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
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FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017March 31, 2020
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) | | | |
|
| | | | | | | |
FloridaTitle of each class | 59-0739250Trading Symbol(s) | Name of each exchange on which registered |
(State or other jurisdiction of incorporation or organization)Common Stock | (I.R.S. Employer Identification No.) |
R | |
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)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 ¨Yes ☑ 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 ¨
Yes ☑ 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 filerþ | ☑ | | 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 NOYes ☐No ☑
The number of shares of Ryder System, Inc. Common Stock ($0.50 par value per share) outstanding at September 30, 2017March 31, 2020 was 52,947,715.
RYDER SYSTEM, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RYDER SYSTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(unaudited)
| | | | | | | | | | | | | | | | Three months ended March 31, | |
| Three months ended September 30, | | Nine months ended September 30, | | 2020 | | 2019 | |
| 2017 | | 2016 | | 2017 | | 2016 | | (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 | | Lease & related maintenance and rental revenues | $ | 927,756 | | | $ | 899,559 | | |
Services revenue | 896,245 |
| | 801,004 |
| | 2,619,139 |
| | 2,345,922 |
| Services revenue | 1,112,188 | | | 1,132,048 | | |
Fuel services revenue | 129,087 |
| | 120,408 |
| | 382,966 |
| | 342,765 |
| Fuel services revenue | 121,362 | | | 148,720 | | |
Total revenues | 1,848,529 |
| | 1,724,418 |
| | 5,389,906 |
| | 5,057,834 |
| Total revenues | 2,161,306 | | | 2,180,327 | | |
| | | | | | | | | | | | |
Cost of lease and rental | 588,626 |
| | 557,901 |
| | 1,745,777 |
| | 1,665,693 |
| |
Cost of lease & related maintenance and rental | | Cost of lease & related maintenance and rental | 818,292 | | | 664,289 | | |
Cost of services | 761,470 |
| | 658,793 |
| | 2,210,314 |
| | 1,936,636 |
| Cost of services | 954,429 | | | 971,690 | | |
Cost of fuel services | 124,562 |
| | 116,904 |
| | 372,016 |
| | 331,283 |
| Cost of fuel services | 120,449 | | | 143,275 | | |
Other operating expenses | 28,445 |
| | 27,997 |
| | 87,122 |
| | 85,944 |
| Other operating expenses | 33,565 | | | 33,626 | | |
Selling, general and administrative expenses | 216,653 |
| | 191,337 |
| | 620,041 |
| | 602,768 |
| Selling, general and administrative expenses | 224,119 | | | 231,325 | | |
Non-operating pension costs | 6,958 |
| | 7,468 |
| | 20,875 |
| | 29,698 |
| Non-operating pension costs | 1,221 | | | 6,462 | | |
Used vehicle sales, net | (2,727 | ) | | (1,873 | ) | | 11,815 |
| | (33,002 | ) | Used vehicle sales, net | 20,684 | | | 8,217 | | |
Interest expense | 34,854 |
| | 37,440 |
| | 104,591 |
| | 112,597 |
| Interest expense | 62,566 | | | 55,336 | | |
Miscellaneous income, net | (4,655 | ) | | (3,247 | ) | | (17,636 | ) | | (10,968 | ) | |
Miscellaneous (income) loss, net | | Miscellaneous (income) loss, net | 8,668 | | | (8,222) | | |
Restructuring and other items, net | | Restructuring and other items, net | 30,947 | | | 6,178 | | |
| 1,754,186 |
| | 1,592,720 |
| | 5,154,915 |
| | 4,720,649 |
| | 2,274,940 | | | 2,112,176 | | |
Earnings from continuing operations before income taxes | 94,343 |
| | 131,698 |
