |
Changes in currency translation adjustment and other | 27,648 |
| | (19,296 | ) | | 70,991 |
| | (37,874 | ) |
| | | | | | | |
Amortization of pension and postretirement items | 7,960 |
| | 7,171 |
| | 23,741 |
| | 22,040 |
|
Income tax expense related to amortization of pension and postretirement items | (2,812 | ) | | (2,667 | ) | | (8,324 | ) | | (7,854 | ) |
Amortization of pension and postretirement items, net of taxes | 5,148 |
| | 4,504 |
| | 15,417 |
| | 14,186 |
|
| | | | | | | |
Change in net actuarial loss and prior service cost | 870 |
| | — |
| | 890 |
| | (17,367 | ) |
Income tax benefit related to change in net actuarial loss and prior service cost | (260 | ) | | — |
| | (80 | ) | | 6,345 |
|
Change in net actuarial loss and prior service cost, net of taxes | 610 |
| | — |
| | 810 |
| | (11,022 | ) |
| | | | | | | |
Other comprehensive income (loss), net of taxes | 33,406 |
| | (14,792 | ) | | 87,218 |
| | (34,710 | ) |
| | | | | | | |
Comprehensive income | $ | 92,029 |
| | 69,960 |
| | $ | 234,806 |
| | 179,586 |
|
|
| | | | | | |
| Three months ended March 31, |
| 2019 | | 2018 |
| (In thousands) |
| | | |
Net earnings | $ | 45,316 |
| | 36,886 |
|
| | | |
Other comprehensive income: | | | |
| | | |
Changes in currency translation adjustment and other | 15,762 |
| | 11,765 |
|
| | | |
Amortization of pension and postretirement items | 7,468 |
| | 7,215 |
|
Income tax expense related to amortization of pension and postretirement items | (2,014 | ) | | (1,609 | ) |
Amortization of pension and postretirement items, net of tax | 5,454 |
| | 5,606 |
|
| | | |
Other comprehensive income, net of taxes | 21,216 |
| | 17,371 |
|
| | | |
Comprehensive income | $ | 66,532 |
| | 54,257 |
|
See accompanying notes to Consolidated Condensed Financial Statements.consolidated condensed financial statements.
RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
| | | September 30, 2017 | | December 31, 2016 | March 31, 2019 | | December 31, 2018 |
| (Dollars in thousands, except per share amount) | (Dollars in thousands, except share amounts) |
Assets: | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | $ | 65,256 |
|
| 58,801 |
| $ | 62,787 |
|
| 68,111 |
|
Receivables, net of allowance of $13,192 and $14,915, respectively | 981,702 |
|
| 831,947 |
| |
Receivables, net of allowance of $17,497 and $17,182, respectively | | 1,221,769 |
|
| 1,242,058 |
|
Inventories | 71,328 |
|
| 69,529 |
| 80,082 |
|
| 79,228 |
|
Prepaid expenses and other current assets | 134,294 |
|
| 141,280 |
| 193,147 |
|
| 178,313 |
|
Total current assets | 1,252,580 |
| | 1,101,557 |
| 1,557,785 |
| | 1,567,710 |
|
Revenue earning equipment, net | 8,249,317 |
|
| 8,147,722 |
| 10,009,161 |
|
| 9,415,961 |
|
Operating property and equipment, net of accumulated depreciation of $1,187,188 and $1,128,040, respectively | 778,879 |
|
| 745,870 |
| |
Operating property and equipment, net of accumulated depreciation of $1,277,906 and $1,256,037, respectively | | 871,524 |
|
| 862,054 |
|
Goodwill | 395,120 |
|
| 386,772 |
| 474,742 |
|
| 475,206 |
|
Intangible assets, net of accumulated amortization of $55,934 and $51,578, respectively | 44,381 |
|
| 48,249 |
| |
Direct financing leases and other assets | 538,697 |
|
| 472,284 |
| |
Intangible assets, net of accumulated amortization of $67,145 and $65,048, respectively | | 57,068 |
|
| 59,075 |
|
Sales-type leases and other assets | | 978,705 |
|
| 967,802 |
|
Total assets | $ | 11,258,974 |
|
| 10,902,454 |
| $ | 13,948,985 |
|
| 13,347,808 |
|
| | | | | | |
Liabilities and shareholders’ equity: | | | | | | |
Current liabilities: | | | | | | |
Short-term debt and current portion of long-term debt | $ | 143,942 |
|
| 791,410 |
| $ | 1,117,489 |
|
| 937,131 |
|
Accounts payable | 557,216 |
|
| 445,470 |
| 839,792 |
|
| 731,876 |
|
Accrued expenses and other current liabilities | 529,171 |
|
| 507,189 |
| 797,298 |
|
| 847,739 |
|
Total current liabilities | 1,230,329 |
| | 1,744,069 |
| 2,754,579 |
| | 2,516,746 |
|
Long-term debt | 5,205,284 |
|
| 4,599,864 |
| 6,025,679 |
|
| 5,712,146 |
|
Other non-current liabilities | 872,071 |
|
| 817,565 |
| 1,399,273 |
|
| 1,402,625 |
|
Deferred income taxes | 1,776,226 |
|
| 1,688,681 |
| 1,202,650 |
|
| 1,179,723 |
|
Total liabilities | 9,083,910 |
| | 8,850,179 |
| 11,382,181 |
| | 10,811,240 |
|
| | | | | | |
Shareholders’ equity: | | | | | | |
Preferred stock, no par value per share — authorized, 3,800,917; none outstanding, September 30, 2017 or December 31, 2016 | — |
| | — |
| |
Common stock, $0.50 par value per share — authorized, 400,000,000; outstanding, September 30, 2017 — 52,947,715; December 31, 2016 — 53,463,118 | 26,474 |
| | 26,732 |
| |
Preferred stock, no par value per share — authorized, 3,800,917; none outstanding, March 31, 2019 or December 31, 2018 | | — |
| | — |
|
Common stock, $0.50 par value per share — authorized, 400,000,000; outstanding, March 31, 2019 — 53,300,205 December 31, 2018 — 53,116,485 | | 26,651 |
| | 26,559 |
|
Additional paid-in capital | 1,039,598 |
| | 1,032,549 |
| 1,086,714 |
| | 1,084,391 |
|
Retained earnings | 1,855,806 |
| | 1,827,026 |
| 2,343,857 |
| | 2,337,252 |
|
Accumulated other comprehensive loss | (746,814 | ) | | (834,032 | ) | (890,418 | ) | | (911,634 | ) |
Total shareholders’ equity | 2,175,064 |
|
| 2,052,275 |
| 2,566,804 |
|
| 2,536,568 |
|
Total liabilities and shareholders’ equity | $ | 11,258,974 |
|
| 10,902,454 |
| $ | 13,948,985 |
|
| 13,347,808 |
|
See accompanying notes to Consolidated Condensed Financial Statements.consolidated condensed financial statements.
RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
| | | Nine months ended September 30, | Three months ended March 31, |
| 2017 | | 2016 | 2019 | | 2018 |
| (In thousands) | (In thousands) |
Cash flows from operating activities from continuing operations: | | | | | | |
Net earnings | $ | 147,588 |
| | 214,296 |
| $ | 45,316 |
| | 36,886 |
|
Less: Loss from discontinued operations, net of tax | (947 | ) | | (1,069 | ) | (574 | ) | | (427 | ) |
Earnings from continuing operations | 148,535 |
| | 215,365 |
| 45,890 |
| | 37,313 |
|
Depreciation expense | 932,772 |
| | 878,173 |
| 377,357 |
| | 332,768 |
|
Goodwill impairment charge | | — |
| | 15,513 |
|
Used vehicle sales, net | 11,815 |
| | (33,002 | ) | 8,217 |
| | 7,431 |
|
Amortization expense and other non-cash charges, net | 27,933 |
| | 20,196 |
| 48,522 |
| | 32,061 |
|
Non-operating pension costs and share-based compensation expense | 35,509 |
| | 43,568 |
| 13,861 |
| | 6,563 |
|
Deferred income tax expense | 75,279 |
| | 109,191 |
| 19,729 |
| | 33,076 |
|
Collections on sales-type leases | | 34,017 |
| | 21,580 |
|
Changes in operating assets and liabilities: | | | | | | |
Receivables | (145,090 | ) | | (69,169 | ) | 26,181 |
| | 22,265 |
|
Inventories | (985 | ) | | (3,524 | ) | (756 | ) | | (253 | ) |
Prepaid expenses and other assets | 255 |
| | (24,241 | ) | (27,645 | ) | | (46,053 | ) |
Accounts payable | 40,734 |
| | 68,599 |
| 18,586 |
| | (30,851 | ) |
Accrued expenses and other non-current liabilities | 39,434 |
| | (20,094 | ) | (78,629 | ) | | (94,563 | ) |
Net cash provided by operating activities from continuing operations | 1,166,191 |
| | 1,185,062 |
| 485,330 |
| | 336,850 |
|
| | | | | | |
Cash flows from financing activities: | | | | |
Cash flows from financing activities from continuing operations: | | | | |
Net change in commercial paper borrowings and revolving credit facilities | 2,153 |
|
| 73,597 |
| 158,258 |
|
| 237,960 |
|
Debt proceeds | 873,302 |
|
| 298,254 |
| 799,300 |
|
| 446,500 |
|
Debt repaid | (938,160 | ) |
| (340,707 | ) | (478,411 | ) |
| (414,299 | ) |
Dividends on common stock | (71,564 | ) | | (67,651 | ) | (29,301 | ) | | (27,795 | ) |
Common stock issued | 10,387 |
| | 9,626 |
| (332 | ) | | 1,417 |
|
Common stock repurchased | (65,856 | ) | | (25,658 | ) | (14,156 | ) | | (12,921 | ) |
Debt issuance costs | (1,517 | ) | | (3,015 | ) | |
Net cash used in financing activities | (191,255 | ) | | (55,554 | ) | |
Debt issuance costs and other items | | (1,070 | ) | | (1,259 | ) |
Net cash provided by financing activities from continuing operations | | 434,288 |
| | 229,603 |
|
| | | | | | |
Cash flows from investing activities: | | | | |
Cash flows from investing activities from continuing operations: | | | | |
Purchases of property and revenue earning equipment | (1,312,845 | ) | | (1,511,359 | ) | (1,026,711 | ) | | (662,744 | ) |
Sales of revenue earning equipment | 289,432 |
| | 331,720 |
| 101,549 |
| | 89,023 |
|
Sales of operating property and equipment | 12,541 |
| | 6,623 |
| 1,918 |
| | 933 |
|
Acquisitions | (7,240 | ) | | — |
| |
Collections on direct finance leases and other items | 54,227 |
| | 60,229 |
| |
Changes in restricted cash | 1,694 |
| | 4,203 |
| |
Net cash used in investing activities | (962,191 | ) | | (1,108,584 | ) | |
Net cash used in investing activities from continuing operations | | (923,244 | ) | | (572,788 | ) |
| | | | | | |
Effect of exchange rate changes on cash | (5,226 | ) | | (5,567 | ) | |
Increase in cash and cash equivalents from continuing operations | 7,519 |
| | 15,357 |
| |
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | | (1,551 | ) | | 3,519 |
|
Decrease in cash, cash equivalents, and restricted cash from continuing operations | | (5,177 | ) | | (2,816 | ) |
| | | | | | |
Decrease in cash and cash equivalents from discontinued operations | (1,064 | ) | | (1,308 | ) | |
| | | | | | |
Increase in cash and cash equivalents | 6,455 |
| | 14,049 |
| |
Cash and cash equivalents at January 1 | 58,801 |
| | 60,945 |
| |
Cash and cash equivalents at September 30 | $ | 65,256 |
| | 74,994 |
| |
Decrease in cash, cash equivalents, and restricted cash from discontinued operations | | (147 | ) | | (348 | ) |
| | | | |
Decrease in cash, cash equivalents, and restricted cash | | (5,324 | ) | | (3,164 | ) |
Cash, cash equivalents, and restricted cash at January 1 | | 68,111 |
| | 83,022 |
|
Cash, cash equivalents, and restricted cash at March 31 | | $ | 62,787 |
| | 79,858 |
|
See accompanying notes to Consolidated Condensed Financial Statements.consolidated condensed financial statements.
RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred Stock | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | |
| | Amount | | Shares | | Par | | | | | Total |
| | (Dollars in thousands, except share amounts) |
Balance at January 1, 2019 | | $ | — |
| | 53,116,485 |
| | $ | 26,559 |
| | 1,084,391 |
| | 2,337,252 |
| | (911,634 | ) | | 2,536,568 |
|
Comprehensive income | | — |
| | — |
| | — |
| | — |
| | 45,316 |
| | 21,216 |
| | 66,532 |
|
Common stock dividends declared and paid—$0.54 per share | | — |
| | — |
| | — |
| | — |
| | (29,207 | ) | | — |
| | (29,207 | ) |
Common stock issued under employee stock option and stock purchase plans (1) | | — |
| | 409,294 |
| | 205 |
| | (547 | ) | | — |
| | — |
| | (342 | ) |
Benefit plan stock sales (2) | | — |
| | 270 |
| | — |
| | 10 |
| | — |
| | — |
| | 10 |
|
Common stock repurchases | | — |
| | (225,844 | ) | | (113 | ) | | (4,539 | ) | | (9,504 | ) | | — |
| | (14,156 | ) |
Share-based compensation | | — |
| | — |
| | — |
| | 7,399 |
| | — |
| | — |
| | 7,399 |
|
Balance at March 31, 2019 | | $ | — |
| | 53,300,205 |
| | $ | 26,651 |
| | 1,086,714 |
| | 2,343,857 |
| | (890,418 | ) | | 2,566,804 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred Stock | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | |
| | Amount | | Shares | | Par | | | | | Total |
| | (Dollars in thousands, except share amounts) |
Balance at January 1, 2018 | | $ | — |
| | 52,955,314 |
| | $ | 26,478 |
| | 1,051,017 |
| | 2,086,918 |
| | (710,836 | ) | | 2,453,577 |
|
Comprehensive income | | — |
| | — |
| | — |
| | — |
| | 36,886 |
| | 17,371 |
| | 54,257 |
|
Common stock dividends declared and paid—$0.52 per share | | — |
| | — |
| | — |
| | — |
| | (27,695 | ) | | — |
| | (27,695 | ) |
Common stock issued under employee stock option and stock purchase plans (1) | | — |
| | 310,173 |
| | 155 |
| | 1,195 |
| | — |
| | — |
| | 1,350 |
|
Benefit plan stock sales (2) | | — |
| | 715 |
| | — |
| | 67 |
| | — |
| | — |
| | 67 |
|
Common stock repurchases | | — |
| | (171,304 | ) | | (86 | ) | | (3,354 | ) | | (9,482 | ) | | — |
| | (12,922 | ) |
Share-based compensation | | — |
| | — |
| | — |
| | 5,341 |
| | — |
| | — |
| | 5,341 |
|
Adoption of new accounting standard (3) | | — |
| | — |
| | — |
| | — |
| | 100,567 |
| | (100,567 | ) | | — |
|
Balance at March 31, 2018 | | $ | — |
| | 53,094,898 |
| | $ | 26,547 |
| | 1,054,266 |
| | 2,187,194 |
| | (794,032 | ) | | 2,473,975 |
|
__________________
| |
(1) | Net of common shares delivered as payment for the exercise price or to satisfy the holders’ withholding tax liability upon exercise of options. |
| |
(2) | Represents open-market transactions of common shares by the trustee of Ryder’s deferred compensation plans. |
| |
(3) | Reflects the impact of adopting ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income in 2018, which resulted in a reclassification of stranded tax effects caused by the 2017 Tax Cuts and Jobs Act from accumulated other comprehensive loss to retained earnings. |
See accompanying notes to consolidated condensed financial statements.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. GENERAL
Interim Financial Statements
The accompanying unaudited Consolidated Condensed Financial Statements include the accounts of Ryder System, Inc. (Ryder) and all entities in which Ryder has a controlling voting interest (subsidiaries) and variable interest entities (VIEs) required to be consolidated in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The accompanying unaudited Consolidated Condensed Financial Statements have been prepared in accordance with the accounting policies described in our 20162018 Annual Report on Form 10-K and should be read in conjunction with the Consolidated Financial Statements and notes thereto.thereto except for the update to our revenue recognition and leases significant accounting policies discussed below. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included and the disclosures herein are adequate. The operating results for interim periods are unaudited and are not necessarily indicative of the results that can be expected for a full year.
Update to Significant Accounting Policies
Our significant accounting policies are detailed in "Note 1: Summary of Significant Accounting Policies" within Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2018. As discussed in Note 2, "Recent Accounting Pronouncements," effective January 1, 2019, we adopted Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) using the modified retrospective transition comparative method. We have recast all prior period amounts in this Form 10-Q to conform to the current period presentation based on our adoption of this new accounting standard. Refer to Note 2, "Recent Accounting Pronouncements," for additional information on the revised amounts. The significant changes to our accounting policies as a result of adopting Topic 842 are discussed below.
Revenue Recognition
Lease & related maintenance and rental revenues includes ChoiceLease and commercial rental revenues from our Fleet Management Solutions (FMS) business segment. We offer a full service lease as well as a lease with more flexible maintenance options under our ChoiceLease product line, which are marketed, priced and managed as bundled lease arrangements, and include equipment, service and financing components. We do not offer a stand-alone unbundled lease of new vehicles. We offer rental of vehicles under our commercial rental product line, which allows customers to supplement their fleet of vehicles on a short-term basis.
Our ChoiceLease arrangements include the lease of a vehicle (lease component) and the executory agreement for the maintenance, insurance, taxes and other services (non-lease components) related to the leased vehicles during the lease term. We generally lease new vehicles to our customers. Arrangement consideration is allocated between the lease component and non-lease component based on management's best estimate of the relative standalone selling price of each component. Our ChoiceLease arrangements provide for a fixed charge billing and a variable charge billing based on mileage or time usage. Fixed charges are typically billed at the beginning of the month and variable charges are typically billed a month in arrears. Revenue from the lease component of ChoiceLease agreements is recognized based on the classification of the arrangement, typically as either an operating or a sales-type lease. Our commercial rental arrangements include the short-term rental of a vehicle (one day up to one year in length). All of our rental arrangements are classified as operating leases and revenue is recognized on a straight-line basis.
The majority of our leases are classified as operating leases and we recognize revenue for the lease component of the product line on a straight-line basis. The non-lease component for maintenance services is accounted for in accordance with revenue guidance in Revenue from Contracts with Customers (Topic 606). Maintenance services are not typically performed evenly over the life of a ChoiceLease contract as the level of maintenance provided generally increases as vehicles age. We recognize maintenance revenue using an input method, consistent with the estimated pattern of the costs to maintain the underlying vehicles. This will generally result in the recognition of a contract liability for some portion of the customer's payments allocated to the maintenance service component of the arrangement. Included in lease & related maintenance and rental revenues is non-lease revenue from maintenance services recognized in accordance with Topic 606 of $239 million and $223 million for the three months ended March 31, 2019 and 2018, respectively.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
Effective with the adoption of Topic 842, we recorded an after-tax cumulative effect adjustment to decrease retained earnings as of January 1, 2017, by approximately $315 million primarily to recognize a contract liability (deferred revenue) related to maintenance services, and partially offset by costs capitalized related to sales commissions.
We recorded deferred revenue of approximately $564 million and $566 million as of March 31, 2019 and December 31, 2018, respectively, related to the maintenance services component of our ChoiceLease product line. Refer to Note 3, "Revenue," and Note 5, "Accrued Expenses and Other Liabilities." In addition, we recorded an asset of approximately $92 million and $93 million as of March 31, 2019 and December 31, 2018, respectively; related to incremental sales commissions paid to our sales force as a result of obtaining ChoiceLease contracts. Capitalized sales commissions includes initial direct costs of our leases in the amount of $53 million at March 31, 2019 and December 31, 2018, respectively, accounted for in accordance with Topic 842. Refer to Note 3, "Revenue."
Lease and rental agreements do not usually provide for scheduled rent increases or escalations. However, most lease agreements allow for rate changes based upon changes in the Consumer Price Index (CPI). ChoiceLease and rental agreements also provide for vehicle usage charges based on a time charge and/or a fixed per-mile charge. The time charge, the per-mile charge and the changes in rates attributed to changes in the CPI are considered contingent rentals and are not considered fixed or determinable until the CPI change or the equipment usage occurs. This consideration is allocated to the lease and non-lease components of the contract as it is billed to the customer based on the allocation determined at contract inception. Variable consideration allocated to the lease component is recognized in revenue on a straight-line basis for the remainder of the contract term and variable consideration allocated to the non-lease component is recognized in revenue using an input method, consistent with the estimated pattern of maintenance costs for the remainder of the contract term.
Leases not classified as operating leases are generally considered sales-type leases. We recognize revenue for sales-type leases using the effective interest method, which provides a constant periodic rate of return on the outstanding investment in the lease. We generally lease new vehicles under our sales-type lease arrangements. Therefore, there is generally not a difference between the net investment in the lease and the carrying value of the vehicles, and we do not recognize selling profit or loss at lease commencement. Revenue is recognized net of amounts collected from customers for taxes, such as sales tax, that are remitted to the applicable taxing authorities.
Significant Judgments and Estimates
Allocating consideration between lease and non-lease components in our ChoiceLease arrangements requires significant judgment. We do not sell the components of our ChoiceLease product offering on a stand-alone basis. Judgment is required to determine the standalone selling prices of the lease and non-lease components in order to allocate the consideration on a relative standalone selling price basis.
We determine the standalone price of the lease component using the projected cash flows of the lease assuming a certain targeted return. We consider a number of factors to determine the targeted return, including the net present value of the projected cash flows in a ChoiceLease arrangement discounted at our weighted average cost of capital.
Our ChoiceLease arrangements include maintenance as a non-lease component of the contract. We determine the standalone price of the maintenance component using an expected cost plus margin approach. The expected costs are based on our historical costs of providing maintenance services in our ChoiceLease arrangements. The margin is based on historical margin percentages for our full service maintenance contracts in the SelectCare product line, as the maintenance performance obligation in those contracts is similar to maintenance in our ChoiceLease arrangements. Full service maintenance arrangements in SelectCare are priced based on targeted margin percentages for new and used vehicles by type of vehicle (trucks, tractors, and trailers), considering the fixed and variable costs of providing maintenance services. Certain ChoiceLease arrangements include liability and/or physical damage insurance coverage to our customers. We charge a separate fixed monthly rate for these insurance offerings, which represents the standalone selling price.
We allocate the contract consideration (excluding insurance) between the lease and maintenance components based on the relative standalone selling prices of each of those services and allocate contract consideration for insurance based on the price of insurance, which is priced separately. If the lessee elects to obtain insurance coverage from us, the consideration for the fixed monthly rate is allocated to the insurance performance obligations.
Variable consideration, such as billings for mileage and from changes in CPI, is excluded from the allocation of consideration at the inception of the contract. Revenues associated with licensing and operating taxes that are billed as incurred
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
based on the contract arrangement are also excluded from the allocation of consideration at contract inception and allocated as earned. The variable consideration and licensing and operating tax revenues are allocated to the lease and maintenance components based on the same allocation percentages at contract inception (or the most recent contract modification) when earned.
Contract Balances
We do not have material contract assets as we generally invoice customers as we perform services. Contract receivables are recorded in “Receivables, net” in the Consolidated Condensed Balance Sheets. Payment terms vary by contract type, although terms generally include a requirement of payment within 15 to 90 days. As a practical expedient, we do not assess whether a contract has a significant financing component as the period between the receipt of customer payment and the transfer of service to the customer is less than a year.
Our contract liabilities consist of deferred revenue related to maintenance services. We record deferred revenues when cash payments are received or due in advance of our performance, including amounts that are refundable. We classify deferred revenue for performance obligations we expect to perform within 12 months as current liabilities and for performance obligations to be performed later than 12 months as other non-current liabilities. Revenue is recognized upon satisfaction of the performance obligation.
As practical expedients, 1) we do not disclose information about remaining performance obligations that are part of a contract that has an original expected duration of one year or less, and 2) we do not disclose information about remaining performance obligations when we have the right to invoice the customer and the revenue recognized corresponds directly with the value to the customer of our performance completed to date.
Leases
Leases as Lessor
We lease revenue earning equipment to customers for periods ranging from three to seven years for trucks and tractors and up to ten years for trailers. We determine if an arrangement is or contains a lease at inception. The standard lease agreement for revenue earning equipment provides both parties the right to terminate; therefore, we evaluate whether the lessee is reasonably certain to exercise the termination option in order to determine the appropriate lease term. If we terminate, the customer has the right (but not obligation) to purchase the vehicle. If the customer terminates, we have the option to require the customer to purchase the vehicle or pay a termination penalty. Our leases generally do not provide either party an option to renew the lease. We also rent revenue earning equipment to customers on a short-term basis, from one day up to one year in length. From time to time, we may also lease facilities to third parties. The majority of our leases are classified as operating leases. However, some of our revenue earning equipment leases are classified as sales-type leases.
Our determination of the residual values (i.e., the price at which we ultimately expect to dispose of revenue earning equipment) is established with a long-term view considering historical market price changes, current and expected future market price trends, expected lives of vehicles and extent of alternative uses. Factors that could cause actual results to materially differ from estimates include, but are not limited to, unforeseen changes in technology innovations, sudden changes in supply and demand, and competitor pricing. We have developed disciplines related to the management and maintenance of our leased vehicles designed to manage the risk associated with the residual values of our revenue earning equipment. In addition, we also monitor market trends throughout the year and assess residual values of vehicles expected to be sold in the near term and may adjust residual values for these vehicles.
Leases as Lessee
We lease facilities, revenue earning equipment, material handling equipment, automated washing machines, vehicles and office equipment. We determine if an arrangement is or contains a lease at inception. Effective with the adoption of Topic 842, we have established right-of-use (ROU) assets, which represent our right to use an underlying asset for the lease term and lease liabilities, which represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate of return, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. Operating lease ROU assets also exclude lease incentives received. We pay variable lease charges related
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
to property taxes, insurance and maintenance as well as changes in CPI for leased facilities; equipment usage for revenue earning equipment, automated washing machines, vehicles and office equipment; and hours of operation for material handling equipment. For leases with a term of 12 months or less, with the exception of our real estate leases, we recognize lease payments in our income statement on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred.
Lease terms for the facilities are generally three to five years with one or more five-year renewal options and the lease terms for revenue earning equipment, material handling equipment, automated washing machines and vehicles typically range from three to seven years typically with no extension options. For purposes of calculating ROU assets and operating lease liabilities, lease terms may be deemed to include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Macroeconomic conditions is the primary factor used to estimate whether an option to extend a lease term will be exercised or not. None of our leasing arrangements contain restrictive financial covenants. Certain of our material handling equipment leases have residual value guarantees. We recorded operating lease ROU assets and finance lease assets totaling approximately $235 million and $245 million as of March 31, 2019 and December 31, 2018, respectively, related to leases as lessee. Refer to Note 6, "Leases".
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
2. RECENT ACCOUNTING PRONOUNCEMENTS
Cloud Computing Arrangements
In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal Use Software (Topic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which amends ASC 350-40 to address a customer’s accounting for implementation costs incurred in a cloud computing arrangement (CCA) that is a service contract. ASU 2018-15 aligns the accounting for costs incurred to implement a CCA that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. The standard is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. Entities are permitted to apply either a retrospective or prospective approach to adopt the guidance. We are currently evaluating the impact of the adoption of this update on our consolidated financial position, results of operations, and cash flows.
Derivatives and Hedging
In August 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.
2017-12, Derivatives and Hedging (Topic 815), which simplifies and clarifies the accounting and disclosure for hedging
activities by more closely aligning the results of cash flow and fair value hedge accounting with the risk management activities of an entity. The amendments in this update are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. We do not expectadopted this standard to have anduring the first quarter of 2018 and it did not impact on our consolidated financial position, results of operations 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 amendments 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, 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, the FASB issued ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost 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 Condensed Statements of Earnings for both the current and prior year periods.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
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 cash payments in the statement of cash flows. In November 2016, the FASB issued additional guidance related to the statement of cash flows, which requires companies to explain the change during the period in the total of cash, cash equivalents, and restricted cash 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.
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), Topic 842, which sets out the principles for the identification, measurement, recognition, measurement, presentation and disclosure of leases. The FASB issued a number of subsequent updates to the standard. Topic 842 impacts the accounting for both lessors and lessees. We have adopted the standard effective January 1, 2019, using the modified retrospective transition method and initial application date of January 1, 2017. For all our facilities and equipment that we lease, we have elected the practical expedient to combine lease and non-lease components. For our existing operating and finance leases that commenced before the date of initial application, we have made an accounting policy election, as lessee, to use the incremental borrowing rate for our leases considering the remaining lease term and remaining minimum rental payments. After lease commencement of our operating leases as lessee, unless the ROU assets are impaired, we have made an accounting policy election to subsequently measure operating lease ROU assets by amortizing the ROU assets calculated as the difference between the straight line cost for the period (including amortization of initial direct costs) and the periodic accretion of the lease liability using the effective interest method. In calculating the change in ROU assets from a lease modification that decreases our rights as lessee to use one or more underlying assets, we have made an accounting policy election of remeasuring the ROU asset based on how much of the original right of use remains after modification.
The new standard requires lessors to identify and evaluate the lease and non-lease components in arrangements containing a lease, provides clarification on the scope of non-lease components and provides more guidance on how to identify and separate the components. From a lessor perspective, the adoption of the new lease standard primarily impacts our ChoiceLease product line, which includes a vehicle lease as well as maintenance and other services.
The standard requires lessees to classify leases as either finance or operating leases. This classification will determinedetermines whether the related expense will beis recognized based on asset amortization and interest on the obligation (finance leases) or on a straight-line basis over the term of the lease. A lessee is also required to recordlease (operating lease). We recorded a right-of-useROU asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. LeasesWe have elected the practical expedient in Topic 842 to not apply these recognition requirements to leases with a term of 12 months or less will be accounted for similar to existing guidance for operatingwith the exception of our real estate 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 separateInstead we recognize 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 forpayments in accordance with the revenue recognition guidance in ASU No. 2014-09. The adoption of the new lease standard will primarily impact our ChoiceLease product line, which includes a vehicle lease as well as maintenance and other services related to the vehicle. We will generally continue to recognize revenue for the lease portion of the product lineprofit or loss on a straight-line basis. Revenue from maintenance services will be recognized atbasis over the time the maintenance services are performed, which will generally require the deferral of some portion of the customer'slease term and variable lease payments when received, as maintenance services are not performed evenly overin the life of a ChoiceLease contract. We will adoptperiod in which 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 sheetobligation for 2017 and restate all prior periods presented (2017 and 2018). We expect the cumulative-effect adjustment will have a significant impact on our consolidated financial position. We continue to evaluate the impact of adoption of this standard on our results of operations. We do not expect the adoption of this standard to have an impact on our cash flows.those payments is incurred.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which together with 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. In June 2017, the FASB provided further clarification on the interaction of the transition provisions of the new revenue standard and the new lease standard. We will adopt the revenue standard on January 1, 2018, using the full retrospective transition method.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
Adoption of the new lease standard impacted our previously reported Consolidated Condensed Statements of Earnings and Comprehensive Income results as follows (in millions, except per share amounts): |
| | | | | | | | | | | | |
| Three months ended March 31, 2018 |
| | | | | | | |
| As Previously | | Lessor | | Lessee and Other | | |
| Reported | | Adjustments (1) | | Adjustments (1) | | As Revised |
Lease & related maintenance and rental revenues | $ | 824.3 |
| | 0.5 |
| | 0.3 |
| | 825.0 |
|
Total revenues
| 1,903.5 |
| | 0.5 |
| | 0.3 |
| | 1,904.2 |
|
Cost of lease & related maintenance and rental | 619.2 |
| | (3.6 | ) | | — |
| | 615.6 |
|
Cost of services (2) | 787.2 |
| | — |
| | 1.5 |
| | 788.8 |
|
Other operating expenses | 33.5 |
| | — |
| | (0.5 | ) | | 33.0 |
|
Selling, general and administrative expenses (2) | 208.6 |
| | (0.4 | ) | | (0.4 | ) | | 207.8 |
|
Interest expense | 37.8 |
| | — |
| | 0.4 |
| | 38.2 |
|
Restructuring and other items, net (2) | 16.0 |
| | — |
| | (0.9 | ) | | 15.1 |
|
Earnings from continuing operations before income taxes
| 48.1 |
| | 4.5 |
| | 0.1 |
| | 52.7 |
|
Provision for income taxes | 14.2 |
| | 1.2 |
| | — |
| | 15.4 |
|
Earnings from continuing operations
| 33.9 |
| | 3.3 |
| | 0.1 |
| | 37.3 |
|
Net earnings | 33.5 |
| | 3.3 |
| | 0.1 |
| | 36.9 |
|
| | | | | | | |
Comprehensive income | 51.0 |
| | 3.4 |
| | — |
| | 54.3 |
|
| | | | | | | |
Earnings per common share - Basic | | | | | | | |
Continuing operations
| $ | 0.65 |
| | 0.06 |
| | — |
| | 0.71 |
|
Net earnings
| $ | 0.64 |
| | 0.06 |
| | — |
| | 0.70 |
|
| | | | | | | |
Earnings per common share - Diluted | | | | | | | |
Continuing operations | $ | 0.64 |
| | 0.06 |
| | — |
| | 0.70 |
|
Net earnings | $ | 0.63 |
| | 0.06 |
| | — |
| | 0.70 |
|
————————————
| |
(1) | Amounts include the correction of a prior period error. The primary components of the error correction are a reduction of "Lease & related maintenance and rental revenues" of approximately $4.7 million and an offsetting reduction in depreciation expense (included in "Cost of lease & related maintenance and rental") of approximately $4.7 million. We determined certain lessor arrangements of revenue earning equipment historically accounted for as operating leases should have been accounted for as direct financing leases. Additionally, we evaluated our leases for classification and determined that certain lessee arrangements, primarily real estate leases, historically accounted for as operating leases should have been accounted for as capital leases. We concluded these errors were not material to any of our previously issued consolidated financial statements. |
| |
(2) | Adjustments primarily reflects the reclassification of our Singapore operations into "Restructuring and other items, net," that we will shut down during 2019. |
Note: Amounts may not be additive due to rounding.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
This standard will primarily impact lease revenue from our ChoiceLease product line, specifically the non-lease component (primarily maintenance services). However, based on the FASB's clarification guidance issued in June 2017, on the interactionAdoption of the transition provisions of the new revenue standard and the new lease standard we will continueimpacted our previously reported Consolidated Condensed Balance Sheet as follows (in millions):
|
| | | | | | | | | | | | | | | |
| | | | December 31, 2018 |
| | | | | | | |
| | | | As Previously | | Lessor | | Lessee | | |
| | | | Reported | | Adjustments (1) | | Adjustments (1) | | As Revised |
Receivables, net | $ | 1,219.4 |
| | 22.6 |
| | — |
| | 1,242.1 |
|
Prepaid expenses and other current assets | 201.6 |
| | (23.3 | ) | | — |
| | 178.3 |
|
Total current assets | 1,568.4 |
| | (0.7 | ) | | — |
| | 1,567.7 |
|
Revenue earning equipment, net | 9,498.0 |
| | (84.2 | ) | | 2.2 |
| | 9,416.0 |
|
Operating property and equipment, net | 843.8 |
| | — |
| | 18.2 |
| | 862.1 |
|
Sales-type leases and other assets | 606.6 |
| | 156.8 |
| | 204.3 |
| | 967.8 |
|
Total assets | 13,051.1 |
| | 72.0 |
| | 224.7 |
| | 13,347.8 |
|
Short-term debt and current portion of long term-debt | 930.0 |
| | — |
| | 7.2 |
| | 937.1 |
|
Accrued expenses and other current liabilities | 630.5 |
| | 145.1 |
| | 72.2 |
| | 847.7 |
|
Total current liabilities | 2,292.3 |
| | 145.1 |
| | 79.3 |
| | 2,516.7 |
|
Long-term debt | 5,693.6 |
| | — |
| | 18.5 |
| | 5,712.1 |
|
Other non-current liabilities | 849.9 |
| | 421.2 |
| | 131.5 |
| | 1,402.6 |
|
Deferred income taxes | 1,304.8 |
| | (124.6 | ) | | (0.5 | ) | | 1,179.7 |
|
Total liabilities | 10,140.8 |
| | 441.7 |
| | 228.8 |
| | 10,811.2 |
|
Retained earnings | 2,710.7 |
| | (369.6 | ) | | (3.8 | ) | | 2,337.3 |
|
Accumulated other comprehensive loss | (911.3 | ) | | (0.1 | ) | | (0.2 | ) | | (911.6 | ) |
Total shareholders' equity | 2,910.3 |
| | (369.7 | ) | | (4.1 | ) | | 2,536.6 |
|
Total liabilities and shareholders' equity | 13,051.1 |
| | 72.0 |
| | 224.7 |
| | 13,347.8 |
|
————————————
| |
(1) | Amounts include the correction of a prior period error. The primary components of the error correction are an increase in "Receivables, net" of approximately $24 million, an increase in sales-type leases and other assets of approximately $65 million and a reduction in "Revenue earning equipment, net" of $83 million. We determined certain lessor arrangements of revenue earning equipment historically accounted for as operating leases should have been accounted for as direct financing leases. Additionally, we evaluated our leases for classification and determined that certain lessee arrangements, primarily real estate leases, historically accounted for as operating leases should have been accounted for as capital leases. We concluded these errors were not material to any of our previously issued consolidated financial statements. |
Note: Amounts may not be additive due to apply the existing lease accounting guidance to our lease revenue upon adoptionrounding.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
Adoption of the revenuenew lease standard on January 1, 2018 and will adopt the new revenue standard for the maintenance and other services componentsimpacted our previously reported Consolidated Condensed Statements of our ChoiceLease product line effective January 1, 2019.Cash Flows as follows (in millions):
|
| | | | | | | | |
| Three months ended March 31, 2018 |
| As Previously Reported | | New Lease Standard Adjustments | | As Revised |
Net earnings | 33.5 |
| | 3.4 |
| | 36.9 |
|
Earnings from continuing operations | 33.9 |
| | 3.4 |
| | 37.3 |
|
Depreciation expense | 336.7 |
| | (3.9 | ) | | 332.8 |
|
Amortization expense and other non-cash charges, net | 13.6 |
| | 18.5 |
| | 32.1 |
|
Deferred income tax expense | 31.9 |
| | 1.2 |
| | 33.1 |
|
Collections on sales-type leases and other items | — |
| | 21.6 |
| | 21.6 |
|
Changes in operating assets and liabilities: | | |
|
| | |
Prepaid expenses and other assets | (26.0 | ) | | (20.1 | ) | | (46.1 | ) |
Accrued expenses and other non-current liabilities | (95.9 | ) | | 1.3 |
| | (94.6 | ) |
Net cash provided by operating activities from continuing operations | 314.9 |
| | 22.0 |
| | 336.9 |
|
Debt repaid | (412.1 | ) | | (2.2 | ) | | (414.3 | ) |
Net cash provided by financing activities from continuing operations | 231.8 |
| | (2.2 | ) | | 229.6 |
|
Collections on direct finance leases and other items | 19.7 |
| | (19.7 | ) | | — |
|
Net cash used in investing activities from continuing operations | (553.0 | ) | | (19.7 | ) | | (572.8 | ) |
| | | | | |
With respect
Note: Amounts may not be additive due to other revenue sources, we continue to assess the impact of the following: (1) timing of recognition of variable consideration; (2) principal versus agent considerations; and (3) accounting for costs to obtain and fulfill contracts. We do not expect the adoption of this standard as it relates to other revenue sources to have a material impact on our consolidated financial position, results of operations or cash flows.rounding.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
3. ACQUISITIONSREVENUE
On September 29, 2017,Disaggregation of Revenue
The following tables disaggregate our revenue by primary geographical market, major product/service lines, and industry. During 2019, we adopted Topic 842 and have retrospectively adjusted 2018 for the impact of this new standard.
Primary Geographical Markets
|
| | | | | | | | | | | | | | | |
| Three months ended March 31, 2019 |
| FMS | | DTS | | SCS | | Eliminations | | Total |
| (In thousands) |
United States | $ | 1,198,943 |
| | 349,621 |
| | 529,393 |
| | (151,163 | ) | | 1,926,794 |
|
Canada | 74,014 |
| | — |
| | 49,708 |
| | (5,401 | ) | | 118,321 |
|
Europe | 78,642 |
| | — |
| | — |
| | — |
| | 78,642 |
|
Mexico | — |
| | — |
| | 53,277 |
| | — |
| | 53,277 |
|
Singapore | — |
| | — |
| | 3,293 |
| | — |
| | 3,293 |
|
Total revenue | $ | 1,351,599 |
| | 349,621 |
| | 635,671 |
| | (156,564 | ) | | 2,180,327 |
|
|
| | | | | | | | | | | | | | |
| Three months ended March 31, 2018 |
| FMS | | DTS | | SCS | | Eliminations | | Total |
| (In thousands) |
United States (1) | 1,085,446 |
| | 298,970 |
| | 401,883 |
| | (127,716 | ) | | 1,658,583 |
|
Canada | 74,808 |
| | — |
| | 43,093 |
| | (4,806 | ) | | 113,095 |
|
Europe | 82,796 |
| | — |
| | — |
| | — |
| | 82,796 |
|
Mexico (1) | — |
| | — |
| | 44,032 |
| | — |
| | 44,032 |
|
Singapore | — |
| | — |
| | 5,699 |
| | — |
| | 5,699 |
|
Total revenue | 1,243,050 |
| | 298,970 |
| | 494,707 |
| | (132,522 | ) | | 1,904,205 |
|
————————————
(1) 2018 SCS total revenue amounts for the United States and Mexico include reclassifications to conform to the current period presentation.
Major Products/Service Lines
|
| | | | | | | | | | | | | | | |
| Three months ended March 31, 2019 |
| FMS | | DTS | | SCS | | Eliminations | | Total |
| (In thousands) |
ChoiceLease | $ | 748,579 |
| | — |
| | — |
| | (68,191 | ) | | 680,388 |
|
SelectCare | 135,779 |
| | — |
| | — |
| | (12,250 | ) | | 123,529 |
|
Commercial rental | 236,148 |
| | — |
| | — |
| | (16,977 | ) | | 219,171 |
|
Fuel | 207,866 |
| | — |
| | — |
| | (59,146 | ) | | 148,720 |
|
Other | 23,227 |
| | — |
| | — |
| | — |
| | 23,227 |
|
DTS | — |
| | 349,621 |
| | — |
| | — |
| | 349,621 |
|
SCS | — |
| | — |
| | 635,671 |
| | — |
| | 635,671 |
|
Total revenue | $ | 1,351,599 |
| | 349,621 |
| | 635,671 |
| | (156,564 | ) | | 2,180,327 |
|
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
|
| | | | | | | | | | | | | | |
| Three months ended March 31, 2018 |
| FMS | | DTS | | SCS | | Eliminations | | Total |
| (In thousands) |
ChoiceLease | 690,902 |
| | — |
| | — |
| | (60,377 | ) | | 630,525 |
|
SelectCare | 121,873 |
| | — |
| | — |
| | (9,344 | ) | | 112,529 |
|
Commercial rental | 204,530 |
| | — |
| | — |
| | (10,064 | ) | | 194,466 |
|
Fuel | 203,807 |
| | — |
| | — |
| | (52,737 | ) | | 151,070 |
|
Other | 21,938 |
| | — |
| | — |
| | — |
| | 21,938 |
|
DTS | — |
| | 298,970 |
| | — |
| | — |
| | 298,970 |
|
SCS | — |
| | — |
| | 494,707 |
| | — |
| | 494,707 |
|
Total revenue | 1,243,050 |
| | 298,970 |
| | 494,707 |
| | (132,522 | ) | | 1,904,205 |
|
Industry
Our SCS business segment includes revenue from the below industries:
|
| | | | | | |
| Three months ended March 31, |
| 2019 | | 2018 |
| (In thousands) |
Automotive | $ | 253,679 |
| | 207,792 |
|
Technology and healthcare | 113,668 |
| | 103,097 |
|
CPG and retail | 217,098 |
| | 135,358 |
|
Industrial and other | 51,226 |
| | 48,460 |
|
Total revenue | $ | 635,671 |
| | 494,707 |
|
Contract Balances
We record a receivable related to revenue recognized when we have an unconditional right to invoice. There were no material contract assets as of March 31, 2019 or December 31, 2018. Trade receivables were $1.06 billion and $1.09 billion at March 31, 2019 and December 31, 2018, respectively. Impairment losses on receivables were not material during the first quarters of 2019 and 2018.
Contract liabilities relate to payments received in advance of performance under the contract. Changes in contract liabilities are due to our performance under the contract. The amount of revenue recognized during the three months ended March 31, 2019, that was included within deferred revenue at January 1, 2019, was $58 million. In addition, we deferred $57 million of revenue during the first quarter of 2019. Refer to Note 5, "Accrued Expenses and Other Liabilities," for additional information on deferred revenue.
Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized (“contracted not recognized revenue”). Contracted not recognized revenue includes deferred revenue and amounts for full service ChoiceLease maintenance revenue that will be invoiced and recognized as revenue in future periods as we provide maintenance services to our customers. Contracted not recognized revenue excludes variable revenue as it is not included in the transaction price consideration allocated at contract inception. Contracted not recognized revenue was $2.7 billion as of March 31, 2019. As a practical expedient, revenue related to our insurance performance obligations is excluded from contracted not recognized revenue since insurance coverage is provided over time, and we recognize revenue in the amount we have the right to bill the customer, which corresponds directly with the value to the customer of our performance completed the acquisition of Dallas Service Center, Inc., an independent truck repair facility, forto date.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
Costs to Obtain and Fullfill a purchase price of approximately $8.0 million, net of cash acquired, which includes $0.8 million in contingent consideration to beContract
We capitalize incremental sales commissions paid to our sales force as a result of obtaining ChoiceLease, DTS and SCS service contracts as contract costs. We recorded capitalized sales commissions of $106 million and $107 million at March 31, 2019 and December 31, 2018, respectively. Capitalized sales commissions includes initial direct costs of our leases in the seller provided certain conditionsamount of $53 million at March 31, 2019 and December 31, 2018, respectively, accounted for in accordance with Topic 842. Capitalized sales commissions are met.presented in “Prepaid expenses and other current assets” and “Sales-type leases and other assets” in our Consolidated Condensed Balance Sheets.
Capitalized sales commissions related to our ChoiceLease product are amortized based on the same pattern that the revenue is recognized for the underlying lease or non-lease components of the contract. Incremental sales commissions capitalized in connection with our ChoiceLease contracts relate to the lease component and non-lease maintenance components of our contracts. We allocate the ChoiceLease commissions to the lease and non-lease components based on the same allocation of the contract consideration. The portion of capitalized commissions related to the lease component is amortized on a straight-line basis and the portion of the capitalized commissions related to the maintenance portion is amortized consistent with the estimated pattern of maintenance costs. The amortization period aligns with the term of our contract, which typically ranges from three to seven years, and amortization expense is included in “Selling, general and administrative expenses” in our Consolidated Condensed Statements of Earnings.
Capitalized commissions related to our DTS and SCS service contracts are amortized based on the same patten that the revenue is recognized for the underlying contracts. This generally results in a straight-line amortization as the amount of revenue billed to the customer under DTS and SCS contracts corresponds directly with the value to the customer of our performance completed to date. The amortization period aligns with the term of the contract, which typically ranges from three to five years, and amortization expense is included in “Selling, general and administrative expenses” in our Consolidated Condensed Statement of Earnings.
For the three months ended March 31, 2019 and 2018, the amount of amortization was $11 million and $6 million, respectively. As a practical expedient, we recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that we otherwise would have recognized is one year or less.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
4. REVENUE EARNING EQUIPMENT, NET
| | | September 30, 2017 | | December 31, 2016 | March 31, 2019 | | December 31, 2018 |
| Cost | | Accumulated Depreciation | | Net Book Value(1) | | Cost | | Accumulated Depreciation | | Net Book Value(1) | Cost | | Accumulated Depreciation | | Net Book Value (1) | | Cost | | Accumulated Depreciation | | Net Book Value (1) |
| (In thousands) | (In thousands) |
Held for use: | | |
ChoiceLease | $ | 9,799,028 |
| | (3,284,267 | ) | | 6,514,761 |
| | $ | 9,486,977 |
| | (3,031,937 | ) | | 6,455,040 |
| $ | 11,331,946 |
| | (3,743,391 | ) | | 7,588,555 |
| | 10,824,989 |
| | (3,645,655 | ) | | 7,179,334 |
|
Commercial rental | 2,599,043 |
| | (973,126 | ) | | 1,625,917 |
| | 2,499,010 |
| | (935,346 | ) | | 1,563,664 |
| 3,315,660 |
| | (1,047,437 | ) | | 2,268,223 |
| | 3,152,908 |
| | (1,047,346 | ) | | 2,105,562 |
|
Held for sale | 417,771 |
| | (309,132 | ) | | 108,639 |
| | 494,355 |
| | (365,337 | ) | | 129,018 |
| 537,173 |
| | (384,790 | ) | | 152,383 |
| | 467,093 |
| | (336,028 | ) | | 131,065 |
|
Total | $ | 12,815,842 |
| | (4,566,525 | ) | | 8,249,317 |
| | $ | 12,480,342 |
| | (4,332,620 | ) | | 8,147,722 |
| $ | 15,184,779 |
| | (5,175,618 | ) | | 10,009,161 |
| | 14,444,990 |
| | (5,029,029 | ) | | 9,415,961 |
|
————————————
| |
(1) | Revenue earning equipment, net includes vehicles acquired under capitalfinance leases of $29$12 million, less accumulated depreciation of $14$6 million, at September 30, 2017,March 31, 2019, and $43$23 million, less accumulated depreciation of $22$13 million, at December 31, 2016.2018. |
We lease revenue earning equipment to customers for periods typically ranging from three to seven years for trucks and tractors and up to ten years for trailers. 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. As of September 30, 2017 and December 31, 2016, the net investment in direct financing and sales-type leases was $439 million and $409 million, respectively. Our direct financing lease customers operate in a wide variety of industries, and we have no significant customer concentrations in any one industry. We assess credit risk for all of our customers including those who lease equipment under direct financing leases prior to signing a ChoiceLease contract. For those customers who are designated as high risk, we typically require security deposits to be paid in advance in order to mitigate our credit risk. Additionally, our receivables are collateralized by the vehicles, which further mitigates our credit risk.
As of September 30, 2017 and December 31, 2016, the amount of direct financing lease receivables past due was not significant, and there were no impaired receivables. Accordingly, we do not believe there is a material risk of default with respect to the direct financing lease receivables.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
Revenue earning equipment held for sale is stated at the lower of carrying amount or fair value less costs to sell. Losses on vehicles held for sale for which carrying values exceeded fair value are recognized at the time they arrive at our used truck sales centers and are presented within “Used vehicle sales, net” in the Consolidated Condensed Statements of Earnings. For revenue earning equipment held for sale, we stratify our fleet by vehicle type (trucks, tractors and trailers), weight class, age and other relevant characteristics and create classes of similar assets for analysis purposes. For a certain population of our revenue earning equipment held for sale, fair value was determined based upon recent market prices obtained from our own sales experience for sales of each class of similar assets and vehicle condition. Expected declines in market prices were also considered when valuing the vehicles held for sale. These vehicles held for sale were classified within Level 3 of the fair value hierarchy.
The following table presents our assets held for sale that are measured at fair value on a nonrecurring basis and considered a Level 3 fair value measurement:
| | | | | Total Losses (2) | | | Total Losses (2) |
| September 30, | | Three months ended September 30, | | Nine months ended September 30, | March 31, | | December 31, | | Three months ended March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 | | 2019 | | 2018 |
| (In thousands) | (In thousands) |
Assets held for sale: | | | | | | | | | | | | | | | | | | |
Revenue earning equipment (1): | | | | | | | | | | | | | | | | | | |
Trucks | $ | 14,081 |
| | 17,091 |
| | $ | 6,215 |
| | 2,528 |
| | $ | 22,942 |
| | 6,842 |
| $ | 41,813 |
| | 44,325 |
| | $ | 11,546 |
| | 8,601 |
|
Tractors | 15,448 |
| | 61,480 |
| | 1,127 |
| | 7,985 |
| | 18,444 |
| | 22,073 |
| 43,269 |
| | 35,397 |
| | 4,968 |
| | 3,377 |
|
Trailers | 2,279 |
| | 2,563 |
| | 1,871 |
| | 1,152 |
| | 5,044 |
| | 2,589 |
| 1,547 |
| | 1,507 |
| | 180 |
| | 1,593 |
|
| | | | | | | | | | | | |
Total assets at fair value | $ | 31,808 |
| | 81,134 |
| | $ | 9,213 |
| | 11,665 |
| | $ | 46,430 |
| | 31,504 |
| $ | 86,629 |
| | 81,229 |
| | $ | 16,694 |
| | 13,571 |
|
————————————
| |
(1) | Assets held for sale in the above table only include the portion of revenue earning equipment held for sale where net book values exceeded fair values and fair value adjustments were recorded. The net book value of assets held for sale whichthat were less than fair value was $77$66 million and $76$50 million as of September 30, 2017March 31, 2019 and 2016,December 31, 2018, respectively. |
| |
(2) | Total losses represent fair value adjustments for all vehicles reclassified to held for sale throughout the period for which fair value was less than net book value. |
For the three and nine months ended September 30, 2017 and 2016, the
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
The components of gains on used vehicles,vehicle sales, net were as follows:
| | | Three months ended September 30, | | Nine months ended September 30, | Three months ended March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 |
| (In thousands) | (In thousands) |
Gains on vehicle sales, net | $ | (11,940 | ) | | (13,538 | ) | | $ | (34,615 | ) | | (64,506 | ) | $ | (8,477 | ) | | (6,140 | ) |
Losses from fair value adjustments | 9,213 |
| | 11,665 |
| | 46,430 |
| | 31,504 |
| 16,694 |
| | 13,571 |
|
Used vehicle sales, net | $ | (2,727 | ) | | (1,873 | ) | | $ | 11,815 |
| | (33,002 | ) | $ | 8,217 |
| | 7,431 |
|
We own the majority of our revenue earning equipment. Revenue earning equipment that we lease as a lessee are immaterial, and are therefore not separately disclosed from owned revenue earning equipment.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
5. ACCRUED EXPENSES AND OTHER LIABILITIES
| | | September 30, 2017 | | December 31, 2016 | March 31, 2019 | | December 31, 2018 |
| Accrued Expenses | | Non-Current Liabilities | | Total | | Accrued Expenses | | Non-Current Liabilities | | Total | Accrued Expenses | | Non-Current Liabilities | | Total | | Accrued Expenses | | Non-Current Liabilities | | Total |
| (In thousands) | (In thousands) |
Salaries and wages | $ | 100,273 |
| | — |
| | 100,273 |
| | $ | 90,913 |
| | — |
| | 90,913 |
| $ | 93,355 |
| | — |
| | 93,355 |
| | 149,629 |
| | — |
| | 149,629 |
|
Deferred compensation | 3,990 |
| | 54,595 |
| | 58,585 |
| | 2,992 |
| | 46,541 |
| | 49,533 |
| 5,730 |
| | 57,876 |
| | 63,606 |
| | 4,524 |
| | 55,279 |
| | 59,803 |
|
Pension benefits | 3,842 |
| | 462,935 |
| | 466,777 |
| | 3,796 |
| | 451,940 |
| | 455,736 |
| 3,764 |
| | 455,989 |
| | 459,753 |
| | 3,754 |
| | 456,979 |
| | 460,733 |
|
Other postretirement benefits | 1,520 |
| | 19,163 |
| | 20,683 |
| | 1,506 |
| | 19,459 |
| | 20,965 |
| 1,391 |
| | 18,114 |
| | 19,505 |
| | 1,387 |
| | 18,097 |
| | 19,484 |
|
Other employee benefits | 22,678 |
| | 2,958 |
| | 25,636 |
| | 29,358 |
| | 5,854 |
| | 35,212 |
| 7,728 |
| | — |
| | 7,728 |
| | 28,370 |
| | — |
| | 28,370 |
|
Insurance obligations (1) | 133,855 |
| | 261,244 |
| | 395,099 |
| | 127,470 |
| | 234,336 |
| | 361,806 |
| 149,946 |
| | 254,270 |
| | 404,216 |
| | 139,314 |
| | 247,552 |
| | 386,866 |
|
Asset retirement obligations | 6,595 |
| | 19,810 |
| | 26,405 |
| | 5,828 |
| | 20,143 |
| | 25,971 |
| |
Operating taxes | 99,086 |
| | — |
| | 99,086 |
| | 92,150 |
| | — |
| | 92,150 |
| 108,343 |
| | — |
| | 108,343 |
| | 100,399 |
| | — |
| | 100,399 |
|
Income taxes | 2,570 |
| | 24,623 |
| | 27,193 |
| | 4,197 |
| | 23,174 |
| | 27,371 |
| 2,872 |
| | 19,655 |
| | 22,527 |
| | 3,491 |
| | 18,477 |
| | 21,968 |
|
Interest | 26,066 |
| | — |
| | 26,066 |
| | 27,277 |
| | — |
| | 27,277 |
| 40,373 |
| | — |
| | 40,373 |
| | 39,522 |
| | — |
| | 39,522 |
|
Customer deposits | 66,302 |
| | 4,089 |
| | 70,391 |
| | 61,225 |
| | 4,569 |
| | 65,794 |
| |
Deposits, mainly from customers | | 81,930 |
| | 3,460 |
| | 85,390 |
| | 80,401 |
| | 3,390 |
| | 83,791 |
|
Operating lease liabilities | | 71,992 |
| | 134,784 |
| | 206,776 |
| | 73,422 |
| | 137,384 |
| | 210,806 |
|
Deferred revenue(2) | 14,997 |
| | — |
| | 14,997 |
| | 14,064 |
| | — |
| | 14,064 |
| 168,271 |
| | 415,166 |
| | 583,437 |
| | 160,902 |
| | 421,176 |
| | 582,078 |
|
Restructuring liabilities (3) | | 4,566 |
| | — |
| | 4,566 |
| | 7,595 |
| | — |
| | 7,595 |
|
Other | 47,397 |
| | 22,654 |
| | 70,051 |
| | 46,413 |
| | 11,549 |
| | 57,962 |
| 57,037 |
| | 39,959 |
| | 96,996 |
| | 55,029 |
| | 44,291 |
| | 99,320 |
|
Total | $ | 529,171 |
| | 872,071 |
| | 1,401,242 |
| | $ | 507,189 |
| | 817,565 |
| | 1,324,754 |
| $ | 797,298 |
| | 1,399,273 |
| | 2,196,571 |
| | 847,739 |
| | 1,402,625 |
| | 2,250,364 |
|
————————————
| |
(1) | Insurance obligations are primarily comprised of self-insured claim liabilities. |
| |
(2) | Deferred revenue is primarily related to the non-lease maintenance services component of our ChoiceLease product line. |
| |
(3) | The reduction in restructuring liabilities from December 31, 2018, principally represents cash payments for employee termination costs. The majority of the balance remaining in restructuring liabilities is expected to be paid by the end of 2019. |
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
6. LEASES
Leases as Lessor
The components of lease income were as follows:
|
| | | | | | |
| Three months ended March 31, |
| 2019 | | 2018 |
| (In thousands) |
Operating leases | | | |
Lease income related to lease payments | $ | 360,309 |
| | 334,367 |
|
Lease income related to commercial rental (1) | 219,171 |
| | 194,466 |
|
| | | |
Sales type leases | | | |
Interest income related to net investment in leases | 11,456 |
| | 9,797 |
|
| | | |
Variable lease income excluding commercial rental (1) | 55,439 |
| | 52,227 |
|
————————————
| |
(1) | Lease income related to commercial rental includes both fixed and variable lease income. Variable lease income is approximately 15% to 25% of total commercial rental income based on management's internal estimates. |
The components of net investment in sales-type leases were as follows:
|
| | | | | | |
| March 31, 2019 | | December 31, 2018 |
| (In thousands) |
Net investment in the lease — lease payment receivable | $ | 514,531 |
| | 505,057 |
|
Net investment in the lease — unguaranteed residual assets | 46,828 |
| | 46,209 |
|
| $ | 561,359 |
| | 551,266 |
|
————————————
Note: The net investment in the sales-type lease shown above are included in "Accounts receivables, net" and "Sales-type leases and other assets" in the Consolidated Condensed Balance Sheets.