| | 234,991 |
| | 337,185 |
| |
Provision for income taxes | 35,430 |
|
| 46,560 |
| | 86,456 |
| | 121,820 |
| |
Earnings from continuing operations | 58,913 |
|
| 85,138 |
| | 148,535 |
| | 215,365 |
| |
Loss from discontinued operations, net of tax | (290 | ) | | (386 | ) | | (947 | ) | | (1,069 | ) | |
Net earnings | $ | 58,623 |
| | 84,752 |
| | $ | 147,588 |
| | 214,296 |
| |
| Earnings (loss) from continuing operations before income taxes | | Earnings (loss) from continuing operations before income taxes | (113,634) | | | 68,151 | | |
Provision for (benefit from) income taxes | | Provision for (benefit from) income taxes | (4,505) | | | 22,261 | | |
Earnings (loss) from continuing operations | | Earnings (loss) from continuing operations | (109,129) | | | 45,890 | | |
Earnings (loss) from discontinued operations, net of tax | | Earnings (loss) from discontinued operations, net of tax | (484) | | | (574) | | |
Net earnings (loss) | | Net earnings (loss) | $ | (109,613) | | | $ | 45,316 | | |
| | | | | | | | | | | | |
Earnings (loss) per common share — Basic | | | | | | | | Earnings (loss) per common share — Basic | | |
Continuing operations | $ | 1.12 |
| | 1.60 |
| | $ | 2.81 |
| | 4.05 |
| Continuing operations | $ | (2.09) | | | $ | 0.87 | | |
Discontinued operations | (0.01 | ) | | (0.01 | ) | | (0.02 | ) | | (0.02 | ) | Discontinued operations | (0.01) | | | (0.01) | | |
Net earnings | $ | 1.11 |
| | 1.60 |
| | $ | 2.79 |
| | 4.03 |
| |
Net earnings (loss) | | Net earnings (loss) | $ | (2.10) | | | $ | 0.86 | | |
| | | | | | | | | | | | |
Earnings (loss) per common share — Diluted | | | | | | | | Earnings (loss) per common share — Diluted | | |
Continuing operations | $ | 1.11 |
| | 1.59 |
| | $ | 2.79 |
| | 4.02 |
| Continuing operations | $ | (2.09) | | | $ | 0.87 | | |
Discontinued operations | (0.01 | ) | | (0.01 | ) | | (0.02 | ) | | (0.02 | ) | Discontinued operations | (0.01) | | | (0.01) | | |
Net earnings | $ | 1.11 |
| | 1.59 |
| | $ | 2.77 |
| | 4.00 |
| |
Net earnings (loss) | | Net earnings (loss) | $ | (2.10) | | | $ | 0.86 | | |
| | | | | | | | |
Cash dividends declared per common share | $ | 0.46 |
| | 0.44 |
| | $ | 1.34 |
| | 1.26 |
| |
See accompanying notes to Consolidated Condensed Financial Statements.
condensed consolidated financial statements.
Note: EPS amounts may not be additive due to rounding.
RYDER SYSTEM, INC. AND SUBSIDIARIES
CONDENSED 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, | | | | | | |
| 2020 | | 2019 | | | | |
| (In thousands) | | | | | | |
| | | | | | | |
Net earnings (loss) | $ | (109,613) | | | $ | 45,316 | | | | | |
| | | | | | | |
Other comprehensive income (loss): | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Changes in currency translation adjustment and other | (84,620) | | | 15,762 | | | | | |
| | | | | | | |
Amortization of pension and postretirement items | 7,779 | | | 7,468 | | | | | |
| | | | | | | |
Income tax expense related to amortization of pension and postretirement items | (1,613) | | | (2,014) | | | | | |
Amortization of pension and postretirement items, net of tax | 6,166 | | | 5,454 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other comprehensive income (loss), net of taxes | (78,454) | | | 21,216 | | | | | |
| | | | | | | |
Comprehensive income | $ | (188,067) | | | $ | 66,532 | | | | | |
See accompanying notes to Consolidated Condensed Financial Statements.condensed consolidated financial statements.