Maturities of sales-type lease receivables were as follows:
|
| | | | | | |
| March 31, 2019 | | December 31, 2018 |
| (In thousands) |
2019 (excluding three months ended March 31, 2019) | $ | 103,957 |
| | 133,557 |
|
2020 | 143,811 |
| | 136,924 |
|
2021 | 121,433 |
| | 114,983 |
|
2022 | 92,028 |
| | 85,146 |
|
2023 | 58,175 |
| | 52,161 |
|
Thereafter | 91,033 |
| | 78,935 |
|
| | | |
Total undiscounted cash flows | 610,437 |
| | 601,706 |
|
Present value of lease payments (recognized as lease receivables) | (514,531 | ) | | (505,057 | ) |
Difference between undiscounted cash flows and discounted cash flows | 95,906 |
| | 96,649 |
|
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
6.
Maturities of operating lease payments were as follows:
|
| | | | | | |
| March 31, 2019 | | December 31, 2018 |
| (In thousands) |
2019 (excluding three months ended March 31, 2019) | $ | 936,560 |
| | 1,159,851 |
|
2020 | 1,008,773 |
| | 892,721 |
|
2021 | 756,134 |
| | 646,008 |
|
2022 | 507,429 |
| | 421,050 |
|
2023 | 319,320 |
| | 249,255 |
|
Thereafter | 291,636 |
| | 203,632 |
|
| | | |
Total undiscounted cash flows | $ | 3,819,852 |
| | 3,572,517 |
|
Leases as Lessee
The components of lease expense were as follows:
|
| | | | | | | | |
| | | Three months ended March 31, |
| Classification | | 2019 | | 2018 |
| | | (In thousands) |
Finance lease cost | | | | | |
Amortization of right-of-use assets | Other operating expenses, SG&A | | $ | 7,788 |
| | 5,143 |
|
Interest on lease liabilities | Interest expense | | 643 |
| | 597 |
|
Operating lease cost | Other operating expenses, SG&A | | 23,218 |
| | 19,687 |
|
Short-term lease and other | Other operating expenses, SG&A | | 1,124 |
| | 982 |
|
Variable lease cost | Other operating expenses, SG&A | | 3,016 |
| | 2,353 |
|
Sublease income | Cost of lease & related maintenance and rental, cost of services | | (5,824 | ) | | (6,364 | ) |
Total lease cost | | | $ | 29,965 |
| | 22,398 |
|
Supplemental cash flow information related to leases was as follows:
|
| | | | | | |
| Three months ended March 31, |
| 2019 | | 2018 |
| (In thousands) |
Cash paid for amounts included in measurement of liabilities | | | |
Operating cash flows from finance leases | $ | 643 |
| | 597 |
|
Operating cash flows from operating leases | 22,974 |
| | 19,303 |
|
Financing cash flows from finance leases | 7,466 |
| | 5,039 |
|
Right-of-use assets obtained in exchange for lease obligations: | | | |
Finance leases | 2,418 |
| | 2,006 |
|
Operating leases | 16,605 |
| | 16,908 |
|
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
Supplemental balance sheet information relates to leases was as follows:
|
| | | | | | | | |
| Classification | | March 31, 2019 | | December 31, 2018 |
| | | (In thousands) |
Assets | | | | | |
Operating lease right-of-use assets | Sales-type leases and other assets | | $ | 199,048 |
| | 203,834 |
|
Finance lease assets | Operating property and equipment, net and revenue earning equipment, net | | 36,007 |
| | 41,647 |
|
| | | | | |
Total leased assets | | | $ | 235,055 |
| | 245,481 |
|
| | | | | |
Liabilities | | | | | |
Current | | | | | |
Operating | Accrued expenses and other current liabilities | | $ | 71,992 |
| | 73,422 |
|
Finance | Short-term debt and current portion of long-term debt | | 11,256 |
| | 14,543 |
|
| | | | | |
Noncurrent | | | �� | | |
Operating | Other non-current liabilities | | 134,784 |
| | 137,384 |
|
Finance | Long-term debt | | 32,446 |
| | 32,909 |
|
| | | | | |
Total lease liabilities | | | $ | 250,478 |
| | 258,258 |
|
| | | | | |
|
| | | | | |
| March 31, 2019 | | December 31, 2018 |
| (In thousands) |
Weighted-average remaining lease term | | | |
Operating | 4 years |
| | 4 years |
|
Finance | 7 years |
| | 7 years |
|
Weighted-average discount rate | | | |
Operating | 3.7 | % | | 3.7 | % |
Finance | 8.3 | % | | 8.0 | % |
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
Maturities of lease liabilities were as follows: |
| | | | | | | | | |
| Operating Leases | | Finance Leases | | Total |
| (In thousands) |
2019 (excluding three months ended March 31, 2019) | $ | 61,234 |
| | 10,527 |
| | 71,761 |
|
2020 | 58,772 |
| | 10,523 |
| | 69,295 |
|
2021 | 39,367 |
| | 8,790 |
| | 48,157 |
|
2022 | 29,231 |
| | 6,112 |
| | 35,343 |
|
2023 | 14,302 |
| | 3,786 |
| | 18,088 |
|
Thereafter | 20,022 |
| | 13,688 |
| | 33,710 |
|
Total lease payments | 222,928 |
| | 53,426 |
| | 276,354 |
|
Less: Imputed Interest | (16,152 | ) | | (9,724 | ) | | (25,876 | ) |
Present value of lease liabilities | $ | 206,776 |
| | 43,702 |
| | 250,478 |
|
| | | | | |
As of March 31, 2019, we have additional facility operating leases that have not yet commenced of $8 million. The operating leases will commence in 2019 with lease terms of 3 to 5 years.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
7. DEBT
| | | Weighted-Average Interest Rate | | | | | | | Weighted-Average Interest Rate | | | | | | |
| September 30, 2017 | | December 31, 2016 | | Maturities | | September 30, 2017 | | December 31, 2016 | March 31, 2019 | | December 31, 2018 | | Maturities | | March 31, 2019 | | December 31, 2018 |
| | | | | | | (In thousands) | | | | | | | (In thousands) |
Short-term debt and current portion of long-term debt: | | | | | | | | |
Short-term debt | 1.57% | | 1.07% | |
| | $ | 59,410 |
| | 177,629 |
| 1.46% | | 2.69% | |
| | $ | 210,185 |
| | 81,522 |
|
Current portion of long-term debt | | 84,532 |
| | 613,781 |
| |
Current portion of long-term debt, including finance leases | | Current portion of long-term debt, including finance leases | | 907,304 |
| | 855,609 |
|
Total short-term debt and current portion of long-term debt | Total short-term debt and current portion of long-term debt | | 143,942 |
| | 791,410 |
| Total short-term debt and current portion of long-term debt | | 1,117,489 |
| | 937,131 |
|
Long-term debt: | | | | | | | | |
U.S. commercial paper (1) | 1.44% | | 0.87% | | 2020 | | 468,540 |
| | 342,480 |
| 2.76% | | 2.78% | | 2023 | | 695,272 |
| | 454,397 |
|
Canadian commercial paper (1) | | 1.99% | | 2.28% | | 2023 | | 105,169 |
| | 123,491 |
|
Trade receivables program | | —% | | 3.15% | | 2019 | | — |
| | 200,000 |
|
Global revolving credit facility | 3.20% | | 2.06% | | 2020 | | 7,596 |
| | 4,703 |
| 2.28% | | 2.25% | | 2023 | | 13,224 |
| | 12,581 |
|
Unsecured U.S. notes — Medium-term notes (1) | 2.69% | | 2.67% | | 2017-2025 | | 4,013,602 |
| | 4,113,421 |
| |
Unsecured U.S. notes — Medium-term notes (1)(2) | | 3.30% | | 3.22% | | 2019-2025 | | 5,207,369 |
| | 4,853,496 |
|
Unsecured U.S. obligations | 2.52% | | 2.19% | | 2018 | | 50,000 |
| | 50,000 |
| 3.49% | | 3.50% | | 2019-2024 | | 250,000 |
| | 50,000 |
|
Unsecured foreign obligations | 1.50% | | 1.55% | | 2017-2020 | | 229,030 |
| | 232,092 |
| 2.67% | | 1.61% | | 2020-2021 | | 33,710 |
| | 216,719 |
|
Asset-backed U.S. obligations (2) | 1.85% | | 1.80% | | 2017-2024 | | 516,009 |
| | 459,876 |
| |
Capital lease obligations | 3.45% | | 3.17% | | 2017-2023 | | 21,859 |
| | 24,184 |
| |
Total before fair market value adjustment | | 5,306,636 |
| | 5,226,756 |
| |
Fair market value adjustment on notes subject to hedging (3) | | (2,058 | ) | | 1,110 |
| |
Asset-backed U.S. obligations (3) | | 2.36% | | 2.37% | | 2019-2025 | | 605,634 |
| | 627,707 |
|
Finance lease obligations | | 8.32% | | 7.97% | | 2019-2073 | | 43,702 |
| | 47,452 |
|
Total long-term debt | | | 6,954,080 |
| | 6,585,843 |
|
Debt issuance costs | | (14,762 | ) | | (14,221 | ) | | (21,097 | ) | | (18,088 | ) |
| | 5,289,816 |
| | 5,213,645 |
| | 6,932,983 |
| | 6,567,755 |
|
Current portion of long-term debt | | (84,532 | ) | | (613,781 | ) | |
Current portion of long-term debt, including finance leases | | Current portion of long-term debt, including finance leases | | (907,304 | ) | | (855,609 | ) |
Long-term debt | | 5,205,284 |
| | 4,599,864 |
| | 6,025,679 |
| | 5,712,146 |
|
Total debt | | $ | 5,349,226 |
| | 5,391,274 |
| | $ | 7,143,168 |
| | 6,649,277 |
|
————————————
| |
(1) | Amounts are net of unamortized original issue discounts of $7 million at September 30, 2017March 31, 2019 and December 31, 2016.2018, respectively. |
| |
(2) | Amounts are inclusive of fair market value adjustments on notes subject to hedging of $6 million and $10 million at March 31, 2019 and December 31, 2018, respectively. The notional amount of the executed interest rate swaps designated as fair value hedges was $725 million at March 31, 2019 and December 31, 2018. Refer to Note 8, "Derivatives," for additional information. |
| |
(3) | Asset-backed U.S. obligations are related to financing transactions backed by a portion of our revenue earning equipment. |
| |
(3) | The notional amount of the executed interest rate swaps designated as fair value hedges was $825 million at September 30, 2017 and December 31, 2016, respectively. |
We maintain a $1.2$1.4 billion global revolving credit facility with a syndicate of twelve lending institutions led by Bank of America N.A., BNP Paribas, Lloyds Bank of Tokyo-Mitsubishi UFJ,Plc, Mizuho Bank, Ltd., BNP Paribas, Mizuho CorporateMUFG Bank, Ltd., Royal Bank of Canada, Lloyds Bank Plc, U.S. Bank National AssociationN.A. and Wells Fargo Bank, N.A. The facility expiresmatures in January 2020.September 2023. The agreement provides for annual facility fees whichthat range from 7.5 basis points to 2520 basis points based on Ryder's long-term credit ratings. The annual facility fee is currently 10 basis points, which applies to the total facility size of $1.2$1.4 billion.
The credit facility is primarily used primarily to finance working capital but can also be used to issue up to $75 million in letters of credit (there were no letters of credit outstanding against the facility at September 30, 2017)March 31, 2019). At our option, the interest rate on borrowings under the credit facility is based on LIBOR, prime, federal funds or local equivalent rates. The credit facility contains no provisions limiting its availability in the event of a material adverse change to Ryder’s business operations; however, the credit facility does contain standard representations and warranties, events of default, cross-default provisions and certain affirmative and negative covenants.
In order to maintain availability of funding, we must maintain a ratio of debt to consolidated net worth of less than or equal to 300%. Net worth, as defined in the credit facility, represents shareholders' equity excluding any accumulated other comprehensive income or loss associated with our pension and other postretirement plans. The ratio at September 30, 2017,March 31, 2019, was 192%197%. At September 30, 2017,March 31, 2019, there was $664$572 million available under the credit facility.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
Our global revolving credit facility enables us to refinance short-term obligations on a long-term basis. Short-term commercial paper obligations not expected to require the use ofrequired for working capital needs are classified as long-term obligations, as we have both the intent and ability to refinance on a long-term basis. In addition, we have the intent and ability to refinance the current portion of certain long-term debt on a long-term basis. At September 30, 2017,March 31, 2019, we classified $469$800 million of short-term commercial paper, and $50 million of the current portion of long-term debt as long-term debt. At December 31, 2016, we classified $342 million of short-term commercial paper and $350 million of the current portion of long-term debt and $69 million of short-term debt as long-term debt. At December 31, 2018, we classified $578 million of short-term commercial paper, $200 million of trade receivables borrowings, $250 million of the current portion of long-term debt and $50 million of short-term debt as long-term debt.
In August 2017,February 2019, we issued $300 million of unsecured medium-term notes maturing in September 2022. In February 2017, we issued $300$600 million of unsecured medium-term notes maturing in March 2022.2024. The proceeds from these notes were used to pay off maturing debt and for general corporate purposes. If these notes are downgraded below investment grade following, orand as a result of, a change in control, the note holders can require us to repurchase all or a portion of the notes at a purchase price equal to 101% of principal value plus accrued and unpaid interest.
In June 2017,the first quarter of 2019, we received $98executed two $100 million from financing transactions backed by a portion of our revenue earning equipment.bank term loans maturing in February and March 2024, respectively. The proceeds from these transactionsloans were used to pay off maturing debt and 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. The program was renewed in October 2017. If no event occurs whichthat causes early termination, the 364-day program will expire on October 22, 2018.June 12, 2019. The program contains provisions restricting its availability in the event of a material adverse change to our business operations or the collectibility of the collateralized receivables. Sales of receivables under this program are accounted for as secured borrowings based on our continuing involvement in the transferred assets. No amounts were outstanding under the program at September 30, 2017 orMarch 31, 2019. At December 31, 2016.2018, $200 million was outstanding under the program.
At September 30, 2017March 31, 2019 and December 31, 2016,2018, we had letters of credit and surety bonds outstanding totaling $357$373 million and $354$375 million, respectively, which primarily guarantee the payment of insurance claims.
The fair value of total debt (excluding capital lease and asset-backed U.S. obligations) at September 30, 2017March 31, 2019 and December 31, 20162018, was approximately $4.89$6.57 billion and $4.97$5.97 billion, respectively. For publicly-traded debt, estimates of fair value were based on market prices. For other debt, fair value was estimated based on a model-driven approach using rates currently available to us for debt with similar terms and remaining maturities. The fair value measurements of our publicly-traded debt and other debt were classified within Level 2 of the fair value hierarchy. The carrying amounts reported in the Consolidated Condensed Balance Sheets for “Cash and cash equivalents,” “Receivables, net” and “Accounts payable” approximate fair value because of the immediate or short-term maturities of these financial instruments.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
7.8. DERIVATIVES
From time to time, we enter into interest rate derivative contractsderivatives to manage our fixed and variable interest rate exposure and to better alignmatch 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 andor forecasted debt obligations as well as any offsetting hedge positions. This risk management process involves the use of analytical techniques, including cash flow sensitivity analyses, to estimate the expected impact of changes in interest rates on our future cash flows.
As of September 30, 2017,March 31, 2019, we had interest rate swaps outstanding whichthat are designated as fair value hedges for certain debt obligations, with a total notional value of $825$725 million and maturities through 2022. Interest rate swaps are measured at fair value on a recurring basis using Level 2 fair value inputs. The fair value amounts of thethese interest rate swaps was a liability of $6 million and $10 million as of March 31, 2019 and December 31, 2018, respectively. The amounts are recordedpresented in "Direct financing leases"Accrued expenses and other assets"current liabilities" and "Other non-current liabilities" in our Consolidated Condensed Balance Sheets. As of September 30, 2017, these amounts are not material to our consolidated financial position or results of operations and have not changed significantly from the amounts reported at December 31, 2016. Changes in the fair value of our interest rate swaps were offset by changes in the fair value of the hedged debt instruments. Accordingly, there was no ineffectiveness related to the interest rate swaps.
As of March 31, 2019, we had interest rate swaps outstanding that are designated as cash flow hedges for a certain debt obligations, with a total notional value of $215 million and maturities through 2024. The interest rate swaps are measured at fair value on a recurring basis using Level 2 fair value inputs. The fair value of these interest rate swaps was a liability of $2 million as of March 31, 2019. The fair value of these interest rate swaps was not material as of December 31, 2018. The amounts are presented in "Other non-current liabilities" in our Consolidated Condensed Balance Sheets. The effective portion of the change in the fair value of the hedging instrument is reported in other comprehensive income. The amounts accumulated in other comprehensive income are reclassified to earnings when the related interest payments affect earnings. There was no ineffectiveness related to the interest rate swap.
8.9. SHARE REPURCHASE PROGRAMS
In December 2015,2017, our Board of Directors authorized a share repurchase program intended to mitigate the dilutive impact of shares issued under our employee stock plans (the program). Under the program, management is authorized to repurchase (i) up to 1.5 million shares of common stock, the sum of which will not exceed the number of shares issued to employees under Ryder'sthe Company’s employee stock plans from December 1, 201531, 2017 to December 9, 2017, plus (ii) 0.5 million shares issued to employees that were not repurchased under Ryder's previous share repurchase program. The program limits aggregate share repurchases to no more than 2 million shares of Ryder common stock.13, 2019. Share repurchases of common stock are made periodically in open-market transactions and are subject to market conditions, legal requirements and other factors. Management may establish prearranged written plans for Ryderthe Company under Rule 10b5-1 of the Securities Exchange Act of 1934 as part of the program, which allow for share repurchases during Ryder’s quarterly blackout periods as set forth in the trading plan.
During the ninethree months ended September 30, 2017March 31, 2019 and September 30, 2016,March 31, 2018, we repurchased approximately 933,000226,000 shares for $65.9$14 million and 380,000171,000 shares for $25.7$13 million, respectively.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
9.10. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following summary sets forth the components of accumulated other comprehensive loss, net of tax:
| | | | Currency Translation Adjustments and Other | | Net Actuarial Loss (1) | | Prior Service (Cost)/ Credit (1) | | Accumulated Other Comprehensive Loss | | Currency Translation Adjustments and Other | | Net Actuarial Loss (1) | | Prior Service (Cost)/ Credit (1) | | Accumulated Other Comprehensive Loss |
| | (In thousands) | | (In thousands) |
December 31, 2016 | | $ | (206,610 | ) | | (620,292 | ) | | (7,130 | ) | | (834,032 | ) | |
December 31, 2018 | | | $ | (199,713 | ) | | (700,384 | ) | | (11,537 | ) | | (911,634 | ) |
Amortization | | — |
| | 15,252 |
| | 165 |
| | 15,417 |
| | — |
| | 5,307 |
| | 147 |
| | 5,454 |
|
Other current period change | | 70,991 |
| | 810 |
| | — |
| | 71,801 |
| | 15,762 |
| | — |
| | — |
| | 15,762 |
|
September 30, 2017 | | $ | (135,619 | ) | | (604,230 | ) | | (6,965 | ) | | (746,814 | ) | |
March 31, 2019 | | | (183,951 | ) | | (695,077 | ) | | (11,390 | ) | | (890,418 | ) |
| | | | Currency Translation Adjustments and Other | | Net Actuarial Loss (1) | | Prior Service Credit (1) | | Accumulated Other Comprehensive Loss | | Currency Translation Adjustments and Other | | Net Actuarial Loss (1) | | Prior Service Credit (1) | | Accumulated Other Comprehensive Loss |
| | (In thousands) | | (In thousands) |
December 31, 2015 | | $ | (136,020 | ) | | (576,993 | ) | | 278 |
| | (712,735 | ) | |
December 31, 2017 | | | (143,773 | ) | | (560,153 | ) | | (6,910 | ) | | (710,836 | ) |
Amortization | | — |
| | 14,052 |
| | 134 |
| | 14,186 |
| | — |
| | 5,517 |
| | 89 |
| | 5,606 |
|
Other current period change | | (37,874 | ) | | (5,495 | ) | | (5,527 | ) | | (48,896 | ) | | 11,765 |
| | — |
| | — |
| | 11,765 |
|
September 30, 2016 | | $ | (173,894 | ) | | (568,436 | ) | | (5,115 | ) | | (747,445 | ) | |
Adoption of new accounting standard (2) | | | — |
| | (98,987 | ) | | (1,580 | ) | | (100,567 | ) |
March 31, 2018 | | | (132,008 | ) | | (653,623 | ) | | (8,401 | ) | | (794,032 | ) |
_______________________
| |
(1) | These amounts are included in the computation of net pension expense. See Note 12,13, "Employee Benefit Plans," for furtheradditional information. |
| |
(2) | Reflects the impact of adopting ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income in 2018, which resulted in a reclassification of stranded tax effects caused by the 2017 Tax Cuts and Jobs Act from accumulated other comprehensive loss to retained earnings in the Consolidated Condensed Balance Sheet. |
The gain from currency translation adjustments in the ninethree months ended September 30, 2017March 31, 2019, of $71.0$16 million was primarily due to the strengthening of the British Pound and the Canadian Dollar against the U.S. Dollar. The lossgain from currency translation adjustments in the ninethree months ended September 30, 2016March 31, 2018, of $37.9$12 million was primarily due to the weakeningstrengthening of the British Pound against the U.S. Dollar, partially offset by the strengtheningweakening of the Canadian Dollar against the U.S. Dollar.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
10.11. EARNINGS PER SHARE
The following table presents the calculation of basic and diluted earnings per common share from continuing operations:
| | | Three months ended September 30, | | Nine months ended September 30, | Three months ended March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 |
| (In thousands, except per share amounts) | (In thousands, except per share amounts) |
Earnings per share — Basic: | | | | | | | | | | |
Earnings from continuing operations | $ | 58,913 |
| | 85,138 |
| | $ | 148,535 |
| | 215,365 |
| $ | 45,890 |
| | 37,313 |
|
Less: Earnings allocated to unvested stock | (222 | ) | | (261 | ) | | (536 | ) | | (674 | ) | |
Less: Distributed and undistributed earnings allocated to unvested stock | | (177 | ) | | (130 | ) |
Earnings from continuing operations available to common shareholders — Basic | $ | 58,691 |
| | 84,877 |
| | $ | 147,999 |
| | 214,691 |
| $ | 45,713 |
| | 37,183 |
|
| | | | | | | | | | |
Weighted average common shares outstanding — Basic | 52,405 |
| | 52,953 |
| | 52,671 |
| | 53,029 |
| 52,418 |
| | 52,405 |
|
| | | | | | | | | | |
Earnings from continuing operations per common share — Basic | $ | 1.12 |
| | 1.60 |
| | $ | 2.81 |
| | 4.05 |
| $ | 0.87 |
| | 0.71 |
|
| | | | | | | | | | |
Earnings per share — Diluted: | | | | | | | | | | |
Earnings from continuing operations | $ | 58,913 |
| | 85,138 |
| | $ | 148,535 |
| | 215,365 |
| $ | 45,890 |
| | 37,313 |
|
Less: Earnings allocated to unvested stock | (222 | ) | | (260 | ) | | (536 | ) | | (672 | ) | |
Less: Distributed and undistributed earnings allocated to unvested stock | | (177 | ) | | (130 | ) |
Earnings from continuing operations available to common shareholders — Diluted | $ | 58,691 |
| | 84,878 |
| | $ | 147,999 |
| | 214,693 |
| $ | 45,713 |
| | 37,183 |
|
| | | | | | | | | | |
Weighted average common shares outstanding — Basic | 52,405 |
| | 52,953 |
| | 52,671 |
| | 53,029 |
| 52,418 |
| | 52,405 |
|
Effect of dilutive equity awards | 371 |
| | 338 |
| | 356 |
| | 315 |
| 223 |
| | 608 |
|
Weighted average common shares outstanding — Diluted | 52,776 |
| | 53,291 |
| | 53,027 |
| | 53,344 |
| 52,641 |
| | 53,013 |
|
| | | | | | | | | | |
Earnings from continuing operations per common share — Diluted | $ | 1.11 |
| | 1.59 |
| | $ | 2.79 |
| | 4.02 |
| $ | 0.87 |
| | 0.70 |
|
| | | | | | | | | | |
Anti-dilutive equity awards not included above | 843 |
| | 653 |
| | 889 |
| | 836 |
| 1,682 |
| | 1,046 |
|
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
11.12. SHARE-BASED COMPENSATION PLANS
Share-based incentive awards are provided to employees under the terms of various share-based compensation plans (collectively, the “Plans”). The Plans are administered by the Compensation Committee of the Board of Directors andDirectors. Awards under the plan principally include at-the-money stock options, unvested stock and cash awards. Unvested stock awards include grants of market-based, performance-based and time-vested restricted stock rights. Under the terms of our Plans, dividends on unvested stock are not paid unless the stock award vests. Upon vesting, the amount of the dividends paid is equal to the aggregate dividends declared on common shares during the period from the grant date of the award until the date the shares underlying the award are delivered.
The following table provides information on share-based compensation expense and income tax benefits recognized during the periods:
| | | Three months ended September 30, | | Nine months ended September 30, | Three months ended March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 |
| (In thousands) | (In thousands) |
Stock option and stock purchase plans | $ | 1,953 |
| | 1,633 |
| | $ | 5,811 |
| | 5,410 |
| $ | 1,819 |
| | 1,875 |
|
Unvested stock | 2,618 |
| | 2,237 |
| | 8,823 |
| | 8,460 |
| 5,580 |
| | 3,466 |
|
Share-based compensation expense | 4,571 |
| | 3,870 |
|
| 14,634 |
|
| 13,870 |
| 7,399 |
| | 5,341 |
|
Income tax benefit | (1,608 | ) | | (1,321 | ) | | (5,090 | ) | | (4,691 | ) | (1,160 | ) | | (1,161 | ) |
Share-based compensation expense, net of tax | $ | 2,963 |
| | 2,549 |
|
| $ | 9,544 |
|
| 9,179 |
| $ | 6,239 |
| | 4,180 |
|
During the three months ended March 31, 2019 and 2018, approximately 182,000 and 347,000 stock options, respectively, were granted under the Plans. These awards generally vest in equal annual installments over a three year period beginning on the date of grant. The following table isstock options have contractual terms of ten years. The fair value of each option award at the date of grant was estimated using a summary ofBlack-Scholes-Merton option-pricing valuation model. Share-based compensation expense is recognized on a straight-line basis over the vesting period. The weighted-average fair value per option granted during the three months ended March 31, 2019 and 2018 was $11.74 and $15.89, respectively.
During the three months ended March 31, 2019, there were no awards with a return on capital (ROC) performance-based vesting condition granted under the Plans. During the three months ended March 31, 2018, there were approximately 95,000 awards granted with a return on capital (ROC) performance-based vesting condition. The awards are segmented into three one-year performance periods. For these awards, up to 150% of the awards may be earned based on Ryder's one-year adjusted return on capital (ROC) measured against an annual ROC target. If earned, employees will receive the grant of stock three years after the grant date, provided they continue to be employed with Ryder, subject to Compensation Committee approval. For accounting purposes, these awards are not considered granted until the Compensation Committee approves the annual ROC target. During the three months ended March 31, 2019 and 2018, approximately 79,000 and 98,000 PBRSRs, respectively, were considered granted for market-basedaccounting purposes. The fair value of the PBRSRs is determined and fixed on the grant date based on Ryder's stock price on the date of grant. Share-based compensation expense is recognized on a straight-line basis over the vesting period, based upon the probability that the performance target will be met. The weighted-average fair value per PBRSR granted during the three months ended March 31, 2019 and 2018 was $57.92 and $74.72, respectively.
During the three months ended March 31, 2019, and 2018, approximately 75,000 and 51,000 performance-based restricted stock rights (PBRSRs), respectively, were awarded under the Plans. For these awards, up to 200% of the awards may be earned based on the spread between Ryder's adjusted return on capital and the cost of capital (ROC/COC) measured against a three-year ROC/COC target. The majority of these awards include a TSR modifier. Ryder's TSR will be compared against the TSR of each of the companies in a custom peer group to determine Ryder's TSR percentile rank versus this custom peer group. The number of ROC/COC PBRSRs will then be adjusted based on Ryder's relative TSR percentile rank. The fair value of these PBRSRs is estimated using a lattice-based option-pricing valuation model that incorporates a Monte-Carlo simulation. Share-based compensation expense is recognized on a straight-line basis over the vesting period, based upon the probability that the performance target will be met. The weighted-average fair value per PBRSR granted during the three months ended March 31, 2019 and 2018 was $61.22 and $72.93, respectively.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
During the three months ended March 31, 2019, and 2018, approximately 75,000 and 51,000 performance-based restricted stock rights (PBRSRs), respectively, were awarded under the Plans. For these awards, up to 200% of the awards may be earned based on Ryder's strategic revenue growth (SRG) measured against a three-year SRG target. The majority of these awards include a TSR modifier. Ryder's TSR will be compared against the TSR of each of the companies in a custom peer group to determine Ryder's TSR percentile rank versus this custom peer group. The number of SRG PBRSRs will then be adjusted based on Ryder's relative TSR percentile rank. The fair value of these PBRSRs is estimated using a lattice-based option-pricing valuation model that incorporates a Monte-Carlo simulation. Share-based compensation expense is recognized on a straight-line basis over the vesting period, based upon the probability that the performance target will be met. The weighted-average fair value per PBRSR granted during the three months ended March 31, 2019 and 2018 was $61.22 and $72.93, respectively.
During the three months ended March 31, 2019 and 2018, approximately 298,000 and 132,000 time-vested restricted stock rights, respectively, were granted under the Plans. The time-vested restricted stock rights entitle the holder to shares of common stock when the awards vest. The 2019 awards primarily vest in equal annual installments over a three-year period beginning on the date of grant. In 2018, 104,000 of the awards granted vest in equal annual installments over a three-year period beginning on the date of grant. The remaining awards granted in 2018 vest at the end of the three-year period. The fair value of the time-vested awards is determined and fixed based on Ryder’s stock price on the date of grant. Share-based compensation expense is recognized on a straight-line basis over the vesting period. The weighted-average fair value per time-vested restricted stock right granted during the three months ended March 31, 2019 and 2018 was $57.92 and $76.69, respectively.
Certain employees were granted cash awards in additionprior to 2016 as part of our long-term incentive compensation program. The cash awards are accounted for as liability awards under the share-based compensation accounting guidance as the awards are based upon the performance of our common stock and are settled in cash. As a result, the liability is adjusted to reflect fair value at the end of each reporting period. The fair value of the cash awards was estimated using a lattice-based option-pricing valuation model that incorporates a Monte-Carlo simulation. Share-based compensation expense reported inis recognized on a straight-line basis over the previous table:
|
| | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In thousands) |
Cash awards | $ | 124 |
| | 119 |
| | $ | 245 |
| | 447 |
|
vesting period. There was no compensation expense associated with cash awards during the three months ended March 31, 2019. The compensation expense associated with cash awards was not material for the three months ended March 31, 2018.
Total unrecognized pre-tax compensation expense related to all share-based compensation arrangements at September 30, 2017March 31, 2019, was $23.3$53 million and is expected to be recognized over a weighted-average period of 1.92.1 years.
The following table is a summary of the awards granted under the Plans during the periods presented:
|
| | | | | |
| Nine months ended September 30, |
| 2017 | | 2016 |
| (Shares in thousands) |
Stock options | 465 |
| | 513 |
|
Market-based restricted stock rights | 46 |
| | 34 |
|
Performance-based restricted stock rights | 79 |
| | 45 |
|
Time-vested restricted stock rights | 110 |
| | 129 |
|
Total | 700 |
|
| 721 |
|
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
12.13. EMPLOYEE BENEFIT PLANS
Components of net pension expense were as follows: | | | Three months ended September 30, | | Nine months ended September 30, | Three months ended March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 |
| (In thousands) | (In thousands) |
Pension Benefits | | | | | | | | | | |
Company-administered plans: | | | | | | | | | | |
Service cost | $ | 3,165 |
| | 2,660 |
| | $ | 9,431 |
| | 9,065 |
| $ | 3,032 |
| | 3,201 |
|
Interest cost | 21,609 |
| | 22,754 |
| | 64,524 |
| | 72,086 |
| 21,469 |
| | 19,752 |
|
Expected return on plan assets | (22,822 | ) | | (22,601 | ) | | (68,012 | ) | | (68,353 | ) | (22,676 | ) | | (25,834 | ) |
Amortization of: | | | | | | | | | | |
Net actuarial loss | 8,336 |
| | 7,324 |
| | 24,863 |
| | 23,889 |
| 7,610 |
| | 7,372 |
|
Prior service cost | 133 |
| | 320 |
| | 399 |
| | 3,060 |
| 179 |
| | 145 |
|
| 10,421 |
| | 10,457 |
| | 31,205 |
| | 39,747 |
| 9,614 |
| | 4,636 |
|
Union-administered plans | 7,873 |
| | 2,493 |
| | 12,996 |
| | 7,221 |
| 2,457 |
| | 2,346 |
|
Net pension expense | $ | 18,294 |
| | 12,950 |
| | $ | 44,201 |
| | 46,968 |
| $ | 12,071 |
| | 6,982 |
|
| | | | | | | | | | |
Company-administered plans: | | | | | | | | | | |
U.S. | $ | 10,929 |
| | 10,952 |
| | $ | 32,787 |
| | 41,389 |
| $ | 11,473 |
| | 7,357 |
|
Non-U.S. | (508 | ) | | (495 | ) | | (1,582 | ) | | (1,642 | ) | (1,859 | ) | | (2,721 | ) |
| 10,421 |
| | 10,457 |
| | 31,205 |
| | 39,747 |
| 9,614 |
| | 4,636 |
|
Union-administered plans | 7,873 |
| | 2,493 |
| | 12,996 |
| | 7,221 |
| 2,457 |
| | 2,346 |
|
Net pension expense | $ | 18,294 |
| | 12,950 |
| | $ | 44,201 |
| | 46,968 |
| $ | 12,071 |
| | 6,982 |
|
| | | | | | | | |
During the ninethree months ended September 30, 2017,March 31, 2019, we contributed $10.6$8 million to our pension plans. In 2017,2019, the expected total contributions to our pension plans are approximately $22$34 million. We also maintain other postretirement benefit plans that are not reflected in the above table. The amount of postretirement benefit expense was not material for the three or nine months ended September 30, 2017.
During the third quarter of 2017, we recorded an estimated pension settlement charge of $5.5 million for the exit from a U.S. multi-employer pension plan. This charge was recorded within “Selling, general,March 31, 2019 and administrative expenses” in our Consolidated Condensed Statement of Earnings and is included in the Union-administered plans expense.
During the second quarter of 2016, we determined that certain 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 was not material to 2016 results, we recognized a one-time, non-cash charge of $7.7 million in "Selling, general and administrative expenses" and a $12.8 million pre-tax increase to “Accumulated other comprehensive loss” in our second quarter 2016 consolidated condensed financial statements to correctly state the pension benefit obligation and account for these 2009 benefit improvements.
2018.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
13.14. OTHER ITEMS IMPACTING COMPARABILITY
Our primary measure of segment performance as shown in Note 16,17, "Segment Reporting," excludes certain items we do not believe are representative of the ongoing operations of the segment. Excluding these items from our segment measure of performance allows for better year over year comparison:
|
| | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In thousands) |
Pension settlement charge (1) | $ | 5,454 |
| | — |
| | $ | 5,454 |
| | — |
|
Fees related to cost-savings program | 4,255 |
| | — |
| | 4,255 |
| | — |
|
Operating tax adjustment | — |
| | — |
| | 2,205 |
| | — |
|
Restructuring | — |
| | — |
| | (2,574 | ) | | — |
|
Pension-related adjustments (1)
| — |
| | — |
| | — |
| | 7,650 |
|
Restructuring and other items, net | $ | 9,709 |
| | — |
| | $ | 9,340 |
| | 7,650 |
|
|
| | | | | | |
| Three months ended March 31, |
| 2019 | | 2018 |
| (In thousands) |
Restructuring and other, net | $ | 2,588 |
| | (392 | ) |
ERP implementation | 3,590 |
| | — |
|
Goodwill impairment | — |
| | 15,513 |
|
Restructuring and other items, net | $ | 6,178 |
| | 15,121 |
|
_______________
| |
(1) | Refer to Note 12, Employee Benefit Plans for additional information. |
During the thirdthree months ended March 31, 2019 and 2018, the below items were recorded in "Restructuring and other, net":
In the first quarter of 2017,2019, we incurredrecorded $2.6 million of net charges of $4.3 millionprimarily related to consulting fees associated withrelated to cost savings initiatives, professional fees related to the pursuit of a cost-savings program.commercial claim, and income from our Singapore operations that will be shut down in the second quarter of 2019. These items were reflected within “Selling, general"Restructuring and administrative expenses”other items, net" in our Consolidated Condensed StatementStatements of Earnings.
In the first quarter of 2018, we recorded $0.4 million of net benefit primarily related to an adjustment to the one-time Tax Reform-related employee bonus accrued as of December 31, 2017, income from our Singapore operations that will be shut down in the second quarter of 2019, offset by charges related to professional fees, adjustments to the restructuring accrual recorded as of December 31, 2017 and acquisition transaction costs. These items were reflected within "Restructuring and other items, net" in our Consolidated Condensed Statements of Earnings.
During the first quarter of 2017,2019, 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$3.6 million of $2.2 million within “Selling, general and administrative expenses” in our Consolidated Condensed Statement of Earnings as the impact of the adjustment was not material to our consolidated condensed financial statements in any individual prior period, and the cumulative amount was not material to the first quarter 2017 results.
During the second quarter of 2017, we realized restructuring credits of $2.6 millioncharges related to the gains on saleimplementation of certain UK facilities that were closed as part of prior year restructuring activities. These items werean Enterprise Resource Planning (ERP) system. This item was reflected within "Miscellaneous income,"Restructuring and other items, net" in our Consolidated Condensed StatementStatements of Earnings.
During the first quarter of 2018, we recorded an impairment charge of $15.5 million for all goodwill in the FMS Europe reporting unit. This item was reflected within "Restructuring and other items, net" in our Consolidated Condensed Statements of Earnings.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
14.15. OTHER MATTERS
We are a party to various claims, complaints and proceedings arising in the ordinary course of our continuing business operations including, but not limited to, those relating to commercial and employment claims, environmental matters, risk management matters (e.g., vehicle liability, workers’ compensation, etc.) and administrative assessments primarily associated with operating taxes. We have established loss provisions for matters in which losses are probable and can be reasonably estimated. We believe that the resolution of these claims, complaints and legal proceedings will not have a material effect on our consolidated condensed financial statements.
Our estimates regarding potential losses and materiality are based on our judgment and assessment of the claims utilizing currently available information. Although we will continue to reassess our reserves and estimates based on future developments, our objective assessment of the legal merits of such claims may not always be predictive of the outcome and actual results may vary from our current estimates.
16. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information was as follows:
|
| | | | | | |
| Three months ended March 31, |
| 2019 | | 2018 |
| (In thousands) |
Interest paid | $ | 52,490 |
| | 40,165 |
|
Income taxes paid | 3,611 |
| | 8,187 |
|
Changes in accounts payable related to purchases of revenue earning equipment | 87,053 |
| | 48,176 |
|
Operating and revenue earning equipment acquired under finance leases | 2,026 |
| | 257 |
|
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
15. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information was as follows:
|
| | | | | | |
| Nine months ended September 30, |
| 2017 | | 2016 |
| (In thousands) |
Interest paid | $ | 99,889 |
| | 100,903 |
|
Income taxes paid | 10,596 |
| | 12,250 |
|
Changes in accounts payable related to purchases of revenue earning equipment | (63,184 | ) | | (107,177 | ) |
Operating and revenue earning equipment acquired under capital leases | 6,209 |
| | 947 |
|
16.17. SEGMENT REPORTING
Ryder is a global leader in transportation and supply chain management solutions. Our operating segments are aggregated into reportable business segments based upon similar economic characteristics, products, services, customers and delivery methods. We report our financial performance in three business segments: (1) Fleet Management Solutions (FMS),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) Dedicated Transportation Solutions (DTS),DTS, which provides vehicles and drivers as part of a dedicatedturnkey transportation solutionsolutions in the U.S.; that includes dedicated vehicles, drivers and engineering and administrative support; and (3) Supply Chain Solutions (SCS),SCS, which provides comprehensive supply chainintegrated logistics solutions, including distribution, management, dedicated transportation and transportationprofessional services primarily in North America and Asia.America. Dedicated transportation services provided as part of an integrated, multi-service, supply chain solution to SCS customers are reported in the SCS business segment.
Our primary measurement of segment financial performance, defined as segment “Earnings Before Tax” (EBT) from continuing operations, includes an allocation of Central Support Services (CSS) and excludes non-operating pension costs and the restructuring and other items, net as discussed in Note 13,14, "Other Items Impacting Comparability." CSS represents those costs incurred to support all business segments, including human resources, finance and procurement, corporate services, public affairs, information technology, health and safety, legal, marketing and corporate communications. The objective of the EBT measurement is to provide clarity on the profitability of each business segment and, ultimately, to hold leadership of each segment accountable for their allocated share of CSS costs. Certain costs are considered to be overhead not attributable to any segment and remain unallocated in CSS. Included among the unallocated overhead remaining within CSS are the costs for investor relations, public affairs and certain executive compensation. CSS costs attributable to the business segments are predominantly allocated to FMS, DTS and SCS as follows:
•Finance, corporate services, and health and safety — allocated to each segment based upon estimated and planned resource utilization for each segment;utilization;
•Human resources — individual costs within this category are allocated under various methods, including allocation based on estimated utilization and number of personnel supported for each segment;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. Such expenses, ifExpenses, where allocated, to a segment, are based primarily on the number of personnel supported in each segment.supported.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
Our FMS segment leases revenue earning equipment and provides fuel, maintenance and other ancillary services to the DTS and SCS segments. Inter-segment revenue and EBT are accounted for at rates similar to those executed with third parties. EBT related to inter-segment equipment and services billed to DTS and SCS customers (equipment contribution) are included in both FMS and the segment that served the customer and then eliminated (presented as “Eliminations" in the table below)“Eliminations”).
Segment results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented. The following tables set forth financial information for each of our segments and provide a reconciliation between segment EBT and earnings from continuing operations before income taxes for the three and nine months ended September 30, 2017March 31, 2019 and 2016. 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.2018. Prior period Segment EBTsegment amounts and non-operating pension costs have been reclassifiedrevised to conform toreflect the current period presentation. These reclassifications were immaterial to the financial statements taken as a whole.
|
| | | | | | | | | | | | | | | | |
| FMS | | DTS | | SCS | | Eliminations | | Total |
| (In thousands) |
For the three months ended September 30, 2017 | | | | | | | | |
Revenue from external customers | $ | 1,080,191 |
| | 272,334 |
| | 496,004 |
| | — |
| | 1,848,529 |
|
Inter-segment revenue | 115,607 |
| | — |
| | — |
| | (115,607 | ) | | — |
|
Total revenue | $ | 1,195,798 |
| | 272,334 |
| | 496,004 |
| | (115,607 | ) | | 1,848,529 |
|
| | | | | | | | | |
Segment EBT | $ | 100,693 |
| | 13,770 |
| | 22,052 |
| | (14,464 | ) | | 122,051 |
|
Unallocated CSS | | | | | | | | | (11,041 | ) |
Non-operating pension costs | | | | | | | | | (6,958 | ) |
Restructuring and other items, net (1) | | | | | | | | | (9,709 | ) |
Earnings from continuing operations before income taxes | | | | | | | | | $ | 94,343 |
|
| | | | | | | | | |
Segment capital expenditures paid | $ | 431,093 |
| | 1,878 |
| | 16,705 |
| | — |
| | 449,676 |
|
Unallocated CSS capital expenditures paid | | | | | | | | | 7,917 |
|
Capital expenditures paid | | | | | | | | | $ | 457,593 |
|
| | | | | | | | | |
| | | | | | | | | |
For the three months ended September 30, 2016 | | | | | | | | |
Revenue from external customers | $ | 1,046,599 |
| | 260,921 |
| | 416,898 |
| | — |
| | 1,724,418 |
|
Inter-segment revenue | 108,412 |
| | — |
| | — |
| | (108,412 | ) | | — |
|
Total revenue | $ | 1,155,011 |
| | 260,921 |
| | 416,898 |
| | (108,412 | ) | | 1,724,418 |
|
| | | | | | | | | |
Segment EBT | $ | 112,507 |
| | 17,584 |
| | 30,956 |
| | (12,606 | ) | | 148,441 |
|
Unallocated CSS | | | | | | | | | (9,275 | ) |
Non-operating pension costs | | | | | | | | | (7,468 | ) |
Earnings from continuing operations before income taxes | | | | | | | | | $ | 131,698 |
|
| | | | | | | | | |
Segment capital expenditures paid | $ | 375,779 |
| | 1,060 |
| | 8,181 |
| | — |
| | 385,020 |
|
Unallocated CSS capital expenditures paid | | | | | | | | | 6,157 |
|
Capital expenditures paid | | | | | | | | | $ | 391,177 |
|
————————————adoption of ASC 842.
| |
(1) | Refer to Note 13, Other Items Impacting Comparability for additional information. |
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
|
| | | | | | | | | | | | | | | | |
| FMS | | DTS | | SCS | | Eliminations | | Total |
| (In thousands) |
For the three months ended March 31, 2019 | | | | | | | | |
Revenue from external customers | $ | 1,195,035 |
| | 349,621 |
| | 635,671 |
| | — |
| | 2,180,327 |
|
Inter-segment revenue | 156,564 |
| | — |
| | — |
| | (156,564 | ) | | — |
|
Total revenue | $ | 1,351,599 |
| | 349,621 |
| | 635,671 |
| | (156,564 | ) | | 2,180,327 |
|
| | | | | | | | | |
Segment EBT | $ | 60,911 |
| | 17,412 |
| | 32,317 |
| | (17,302 | ) | | 93,338 |
|
Unallocated CSS | | | | | | | | | (12,547 | ) |
Non-operating pension costs (1) | | | | | | | | | (6,462 | ) |
Restructuring and other items, net (2) | | | | | | | | | (6,178 | ) |
Earnings from continuing operations before income taxes | | | | | | | | | $ | 68,151 |
|
| | | | | | | | | |
Segment capital expenditures paid (3) | $ | 1,006,129 |
| | 343 |
| | 12,756 |
| | — |
| | 1,019,228 |
|
Unallocated CSS capital expenditures paid | | | | | | | | | 7,483 |
|
Capital expenditures paid | | | | | | | | | $ | 1,026,711 |
|
| | | | | | | | | |
| | | | | | | | | |
For the three months ended March 31, 2018
| | | | | | | | |
Revenue from external customers | 1,110,528 |
| | 298,970 |
| | 494,707 |
| | — |
| | 1,904,205 |
|
Inter-segment revenue | 132,522 |
| | — |
| | — |
| | (132,522 | ) | | — |
|
Total revenue | 1,243,050 |
| | 298,970 |
| | 494,707 |
| | (132,522 | ) | | 1,904,205 |
|
| | | | | | | | | |
Segment EBT | 54,343 |
| | 13,052 |
| | 25,511 |
| | (13,272 | ) | | 79,634 |
|
Unallocated CSS | | | | | | | | | (10,592 | ) |
Non-operating pension costs (1) | | | | | | | | | (1,222 | ) |
Restructuring and other items, net (2) | | | | | | | | | (15,121 | ) |
Earnings from continuing operations before income taxes | | | | | | | | | $ | 52,699 |
|
| | | | | | | | | |
Segment capital expenditures paid (3) | 645,369 |
| | 249 |
| | 12,293 |
| | — |
| | 657,911 |
|
Unallocated CSS capital expenditures paid | | | | | | | | | 4,833 |
|
Capital expenditures paid | | | | | | | | | $ | 662,744 |
|
|
| | | | | | | | | | | | | | | | |
| FMS | | DTS | | SCS | | Eliminations | | Total |
| (In thousands) |
For the nine months ended September 30, 2017 | | | | | | | | |
Revenue from external customers | $ | 3,148,809 |
| | 811,620 |
| | 1,429,477 |
| | — |
| | 5,389,906 |
|
Inter-segment revenue | 343,038 |
| | — |
| | — |
| | (343,038 | ) | | — |
|
Total revenue | $ | 3,491,847 |
| | 811,620 |
| | 1,429,477 |
| | (343,038 | ) | | 5,389,906 |
|
| | | | | | | | | |
Segment EBT | $ | 220,973 |
| | 39,892 |
| | 75,359 |
| | (38,053 | ) | | 298,171 |
|
Unallocated CSS | | | | | | | | | (32,965 | ) |
Non-operating pension costs | | | | | | | | | (20,875 | ) |
Restructuring and other items, net (1) | | | | | | | | | (9,340 | ) |
Earnings from continuing operations before income taxes | | | | | | | | | $ | 234,991 |
|
| | | | | | | | | |
Segment capital expenditures paid | $ | 1,255,789 |
| | 2,989 |
| | 34,839 |
| | — |
| | 1,293,617 |
|
Unallocated CSS capital expenditures paid | | | | | | | | | 19,228 |
|
Capital expenditures paid | | | | | | | | | $ | 1,312,845 |
|
| | | | | | | | | |
| | | | | | | | | |
For the nine months ended September 30, 2016 | | | | | | | | |
Revenue from external customers | $ | 3,086,144 |
| | 764,025 |
| | 1,207,665 |
| | — |
| | 5,057,834 |
|
Inter-segment revenue | 318,308 |
| | — |
| | — |
| | (318,308 | ) | | — |
|
Total revenue | $ | 3,404,452 |
| | 764,025 |
| | 1,207,665 |
| | (318,308 | ) | | 5,057,834 |
|
| | | | | | | | | |
Segment EBT | $ | 306,554 |
| | 48,300 |
| | 79,105 |
| | (37,116 | ) | | 396,843 |
|
Unallocated CSS | | | | | | | | | (29,960 | ) |
Non-operating pension costs | | | | | | | | | (22,048 | ) |
Pension-related charge (2)
| | | | | | | | | (7,650 | ) |
Earnings from continuing operations before income taxes | | | | | | | | | $ | 337,185 |
|
| | | | | | | | | |
Segment capital expenditures paid | $ | 1,438,104 |
| | 1,940 |
| | 52,643 |
| | — |
| | 1,492,687 |
|
Unallocated CSS capital expenditures paid | | | | | | | | | 18,672 |
|
Capital expenditures paid | | | | | | | | | $ | 1,511,359 |
|
————————————
| |
(1) | Refer toNon-operating pension costs include the amortization of net actuarial loss and prior service costs, interest costs and expected return on plan assets. |
| |
(2) | See Note 13, Other14, "Other Items Impacting Comparability," for additional information. |
| |
(2)(3) | During the second quarter of 2016, we determined that certain pension benefit improvements made in 2009 were not fully reflected in our projected benefit obligation. We recognized a charge of $7.7 million related to these benefit improvements.Excludes revenue earning equipment acquired under finance leases. |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the unaudited Consolidated Condensed Financial Statements and notes thereto included under Item 1. As discussed in Note 2, effective January 1, 2019, we adopted Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) using the modified retrospective transition comparative method. We have recast all prior period amounts in this MD&A to conform to the current period presentation based on our adoption of this new accounting standard. Refer to Note 2, "Recent Accounting Pronouncements," for additional information on the revised amounts. In addition, reference should be made to our audited Consolidated Financial Statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 20162018 Annual Report on Form 10-K.