RYDER SYSTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
| | | September 30, 2017 | | December 31, 2016 | | March 31, 2020 | | December 31, 2019 |
| (Dollars in thousands, except per share amount) | | (In thousands, except share amounts) | |
Assets: | | | | Assets: | |
Current assets: | | | | Current assets: | |
Cash and cash equivalents | $ | 65,256 |
|
| 58,801 |
| Cash and cash equivalents | $ | 397,235 | | | $ | 73,584 | |
Receivables, net of allowance of $13,192 and $14,915, respectively | 981,702 |
|
| 831,947 |
| |
Receivables, net | | Receivables, net | 1,202,819 | | | 1,228,490 | |
Inventories | 71,328 |
|
| 69,529 |
| Inventories | 65,422 | | | 80,822 | |
Prepaid expenses and other current assets | 134,294 |
|
| 141,280 |
| Prepaid expenses and other current assets | 191,090 | | | 179,155 | |
Total current assets | 1,252,580 |
| | 1,101,557 |
| Total current assets | 1,856,566 | | | 1,562,051 | |
Revenue earning equipment, net | 8,249,317 |
|
| 8,147,722 |
| Revenue earning equipment, net | 10,033,616 | | | 10,427,664 | |
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 $1,226,339 and $1,224,216, respectively | | Operating property and equipment, net of accumulated depreciation of $1,226,339 and $1,224,216, respectively | 906,712 | | | 917,799 | |
Goodwill | 395,120 |
|
| 386,772 |
| Goodwill | 474,179 | | | 475,025 | |
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 | | Intangible assets, net | 48,673 | | | 50,905 | |
Sales-type leases and other assets | | Sales-type leases and other assets | 1,044,478 | | | 1,041,890 | |
Total assets | $ | 11,258,974 |
|
| 10,902,454 |
| Total assets | $ | 14,364,224 | | | $ | 14,475,334 | |
| | | | | | | |
Liabilities and shareholders’ equity: | | | | Liabilities and shareholders’ equity: | | |
Current liabilities: | | | | Current liabilities: | | |
Short-term debt and current portion of long-term debt | $ | 143,942 |
|
| 791,410 |
| Short-term debt and current portion of long-term debt | $ | 853,527 | | | $ | 1,154,564 | |
Accounts payable | 557,216 |
|
| 445,470 |
| Accounts payable | 522,612 | | | 594,712 | |
Accrued expenses and other current liabilities | 529,171 |
|
| 507,189 |
| Accrued expenses and other current liabilities | 820,257 | | | 876,077 | |
Total current liabilities | 1,230,329 |
| | 1,744,069 |
| Total current liabilities | 2,196,396 | | | 2,625,353 | |
Long-term debt | 5,205,284 |
|
| 4,599,864 |
| Long-term debt | 7,320,843 | | | 6,770,224 | |
Other non-current liabilities | 872,071 |
|
| 817,565 |
| Other non-current liabilities | 1,472,284 | | | 1,442,003 | |
Deferred income taxes | 1,776,226 |
|
| 1,688,681 |
| Deferred income taxes | 1,131,965 | | | 1,161,444 | |
Total liabilities | 9,083,910 |
| | 8,850,179 |
| Total liabilities | 12,121,488 | | | 11,999,024 | |
| | | | | | | |
Commitments and contingencies (Note 17) | | Commitments and contingencies (Note 17) | | |
Shareholders’ equity: | | | | 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, 0 par value per share — authorized, 3,800,917; NaN outstanding, March 31, 2020 and December 31, 2019 | | Preferred stock, 0 par value per share — authorized, 3,800,917; NaN outstanding, March 31, 2020 and December 31, 2019 | — | | | — | |
Common stock, $0.50 par value per share — authorized, 400,000,000; outstanding, March 31, 2020 — 53,735,964 and December 31, 2019 — 53,278,316 | | Common stock, $0.50 par value per share — authorized, 400,000,000; outstanding, March 31, 2020 — 53,735,964 and December 31, 2019 — 53,278,316 | 26,867 | | | 26,639 | |
Additional paid-in capital | 1,039,598 |
| | 1,032,549 |
| Additional paid-in capital | 1,103,928 | | | 1,108,649 | |
Retained earnings | 1,855,806 |
| | 1,827,026 |
| Retained earnings | 2,026,886 | | | 2,177,513 | |
Accumulated other comprehensive loss | (746,814 | ) | | (834,032 | ) | Accumulated other comprehensive loss | (914,945) | | | (836,491) | |
Total shareholders’ equity | 2,175,064 |
|
| 2,052,275 |
| Total shareholders’ equity | 2,242,736 | | | 2,476,310 | |
Total liabilities and shareholders’ equity | $ | 11,258,974 |
|
| 10,902,454 |
| Total liabilities and shareholders’ equity | $ | 14,364,224 | | | $ | 14,475,334 | |
See accompanying notes to Consolidated Condensed Financial Statements.
condensed consolidated financial statements.
RYDER SYSTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
|
| | | | | | |
| Nine months ended September 30, |
| 2017 | | 2016 |
| (In thousands) |
Cash flows from operating activities from continuing operations: | | | |
Net earnings | $ | 147,588 |
| | 214,296 |
|
Less: Loss from discontinued operations, net of tax | (947 | ) | | (1,069 | ) |
Earnings from continuing operations | 148,535 |
| | 215,365 |
|
Depreciation expense | 932,772 |
| | 878,173 |
|
Used vehicle sales, net | 11,815 |
| | (33,002 | ) |
Amortization expense and other non-cash charges, net | 27,933 |
| | 20,196 |
|
Non-operating pension costs and share-based compensation expense | 35,509 |
| | 43,568 |
|
Deferred income tax expense | 75,279 |
| | 109,191 |
|
Changes in operating assets and liabilities: | | | |
Receivables | (145,090 | ) | | (69,169 | ) |
Inventories | (985 | ) | | (3,524 | ) |
Prepaid expenses and other assets | 255 |
| | (24,241 | ) |
Accounts payable | 40,734 |
| | 68,599 |
|
Accrued expenses and other non-current liabilities | 39,434 |
| | (20,094 | ) |
Net cash provided by operating activities from continuing operations | 1,166,191 |
| | 1,185,062 |
|
| | | |
Cash flows from financing activities: | | | |
Net change in commercial paper borrowings and revolving credit facilities | 2,153 |
|
| 73,597 |
|
Debt proceeds | 873,302 |
|
| 298,254 |
|
Debt repaid | (938,160 | ) |
| (340,707 | ) |
Dividends on common stock | (71,564 | ) | | (67,651 | ) |
Common stock issued | 10,387 |
| | 9,626 |
|
Common stock repurchased | (65,856 | ) | | (25,658 | ) |
Debt issuance costs | (1,517 | ) | | (3,015 | ) |
Net cash used in financing activities | (191,255 | ) | | (55,554 | ) |
| | | |
Cash flows from investing activities: | | | |
Purchases of property and revenue earning equipment | (1,312,845 | ) | | (1,511,359 | ) |
Sales of revenue earning equipment | 289,432 |
| | 331,720 |
|
Sales of operating property and equipment | 12,541 |
| | 6,623 |
|
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 | ) |
| | | |
Effect of exchange rate changes on cash | (5,226 | ) | | (5,567 | ) |
Increase in cash and cash equivalents from continuing operations | 7,519 |
| | 15,357 |
|
| | | |
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 |
|
| | | | | | | | | | | | | |
| Three months ended March 31, | | | | |
| 2020 | | 2019 | | |
| (In thousands) | | | | |
Cash flows from operating activities from continuing operations: | | | | | |
Net earnings (loss) | $ | (109,613) | | | $ | 45,316 | | | |
Less: Loss from discontinued operations, net of tax | (484) | | | (574) | | | |
Earnings (loss) from continuing operations | (109,129) | | | 45,890 | | | |
Depreciation expense | 523,223 | | | 377,357 | | | |
| | | | | |
Used vehicle sales, net | 20,684 | | | 8,217 | | | |
Amortization expense and other non-cash charges, net | 42,698 | | | 27,131 | | | |
Non-cash lease expense | 22,460 | | | 23,218 | | | |
Non-operating pension costs and share-based compensation expense | 4,312 | | | 13,861 | | | |
Deferred income tax expense (benefit) | (13,598) | | | 19,729 | | | |
Collections on sales-type leases | 26,597 | | | 34,017 | | | |
Changes in operating assets and liabilities, net of acquisitions: | | | | | |
Receivables | (14,634) | | | 26,181 | | | |
Inventories | 15,409 | | | (756) | | | |
Prepaid expenses and other assets | (36,482) | | | (27,645) | | | |
Accounts payable | (25,707) | | | 18,586 | | | |
Accrued expenses and other non-current liabilities | (17,247) | | | (80,456) | | | |
Net cash provided by operating activities from continuing operations | 438,586 | | | 485,330 | | | |
| | | | | |
Cash flows from investing activities from continuing operations: | | | | | |
Purchases of property and revenue earning equipment | (430,960) | | | (1,026,711) | | | |
Sales of revenue earning equipment | 101,099 | | | 101,549 | | | |
Sales of operating property and equipment | 1,883 | | | 1,918 | | | |
| | | | | |
| | | | | |
| | | | | |
Other | (5,000) | | | — | | | |
Net cash used in investing activities from continuing operations | (332,978) | | | (923,244) | | | |
| | | | | |
Cash flows from financing activities from continuing operations: | | | | | |