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) Fleet Management Solutions (FMS),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) Dedicated Transportation Solutions (DTS),DTS, which provides vehicles and drivers as part of a dedicatedturnkey transportation solutionsolutions in the U.S.; that includes dedicated vehicles, drivers and engineering and administrative support; and (3) Supply Chain Solutions (SCS),SCS, which provides comprehensive supply chainintegrated logistics solutions, including distribution, management, dedicated transportation and transportationprofessional services primarily in North America and Asia.America. Dedicated transportation services provided as part of an integrated, multi-service, supply chain solution to SCS customers are reported in the SCS business segment.
We operate in highly competitive markets. Our customers select us based on numerous factors including service quality, price, technology and service offerings. As an alternative to using our services, customers may choose to provide these services for themselves, or may choose to obtain similar or alternative services from other third-party vendors. Our customer base includes enterprises operating in a variety of industries including automotive, industrial, food and beverage service, consumer packaged goods (CPG), transportation and warehousing,logistics, automotive, retail and consumer goods, industrial, housing, technology, and healthcare, retail, housing, business and personal services, and paper and publishing.services.
In 2016, we expandedaddition, our full service lease product line to provide lease customers additional flexibility, choiceresults of operations and
control financial condition are influenced by a number of factors including, but not limited to: customer contracting activity and retention, rental demand, used vehicle sales pricing, maintenance costs, depreciation policy changes, currency exchange rate fluctuations, customer preferences, inflation, fuel and energy prices, general economic conditions, insurance costs, interest rates, labor costs, unemployment, tax rates, changes in fleet management,accounting or regulatory requirements and we renamed this lease product line "ChoiceLease." Our ChoiceLease product line allows customers to select the level of maintenance they prefer in their leases, from full service or total bumper-to-bumper coverage to on demand or pay-as-you-go maintenance. We also combined our historical contract maintenance and our contract-related maintenance product offerings into a new product line "SelectCare." Our SelectCare product line allows customers to select the level of maintenance to keep their fleet running properly, as well as the option to choose where they want their service delivered. Beginning in 2017, FMS is using these new product names in its reporting.cybersecurity attacks.
This MD&A includes certain non-GAAP financial measures. Please refer to the “Non-GAAP Financial Measures” section of this MD&A for information on the non-GAAP measures included in the MD&A, reconciliations to the most comparable GAAP financial measure and the reasons why we believe each measure is useful to investors.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Operating results were as follows:
| | | Three months ended September 30, | | Nine months ended September 30, | | Change 2017/2016 | Three months ended March 31, | | Change |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | Nine Months | 2019 | | 2018 | | 2019/2018 |
| (In thousands, except per share amounts) | | | | (In thousands, except per share amounts) |
Total revenue | $ | 1,848,529 |
| | 1,724,418 |
| | $ | 5,389,906 |
| | 5,057,834 |
| | 7 | % | 7 | % | $ | 2,180,327 |
| | 1,904,205 |
| | 15 | % |
Operating revenue (1) | 1,525,453 |
| | 1,468,293 |
| | 4,453,768 |
| | 4,324,019 |
| | 4 | % | 3 | % | 1,759,007 |
| | 1,543,667 |
| | 14 | % |
|
|
| |
|
| | | | | |
|
| |
|
| |
|
| | |
|
|
| |
|
| | | | | |
|
| |
|
| |
|
| | |
EBT | $ | 94,343 |
| | 131,698 |
| | $ | 234,991 |
| | 337,185 |
| | (28 | )% | (30 | )% | $ | 68,151 |
| | 52,699 |
| | 29 | % |
Comparable EBT (2) | 111,010 |
| | 139,141 |
| | 265,206 |
| | 366,858 |
| | (20 | )% | (28 | )% | 80,791 |
| | 69,042 |
| | 17 | % |
Earnings from continuing operations | 58,913 |
| | 85,138 |
| | 148,535 |
| | 215,365 |
| | (31 | )% | (31 | )% | 45,890 |
| | 37,313 |
| | 23 | % |
Comparable earnings from continuing operations (2) | 70,820 |
| | 89,558 |
| | 168,079 |
| | 233,039 |
| | (21 | )% | (28 | )% | 58,462 |
| | 51,099 |
| | 14 | % |
Net earnings | 58,623 |
| | 84,752 |
| | 147,588 |
| | 214,296 |
| | (31 | )% | (31 | )% | 45,316 |
| | 36,886 |
| | 23 | % |
|
| |
| | | | | |
|
| |
| |
| | |
|
| |
| | | | | |
|
| |
| |
| | |
Earnings per common share (EPS) — Diluted |
| |
| | | | | |
|
| |
| |
| | |
Continuing operations | $ | 1.11 |
| | 1.59 |
| | $ | 2.79 |
| | 4.02 |
| | (30 | )% | (31 | )% | $ | 0.87 |
| | 0.70 |
| | 24 | % |
Comparable (2) | 1.33 |
| | 1.67 |
| | 3.16 |
| | 4.35 |
| | (20 | )% | (27 | )% | 1.11 |
| | 0.96 |
| | 16 | % |
Net earnings | 1.11 |
| | 1.59 |
| | 2.77 |
| | 4.00 |
| | (30 | )% | (31 | )% | 0.86 |
| | 0.70 |
| | 23 | % |
————————————
| |
(1) | Non-GAAP financial measure. Refer to the“Non-GAAPthe “Non-GAAP Financial Measures” section of this MD&A for a reconciliation of total revenue to operating revenue and the reasons why management believes this measure is important to investors. |
| |
(2) | Non-GAAP financial measures. Refer to the “Non-GAAP Financial Measures” section for a reconciliation of EBT, net earnings and earnings per diluted common share to the comparable measures and the reasons why management believes these measures are important to investors. |
Total revenue increased 15% and operating revenue (a non-GAAP measure excluding fuel and subcontracted transportation) increased 7% and 4%, respectively,14% in the thirdfirst quarter of 2017. For the nine months ended September 30, 2017, total revenue and operating revenue increased 7% and 3%, respectively. Total revenue2019. Revenue grew in both periods increased due to higher operating revenue and increased subcontracted transportation passed through to customers,all three business segments reflecting new business and higher volumes,volumes. SCS total and operating revenue growth also reflects the acquisition of MXD Group, Inc. (MXD), re-branded as well as higher fuel costs passed through to customers. Operating revenue in both periodsRyder Last Mile, during the second quarter of 2018. EBT increased due to higher revenue29% in the SCS business segment and higher contractual ChoiceLease revenue. Operatingthree months ended March 31, 2019, reflecting revenue growth was partially offset by lower commercial rental revenue in the nine months ended September 30, 2017.
EBT decreased 28% in the third quarter of 2017, reflecting lower year over yearand improved operating results in all segments, a $5.5 million estimated pension settlement charge for the exit from a U.S. multi-employer pension plan and $4.3 million related to consulting fees associated with a cost-savings program. In FMS, EBT decreased in the third quarter due to accelerated depreciation of $4 million on vehicles expected to be made available for sale through June 2018 and more normalized maintenance spending associated with vehicles being prepared for sale, as well as increased overhead spending, primarily due to the timing of incentive compensation and higher sales and marketing expense. DTS EBT decreased in the third quarter due to higher insurance premiums, higher maintenance costs on certain older model year vehicles and the impact of one less work day. SCS EBT decreased in the third quarter primarily due to the operating performance of two customer accounts, including a particularly challenging start-up, and higher overhead spending, primarily for planned investments in information technology and sales. The net impact of hurricanes was neutral in the third quarter of 2017, as hurricane-related increases in commercial rental demand were offset by property losses.
EBT decreased 30% in the nine months ended September 30, 2017, primarily reflecting lower used vehicle sales and commercial rental results, as well as accelerated depreciation of $21 million, a $5.5 million estimated pension settlement charge, $4.3 million related to consulting fees associated with a cost-savings program and a particularly challenging start-up during the third quarter in the SCS segment.performance.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
CONSOLIDATED RESULTS
Lease & Related Maintenance and Rental
| | | Three months ended September 30, | | Nine months ended September 30, | | Change 2017/2016 | Three months ended March 31, | | Change |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | | Nine Months | 2019 | | 2018 | | 2019/2018 |
| (Dollars in thousands) | | | | | (Dollars in thousands) | | |
Lease and rental revenues | $ | 823,197 |
| | 803,006 |
| | $ | 2,387,801 |
| | 2,369,147 |
| | 3 | % | | 1 | % | |
Cost of lease and rental | 588,626 |
| | 557,901 |
| | 1,745,777 |
| | 1,665,693 |
| | 6 | % | | 5 | % | |
Lease & related maintenance and rental revenues | | $ | 899,559 |
| | 824,991 |
| | 9 | % |
Cost of lease & related maintenance and rental | | 664,289 |
| | 615,605 |
| | 8 | % |
Gross margin | 234,571 |
| | 245,105 |
| | 642,024 |
| | 703,454 |
| | (4 | )% | | (9 | )% | 235,270 |
| | 209,386 |
| | 12 | % |
Gross margin % | 28 | % | | 31 | % | | 27 | % | | 30 | % | | | | | 26 | % | | 25 | % | | |
Lease & related maintenance and rental revenues represent revenuerevenues from our ChoiceLease and commercial rental product offerings within our FMS business segment. Revenues increased 3%9% to $823$900 million in the thirdfirst quarter and 1% to $2.39 billion in the nine months ended September 30, 2017,of 2019, driven by growth in the ChoiceLease fleet growth and higher prices on replacement vehicles in the ChoiceLease product offering. In the nine months ended September 30, 2017, ChoiceLease revenuevehicles. Lease & related maintenance and rental revenues growth was partially offset by loweralso reflects higher commercial rental revenue reflecting lower demand.driven by higher demand and pricing.
Cost of lease & related maintenance and rental represents the direct costs related to lease & related maintenance and rental revenues. These costs consist of depreciation of revenue earning equipment, maintenance costs (primarily repair parts and labor), and other costs such as licenses, insurance and operating taxes. Cost of lease & related maintenance and rental excludes interest costs from vehicle financing. Cost of lease & related maintenance and rental revenues increased 6%8% in the thirdfirst quarter, and 5% in the nine months ended September 30, 2017, primarily due to higher depreciation and maintenance costs from a larger average lease fleet and normalizedrental fleets (8% and 11% higher in the first quarter, respectively), as well as higher liability insurance costs related to development of prior period claims, partially offset by a significant maintenance spending associated with vehicles being prepared for sale. During the nine months ended, cost recovery item. Cost of lease & related maintenance and rental also increased by $9 million in the first quarter of 2019, due to higher maintenance costs on certain older model year vehicles. Costdepreciation as a result of lease and rental was also impacted by accelerated depreciation on vehicles expected to be made available for sale through June 2018 of $4 million in the third quarter and $21 million in the nine months ended September 30, 2017. These increases were partially offset by lower depreciation on a smaller average rental fleet. Cost of lease and rental also increased $1 million in the third quarter of 2017 and $3 million in the nine months ended September 30, 2017, due to changes in estimated vehicle residual values effective January 1, 2017.2019, and, to a lesser extent, accelerated depreciation.
Lease & related maintenance and rental gross margin decreased 4%increased 12% in the thirdfirst quarter of 2019 and 9% in the nine months ended September 30, 2017. Lease and rental gross margin as a percentage of revenue decreasedincreased to 28%26% in the thirdfirst quarter and to 27% in the nine months ended September 30, 2017.of 2019. The decreaseincrease in gross margin dollars and gross margin as a percentage of revenue in the thirdfirst quarter was due to accelerated depreciation on vehicles expected to be made available for sale through June 2018 and more normalized maintenance spending associated with vehicles being prepared for sale. The decrease in gross margin dollars in the nine months ended September 30, 2017, was due to lower commercial rental demand, higher maintenance costs and accelerated depreciation. The decrease in gross margin dollars and as a percentage of revenue in the nine months ended September 30, 2017,2019 was primarily due to stronger commercial rental demand, as well as the maintenance cost recovery, partially offset by higher maintenance costs and accelerated depreciation.depreciation due to vehicle residual value changes.
Services
| |
| Three months ended September 30, | | Nine months ended September 30, | | Change 2017/2016 | Three months ended March 31, | | Change |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | | Nine Months | 2019 | | 2018 | | 2019/2018 |
| (Dollars in thousands) | |
|
| | | (Dollars in thousands) | |
|
|
Services revenue | $ | 896,245 |
| | 801,004 |
| | $ | 2,619,139 |
| | 2,345,922 |
| | 12 | % | | 12 | % | $ | 1,132,048 |
| | 928,144 |
| | 22 | % |
Cost of services | 761,470 |
| | 658,793 |
| | 2,210,314 |
| | 1,936,636 |
| | 16 | % | | 14 | % | 971,690 |
| | 788,771 |
| | 23 | % |
Gross margin | 134,775 |
| | 142,211 |
| | 408,825 |
| | 409,286 |
| | (5 | )% | | — | % | 160,358 |
| | 139,373 |
| | 15 | % |
Gross margin % | 15 | % | | 18 | % | | 16 | % | | 17 | % | | | | | 14 | % | | 15 | % | | |
Services revenue represents all the revenues associated with our DTS and SCS business segments, as well as SelectCare and fleet support services associated with our FMS business segment. Services revenue increased 12%22% in the thirdfirst quarter, primarily due to new business in the SCS and DTS segments. Services revenue increased 12% in the nine months ended September 30, 2017, primarily due todriven by new business and increased volumes in the SCS and DTS segments.DTS. Services revenue also benefited from higher fuel costs passed through to our customers in both the three and nine months ended September 30, 2017.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
MXD acquisition during the second quarter of 2018.
Cost of services represents the direct costs related to services revenue and is primarily comprised of salaries and employee-related costs, subcontracted transportation (purchased transportation from third parties), fuel, vehicle liability costs and maintenance costs. Cost of services increased 16%23% in the thirdfirst quarter and 14% in the nine months ended September 30, 2017, primarilyof 2019 due to higher volumes in SCS and SelectCare and higher fuel costs in SCS and DTS. Cost of services also increased in both periods due to higher costs incurred during the start-up phase on certain new SCS contracts and higher vehicle maintenance costs on certain older model year vehicles in DTS.volumes.
Services gross margin decreased 5%increased 15% in the thirdfirst quarter of 2017 and remained unchanged in the nine months ended September 30, 2017. Services2019. Service gross margin as a percentage of revenue decreased to 15%14% in the thirdfirst quarter of 2019. The increase in gross margin dollars reflects benefits from new business and to 16%increased volumes in the nine months ended September 30, 2017.SCS and DTS. The decrease in gross margin dollars and as a percentage of revenue reflects a change in the third quarter and nine months ended, reflects lower operating performance on certain SCS contracts, including a particularly challenging start-up during the third quarter, as well as increased maintenance costs on certain older model year vehicles in DTS.mix of business.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Fuel
| |
| Three months ended September 30, | | Nine months ended September 30, | | Change 2017/2016 | Three months ended March 31, | | Change |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | | Nine Months | 2019 | | 2018 | | 2019/2018 |
| (Dollars in thousands) | |
|
| | | (Dollars in thousands) | | |
Fuel services revenue | $ | 129,087 |
| | 120,408 |
| | $ | 382,966 |
| | 342,765 |
| | 7 | % | | 12 | % | $ | 148,720 |
| | 151,070 |
| | (2 | )% |
Cost of fuel services | 124,562 |
| | 116,904 |
| | 372,016 |
| | 331,283 |
| | 7 | % | | 12 | % | 143,275 |
| | 146,903 |
| | (2 | )% |
Gross margin | 4,525 |
| | 3,504 |
| | 10,950 |
| | 11,482 |
| | 29 | % | | (5 | )% | 5,445 |
| | 4,167 |
| | 31 | % |
Gross margin % | 4 | % | | 3 | % | | 3 | % | | 3 | % | | | | | 4 | % | | 3 | % | | |
Fuel services revenue represents fuel services provided to our FMS customers. Fuel services revenue increased 7%decreased 2% in the thirdfirst quarter, of 2017 and 12% in the nine months ended September 30, 2017, primarily due to higherreflecting lower fuel costs passed through to customers.customers, partially offset by higher gallons sold.
Cost of fuel services includes the direct costs associated with providing our customers with fuel. These costs include fuel, salaries and employee-related costs of fuel island attendants and depreciation of our fueling facilities and equipment. Cost of fuel services increased 7%decreased 2% in the thirdfirst quarter and 12% in the nine months ended September 30, 2017, as a result of higher fuel costs.lower revenue.
Fuel services gross margin increased 29% in the third quarter31% and decreased 5% in the nine months ended September 30, 2017. Fuelfuel services gross margin as a percentage of revenue increased to 4% in the thirdfirst quarter and remained at 3% in the nine months ended September 30, 2017, compared to the same periods of 2016.2019. Fuel is largely a pass-through to customers for which we realize minimal changes in margin during periods of steady market fuel prices. However, fuel services margin is impacted by sudden increases or decreases in market fuel prices during a short period of time, as customer pricing for fuel is established based on trailing market fuel costs.
Fuel services gross margin in the first quarter of 2019 was positively impacted by these price change dynamics as fuel prices fluctuated during the period.
|
| | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | Change 2017/2016 |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | | Nine Months |
| (In thousands) | |
|
| | |
Other operating expenses | $ | 28,445 |
| | 27,997 |
| | $ | 87,122 |
| | 85,944 |
| | 2 | % | | 1 | % |
|
| | | | | | | | | |
| Three months ended March 31, | | Change |
| 2019 | | 2018 | | 2019/2018 |
| (Dollars in thousands) | |
|
|
Other operating expenses | $ | 33,626 |
| | 32,975 |
| | 2 | % |
Other operating expenses include costs related to our owned and leased facilities within the FMS segment, such as facility depreciation, rent, purchased insurance, utilities and taxes. These facilities are utilized to provide maintenance to our ChoiceLease, commercial rental, and SelectCare customers. Other operating expenses increased slightly to $28.4 million in the third quarter and to $87.1$34 million in the nine months ended September 30, 2017.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
first quarter, primarily from growth and additional investments to upgrade our facilities.
| |
| Three months ended September 30, | | Nine months ended September 30, | | Change 2017/2016 | Three months ended March 31, | | Change |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | | Nine Months | 2019 | | 2018 | | 2019/2018 |
| (Dollars in thousands) | |
|
| | | (Dollars in thousands) | |
|
|
Selling, general and administrative expenses (SG&A) | $ | 216,653 |
| | 191,337 |
| | $ | 620,041 |
| | 602,768 |
| | 13 | % | | 3 | % | $ | 231,325 |
| | 207,828 |
| | 11 | % |
Percentage of total revenue | 12 | % | | 11 | % | | 12 | % | | 12 | % | | | | | 11 | % | | 11 | % | | |
SG&A expenses increased 11% in the thirdfirst quarter of 2017 increased 13% and as a percentage of total revenue increased to 12% driven by an estimated pension settlement charge for the exit from a U.S. multi-employer pension plan of $5.5 million during the quarter as well as higher compensation-related costs, professional fees, including consulting fees associated with a cost-savings program, and information technology costs. SG&A expenses in the nine months ended September 30, 2017, increased 3% primarily due to the estimated pension settlement charge, higher information technology costs and professional fees. SG&A expenses as a percentage of total revenue remained at 12%11%. The increase in the nine months ended September 30, 2017 comparedSG&A expenses primarily reflects higher compensation-related expenses and, to the same perioda lesser extent, growth-related investments in 2016.sales, marketing and technology.
|
| | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | Change 2017/2016 |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | | Nine Months |
| (Dollars in thousands) | | | | |
Non-operating pension costs | $ | 6,958 |
| | 7,468 |
| | 20,875 |
| | 29,698 |
| | (7 | )% | | (30 | )% |
|
| | | | | | | | |
| Three months ended March 31, | | Change |
| 2019 | | 2018 | | 2019/2018 |
| (Dollars in thousands) | | |
Non-operating pension costs | $ | 6,462 |
| | 1,222 |
| | NM |
Non-operating pension costs includes the components of our net periodic benefit cost other than service cost. These components include interest cost, expected return on plan assets, amortization of actuarial loss and prior service cost. Non-operatingNon-
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
operating pension costs decreased $0.5increased $5 million in the thirdfirst quarter and $8.8 million in the nine months ended September 30, 2017, from the respective prior year periods. The year-to-date decrease is primarily due to a one-time charge of $7.7 millionunfavorable asset returns in the second quarter of 2016 to fully reflect pension benefit improvements made in 2009 in our pension benefit obligation.2018, partially offset by higher interest rates.
|
| | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | Change 2017/2016 |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | | Nine Months |
| (Dollars in thousands) | |
| | |
Used vehicle sales, net | $ | 2,727 |
| | 1,873 |
| | $ | (11,815 | ) | | 33,002 |
| | 46 | % | | (136 | )% |
|
| | | | | | | | | |
| Three months ended March 31, | | Change |
| 2019 | | 2018 | | 2019/2018 |
| (Dollars in thousands) | | |
Used vehicle sales, net | $ | (8,217 | ) | | (7,431 | ) | | 11 | % |
Used vehicle sales, net includes gains from sales of used vehicles, as well as the selling costs associated with used vehicles and write-downs of vehicles to fair market values. Used vehicle sales, net increaseddecreased to a gain of $2.7an $8 million loss in the thirdfirst quarter of 2017 and decreased to2019, as increased sales of used vehicles at higher prices were offset by higher valuation adjustments on a loss of $11.8 millionlarger inventory. Global average proceeds per unit in the nine months ended September 30, 2017. The quarterly increase is driven by lower fair market value write-downs on vehicles held for sale, partially offset by lowerfirst quarter increased from the prior year reflecting increased tractor and truck proceeds per unit resultingpricing and a higher number of units sold. The increase in tractor pricing was primarily due to a lower gains on sales. For the nine months ended September 30, 2017, used vehicle sales results have been impacted primarily by a sharp drop in the market valueaverage age of tractors and trucks, which resulted in lower gains onvehicles sold, higher mix of retail sales and greater fairimproved market value write-downs on vehicles held for sale. pricing.
The following table presents the used vehicle pricing changes for the three and nine months ended September 30, 2017.
first quarter of 2019 compared with the prior year:
|
| | | | | |
| Proceeds per unit change 2017/2016 |
| Three Months | | Nine Months |
| | | |
Tractors | (19 | )% |
| (17 | )% |
Trucks | (15 | )% | | (16 | )% |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
|
| | |
| Change |
| 2019/2018 |
| |
Tractors | 17 | % |
Trucks | 3 | % |
| | | Three months ended September 30, | | Nine months ended September 30, | | Change 2017/2016 | Three months ended March 31, | | Change |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | | Nine Months | 2019 | | 2018 | | 2019/2018 |
| (Dollars in thousands) | | | | | (Dollars in thousands) | | |
Interest expense | $ | 34,854 |
| | 37,440 |
| | $ | 104,591 |
| | 112,597 |
| | (7 | )% | | (7 | )% | $ | 55,336 |
| | 38,160 |
| | 45 | % |
Effective interest rate | 2.6 | % | | 2.7 | % | | 2.6 | % | | 2.7 | % | | | | | 3.2 | % | | 2.7 | % | | |
Interest expense decreased 7%increased 45% in the thirdfirst quarter of 2017 and in the nine months ended September 30, 2017,2019, reflecting lowerhigher average outstanding debt and a lowerhigher effective interest rate. The decreaseincrease in average outstanding debt reflects lowerhigher planned vehicle capital spending. The lowerhigher effective interest rate in 20172019 reflects the replacement of higherlower fixed interest rate debt with debt issuances at lower rates.higher fixed rates as well as the impact on variable rate debt of a higher interest rate environment.
|
| | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | Change 2017/2016 |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | | Nine Months |
| (Dollars in thousands) | | | | |
Miscellaneous income, net | $ | 4,655 |
| | 3,247 |
| | $ | 17,636 |
| | 10,968 |
| | 43 | % | | 61 | % |
|
| | | | | | | | |
| Three months ended March 31, | | Change |
| 2019 | | 2018 | | 2019/2018 |
| (Dollars in thousands) | | |
Miscellaneous income, net | $ | 8,222 |
| | 2,510 |
| | NM |
Miscellaneous income, net consists of investment income on securities used to fund certain benefit plans, interest income,
gains from sales of operating property, foreign currency transaction gainslosses and other non-operating items. Miscellaneous income, increased to $8 million in the first quarter of 2019. The increase in the third quarter and nine months ended September 30, 2017 is primarily driven by increasedhigher rabbi trust investment income, gains on sales of properties of $0.6 million in the third quarter and $3.7 million in the nine months ended September 30, 2017, respectively, and recoveries from business interruption claims of $3.2 million in the nine months ended September 30, 2017.income.
|
| | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | Change 2017/2016 |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | | Nine Months |
| (Dollars in thousands) | | | | |
Provision for income taxes | $ | 35,430 |
| | 46,560 |
| | $ | 86,456 |
| | 121,820 |
| | (24 | )% | | (29 | )% |
Effective tax rate from continuing operations | 37.6 | % | | 35.4 | % | | 36.8 | % | | 36.1 | % | | | | |
|
| | | | | | | | |
| Three months ended March 31, | | Change |
| 2019 | | 2018 | | 2019/2018 |
| (Dollars in thousands) | | |
Restructuring and other items, net | $ | 6,178 |
| | 15,121 |
| | NM |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Refer to Note 14, "Other Items Impacting Comparability," in the Notes to the Consolidated Condensed Financial Statements for a discussion of restructuring charges and fees, net.
|
| | | | | | | | | |
| Three months ended March 31, | | Change |
| 2019 | | 2018 | | 2019/2018 |
| (Dollars in thousands) | | |
Provision for income taxes | $ | 22,261 |
| | 15,386 |
| | 45 | % |
Effective tax rate from continuing operations | 32.7 | % | | 29.2 | % | | |
Provision for income taxes decreased 24%increased 45% in the thirdfirst quarter, reflecting the expiration of 2017certain state net operating losses in 2019 and 29%a one-time beneficial adjustment associated with uncertain tax positions in 2018. In addition, the nine months ended September 30, 2017. The decrease in the provision for income taxes reflects lower taxable earnings, partially offset by a higher effectivefirst quarter 2019 tax rate primarily due toreflects a state$1 million benefit for the alternative minimum tax law change in the third quarter.
sequestration reversal.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
OPERATING RESULTS BY BUSINESS SEGMENT
| | | Three months ended September 30, | | Nine months ended September 30, | | Change 2017/2016 | Three months ended March 31, | | Change |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | | Nine Months | 2019 | | 2018 | | 2019/2018 |
| (Dollars in thousands) | | | | | (Dollars in thousands) | | |
Total Revenue: | | | | | | | | | | | | | | | | |
Fleet Management Solutions | $ | 1,195,798 |
| | 1,155,011 |
| | $ | 3,491,847 |
| | 3,404,452 |
| | 4 | % | | 3 | % | $ | 1,351,599 |
| | 1,243,050 |
| | 9 | % |
Dedicated Transportation Solutions | 272,334 |
| | 260,921 |
| | 811,620 |
| | 764,025 |
| | 4 |
| | 6 |
| 349,621 |
| | 298,970 |
| | 17 |
|
Supply Chain Solutions | 496,004 |
|
| 416,898 |
| | 1,429,477 |
| | 1,207,665 |
| | 19 |
| | 18 |
| 635,671 |
|
| 494,707 |
| | 28 |
|
Eliminations | (115,607 | ) |
| (108,412 | ) | | (343,038 | ) | | (318,308 | ) | | 7 |
| | 8 |
| (156,564 | ) |
| (132,522 | ) | | (18 | ) |
Total | $ | 1,848,529 |
|
| 1,724,418 |
| | $ | 5,389,906 |
| | 5,057,834 |
| | 7 | % | | 7 | % | $ | 2,180,327 |
|
| 1,904,205 |
| | 15 | % |
Operating Revenue: (1) |
|
|
| | | | |
|
|
| |
|
|
|
|
| |
|
|
Fleet Management Solutions | $ | 1,026,011 |
|
| 997,903 |
| | $ | 2,986,792 |
| | 2,955,465 |
|
| 3 | % | | 1 | % | $ | 1,143,733 |
|
| 1,039,243 |
| | 10 | % |
Dedicated Transportation Solutions | 197,917 |
|
| 196,648 |
| | 591,045 |
| | 581,213 |
|
| 1 |
| | 2 |
| 235,620 |
|
| 201,405 |
| | 17 |
|
Supply Chain Solutions | 376,429 |
|
| 345,453 |
| | 1,096,899 |
| | 999,427 |
|
| 9 |
| | 10 |
| 477,089 |
|
| 382,806 |
| | 25 |
|
Eliminations | (74,904 | ) |
| (71,711 | ) | | (220,968 | ) | | (212,086 | ) |
| 4 |
| | 4 |
| (97,435 | ) |
| (79,787 | ) | | (22 | ) |
Total | $ | 1,525,453 |
|
| 1,468,293 |
| | $ | 4,453,768 |
| | 4,324,019 |
|
| 4 | % | | 3 | % | $ | 1,759,007 |
|
| 1,543,667 |
| | 14 | % |
EBT: | | | | | | | | | | |
|
| | | | | |
Fleet Management Solutions | $ | 100,693 |
|
| 112,507 |
| | $ | 220,973 |
| | 306,554 |
| | (11 | )% | | (28 | )% | $ | 60,911 |
|
| 54,343 |
| | 12 | % |
Dedicated Transportation Solutions | 13,770 |
| | 17,584 |
| | 39,892 |
| | 48,300 |
| | (22 | ) | | (17 | ) | 17,412 |
| | 13,052 |
| | 33 |
|
Supply Chain Solutions | 22,052 |
|
| 30,956 |
| | 75,359 |
| | 79,105 |
| | (29 | ) | | (5 | ) | 32,317 |
|
| 25,511 |
| | 27 |
|
Eliminations | (14,464 | ) |
| (12,606 | ) | | (38,053 | ) | | (37,116 | ) | | 15 |
| | 3 |
| (17,302 | ) |
| (13,272 | ) | | (30 | ) |
| 122,051 |
|
| 148,441 |
|
| 298,171 |
|
| 396,843 |
| | (18 | ) | | (25 | ) | 93,338 |
|
| 79,634 |
| | 17 |
|
Unallocated Central Support Services | (11,041 | ) |
| (9,275 | ) | | (32,965 | ) | | (29,960 | ) | | 19 |
| | 10 |
| (12,547 | ) |
| (10,592 | ) | | (18 | ) |
Non-operating pension costs | (6,958 | ) |
| (7,468 | ) | | (20,875 | ) | | (22,048 | ) | | (7 | ) | | (5 | ) | (6,462 | ) |
| (1,222 | ) | | NM |
|
Restructuring and other items, net | (9,709 | ) |
| — |
| | (9,340 | ) | | (7,650 | ) | | NM |
| | NM |
| (6,178 | ) |
| (15,121 | ) | | NM |
|
Earnings from continuing operations before income taxes | $ | 94,343 |
|
| 131,698 |
|
| $ | 234,991 |
|
| 337,185 |
| | (28 | )% | | (30 | )% | $ | 68,151 |
|
| 52,699 |
| | 29 | % |
————————————
| |
(1) | Non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section of this MD&A for a reconciliation of total revenue to operating revenue, and segment total revenue to segment operating revenue for FMS, DTS and SCS, as well as the reasons why management believes these measures are important to investors. |
As part of management’s evaluation of segment operating performance, we define the primary measurement of our segment financial performance as “Earnings Before Taxes” (EBT) from continuing operations, which includes an allocation of Central Support Services (CSS), and excludes non-operating pension costs and restructuring and other items, net discussed in Note 16, "Segment Reporting,14, "Other Items Impacting Comparability," in the Notes to Consolidated Condensed Financial Statements. CSS represents those costs
incurred to support all business segments, including human resources, finance and procurement, corporate services and public affairs, information technology, health and safety, legal, marketing and corporate communications.