Net borrowings (repayments) of commercial paper and revolving credit facilities | 332,682 | | | 158,258 | | | |
Debt proceeds | 556,849 | | | 799,300 | | | |
Debt repaid | (627,701) | | | (478,411) | | | |
Dividends on common stock | (30,594) | | | (29,301) | | | |
Common stock issued | 2,795 | | | 3,108 | | | |
Common stock repurchased | (11,924) | | | (14,156) | | | |
| | | | | |
Tax withholding on shares settled | (4,013) | | | (3,440) | | | |
Debt issuance costs and other items | (474) | | | (1,070) | | | |
Net cash provided by financing activities from continuing operations | 217,620 | | | 434,288 | | | |
| | | | | |
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 725 | | | (1,551) | | | |
Increase (decrease) in cash, cash equivalents, and restricted cash from continuing operations | 323,953 | | | (5,177) | | | |
Increase (decrease) in cash, cash equivalents, and restricted cash from discontinued operations | (302) | | | (147) | | | |
Increase (decrease) in cash, cash equivalents, and restricted cash | 323,651 | | | (5,324) | | | |
Cash, cash equivalents, and restricted cash at beginning of year | 73,584 | | | 68,111 | | | |
Cash, cash equivalents, and restricted cash at end of period | $ | 397,235 | | | $ | 62,787 | | | |
See accompanying notes to Consolidated Condensed Financial Statements.condensed consolidated financial statements.
RYDER SYSTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited)
| | | | | |
| Three months ended March 31, 2020 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred Stock | | Common Stock | | | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | |
| | Amount | | Shares | | Par | | | | | | | | Total |
| | (In thousands, except share amounts) | | | | | | | | | | | | |
Balance at January 1, 2020 | | $ | — | | | 53,278,316 | | | $ | 26,639 | | | $ | 1,108,649 | | | $ | 2,177,513 | | | $ | (836,491) | | | $ | 2,476,310 | |
Adoption of new accounting standard (see Note 2) | | — | | | — | | | — | | | — | | | (5,077) | | | — | | | (5,077) | |
Comprehensive income | | — | | | — | | | — | | | — | | | (109,613) | | | (78,454) | | | (188,067) | |
Common stock dividends declared and paid—$0.56 per share | | — | | | — | | | — | | | — | | | (30,379) | | | — | | | (30,379) | |
Common stock issued under employee stock award and stock purchase plans (1) | | — | | | 760,258 | | | 380 | | | (1,637) | | | — | | | — | | | (1,257) | |
Benefit plan stock sales (purchases) (2) | | — | | | 488 | | | — | | | 39 | | | — | | | — | | | 39 | |
Common stock repurchases | | — | | | (303,098) | | | (152) | | | (6,214) | | | (5,558) | | | — | | | (11,924) | |
Share-based compensation | | — | | | — | | | — | | | 3,091 | | | — | | | — | | | 3,091 | |
Balance at March 31, 2020 | | $ | — | | | 53,735,964 | | | $ | 26,867 | | | $ | 1,103,928 | | | $ | 2,026,886 | | | $ | (914,945) | | | $ | 2,242,736 | |
| | | | | |
| Three months ended March 31, 2019 |
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| | Preferred Stock | | Common Stock | | | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | |
| | Amount | | Shares | | Par | | | | | | | | Total |
| | (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 award and stock purchase plans (1) | | — | | | 409,294 | | | 205 | | | (547) | | | — | | | — | | | (342) | |
Benefit plan stock sales (purchases) (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 | |
__________________
(1)Net of common shares withheld 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 our deferred compensation plans.
See accompanying notes to condensed consolidated financial statements.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. GENERAL
Interim Financial Statements
The accompanying unaudited Condensed 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)(VIE) required to be consolidated in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The accompanying unaudited Condensed Consolidated Condensed Financial Statements have been prepared in accordance with the accounting policies described in our 20162019 Annual Report on Form 10-K and should be read in conjunction with the Consolidated Financial Statements and notes thereto. 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.