The objective of the EBT measurement is to provide clarity on the profitability of each segment and, ultimately, to hold leadership of each business segment accountable for their allocated share of CSS costs. Segment results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented. Certain costs are not attributable to any segment and remain unallocated in CSS, including costs for investor relations, public affairs and certain executive compensation.
See Note 17, "Segment Reporting," in the Notes to Consolidated Condensed Financial Statements for a description of the methodology for allocating the remainder of CSS costs to the business segments.
Inter-segment revenue and EBT are accounted for at rates similar to those executed with third parties. EBT related to inter-segment equipment and services billed to DTS and SCS customers (equipment contribution) are included in both FMS and the segment that served the customer and then eliminated (presented as “Eliminations” in the table above). Prior year amounts have been reclassifiedrevised to conform to the current period presentation.
presentation, which excludes EBT from our Singapore operations that will be shut down in 2019.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The following table sets forth equipment contribution included in EBT for our DTS and SCS business segments:
| | | Three months ended September 30, | | Nine months ended September 30, | | Change 2017/2016 | Three months ended March 31, | | Change |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | | Nine Months | 2019 | | 2018 | | 2019/2018 |
| (Dollars in thousands) | | | | | (Dollars in thousands) | | |
Equipment Contribution: | | | | | | | | | | | | | | | | |
Dedicated Transportation Solutions | $ | 8,320 |
| | 8,047 |
| | $ | 22,532 |
| | 24,214 |
| | 3 | % | | (7 | )% | $ | 9,660 |
| | 7,491 |
| | 29 | % |
Supply Chain Solutions | 6,144 |
| | 4,559 |
| | 15,521 |
| | 12,902 |
| | 35 |
| | 20 |
| 7,642 |
| | 5,781 |
| | 32 |
|
Total (1) | $ | 14,464 |
| | 12,606 |
| | $ | 38,053 |
| | 37,116 |
| | 15 | % | | 3 | % | $ | 17,302 |
| | 13,272 |
| | 30 | % |
———————————
| |
(1) | Total amount is included in FMS EBT. |
The increase in DTS and SCS equipment contribution increased slightly infor the thirdfirst quarter and decreased in the nine months ended September 30, 2017. The decrease in the nine months endedof 2019 is primarily driven by higher maintenance costs on an older vehicle fleet used in DTS operations. The increase in SCS equipment contribution in the third quarternew business and in the nine months ended is primarily driven by increasedhigher volumes.
The following table sets forth itemsItems excluded from our segment EBT measure and their classification within our Consolidated Condensed Statements of Earnings:Earnings follow:
|
| | | | | | | | | | | | | | | | |
| | | | Three months ended September 30, | | Nine months ended September 30, |
Description | | Classification | | 2017 | | 2016 | | 2017 | | 2016 |
| | | | (In thousands) |
Non-operating pension costs (1) | | Non-operating pension costs | | $ | (6,958 | ) | | (7,468 | ) | | $ | (20,875 | ) | | (22,048 | ) |
Pension settlement charge (2) | | SG&A | | (5,454 | ) | | — |
| | (5,454 | ) | | — |
|
Fees related to cost-savings program (3) | | SG&A | | (4,255 | ) | | — |
| | (4,255 | ) | | — |
|
Operating tax adjustment (3) | | SG&A | | — |
| | — |
| | (2,205 | ) | | — |
|
Restructuring (3) | | Miscellaneous income, net | | — |
| | — |
| | 2,574 |
| | — |
|
Pension-related adjustments (2) | | Non-operating pension costs | | — |
| | — |
| | — |
| | (7,650 | ) |
| | | | $ | (16,667 | ) | | (7,468 | ) | | $ | (30,215 | ) | | (29,698 | ) |
|
| | | | | | | | | |
| | | | Three months ended March 31, |
Description | | Classification | | 2019 | | 2018 |
| | | | (In thousands) |
Non-operating pension costs (1) | | Non-operating pension costs | | $ | (6,462 | ) | | (1,222 | ) |
ERP implementation costs (2) | | Restructuring and other items, net | | (3,590 | ) | | — |
|
Restructuring and other, net (2) | | Restructuring and other items, net | | (2,588 | ) | | 392 |
|
Goodwill impairment (2) | | Restructuring and other items, net | | — |
| | (15,513 | ) |
| | | | $ | (12,640 | ) | | (16,343 | ) |
———————————
| |
(1) | See Note 16, “Segment17, "Segment Reporting, ,"" in the Notes to Consolidated Condensed Financial Statements for a discussion of adjustments.additional information. |
| |
(2) | See Note 12, “Employee Benefit Plans,��� in the Notes to Consolidated Condensed Financial Statements for a discussion of adjustments. |
| |
(3) | See Note 13,14, “Other Items Impacting Comparability,” in the Notes to Consolidated Condensed Financial Statements for a discussion of adjustments. |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Fleet Management Solutions
| | | Three months ended September 30, | | Nine months ended September 30, | | Change 2017/2016 | Three months ended March 31, | | Change |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | | Nine Months | 2019 | | 2018 | | 2019/2018 |
| (Dollars in thousands) | | |
| | | (Dollars in thousands) | |
|
ChoiceLease | $ | 673,882 |
|
| 649,208 |
| | $ | 1,992,656 |
| | 1,918,418 |
| | 4 | % | | 4 | % | $ | 748,579 |
|
| 690,902 |
| | 8 | % |
SelectCare | 116,986 |
|
| 113,093 |
| | 347,979 |
| | 341,350 |
| | 3 |
| | 2 |
| 135,779 |
|
| 121,873 |
| | 11 |
|
Commercial Rental | 216,015 |
|
| 216,592 |
| | 589,353 |
| | 636,028 |
| | — |
| | (7 | ) | 236,148 |
|
| 204,530 |
| | 15 |
|
Other | 19,128 |
|
| 19,010 |
| | 56,804 |
| | 59,669 |
| | 1 |
| | (5 | ) | 23,227 |
|
| 21,938 |
| | 6 |
|
Fuel services revenue | 169,787 |
|
| 157,108 |
| | 505,055 |
| | 448,987 |
| | 8 |
| | 12 |
| 207,866 |
|
| 203,807 |
| | 2 |
|
FMS total revenue (1) | $ | 1,195,798 |
| | 1,155,011 |
|
| $ | 3,491,847 |
| | 3,404,452 |
| | 4 | % | | 3 | % | $ | 1,351,599 |
|
| 1,243,050 |
| | 9 | % |
| | | | | | | | | | | | | | | | |
FMS operating revenue (2) | $ | 1,026,011 |
| | 997,903 |
| | $ | 2,986,792 |
| | 2,955,465 |
| | 3 |
| | 1 |
| $ | 1,143,733 |
|
| 1,039,243 |
| | 10 | % |
| | | | | | | | | | |
|
| | | | | |
FMS EBT | $ | 100,693 |
|
| 112,507 |
| | $ | 220,973 |
| | 306,554 |
| | (11 | )% | | (28 | )% | $ | 60,911 |
|
| 54,343 |
| | 12 | % |
FMS EBT as a % of FMS total revenue | 8.4 | % |
| 9.7 | % | | 6.3 | % | | 9.0 | % | | (130) bps | | (270) bps | 4.5 | % |
| 4.4 | % | | 10 bps |
FMS EBT as a % of FMS operating revenue (2) | 9.8 | % |
| 11.3 | % | | 7.4 | % | | 10.4 | % | | (150) bps | | (300) bps | 5.3 | % |
| 5.2 | % | | 10 bps |
————————————
| |
(1) | Includes intercompany fuel sales from FMS to DTS and SCS. |
| |
(2) | Non-GAAP financial measures. Reconciliations of FMS total revenue to FMS operating revenue, FMS EBT as a % of FMS total revenue to FMS EBT as a % of FMS operating revenue, as well as the reasons why management believes these measures are important to investors are included in the “Non-GAAP Financial Measures” section of this MD&A. |
The following table summarizes the components of the change in FMS revenue on a percentage basis versus the prior year:
| | | Three months ended September 30, 2017 | | Nine months ended September 30, 2017 | Three months ended March 31, 2019 |
| Total | | Operating (1) | | Total | | Operating (1) | Total | | Operating (1) |
Organic, including price and volume | 3 | % | | 3 | % | | 2 | % | | 2 | % | 9 | % | | 11 | % |
Fuel | 1 |
| | — |
| | 2 |
| | — |
| 1 |
| | — |
|
Foreign exchange | — |
| | — |
| | (1 | ) | | (1 | ) | (1 | ) | | (1 | ) |
Net increase | 4 | % | | 3 | % | | 3 | % | | 1 | % | 9 | % | | 10 | % |
————————————
| |
(1) | Non-GAAP financial measure. A reconciliation of FMS total revenue to FMS operating revenue as well as the reasons why management believes this measure is important to investors is included in the "Non-GAAP Financial Measures" section of this MD&A. |
FMS total revenue increased to $1.20$1.35 billion in the thirdfirst quarter of 2017,primarily due to higher operating revenue. FMS operating revenue (a non-GAAP measure excluding fuel) and fuel services revenue. FMS total revenuein the first quarter increased to $3.49$1.14 billion in the nine months ended September 30, 2017, due to higher fuel services revenue and FMS operating revenue, partially offset by negative impactsprimarily from foreign exchange. FMS operating revenue grew in both periods as a result of organic growth primarily in the ChoiceLease product line. In the nine months ended September 30, 2017, FMS operating revenue growth was partially offset by lowerand commercial rental revenue and negative impacts from foreign exchange. Foreign exchange negatively impacted both total revenue and operating revenue growth by 100 basis points in the nine months ended September 30, 2017.product lines.
ChoiceLease revenue increased 4%8% in both the thirdfirst quarter and the nine months ended September 30, 2017, reflectingdue to a larger average fleet size and higher prices on replacement vehicles. Foreign exchange negatively impacted ChoiceLease revenue growth by 100 basis points in the nine months ended September 30, 2017. We expect favorable ChoiceLease revenue comparisons to continue through the end of the year based on strong sales activity. SelectCare revenue increased 3% in the third quarter and 2% in the nine months ended September 30, 2017, due to new business and increased volumes, partially offset by negative impacts from foreign exchange year-to-date. Commercial rental revenue was unchangedincreased 15% in the thirdfirst quarter and decreased 7% in the nine months ended September 30, 2017, due to lower demand.higher demand and pricing. We expect favorable commercial rental revenue comparisons through the end of the year, however, at a declining growth rate compared to the growth we experienced in the fourthfirst first quarter. SelectCare revenue increased 11% in the first quarter givendue to increased volumes. Fuel services revenue increased 2% in the current rental demand environment.first quarter primarily reflecting higher gallons sold, partially offset by lower fuel costs passed through to customers.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The following table provides commercial rental statistics on our global fleet:
| | | Three months ended September 30, | | Nine months ended September 30, | | Change 2017/2016 | Three months ended March 31, | | Change |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | | Nine Months | 2019 | | 2018 | | 2019/2018 |
| (Dollars in thousands) | | | | | (Dollars in thousands) | | |
Rental revenue from non-lease customers | $ | 138,887 |
| | 141,836 |
| | $ | 372,853 |
| | 397,305 |
| | (2 | )% | | (6 | )% | $ | 129,548 |
| | 120,700 |
| | 7 | % |
Rental revenue from lease customers (1) | $ | 77,128 |
| | 74,756 |
| | $ | 216,500 |
| | 238,723 |
| | 3 | % | | (9 | )% | $ | 106,600 |
| | 83,830 |
| | 27 | % |
Average commercial rental power fleet size — in service (2), (3) | 30,100 |
| | 30,900 |
| | 29,600 |
| | 31,700 |
| | (3 | )% | | (7 | )% | |
Average commercial rental power fleet size — in service (2) (3) | | 34,700 |
| | 30,380 |
| | 14 | % |
Commercial rental utilization — power fleet (2) | 78.0 | % |
| 76.7 | % | | 73.7 | % | | 73.9 | % | | 130 bps | | (20) bps | 74.9 | % |
| 74.8 | % | | 10 bps |
————————————
| |
(1) | Represents revenue from rental vehicles provided to our existing ChoiceLease customers, generally in place of a lease vehicle. |
| |
(2) | Number of units rounded to nearest hundred and calculated using quarterly average unit counts. |
FMS EBT decreased 11%increased 12% in the thirdfirst quarter, of 2017, reflecting impactsChoiceLease growth and, to ChoiceLease anda lesser extent, commercial rental gross margingrowth. Lease results benefited from accelerated depreciation of $4 million on vehicles expected to be made available for sale through June 2018,fleet growth, reflecting strong outsourcing trends and more normalized maintenance spending associated with vehicles being prepared for sale. FMS EBT was also impacted by higher overhead spending due to the timing of incentive compensation and higherour sales and marketing expense. These items were partially offset by improved performance across all product lines.initiatives. Commercial rental performance improved due to stronger demand and higher pricingpricing. Rental power fleet utilization was 74.9% for the first quarter, consistent with the prior year. Both lease and rental performance benefited from a 130 basis point improvement in utilization, reflecting fleet right-sizing actions taken earlier in the year. Used vehicle results improved modestlysignificant maintenance cost recovery item. These benefits were offset by higher depreciation of $9 million due to lower fair market value write-downs on vehicles held for sale, partially offset by lower proceeds per unit.
FMS EBT decreased 28% in the nine months ended September 30, 2017, due to lower used vehicle sales and commercial rental results, as well as $21 million of accelerated depreciation on vehicles expected to be made available for sale through June 2018 and higher maintenance costs, partially offset by improved SelectCare results. Used vehicle sales results decreased year-to-date due to lower pricing, which resulted in lower gains on sales and greater fair market value write-downs on vehicles held for sale. Commercial rental results declined year-to-date from lower demand. ChoiceLease and commercial rental results were negatively impacted by $1 million of higher depreciation in the third quarter and $3 million in the nine months ended September 30, 2017, due to residual value changes implemented January 1, 2017.2019, and accelerated depreciation, as well as higher liability insurance costs related to development of prior years' claims. In addition, overheads were higher, reflecting growth-related investments in sales, marketing and technology. Used vehicle results slightly declined from the prior year as increased sales of used vehicles at improved prices were offset by higher valuation adjustments on a larger inventory.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Our global fleet of 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 |
| September 30, 2017 | | December 31, 2016 | | September 30, 2016 | | Sept. 2017/Dec. 2016 | | Sept. 2017/Sept. 2016 | March 31, 2019 | | December 31, 2018 | | March 31, 2018 | | March 2019/Dec. 2018 | | March 2019/March 2018 |
End of period vehicle count | | | | | | | | | | | | | | | | | | |
By type: | | | | | | | | | | | | | | | | | | |
Trucks (1) | 75,700 |
| | 73,300 |
| | 73,500 |
| | 3 | % | | 3 | % | 83,000 |
| | 81,700 |
| | 78,200 |
| | 2 | % | | 6 | % |
Tractors (2) | 65,600 |
| | 67,900 |
| | 68,600 |
| | (3 | ) | | (4 | ) | 78,400 |
| | 74,000 |
| | 67,100 |
| | 6 |
| | 17 |
|
Trailers (3), (4) | 42,200 |
| | 42,800 |
| | 42,300 |
| | (1 | ) | | — |
| |
Trailers (3) | | 45,000 |
| | 44,700 |
| | 42,800 |
| | 1 |
| | 5 |
|
Other | 1,200 |
| | 1,100 |
| | 1,200 |
| | 9 |
| | — |
| 1,200 |
| | 1,200 |
| | 1,200 |
| | — |
| | — |
|
Total | 184,700 |
| | 185,100 |
| | 185,600 |
| | — | % | | — | % | 207,600 |
| | 201,600 |
| | 189,300 |
| | 3 | % | | 10 | % |
| | | | | | | | | | | | | | | | | | |
By ownership: | | | | | | | | | | | | | | | | | | |
Owned | 183,400 |
| | 183,700 |
| | 184,100 |
| | — | % | | — | % | 206,200 |
| | 200,200 |
| | 187,900 |
| | 3 | % | | 10 | % |
Leased | 1,300 |
| | 1,400 |
| | 1,500 |
| | (7 | ) | | (13 | ) | 1,400 |
| | 1,400 |
| | 1,400 |
| | — |
| | — |
|
Total | 184,700 |
| | 185,100 |
| | 185,600 |
| | — | % | | — | % | 207,600 |
| | 201,600 |
| | 189,300 |
| | 3 | % | | 10 | % |
| | | | | | | | | | | | | | | | | | |
By product line: (4) | | | | | | | | | | | | | | | | | | |
ChoiceLease | 137,300 |
| | 136,500 |
| | 136,600 |
| | 1 | % | | 1 | % | 153,500 |
| | 149,300 |
| | 140,800 |
| | 3 | % | | 9 | % |
Commercial rental | 37,800 |
| | 37,800 |
| | 38,000 |
| | — |
| | (1 | ) | 43,800 |
| | 42,600 |
| | 39,300 |
| | 3 |
| | 11 |
|
Service vehicles and other | 3,300 |
| | 3,300 |
| | 3,500 |
| | — |
| | (6 | ) | 2,700 |
| | 2,800 |
| | 3,200 |
| | (4 | ) | | (16 | ) |
Active units | 178,400 |
| | 177,600 |
| | 178,100 |
| | — |
| | — |
| 200,000 |
| | 194,700 |
| | 183,300 |
| | 3 |
| | 9 |
|
Held for sale | 6,300 |
| | 7,500 |
| | 7,500 |
| | (16 | ) | | (16 | ) | 7,600 |
| | 6,900 |
| | 6,000 |
| | 10 |
| | 27 |
|
Total | 184,700 |
| | 185,100 |
| | 185,600 |
| | — | % | | — | % | 207,600 |
| | 201,600 |
| | 189,300 |
| | 3 | % | | 10 | % |
| | | | | | | | | | | | | | | | | | |
Customer vehicles under SelectCare contracts | 54,400 |
| | 49,000 |
| | 49,300 |
| | 11 | % | | 10 | % | |
Customer vehicles under SelectCare contracts (4) | | 55,900 |
| | 56,300 |
| | 54,500 |
| | (1 | )% | | 3 | % |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Quarterly average vehicle count | | | | | | | | | | | | | | | | | | |
By product line: | | | | | | | | | | | | | | | | | | |
ChoiceLease | 137,200 |
| | 136,500 |
| | 135,100 |
| | 1 | % | | 2 | % | 151,400 |
| | 147,000 |
| | 140,100 |
| | 3 | % | | 8 | % |
Commercial rental | 37,600 |
| | 37,800 |
| | 38,300 |
| | (1 | ) | | (2 | ) | 43,000 |
| | 42,600 |
| | 38,600 |
| | 1 |
| | 11 |
|
Service vehicles and other | 3,300 |
| | 3,400 |
| | 3,300 |
| | (3 | ) | | — |
| 2,800 |
| | 2,900 |
| | 3,300 |
| | (3 | ) | | (15 | ) |
Active units | 178,100 |
| | 177,700 |
| | 176,700 |
| | — |
| | 1 |
| 197,200 |
| | 192,500 |
| | 182,000 |
| | 2 |
| | 8 |
|
Held for sale | 6,900 |
| | 7,500 |
| | 8,700 |
| | (8 | ) | | (21 | ) | 7,300 |
| | 6,600 |
| | 6,000 |
| | 11 |
| | 22 |
|
Total | 185,000 |
| | 185,200 |
| | 185,400 |
| | — | % | | — | % | 204,500 |
| | 199,100 |
| | 188,000 |
| | 3 | % | | 9 | % |
| | | | | | | | | | | | | | | | | | |
Customer vehicles under SelectCare contracts | 52,800 |
| | 49,200 |
| | 49,600 |
| | 7 | % | | 6 | % | |
Customer vehicles under SelectCare contracts (4) | | 56,200 |
| | 56,400 |
| | 54,200 |
| | — | % | | 4 | % |
| | | | | | | | | | | | | | | | | | |
Customer vehicles under SelectCare on-demand (5) | 8,700 |
| | 7,800 |
| | 8,000 |
| | 12 | % | | 9 | % | 9,000 |
| | 8,600 |
| | 8,100 |
| | 5 | % | | 11 | % |
| | | | | | | | | | | | | | | | | | |
Total vehicles serviced | 246,500 |
| | 242,200 |
| | 243,000 |
| | 2 | % | | 1 | % | 269,700 |
| | 264,100 |
| | 250,300 |
| | 2 | % | | 8 | % |
| | | | | | | | | | | | | | | | | | |
Year-to-date average vehicle count | | | | | | | | | | |
By product line: | | | | | | | | | | |
ChoiceLease | 137,400 |
| | 134,400 |
| | 133,800 |
| | 2 | % | | 3 | % | |
Commercial rental | 37,500 |
| | 39,200 |
| | 39,600 |
| | (4 | ) | | (5 | ) | |
Service vehicles and other | 3,400 |
| | 3,400 |
| | 3,400 |
| | — |
| | — |
| |
Active units | 178,300 |
| | 177,000 |
| | 176,800 |
| | 1 |
| | 1 |
| |
Held for sale | 6,900 |
| | 8,400 |
| | 8,600 |
| | (18 | ) | | (20 | ) | |
Total | 185,200 |
| | 185,400 |
| | 185,400 |
| | — | % | | — | % | |
| | | | | | | | | | | | | | | | | | |
Customer vehicles under SelectCare contracts (5) | 51,300 |
| | 49,200 |
| | 49,000 |
| | 4 | % | | 5 | % | |
Customer vehicles under SelectCare on-demand (6) | 20,600 |
| | 21,000 |
| | 22,700 |
| | (2 | )% | | (9 | )% | |
Total vehicles serviced | 257,100 |
| | 255,600 |
| | 257,100 |
| | 1 | % | | — | % | |
———————————
| |
(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 4,800 UK trailers (3,000 ChoiceLease and 1,800 commercial rental), 5,300 UK trailers (3,300 ChoiceLease and 2,000 commercial rental) and 5,400 UK trailers (3,500 ChoiceLease and 1,900 commercial rental) as of September 30, 2017, December 31, 2016, and September 30, 2016, respectively.Excludes customer vehicles under SelectCare on-demand contracts. |
| |
(5) | Comprised of the number of unique vehicles serviced under on-demand maintenance agreements for the quarterly and year-to-date periods. This does not represent averages for the periods. Vehicles included in the count may have been serviced more than one time during the respective period. |
| |
(6) | Comprised of the number of unique vehicles serviced under on-demand maintenance agreements for the quarterly periods. This does not represent averages for the periods. Vehicles included in the count may have been serviced more than one time during the respective period. |
Note: Quarterly and year-to-date amounts were computed using a 6-point and 18-point average respectively, based on monthly information.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The following table provides a breakdown of our non-revenue earning equipment included in our global fleet count (number of units rounded to nearest hundred):
| | | | | | | | | Change | | | | | | | Change |
| September 30, 2017 | | December 31, 2016 | | September 30, 2016 | | Sept. 2017/Dec. 2016 | | Sept. 2017/Sept. 2016 | March 31, 2019 | | December 31, 2018 | | March 31, 2018 | | March 2019/Dec. 2018 | | March 2019/March 2018 |
Not yet earning revenue (NYE) | 2,100 | | 1,700 | | 1,900 | | 24 | % | | 11 | % | 5,200 | | 4,500 | | 3,800 | | 16 | % | | 37 | % |
No longer earning revenue (NLE): | | | | | | | | |
Units held for sale | 6,300 | | 7,500 | | 7,500 | | (16 | ) | | (16 | ) | 7,600 | | 6,900 | | 6,000 | | 10 |
| | 27 |
|
Other NLE units | 3,900 | | 4,400 | | 5,000 | | (11 | ) | | (22 | ) | 6,200 | | 4,300 | | 4,800 | | 44 |
| | 29 |
|
Total | 12,300 | | 13,600 | | 14,400 | | (10 | )% | | (15 | )% | 19,000 | | 15,700 | | 14,600 | | 21 | % | | 30 | % |
NYE units represent new vehicles on hand that are being prepared for deployment to a lease customer or into the rental fleet. Preparations include activities such as adding lift gates, paint, decals, cargo area and refrigeration equipment. NYE units increased 37% compared to March 31, 2018, reflecting lease fleet growth. NLE units represent vehicles held for sale and vehicles for which no revenue has been earned in the previous 30 days. Accordingly, these vehicles may be temporarily out of service, being prepared for sale or awaiting redeployment. NLE units decreasedincreased 28% compared to September 30, 2016,March 31, 2018, reflecting lowerhigher used vehicle inventories, which are at the midpoint of our target range, and a lower number of units being prepared for sale.inventories. We expect NLE levels to declineincrease through the end of the year.year as a result of higher expected used vehicle inventories driven by the lease vehicle replacement cycle.