The coronavirus (COVID-19) pandemic has negatively impacted several areas of our businesses, including lower demand for commercial rental and declines in volumes in our used vehicle sales, which we also expect to impact pricing (refer to Note 5, "Revenue Earning Equipment," for additional information), in our Fleet Management Solutions (FMS) business segment; deterioration in Supply Chain Solutions (SCS) volumes, primarily due to production shut downs in the automotive industry; sales growth opportunities in all of our businesses; and higher bad debt expenses related to increased concerns around customers' ability to pay invoices. With respect to our ChoiceLease product line, our customers have signed long-term lease contracts and, therefore, we do not expect our revenue and cash flows to be materially affected provided our customers remain solvent and continue to make their payments. We have attempted to mitigate the adverse impacts from the pandemic through cost reduction measures and reduction in capital expenditures.
Depending on the extent and duration of the pandemic, it may have a further impact on our significant judgments and estimates, including those related to goodwill and other asset impairments, residual values and other depreciation assumptions, deferred income taxes and annual effective tax rates, variable revenue considerations, the valuation of our pension plans, and allowance for credit losses.
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, 2019.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Derivatives and HedgingReference Rate Reform
In August 2017,March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-12, Derivatives2020-04, Reference Rate Reform (Topic 848). This update provides optional expedients for applying generally accepted accounting principles to contracts, hedging relationships, and Hedging (Topic 815), which simplifies and clarifiesother transactions that reference LIBOR or another reference rate expected to be discontinued at the accounting and disclosure for hedging activities by more closely aligning the resultsend of cash flow and fair value hedge accounting with the risk management activities2021 because of an entity.reference rate reform. The amendments in this update areis effective for annual periods, and interim periods within those annual periods, beginning afterall entities as of March 12, 2020 through December 15, 2018, with early adoption permitted.31, 2022. We do not expect this standard to have anare currently evaluating the impact on our consolidated financial position, results of operations, orand cash flows.
Share-Based CompensationIncome Taxes
In May 2017,December 2019, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation2019-12, Simplifying the Accounting for Income Taxes (Topic 718): Scope740). This pronouncement enhances and simplifies various aspects of Modification Accounting, which clarifies when changesincome tax accounting guidance. Among other things, the amendment removes the year-to-date loss limitations in interim-period tax accounting and requires entities to reflect the terms or conditionseffect of a share-based payment award must be accounted for as modifications.an enacted change in tax laws in the interim period that includes the enactment date of the new legislation. The amendments in this update arestandard is effective for annual periods,fiscal years beginning after December 15, 2020, and interim periods within those annual periods, beginning after December 15, 2017,fiscal years, with early adoption permitted. We will adopt the standard as of January 1, 2018, on a prospective basis. We do not expecthave early adopted 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 componentupdate 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 20172020, under the modified retrospective basis 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 2017prospective transition approaches, 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), which sets out the principles for the recognition, measurement, presentation and disclosure of leases. The standard requires lessees to classify leases as either finance or operating leases. This classification will determine whether the related expense will be recognized based on asset amortization and interest on the obligation or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. We do not expect the lessee requirements to have a material impact on our consolidated financial position, results of operations, or cash flows.
The new standard continues to require lessors to separate the lease component from the non-lease component; however, it provides clarification on the scope of non-lease components (e.g., maintenance services). The new standard also provides more guidance on how to identify and separate the components. The lease component will be accounted for using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The non-lease component will be accounted for in accordance with the revenue recognition guidance 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 line on a straight-line basis. Revenue from maintenance services will be recognized at the time the maintenance services are performed, which will generally require the deferral of some portion of the customer's lease payments when received, as maintenance services are not performed evenly over the life of a ChoiceLease contract. We will adopt the standard effective January 1, 2019, using the modified retrospective transition method. Upon adoption, we will record a cumulative-effect adjustment to recognize deferred revenue related to the maintenance services on the opening balance sheet for 2017 and restate all prior periods presented (2017 and 2018). We expect the cumulative-effect adjustment 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.
6
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 CONDENSED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
Cloud Computing Arrangements
ThisIn August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal Use Software (Topic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which addresses a customer’s accounting for implementation costs incurred in a cloud computing arrangement (CCA) that is a service contract. The new standard will primarily impact lease revenue from our ChoiceLease product line, specificallyaligns the non-lease component (primarily maintenance services). However, basedaccounting for costs incurred to implement a CCA that is a service arrangement with the guidance on the FASB's clarification guidance issued in June 2017, on the interaction of the transition provisions ofcapitalizing costs associated with developing or obtaining internal-use software. The standard is effective for fiscal years beginning after December 15, 2019. We adopted the new revenue standard and the new lease standard, we will continue to apply the existing lease accounting guidance to our lease revenue upon adoption of the revenue standardprospectively on January 1, 20182020 and will adopt the new revenue standard for the maintenance and other services components of our ChoiceLease product line effective January 1, 2019.