Dedicated Transportation Solutions
| | | Three months ended September 30, | | Nine months ended September 30, | | Change 2017/2016 | Three months ended March 31, | | Change |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | | Nine Months | 2019 | | 2018 | | 2019/2018 |
| (Dollars in thousands) | | | | | (Dollars in thousands) | |
DTS total revenue | $ | 272,334 |
| | 260,921 |
| | $ | 811,620 |
|
| 764,025 |
| | 4 | % | | 6 | % | $ | 349,621 |
| | 298,970 |
| | 17 | % |
| | | | | | | | | | | | | | | | |
DTS operating revenue (1) | $ | 197,917 |
|
| 196,648 |
|
| $ | 591,045 |
|
| 581,213 |
| | 1 | % | | 2 | % | $ | 235,620 |
|
| 201,405 |
| | 17 | % |
| | | | | | | | | | | | | | | | |
DTS EBT | $ | 13,770 |
| | 17,584 |
| | $ | 39,892 |
| | 48,300 |
| | (22 | )% | | (17 | )% | $ | 17,412 |
| | 13,052 |
| | 33 | % |
DTS EBT as a % of DTS total revenue | 5.1 | % | | 6.7 | % | | 4.9 | % | | 6.3 | % | | (160) bps | | (140) bps | 5.0 | % | | 4.4 | % | | 60 bps |
DTS EBT as a % of DTS operating revenue (1) | 7.0 | % | | 8.9 | % | | 6.7 | % | | 8.3 | % | | (190) bps | | (160) bps | 7.4 | % | | 6.5 | % | | 90 bps |
| | | | | | | | | | | | | | | | |
Memo: | | | | | | | | | | | | | | | | |
Average fleet | 8,200 |
| | 8,300 |
| | 8,200 |
| | 8,200 |
| | (1 | )% | | — | % | 9,500 |
| | 8,500 |
| | 12 | % |
————————————
| |
(1) | Non-GAAP financial measures. Reconciliations of DTS total revenue to DTS operating revenue, DTS EBT as a % of DTS total revenue to DTS EBT as a % of DTS operating revenue, as well as the reasons why management believes these measures are important to investors are included in the “Non-GAAP Financial Measures” section of this MD&A. |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The following table summarizes the components of the change in DTS revenue on a percentage basis versus the prior year:
| | | Three months ended September 30, 2017 | | Nine months ended September 30, 2017 | Three months ended March 31, 2019 |
| Total | | Operating (1) | | Total | | Operating (1) | Total | | Operating (1) |
Organic, including price and volume | 3 | % | | 1 | % | | 5 | % | | 2 | % | 16 | % | | 17 | % |
Fuel | 1 |
| | — |
| | 1 |
| | — |
| 1 |
| | — |
|
Net increase | 4 | % | | 1 | % | | 6 | % | | 2 | % | 17 | % | | 17 | % |
————————————
| |
(1) | Non-GAAP financial measure. A reconciliation of DTS total revenue to DTS operating revenue, as well as the reasons why management believes this measure is important to investors is included in the "Non-GAAP Financial Measures" section of this MD&A. |
In the third quarter of 2017, DTS total revenue and DTS operating revenue (a non-GAAP measure excluding fuel and subcontracted transportation)both increased 4% and 1%, respectively, primarily due to17% in the first quarter reflecting new business, partially offset by one less work day in the quarter. DTS EBT decreased 22% in the third quarter of 2017, primarily due to higher insurance premiums, higher vehicle maintenance costs on certain older model year vehiclescustomer expansions and the impact of one less work day.
In the nine months ended September 30, 2017, DTS total and operating revenue increased 6% and 2%, respectively, due to new business and higher pricing.volumes. We expect DTS total revenue comparisons for the remainder of the year to be consistent with the prior year and DTS operating revenue comparisons to remain favorable through the end of the year.year based on strong sales activity but to a lesser extent than experienced in the first quarter. DTS EBT decreased 17%increased 33% in the nine months ended September 30, 2017, primarilyfirst quarter due to higher maintenance costs on certain older model year vehiclesrevenue growth, improved operating performance and higherfavorable insurance costs during the first halfresults related to development of the year.prior years' claims.
Supply Chain Solutions
| | | Three months ended September 30, | | Nine months ended September 30, | | Change 2017/2016 | Three months ended March 31, | | Change |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | | Nine Months | 2019 | | 2018 | | 2019/2018 |
| (Dollars in thousands) | | | | | (Dollars in thousands) | |
Automotive | $ | 135,853 |
| | 140,785 |
| | $ | 420,113 |
| | 407,083 |
| | (4 | )% | | 3 | % | $ | 176,525 |
| | 142,980 |
| | 23 | % |
Technology and healthcare | 68,008 |
| | 61,425 |
| | 194,561 |
| | 177,138 |
| | 11 |
| | 10 |
| 78,751 |
| | 71,530 |
| | 10 |
|
CPG and Retail | 130,528 |
| | 110,840 |
| | 365,185 |
| | 324,814 |
| | 18 |
| | 12 |
| 178,472 |
| | 129,310 |
| | 38 |
|
Industrial and other | 42,040 |
| | 32,403 |
| | 117,040 |
| | 90,392 |
| | 30 |
| | 29 |
| 43,341 |
| | 38,986 |
| | 11 |
|
Subcontracted transportation | 101,740 |
|
| 56,089 |
| | 279,326 |
| | 162,743 |
| | 81 |
| | 72 |
| 127,995 |
|
| 86,861 |
| | 47 |
|
Fuel | 17,835 |
|
| 15,356 |
| | 53,252 |
| | 45,495 |
| | 16 |
| | 17 |
| 30,587 |
|
| 25,040 |
| | 22 |
|
SCS total revenue | $ | 496,004 |
| | 416,898 |
|
| $ | 1,429,477 |
| | 1,207,665 |
| | 19 | % | | 18 | % | $ | 635,671 |
|
| 494,707 |
| | 28 | % |
| | | | | | | | | | | | | | | | |
SCS operating revenue (1) | $ | 376,429 |
|
| 345,453 |
| | $ | 1,096,899 |
| | 999,427 |
| | 9 | % | | 10 | % | $ | 477,089 |
|
| 382,806 |
| | 25 | % |
| | | | | | | | | | |
|
| | | | | |
SCS EBT | $ | 22,052 |
|
| 30,956 |
| | $ | 75,359 |
| | 79,105 |
| | (29 | )% | | (5 | )% | $ | 32,317 |
|
| 25,511 |
| | 27 | % |
SCS EBT as a % of SCS total revenue | 4.4 | % |
| 7.4 | % | | 5.3 | % | | 6.6 | % | | (300) bps | | (130) bps | 5.1 | % |
| 5.2 | % | | (10) bps |
SCS EBT as a % of SCS operating revenue (1) | 5.9 | % |
| 9.0 | % | | 6.9 | % | | 7.9 | % | | (310) bps | | (100) bps | 6.8 | % |
| 6.7 | % | | 10 bps |
| | | | | | | | | | | | | | | | |
Memo: | | | | | | | | |
| | | | | | |
|
Average fleet | 7,900 |
| | 7,400 |
| | 7,800 |
| | 7,100 |
| | 7 | % | | 10 | % | 9,700 |
| | 8,400 |
| | 15 | % |
————————————
| |
(1) | Non-GAAP financial measures. Reconciliations of SCS total revenue to SCS operating revenue, SCS EBT as a % of SCS total revenue to SCS EBT as a % of SCS operating revenue, as well as the reasons why management believes these measures are important to investors are included in the “Non-GAAP Financial Measures” section of this MD&A. |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The following table summarizes the components of the change in SCS revenue on a percentage basis versus the prior year:
| | | Three months ended September 30, 2017 | | Nine months ended September 30, 2017 | Three months ended March 31, 2019 |
| Total | | Operating (1) | | Total | | Operating (1) | Total | | Operating (1) |
Organic, including price and volume | 18 | % | | 8 | % | | 18 | % | | 10 | % | 18 | % | | 20 | % |
Fuel | — |
| | — |
| | — |
| | — |
| 1 |
| | — |
|
Acquisitions | | 10 |
| | 6 |
|
Foreign exchange | 1 |
| | 1 |
| | — |
| | — |
| (1 | ) | | (1 | ) |
Net increase | 19 | % |
| 9 | % |
| 18 | % |
| 10 | % | 28 | % |
| 25 | % |
————————————
| |
(1) | Non-GAAP financial measure. A reconciliation of SCS total revenue to SCS operating revenue, as well as the reasons why management believes this measure is important to investors is included in the "Non-GAAP Financial Measures" section of this MD&A. |
In the third quarter of 2017, SCS total revenue increased 19%,28% and SCS operating revenue (a non-GAAP measure excluding fuel and subcontracted transportation) increased 9%, primarily reflecting new business. SCS EBT decreased 29%25% in the thirdfirst quarter of 2017, primarily related to the performance of two customer accounts, including a particularly challenging start-up. Additionally, results were impacted by higher overhead spending, primarily due to planned investments in information technology and sales.
In the nine months ended September 30, 2017, SCS total revenue increased 18%,largely reflecting organic growth. SCS operating revenue increased 10% due to new business, increased volumes and higher pricing. Total and operating revenue growth also reflects the acquisition of MXD during the second quarter of 2018. We expect SCS total revenue and SCS operating revenue comparisons to remain favorable through the endfirst half of this year, with negative growth towards the year. SCS EBT decreased 5% in the nine months ended September 30, 2017, primarily related to a particularly challenging start-up in the third quarter, higher costs incurred during the start-up phase of certain new accounts in the firstsecond half of the year as well as planned investmentsdue to the timing of lost business. SCS EBT increased 27% in information technology and sales and higher compensation-related costs.the first quarter driven by revenue growth.
Central Support Services
| | | Three months ended September 30, | | Nine months ended September 30, | | Change 2017/2016 | Three months ended March 31, | | Change |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | | Nine Months | 2019 | | 2018 | | 2019/2018 |
| (Dollars in thousands) | | | | | (Dollars in thousands) | | |
Human resources | $ | 3,778 |
| | 4,184 |
| | $ | 12,186 |
| | 12,968 |
| | (10 | )% | | (6 | )% | $ | 5,280 |
| | 4,991 |
| | 6 | % |
Finance | 14,426 |
| | 15,143 |
| | 43,604 |
| | 44,267 |
| | (5 | ) | | (1 | ) | |
Finance and procurement | | 18,007 |
| | 17,141 |
| | 5 |
|
Corporate services and public affairs | 2,618 |
| | 2,471 |
| | 7,612 |
| | 7,463 |
| | 6 |
| | 2 |
| 2,320 |
| | 2,300 |
| | 1 |
|
Information technology | 22,265 |
| | 20,466 |
| | 64,744 |
| | 60,369 |
| | 9 |
| | 7 |
| 25,638 |
| | 20,766 |
| | 23 |
|
Legal and safety | 6,246 |
| | 5,711 |
| | 19,109 |
| | 17,798 |
| | 9 |
| | 7 |
| 6,947 |
| | 6,286 |
| | 11 |
|
Marketing | 4,556 |
| | 4,336 |
| | 13,290 |
| | 14,220 |
| | 5 |
| | (7 | ) | 4,732 |
| | 4,070 |
| | 16 |
|
Other | 8,318 |
| | 4,911 |
| | 23,597 |
| | 19,317 |
| | 69 |
| | 22 |
| 9,210 |
| | 6,841 |
| | 35 |
|
Total CSS | 62,207 |
| | 57,222 |
|
| 184,142 |
| | 176,402 |
| | 9 |
| | 4 |
| 72,134 |
| | 62,395 |
| | 16 | % |
Allocation of CSS to business segments | (51,166 | ) |
| (47,947 | ) | | (151,177 | ) | | (146,442 | ) |
| 7 |
| | 3 |
| (59,587 | ) |
| (51,803 | ) | | 15 |
|
Unallocated CSS | $ | 11,041 |
| | 9,275 |
|
| $ | 32,965 |
| | 29,960 |
|
| 19 | % | | 10 | % | $ | 12,547 |
|
| 10,592 |
| | 18 | % |
Total CSS costs increased 9%16% in the thirdfirst quarter of 2017, due to higher information technology, compensation-related and professional services costs associated with strategic initiatives. Total CSS costs increased 4%primarily reflecting investments in the nine months ended September 30, 2017, due to higher information technology and professional services costs associated with strategic initiatives.higher compensation-related costs. Unallocated CSS increased 19%to $13 million in the third quarter and 10% in the nine months ended September 30, 2017, driven by higher professional services costs associated with strategic initiatives.first quarter.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
FINANCIAL RESOURCES AND LIQUIDITY
Cash Flows
The following is a summary of our cash flows from continuing operations:
| | | Nine months ended September 30, | Three months ended March 31, |
| 2017 | | 2016 | 2019 | | 2018 |
| (In thousands) | (In thousands) |
Net cash (used in) provided by: | | | | |
Net cash provided by (used in): | | | | |
Operating activities | $ | 1,166,191 |
| | 1,185,062 |
| $ | 485,330 |
| | 336,850 |
|
Financing activities | (191,255 | ) | | (55,554 | ) | 434,288 |
| | 229,603 |
|
Investing activities | (962,191 | ) | | (1,108,584 | ) | (923,244 | ) | | (572,788 | ) |
Effect of exchange rates on cash | (5,226 | ) | | (5,567 | ) | |
Net change in cash and cash equivalents | $ | 7,519 |
| | 15,357 |
| |
Effect of exchange rates on cash, cash equivalents, and restricted cash | | (1,551 | ) | | 3,519 |
|
Net change in cash, cash equivalents, and restricted cash | | $ | (5,177 | ) | | (2,816 | ) |
Cash provided by operating activities decreasedincreased to $1.17 billion in the nine months ended September 30, 2017, compared with $1.19 billion in 2016, primarily due to lower earnings adjusted for non-cash items. Cash used in financing activities was $191$485 million in the ninethree months ended September 30, 2017,March 31, 2019, compared with $56$337 million in 2016,2018, reflecting higher earnings excluding non-cash items, primarily depreciation and deferred tax expense. Cash provided by financing activities increased to $434 million in the three months ended March 31, 2019, compared with $230 million in 2018, due to lowerhigher borrowing needs from lower capital spending.needs. Cash used in investing activities decreasedincreased to $962$923 million in the ninethree months ended September 30, 2017,March 31, 2019, compared with $1.11 billion$573 million in 2016,2018, primarily due to lower payments forincreased capital expenditures.
The following table shows our free cash flow computation: | | | Nine months ended September 30, | Three months ended March 31, |
| 2017 | | 2016 | 2019 | | 2018 |
| (In thousands) | (In thousands) |
Net cash provided by operating activities from continuing operations | $ | 1,166,191 |
|
| 1,185,062 |
| 485,330 |
|
| 336,850 |
|
Sales of revenue earning equipment (1) | 289,432 |
|
| 331,720 |
| 101,549 |
|
| 89,023 |
|
Sales of operating property and equipment (1) | 12,541 |
|
| 6,623 |
| 1,918 |
|
| 933 |
|
Collections on direct finance leases and other items (1) | 54,227 |
|
| 60,229 |
| |
Total cash generated (2) | 1,522,391 |
|
| 1,583,634 |
| 588,797 |
|
| 426,806 |
|
Purchases of property and revenue earning equipment (1) | (1,312,845 | ) |
| (1,511,359 | ) | (1,026,711 | ) |
| (662,744 | ) |
Free cash flow (2) | $ | 209,546 |
|
| 72,275 |
| $ | (437,914 | ) |
| (235,938 | ) |
| | | | | | |
Memo: | | | | | | |
Net cash used in financing activities | $ | (191,255 | ) | | (55,554 | ) | |
Net cash provided by financing activities | | $ | 434,288 |
| | 229,603 |
|
Net cash used in investing activities | $ | (962,191 | ) | | (1,108,584 | ) | $ | (923,244 | ) | | (572,788 | ) |
———————————
| |
(1) | Included in cash flows from investing activities. |
| |
(2) | Non-GAAP financial measures. Reconciliations of net cash provided by operating activities to total cash generated and to free cash flow are set forth in this table. Refer to the “Non-GAAP Financial Measures” section of this MD&A for the reasons why management believes these measures are important to investors. |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The following table provides a summary of capital expenditures:
| | | Nine months ended September 30, | Three months ended March 31, |
| 2017 | | 2016 | 2019 | | 2018 |
| (In thousands) | (In thousands) |
Revenue earning equipment: | | | | | | |
ChoiceLease | $ | 985,541 |
| | 1,223,141 |
| $ | 817,027 |
| | 418,255 |
|
Commercial rental | 295,638 |
| | 79,204 |
| 256,671 |
| | 255,507 |
|
| 1,281,179 |
| | 1,302,345 |
| 1,073,698 |
| | 673,762 |
|
Operating property and equipment | 94,850 |
| | 101,837 |
| 40,066 |
| | 37,158 |
|
Total capital expenditures | 1,376,029 |
|
| 1,404,182 |
| 1,113,764 |
|
| 710,920 |
|
Changes in accounts payable related to purchases of revenue earning equipment | (63,184 | ) | | 107,177 |
| (87,053 | ) | | (48,176 | ) |
Cash paid for purchases of property and revenue earning equipment | $ | 1,312,845 |
|
| 1,511,359 |
| $ | 1,026,711 |
|
| 662,744 |
|
Capital expenditures increased 57% to $1.11 billion in the ninethree months ended September 30, 2017 of $1.38 billion, were largely unchanged fromMarch 31, 2019, reflecting planned higher investments in the prior year, reflecting greater use of redeployed vehicles to fulfill new ChoiceLease contracts. Lower ChoiceLease spending was offset by higher planned investments to refresh our commercial rental fleet. We expect full-year 20172019 capital expenditures to be approximately $1.9$3.6 billion. We expect to fund 20172019 capital expenditures primarily with internally generated funds and additional debt financing.
Financing and Other Funding Transactions
We utilize external capital primarily to support working capital needs and growth in our asset-based product lines. The variety of debt financing alternatives typically available to fund our capital needs include commercial paper, long-term and medium-term public and private debt, asset-backed securities, bank term loans, leasing arrangements and bank credit facilities. Our principal sources of financing are issuances of commercial paper and medium-term public debt.notes.
Our ability to access unsecured debt in the capital markets is impacted by both our short-term and long-term debt ratings. These ratings are intended to provide guidance to investors in determining the credit risk associated with particular Ryder securities based on current information obtained by the rating agencies from us or from other sources. Lower ratings generally result in higher borrowing costs, as well as reduced access to unsecured capital markets. A significant downgrade of our short-term debt ratings would impair our ability to issue commercial paper and likely require us to rely on alternative funding sources. A significant downgrade would not affect our ability to borrow amounts under our revolving credit facility described below, and above in Note 6, "Debt," to Consolidated Condensed Financial Statements, assuming ongoing compliance with the terms and conditions of the credit facility.
Our debt ratings and rating outlooks at September 30, 2017March 31, 2019, were as follows:
|
| | | | | |
| Rating Summary | | |
| Short-Term | | Long-Term | | Outlook |
Fitch Ratings | F-2 | | A- | | Stable |
Standard & Poor’s Ratings Services | A-2 | | BBB+ | | Stable |
Moody’s Investors Service | P-2 | | Baa1 | | Stable |
DBRS | R-1 (Low) | | A (Low) | | Stable |
Cash and cash equivalents totaled $65$63 million as of September 30, 2017.March 31, 2019. As of September 30, 2017,March 31, 2019, approximately $29$15 million was held outside the U.S. and is available to fund operations and other growth of non-U.S. subsidiaries. If we decide to repatriate cash and cash equivalents held outside the U.S., we may be subject to additional U.S. income taxes and foreign withholding taxes. However, our intent is to permanently reinvest these foreign amounts outside the U.S. and our current plans do not demonstrate a need to repatriate these foreign amounts to fund our U.S. operations.
We believe that our operating cash flows, together with our access to the public unsecured bond market, commercial paper market and other available debt financing, will be adequate to meet our operating, investing and financing needs in the foreseeable future. However, there can be no assurance that unanticipated volatility and disruption in the public unsecured debt market or the commercial paper market would not impair our ability to access these markets on terms commercially acceptable to us or at all. If we cease to have access to public bonds, commercial paper and other sources of unsecured borrowings, we would meet our liquidity needs by drawing upon contractually committed lending agreements as described below and/or by seeking other funding sources.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
would meet our liquidity needs by drawing upon contractually committed lending agreements and/or by seeking other funding sources.
As of September 30, 2017March 31, 2019, we had the following amounts available to fund operations under the following facilities:
|
| |
| (In millions) |
Global revolving credit facility | $664572 |
Trade receivables program | $175225 |
See Note 6,7, "Debt", in the Notes to Consolidated Condensed Financial Statements for a discussion of these debt facilities.
The following table shows the movements in our debt balance:
| | | | | | | | Three months ended March 31, |
| Nine months ended September 30, | 2019 | | 2018 |
| 2017 | | 2016 | (In thousands) |
| (In thousands) | | | |
Debt balance at January 1 | $ | 5,391,274 |
| | 5,502,627 |
| $ | 6,649,277 |
| | 5,440,006 |
|
Cash-related changes in debt: | | | | | | |
Net change in commercial paper borrowings | 2,153 |
| | 73,597 |
| |
Net change in commercial paper borrowings and revolving credit facilities | | 158,258 |
| | 237,960 |
|
Proceeds from issuance of medium-term notes | 595,785 |
| | 298,254 |
| 596,274 |
| | 446,500 |
|
Proceeds from issuance of other debt instruments | 277,517 |
| | — |
| 203,026 |
| | — |
|
Retirement of medium term notes | (700,000 | ) | | (300,000 | ) | (250,000 | ) | | (350,000 | ) |
Other debt repaid | (238,160 | ) | | (40,707 | ) | (228,411 | ) | | (64,299 | ) |
Debt issuance costs paid | (1,379 | ) | | (622 | ) | (1,006 | ) | | (999 | ) |
| (64,084 | ) | | 30,522 |
| 478,141 |
| | 269,162 |
|
Non-cash changes in debt: | | | | | | |
Fair value adjustment on notes subject to hedging | (3,168 | ) | | 8,960 |
| 3,870 |
| | (7,364 | ) |
Addition of capital lease obligations | 6,209 |
| | 948 |
| |
Addition of finance lease obligations | | 2,026 |
| | 2,259 |
|
Changes in foreign currency exchange rates and other non-cash items | 18,995 |
| | (23,416 | ) | 9,855 |
| | 4,256 |
|
Total changes in debt | (42,048 | ) | | 17,014 |
| 493,892 |
| | 268,313 |
|
Debt balance at September 30 | $ | 5,349,226 |
| | 5,519,641 |
| |
Debt balance at March 31 | | $ | 7,143,169 |
| | 5,708,319 |
|
In accordance with our funding philosophy, we attempt to align the aggregate average remaining re-pricing life of our debt with the aggregate average remaining re-pricing life of our assets. We utilize both fixed-rate and variable-rate debt to achieve this alignment and generally target a mix of 20% - 40% variable-rate debt as a percentage of total debt outstanding. The variable-rate portion of our total debt (including notional value of swap agreements) was 30%25% and 28% as of September 30, 2017March 31, 2019 and December 31, 2016.2018.
Refer to Note 6,7, “Debt,” in the Notes to Consolidated Condensed Financial Statements for further discussion around the global revolving credit facility, the trade receivables program, the issuance of medium-term notes under our shelf registration statement, asset-backed financing obligations and debt maturities.
Ryder’s debt to equity ratios were 246%278% and 263%262% as of September 30, 2017March 31, 2019 and December 31, 2016,2018, respectively. The debt to equity ratio represents total debt divided by total equity. The Company's target debt to equity ratio is 250% to 300%.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Pension Information
The funded status of our pension plans is dependent upon many factors, including returns on invested assets and the level of certain market interest rates. We review pension assumptions regularly and we may, from time to time, make voluntary contributions to our pension plans, which exceed the amounts required by statute. In 2017,2019, the expected total contributions to our pension plans are approximately $22$34 million. During the ninethree months ended September 30, 2017,March 31, 2019, we contributed $10.6$8 million to our pension plans. Changes in interest rates and the market value of the securities held by the plans during 20172019 could materially change, positively or negatively, the funded status of the plans and affect the level of pension expense and contributions in 20172019 and beyond. See Note 12,13, “Employee Benefit Plans,” in the Notes to Consolidated Condensed Financial Statements for additional information.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Share Repurchases and Cash Dividends
See Note 8,9, “Share Repurchase Programs,” in the Notes to Consolidated Condensed Financial Statements for a discussion of share repurchases.
In October 2017,February 2019 and 2018, our Board of Directors declared a quarterly cash dividenddividends of $0.46$0.54 and $0.52 per common share of common stock.stock, respectively. The dividends were paid during the first quarter of each respective year.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2, “Recent Accounting Pronouncements," in the Notes to Consolidated Condensed Financial Statements for a discussion of recent accounting pronouncements.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
NON-GAAP FINANCIAL MEASURES
This Quarterly Report on Form 10-Q includes information extracted from consolidated condensed financial information but not required by generally accepted accounting principles in the United States of America (U.S. GAAP)(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 U.S. 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 U.S. GAAP measure in this non-GAAP financial measures section. We also provide the reasons why management believes each non-GAAP financial measure is useful to investors in this section.
Specifically, we refer to the following non-GAAP financial measures in this Form 10-Q:
|
| |
Non-GAAP Financial Measure | Comparable U.S. GAAP Measure |
Operating Revenue Measures: | |
Operating Revenue | Total Revenue |
FMS Operating Revenue | FMS Total Revenue |
DTS Operating Revenue | DTS Total Revenue |
SCS Operating Revenue | SCS Total Revenue |
FMS EBT as a % of FMS Operating Revenue | FMS EBT as a % of FMS Total Revenue |
DTS EBT as a % of DTS Operating Revenue | DTS EBT as a % of DTS Total Revenue |
SCS EBT as a % of SCS Operating Revenue | SCS EBT as a % of SCS Total Revenue |
Comparable Earnings Measures: | |
Comparable Earnings Before Income Tax | Earnings Before Income Tax |
Comparable Earnings | Earnings from Continuing Operations |
Comparable EPS | EPS from Continuing Operations |
Cash Flow Measures: | |
Total Cash Generated and Free Cash Flow | Cash Provided by Operating Activities |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Set forth in the table below is an explanationoverview of each non-GAAP financial measure and why management believes that the presentation of each non-GAAP financial measure provides useful information to investors:investors. See reconciliations for each of these measures following this table.
|
| | | | |
| Operating Revenue Measures: | | | |
| Operating Revenue FMS Operating Revenue DTS Operating Revenue SCS Operating Revenue FMS EBT as a % of FMS Operating Revenue DTS EBT as a % of DTS Operating Revenue SCS EBT as a % of SCS Operating Revenue | Operating revenue is defined as total revenue for Ryder System, Inc. or each business segment (FMS, DTS and SCS), respectively, excluding any (1) fuel and (2) subcontracted transportation. We believe operating revenue provides useful information to investors as we use it to evaluate the operating performance of our core businesses and as a measure of sales activity at the consolidated level for Ryder System, Inc., as well as for each of our business segments. We also use segment EBT as a percentage of segment operating revenue for each business segment for the same reason. Note: FMS EBT, DTS EBT and SCS EBT, our primary measures of segment performance, are not non-GAAP measures. Fuel: We exclude FMS, DTS and SCS fuel from the calculation of our operating revenue measures, as fuel is an ancillary service that we provide our customers, which is impacted by fluctuations in market fuel prices, and the costs are largely a pass-through to our customers, resulting in minimal changes in our profitability during periods of steady market fuel prices. However, profitability may be positively or negatively impacted by rapid changes in market fuel prices during a short period of time, as customer pricing for fuel services is established based on trailing market fuel costs. Subcontracted transportation: We also exclude subcontracted transportation from the calculation of our operating revenue measures, as these services are also typically a pass-through to our customers and, therefore, fluctuations result in minimal changes to our profitability. While our DTS and SCS business segments subcontract certain transportation services to third party providers, our FMS business segment does not engage in subcontracted transportation and, therefore, this item is not applicable to FMS. |
| Comparable Earnings Measures: | | | |
| Comparable earnings before income tax (EBT) Comparable Earningsearnings Comparable earnings per diluted common share (EPS)
| Comparable EBT, comparable earnings and comparable EPS are defined, respectively, as GAAP EBT, earnings and EPS, all from continuing operations, excluding (1) non-operating pension costs and (2) any other significant items that are not representative of our business operations. We believe these comparable earnings measures provide useful information to investors and allow for better year-over-year comparison of operating performance. Non-Operating Pension Costs: Our comparable earnings measures exclude non-operating pension costs, which include the amortization of net actuarial loss and prior service cost, interest cost and expected return on plan assets components of pension and postretirement benefit costs. We exclude non-operating pension costs because we consider these to be impacted by financial market performance and outside the operational performance of our business. Other Significant Items: Our comparable earnings measures also exclude other significant items that are not representative of our business operations.operations as detailed in the reconciliation table below - page 57. These other significant items vary from period to period and, in some periods, there may be no such significant items. In the three and nine month periods ended September 30, 2017, we exclude the following other significant items from our comparable earnings measures in this Form 10-Q: (1) Fees related to cost-savings program: In the third quarter of 2017, we recorded consulting fees associated with a cost-savings program.
(2) Pension settlement charge: In the third quarter of 2017, we recorded an estimated pension settlement charge for the exit from a U.S. multi-employer pension plan.
(3) Tax law change - rate increase: In the third quarter of 2017, the state of Illinois enacted changes to their tax system, which increased the provision for income taxes by $1.8 million.
(4) Restructuring: In the second quarter of 2017, we recorded restructuring credits related to the gains on sale of certain UK facilities.
|
|
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
|
| | | |
| (5) Operating tax adjustment: In the first quarter of 2017, we recorded a one-time charge of $2.2 million related to operating tax expenses that had not been recognized in prior period earnings.
(6) Pension-related adjustments: In the second quarter of 2016, it was determined that certain pension benefit improvements made in 2009 were not fully reflected in our projected benefit obligation, resulting in a charge to reflect those pension benefits.
Calculation of comparable tax rate: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.
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
|
| | | |
Cash Flow Measures: | | | |
Total Cash Generated Free Cash Flow
| We consider total cash generated and free cash flow to be important measures of comparative operating performance, as our principal sources of operating liquidity are cash from operations and proceeds from the sale of revenue earning equipment. Total Cash Generated: Total cash generated is defined as the sum of (1) net cash provided by operating activities, (2) net cash provided by the sale of revenue earning equipment, (3) net cash provided by the sale of operating property and equipment (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, (3) net cash provided by the sale of operating property and equipment, (4) collections on direct finance leases and (5) 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 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The following table provides a reconciliation of U.S. 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 which was not provided withinfor the MD&A discussion.
three months ended March 31, 2019 and 2018. Certain items included in EBT, earnings and diluted EPS from continuing operations in the three and nine months ended September 30, 2017 and 2016, 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 Condensed Financial Statements:
|
| | | | | | | | | | | | | | | | | | | | |
| EBT | | Earnings | | Diluted EPS |
| 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
Three months ended September 30, | (In thousands, except per share amounts) |
EBT/Earnings/EPS | $ | 94,343 |
| | 131,698 |
| | $ | 58,913 |
| | 85,138 |
| | $ | 1.11 |
| | 1.59 |
|
Non-operating pension costs | 6,958 |
| | 7,443 |
| | 4,019 |
| | 4,420 |
| | 0.08 |
| | 0.08 |
|
Pension settlement charge | 5,454 |
| | — |
| | 3,304 |
| | — |
| | 0.06 |
| | — |
|
Fees related to cost-savings program | 4,255 |
| | — |
| | 2,740 |
| | — |
| | 0.05 |
| | — |
|
Tax law change - rate increase | — |
| | — |
| | 1,844 |
| | — |
| | 0.03 |
| | — |
|
Comparable EBT/ Earnings/ EPS | $ | 111,010 |
| | 139,141 |
| | $ | 70,820 |
| | 89,558 |
| | $ | 1.33 |
| | 1.67 |
|
| | | | | | | | | | | |
Nine months ended September 30, | | | | | | | | | | | |
EBT/Earnings/EPS | $ | 234,991 |
| | 337,185 |
| | $ | 148,535 |
| | 215,365 |
| | $ | 2.79 |
| | 4.02 |
|
Non-operating pension costs | 20,875 |
| | 22,023 |
| | 12,065 |
| | 12,857 |
| | 0.24 |
| | 0.24 |
|
Pension settlement charge | 5,454 |
| | — |
| | 3,303 |
| | — |
| | 0.06 |
| | — |
|
Fees related to cost-savings program | 4,255 |
| | — |
| | 2,740 |
| | — |
| | 0.05 |
| | — |
|
Operating tax adjustment | 2,205 |
| | — |
| | 1,677 |
| | — |
| | 0.03 |
| | — |
|
Restructuring | (2,574 | ) | | — |
| | (2,085 | ) | | — |
| | (0.04 | ) | | — |
|
Tax law change - rate increase | — |
| | — |
| | 1,844 |
| | — |
| | 0.03 |
| | — |
|
Pension-related adjustment | — |
| | 7,650 |
| | — |
| | 4,817 |
| | — |
| | 0.09 |
|
Comparable EBT/ Earnings/ EPS | $ | 265,206 |
| | 366,858 |
| | $ | 168,079 |
| | 233,039 |
| | $ | 3.16 |
| | 4.35 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| EBT | | Earnings | | Diluted EPS |
| 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
Three months ended March 31, | (In thousands, except per share amounts) |
EBT/Earnings/EPS | $ | 68,151 |
| | 52,699 |
| | $ | 45,890 |
| | 37,313 |
| | $ | 0.87 |
| | 0.70 |
|
Non-operating pension costs | 6,462 |
| | 1,222 |
| | 4,562 |
| | 598 |
| | 0.09 |
| | 0.01 |
|
ERP implementation costs (1) | 3,590 |
| | — |
| | 2,660 |
| | — |
| | 0.05 |
| | — |
|
Restructuring and other, net (1) | 2,588 |
| | (392 | ) | | 1,842 |
| | (423 | ) | | 0.04 |
| | — |
|
Goodwill impairment (1) | — |
| | 15,513 |
| | — |
| | 15,513 |
| | — |
| | 0.29 |
|
Tax adjustments (2) | — |
| | — |
| | 3,508 |
| | (1,902 | ) | | 0.06 |
| | (0.04 | ) |
Comparable EBT/Earnings/EPS | $ | 80,791 |
| | 69,042 |
| | $ | 58,462 |
| | 51,099 |
| | $ | 1.11 |
| | 0.96 |
|
(1) Refer to Note 14, “Other Items Impacting Comparability,” in the Notes to Consolidated Condensed Financial Statements for additional information.
(2) In the first quarter of 2019, we recorded a $5 million charge to our tax provision for income taxes due to expiring state net operating losses, never
previously benefited in the tax rate, offset by a $1 million benefit to our provision due to a tax law change. In the first quarter of 2018, we determined that certain uncertain tax positions should have been reversed in prior periods when the statutes of limitations expired and recorded a $3 million benefit to our provision for income taxes. In the first quarter of 2018, we also recorded a $1 million deferred tax liability adjustment related to the prior provisional estimate from Tax Reform.
The following table provides a reconciliation of the provision for income taxes to the comparable provision for income taxes:
| | | Three months ended September 30, | | Nine months ended September 30, | Three months ended March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 |
| (Dollars in thousands) | (Dollars in thousands) |
Provision for income taxes (1) | $ | (35,430 | ) | | (46,560 | ) | | $ | (86,456 | ) | | (121,820 | ) | $ | (22,261 | ) | | (15,386 | ) |
Income tax effects of non-GAAP adjustments (1) | (4,760 | ) | | (3,023 | ) | | (10,671 | ) | | (11,999 | ) | (68 | ) | | (2,557 | ) |
Comparable provision for income taxes (1) | $ | (40,190 | ) | | (49,583 | ) | | $ | (97,127 | ) | | (133,819 | ) | $ | (22,329 | ) | | (17,943 | ) |
————————————
| |
(1) | The comparable provision for income taxes is computed using the same methodology as the GAAP provision of income taxes. Income tax effects of non-GAAP adjustments are calculated based on statutory tax rates of the jurisdictions to which the non-GAAP adjustments related. |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The following table provides a numerical reconciliation of net cash provided by operating activities to total cash generated and free cash flow for the nine months ended September 30, 2017:
| | | Nine months ended September 30, | Three months ended March 31, |
| 2017 | | 2016 | 2019 | | 2018 |
| (In thousands) | (In thousands) |
Net cash provided by operating activities from continuing operations | $ | 1,166,191 |
| | 1,185,062 |
| $ | 485,330 |
| | 336,850 |
|
Sales of revenue earning equipment (1) | 289,432 |
| | 331,720 |
| 101,549 |
| | 89,023 |
|
Sales of operating property and equipment (1) | 12,541 |
| | 6,623 |
| 1,918 |
| | 933 |
|
Collections on direct finance leases and other items (1) | 54,227 |
| | 60,229 |
| |
Total cash generated | 1,522,391 |
| | 1,583,634 |
| 588,797 |
| | 426,806 |
|
Purchases of property and revenue earning equipment (1) | (1,312,845 | ) | | (1,511,359 | ) | (1,026,711 | ) | | (662,744 | ) |
Free cash flow | $ | 209,546 |
| | 72,275 |
| $ | (437,914 | ) | | (235,938 | ) |
| | | | | | |
Memo: | | | | | | |
Net cash (used in) provided by financing activities | $ | (191,255 | ) | | (55,554 | ) | |
Net cash provided by financing activities | | $ | 434,288 |
| | 229,603 |
|
Net cash used in investing activities | $ | (962,191 | ) | | (1,108,584 | ) | (923,244 | ) | | (572,788 | ) |
————————————
| |
(1) | Included in cash flows from investing activities. |
The following table provides a reconciliation of total revenue to operating revenue, which was not provided within the MD&A discussion:revenue:
| | | Three months ended September 30, | | Nine months ended September 30, | Three months ended March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 |
| (In thousands) | (In thousands) |
Total revenue | $ | 1,848,529 |
| | 1,724,418 |
| | $ | 5,389,906 |
| | 5,057,834 |
| $ | 2,180,327 |
| | 1,904,205 |
|
Fuel | (175,106 | ) | | (162,293 | ) | | (519,979 | ) | | (464,176 | ) | (216,543 | ) | | (209,961 | ) |
Subcontracted transportation | (147,970 | ) | | (93,832 | ) | | (416,159 | ) | | (269,639 | ) | (204,777 | ) | | (150,577 | ) |
Operating revenue | $ | 1,525,453 |
| | 1,468,293 |
| | $ | 4,453,768 |
| | 4,324,019 |
| $ | 1,759,007 |
| | 1,543,667 |
|
The following table provides a reconciliation of FMS total revenue to FMS operating revenue, which was not provided within the MD&A discussion:revenue:
| | | Three months ended September 30, | | Nine months ended September 30, | Three months ended March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 |
| (In thousands) | (In thousands) |
FMS total revenue | $ | 1,195,798 |
| | 1,155,011 |
| | $ | 3,491,847 |
| | 3,404,452 |
| $ | 1,351,599 |
| | 1,243,050 |
|
Fuel (1) | (169,787 | ) | | (157,108 | ) | | (505,055 | ) | | (448,987 | ) | (207,866 | ) | | (203,807 | ) |
FMS operating revenue | $ | 1,026,011 |
| | 997,903 |
| | $ | 2,986,792 |
| | 2,955,465 |
| $ | 1,143,733 |
| | 1,039,243 |
|
| | | | | | | | | | |
FMS EBT | $ | 100,693 |
| | 112,507 |
| | $ | 220,973 |
| | 306,554 |
| $ | 60,911 |
| | 54,343 |
|
FMS EBT as a % of FMS total revenue | 8.4 | % | | 9.7 | % | | 6.3 | % | | 9.0 | % | 4.5 | % | | 4.4 | % |
FMS EBT as a % of FMS operating revenue | 9.8 | % | | 11.3 | % | | 7.4 | % | | 10.4 | % | 5.3 | % | | 5.2 | % |
————————————
| |
(1) | Includes intercompany fuel sales from FMS to DTS and SCS. |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The following table provides a reconciliation of DTS total revenue to DTS operating revenue, which was not provided within the MD&A discussion:revenue:
| | | Three months ended September 30, | | Nine months ended September 30, | Three months ended March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 |
| (In thousands) | (In thousands) |
DTS total revenue | $ | 272,334 |
| | 260,921 |
| | $ | 811,620 |
| | 764,025 |
| $ | 349,621 |
| | 298,970 |
|
Subcontracted transportation | (46,230 | ) | | (37,743 | ) | | (136,833 | ) | | (106,896 | ) | (76,782 | ) | | (63,716 | ) |
Fuel | (28,187 | ) | | (26,530 | ) | | (83,742 | ) | | (75,916 | ) | (37,219 | ) | | (33,849 | ) |
DTS operating revenue | $ | 197,917 |
| | 196,648 |
| | $ | 591,045 |
| | 581,213 |
| $ | 235,620 |
| | 201,405 |
|
| | | | | | | | | | |
DTS EBT | $ | 13,770 |
| | 17,584 |
| | $ | 39,892 |
| | 48,300 |
| $ | 17,412 |
| | 13,052 |
|
DTS EBT as a % of DTS total revenue | 5.1 | % | | 6.7 | % | | 4.9 | % | | 6.3 | % | 5.0 | % | | 4.4 | % |
DTS EBT as a % of DTS operating revenue | 7.0 | % | | 8.9 | % | | 6.7 | % | | 8.3 | % | 7.4 | % | | 6.5 | % |
The following table provides a reconciliation of SCS total revenue to SCS operating revenue, which was not provided within the MD&A discussion:revenue:
| | | Three months ended September 30, | | Nine months ended September 30, | Three months ended March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 |
| (In thousands) | (In thousands) |
SCS total revenue | $ | 496,004 |
| | 416,898 |
| | $ | 1,429,477 |
| | 1,207,665 |
| $ | 635,671 |
| | 494,707 |
|
Subcontracted transportation | (101,740 | ) | | (56,089 | ) | | (279,326 | ) | | (162,743 | ) | (127,995 | ) | | (86,861 | ) |
Fuel | (17,835 | ) | | (15,356 | ) | | (53,252 | ) | | (45,495 | ) | (30,587 | ) | | (25,040 | ) |
SCS operating revenue | $ | 376,429 |
| | 345,453 |
| | $ | 1,096,899 |
| | 999,427 |
| $ | 477,089 |
| | 382,806 |
|
| | | | | | | | | | |
SCS EBT | $ | 22,052 |
| | 30,956 |
| | $ | 75,359 |
| | 79,105 |
| $ | 32,317 |
| | 25,511 |
|
SCS EBT as a % of SCS total revenue | 4.4 | % | | 7.4 | % | | 5.3 | % | | 6.6 | % | 5.1 | % | | 5.2 | % |
SCS EBT as a % of SCS operating revenue | 5.9 | % | | 9.0 | % | | 6.9 | % | | 7.9 | % | 6.8 | % | | 6.7 | % |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
FORWARD-LOOKING STATEMENTS
Forward-looking statements (within the meaning of the Federal Private Securities Litigation Reform Act of 1995) are statements that relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends concerning matters that are not historical facts. These statements are often preceded by or include the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will,” “may,” “could,” “should” or similar expressions. This Quarterly Report on Form 10-Q contains forward-looking statements including, but not limited to, statements regarding:
our expectations in our FMS business segment regarding anticipated ChoiceLease revenue and fleet growth and commercial rental revenue and demand;
our expectations in our DTS and SCS business segments regarding anticipated total and operating revenue trends, sales activity and growth rates;
our expectations of the long-term residual values of revenue earning equipment;
the anticipated declineincrease in NLE vehicles in inventory through the end of the year;
the expected pricing and inventory levels for used vehicles;
our expectations of operating cash flow and capital expenditures through the end of 2017;2019;
the adequacy of our accounting estimates and reserves for pension expense, compensation expense and employee benefit plan obligations, depreciation and residual value guarantees and income taxes;
the anticipated timing of payment of restructuring liabilities;
the adequacy of estimates we make in preparing financial statements including our fair value estimates of employee incentive awards under our share-based compensation plans, publicly traded debt and other debt;
our beliefs regarding the default risk of our direct financing lease receivables;
our ability to fund all of our operating, investing and financial needs for the foreseeable future through internally generated funds and outside funding sources;
the anticipated impact of fuel price fluctuations;
our expectations as to return on pension plan assets, future pension expense and estimated contributions;
our expectations regarding the scope, anticipated outcomes and the adequacy of our loss provisions with respect to certain claims, proceedings and lawsuits;
our expectations about the need to repatriate foreign cash to the U.S.;
our ability to access commercial paper and other available debt financing in the capital markets;
our expectations regarding the future use and availability of funding sources; and
the anticipated impact of recent accounting pronouncements.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
These statements, as well as other forward-looking statements contained in this Quarterly Report, are based on our current plans and expectations and are subject to risks, uncertainties and assumptions. We caution readers that certain important factors could cause actual results and events to differ significantly from those expressed in any forward-looking statement.statements. These risk factors include, but are not limited to, the following:
Market Conditions:
|
| | | |
| Ÿ | | Changes in general economic and financial conditions in the U.S. and worldwide leading to decreased demand for our services, lower profit margins, increased levels of bad debt and reduced access to credit and financial markets |
|
| | | |
| Ÿ | | Decreases in freight demand which would impact both our transactional and variable-based contractual business |
|
| | | |
| Ÿ | | Changes in our customers’ operations, financial condition or business environment that may limit their needdemand for, or ability to purchase, our services |
|
| | | |
| Ÿ | | Further decreasesDecreases in market demand affecting the commercial rental market and used vehicle sales as well as global economic conditions |
|
| | | |
| Ÿ | | Volatility in customer volumes and shifting customer demand in the industries serviced by our SCS business |
|
| | | |
| Ÿ | | Changes in current financial, tax or regulatory requirements that could negatively impact the leasing marketour financial results |
Competition:
|
| | | |
| Ÿ | | Advances in technology may impact demand for our services or may require increased investments to remain competitive, which may take time and require additional investment and increase costs which our customers may not be willing to accept higher prices to cover the cost of these investments |
|
| | | |
| Ÿ | | Competition from other service providers, some of which have greater capital resources or lower capital costs, or from our customers, who may choose to provide services themselves |
|
| | | |
| Ÿ | | Continued consolidation in the markets in which we operate which may create large competitors with greater financial resources |
|
| | | |
| Ÿ | | Our inability to maintain current pricing levels due to economic conditions, demand for services, customer acceptance or competition |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Profitability:
|
| | | |
| Ÿ | | Our inability to obtain adequate profit margins for our services |
|
| | | |
| Ÿ | | Lower than expected sales volumes or customer retention levels |
|
| | | |
| Ÿ | | Decreases in commercial rental fleet utilization and pricing |
|
| | | |
| Ÿ | | Lower than expected demand for,used vehicle sales pricing levels and valuesfluctuations in the anticipated proportion of used vehiclesretail versus wholesale sales |
|
| | | |
| Ÿ | | Loss of key customers in our DTS and SCS business segments |
|
| | | |
| Ÿ | | Our inability to adapt our product offerings to meet changing consumer preferences on a cost-effective basis |
|
| | | |
| Ÿ | | The inability of our legacy information technology systems to provide timely access to data |
|
| | | |
| Ÿ | | Sudden changes in fuel prices and fuel shortages |
|
| | | |
| Ÿ | | Higher prices for vehicles, diesel engines and fuel as a result of new environmental standards |
|
| | | |
| Ÿ | | Higher than expected maintenance costs and lower than expected benefits associated with our maintenance initiatives |
|
| | | |
| Ÿ | | Our inability to successfully execute our asset management initiatives, maintain our fleet at normalized levels and right-size our fleet in line with demand |
|
| | | |
| Ÿ | | Our inability to redeploy vehicles and prepare vehicles for sale in a cost-efficient manner |
|
| | | |
| Ÿ | | Our key assumptions and pricing structure of our DTS and SCS contracts prove to be inaccurate |
|
| | | |
| Ÿ | | Increased unionizing, labor strikes and work stoppages |
|
| | | |
| Ÿ | | Difficulties in attracting and retaining drivers and technicians due to driver and technician shortages, which may result in higher costs to procure drivers and technicians and higher turnover rates affecting our customers |
|
| | | |
| Ÿ | | Our inability to manage our cost structure |
|
| | | |
| Ÿ | | Our inability to limit our exposure for customer claims |
|
| | | |
| Ÿ | | Unfavorable or unanticipated outcomes in legal or regulatory proceedings or uncertain positions |
|
| | | |
| Ÿ | | Business interruptions or expenditures due to severe weather or natural occurrences |
|
| | | |
| Ÿ | | Inability to react to and quickly adapt to changing market conditions |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Financing Concerns:
|
| | | |
| Ÿ | | Higher borrowing costs and possible decreases in available funding sources caused by an adverse change in our debt ratings |
|
| | | |
| Ÿ | | Unanticipated interest rate and currency exchange rate fluctuations |
|
| | | |
| Ÿ | | Negative funding status of our pension plans caused by lower than expected returns on invested assets and unanticipated changes in interest rates |
|
| | | |
| Ÿ | | Withdrawal liability as a result of our participation in multi-employer plans |
|
| | | |
| Ÿ | | Instability in U.S. and worldwide credit markets, resulting in higher borrowing costs and/or reduced access to credit |
Accounting Matters:
|
| | | |
| Ÿ | | Impact of unusual items resulting from ongoing evaluations of business strategies, asset or expense valuations, acquisitions, divestitures and our organizational structure |
|
| | | |
| Ÿ | | Reductions in residual values or useful lives of revenue earning equipment and changes to depreciation policy |
|
| | | |
| Ÿ | | Increases in compensation levels, retirement rate and mortality resulting in higher pension expense; regulatory changes affecting pension estimates, accruals and expenses |
|
| | | |
| Ÿ | | Increases in health care costs resulting in higher insurance costs |
|
| | | |
| Ÿ | | Changes in accounting rules, assumptions and accruals |
|
| | | |
| Ÿ | | Impact of actual insurance claim and settlement activity compared to historical loss development factors used to project future development |
|
| | | |
| Ÿ
| | Lower than expected operating performance in our FMS Europe reporting unit could affect key assumptions used in our annual goodwill impairment test and result in impairment |
Other risks detailed from time to time in our SEC filings including our 20162018 Annual Report on Form 10-K.
New risk factors emerge from time to time and it is not possible for management to predict all such risk factors or to assess the impact of such risk factors on our business. As a result, no assurance can be given as to our future results or achievements. You should not place undue reliance on the forward-looking statements contained herein, which speak only as of the date of this Quarterly Report. We do not intend, or assume any obligation, to update or revise any forward-looking statements contained in this Quarterly Report, whether as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to Ryder’s exposures to market risks since December 31, 2016.2018. Please refer to the 20162018 Annual Report on Form 10-K for a complete discussion of Ryder’s exposures to market risks.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the thirdfirst quarter of 2017,2019, we carried out an evaluation, under the supervision and with the participation of management, including Ryder’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Ryder’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of the end of the thirdfirst quarter of 2017,2019, Ryder’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) were effective.
Changes in Internal Controls over Financial Reporting
Beginning January 1, 2019, we adopted ASU No. 2016-02, “Leases (Topic 842)” and related amendments (collectively, the “new lease standard”). As a result of our adoption of the new lease standard, we implemented significant new lease accounting systems, processes and internal controls over lease accounting to assist us in the application of the new lease standard. During the three months ended September 30, 2017,March 31, 2019, there were no other changes in Ryder’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect such internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 21, 2019, contains a discussion of our risk factors. Our operations could also be affected by additional risk factors that are not presently known to us or by factors that we currently consider immaterial to our business. To our knowledge and except to the extent additional factual information disclosed in this Quarterly Report on Form 10-Q relates to such risk factors, there have been no material changes in the risk factors described in "Item 1A. Risk Factors" in our Form 10-K for the year ended December 31, 2018, filed with the SEC on February 21, 2019.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information with respect to purchases we made of our common stock during the three months ended September 30, 2017March 31, 2019:
|
| | | | | | | | | | | | |
| Total Number of Shares Purchased(1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Programs | | Maximum Number of Shares That May Yet Be Purchased Under the Anti-Dilutive Program (2) |
July 1 through July 30, 2017 | 8,758 |
| | $ | 72.82 |
| | — |
| | 636,128 |
|
August 1 through August 31, 2017 | 105,394 |
| | 72.36 |
| | 105,394 |
| | 530,734 |
|
September 1 through September 30, 2017 | 34 |
| | 78.92 |
| | — |
| | 530,734 |
|
Total | 114,186 |
| | $ | 72.40 |
| | 105,394 |
| | |
|
| | | | | | | | | | | | |
| Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Programs | | Maximum Number of Shares That May Yet Be Purchased Under the Anti-Dilutive Program (2) |
January 1 through January 31, 2019 | 502 |
| | $ | 50.02 |
| | — |
| | 1,075,181 |
|
February 1 through February 28, 2019 | 170,574 |
| | 61.83 |
| | 112,922 |
| | 962,259 |
|
March 1 through March 31, 2019 | 113,100 |
| | 62.16 |
| | 112,922 |
| | 849,337 |
|
Total | 284,176 |
| | $ | 61.94 |
| | 225,844 |
| | |
————————————
| |
(1) | During the three months ended September 30, 2017,March 31, 2019, we purchased an aggregate of 8,89258,332 shares of our common stock in employee-related transactions. Employee-related transactions may include: (i) shares of common stock withheld as payment for the exercise price of options exercised or to satisfy the employees' tax withholding liability associated with our share-based compensation programs and (ii) open-market purchases by the trustee of Ryder’s deferred compensation plans relating to investments by employees in our stock, one of the investment options available under the plans. |
| |
(2) | In December 2015,2017, our Board of Directors authorized a new share repurchase program intended to mitigate the dilutive impact of shares issued under our employee stock plans.plans (the program). Under the December 2015 program, management is authorized to repurchase (i) up to 1.5 million shares of common stock, the sum of which will not exceed the number of shares issued to employees under Ryder'sthe Company’s employee stock plans from December 1, 201531, 2017 to December 9, 2017 plus (ii) 0.5 million shares issued to employees that were not purchased under Ryder's previous share repurchase program. The December 2015 program limits aggregate share repurchases to no more than 2 million shares of Ryder common stock.13, 2019. Share repurchases of common stock are made periodically in open-market transactions and are subject to market conditions, legal requirements and other factors. Management may establish prearranged written plans for Ryderthe Company under Rule 10b5-1 of the Securities Exchange Act of 1934 as part of the December 2015 program, which allow for share repurchases during Ryder’s quarterly blackout periods as set forth in the trading plan. |
ITEM 6. EXHIBITS
|
| | | |
Exhibit Number | | Description |
12.1 |
| |
3.1 | |
|
| | |
3.2 | | |
| | |
10.1 | | |
| | |
10.2 | |
|
| | |
10.3 | | |
| | |
10.4 | | |
| | |
10.5 | | |
| | |
10.6 | | |
| | |
10.7 | | |
| | |
10.8 | | |
| | |
10.9 | | |
| | |
31.1 |
| | |
| | |
31.2 |
| | |
| | |
32 |
| | |
| | |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | |
| RYDER SYSTEM, INC. |
| (Registrant) |
| | |
Date: October 24, 2017May 8, 2019 | By: | /s/ Art A. GarciaScott Parker |
| | Art A. GarciaScott Parker |
| | Executive Vice President and Chief Financial Officer |
| | (Principal Financial Officer) |
| | |
Date: October 24, 2017May 8, 2019 | By: | /s/ Frank Mullen |
| | Frank Mullen |
| | Vice President and Controller |
| | (Principal Accounting Officer) |
| | |