With respect 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 doit did 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, orand cash flows.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326). The new standard modifies the measurement of expected credit losses of certain financial instruments, including accounts receivable (excluding those related to operating leases) and net investments in sales-type leases. Among other things, these amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The standard is effective for fiscal years beginning after December 15, 2019. The standard requires a cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is effective. Periods prior to the adoption date that are presented for comparative purposes are not adjusted. We adopted this new standard as of January 1, 2020 and it did not have a material impact on our consolidated financial position, results of operations, and cash flows.
3. ACQUISITIONSREVENUE
On September 29, 2017, we completedLease & related maintenance and rental revenues included non-lease revenue from maintenance services of $240 million and $239 million for the acquisitionthree months ended March 31, 2020 and 2019, respectively.
Disaggregation of Dallas Service Center, Inc., an independent truck repair facility,Revenue
The following tables disaggregate our revenue recognized by primary geographical market by our FMS, SCS and DTS reportable business segments, as well as by industry for a purchase price of approximately $8.0 million, net of cash acquired, which includes $0.8 million in contingent considerationSCS. Refer to be paid toNote 19, "Segment Reporting," for the seller provided certain conditions are met.
4. REVENUE EARNING EQUIPMENT
|
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| September 30, 2017 | | December 31, 2016 |
| Cost | | Accumulated Depreciation | | Net Book Value(1) | | Cost | | Accumulated Depreciation | | Net Book Value(1) |
| (In thousands) |
Held for use: | |
ChoiceLease | $ | 9,799,028 |
| | (3,284,267 | ) | | 6,514,761 |
| | $ | 9,486,977 |
| | (3,031,937 | ) | | 6,455,040 |
|
Commercial rental | 2,599,043 |
| | (973,126 | ) | | 1,625,917 |
| | 2,499,010 |
| | (935,346 | ) | | 1,563,664 |
|
Held for sale | 417,771 |
| | (309,132 | ) | | 108,639 |
| | 494,355 |
| | (365,337 | ) | | 129,018 |
|
Total | $ | 12,815,842 |
| | (4,566,525 | ) | | 8,249,317 |
| | $ | 12,480,342 |
| | (4,332,620 | ) | | 8,147,722 |
|
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| |
(1) | Revenue earning equipment, net includes vehicles acquired under capital leases of $29 million, less accumulated depreciation of $14 million, at September 30, 2017, and $43 million, less accumulated depreciation of $22 million, at December 31, 2016. |
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, somedisaggregation 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.major products/service line.
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.Primary Geographical Markets
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| Three months ended March 31, 2020 | | | | | | | | |
| FMS | | SCS | | DTS | | Eliminations | | Total |
| (In thousands) | | | | | | | | |
United States | $ | 1,197,521 | | | $ | 522,525 | | | $ | 334,888 | | | $ | (137,295) | | | $ | 1,917,639 | |
Canada | 70,765 | | | 53,552 | | | — | | | (4,971) | | | 119,346 | |
Europe | 71,951 | | | — | | | — | | | — | | | 71,951 | |
Mexico | — | | | 52,370 | | | — | | | — | | | 52,370 | |
| | | | | | | | | |
Total Revenues | $ | 1,340,237 | | | $ | 628,447 | | | $ | 334,888 | | | $ | (142,266) | | | $ | 2,161,306 | |
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2019 | | | | | | | | |
| FMS | | SCS | | DTS | | Eliminations | | Total |
| (In thousands) | | | | | | | | |
United States | $ | 1,198,943 | | | $ | 529,393 | | | $ | 349,621 | | | $ | (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 Revenues | $ | 1,351,599 | | | $ | 635,671 | | | $ | 349,621 | | | $ | (156,564) | | | $ | 2,180,327 | |
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Industry
Our SCS business segment includes revenue from the below industries:
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | | | |
| 2020 | | 2019 | | | | |
| (In thousands) | | | | | | |
Automotive | $ | 249,925 | | | $ | 253,679 | | | | | |
Technology and healthcare | 91,133 | | | 113,668 | | | | | |
Consumer package goods and retail | 229,932 | | | 217,098 | | | | | |
Industrial and other | 57,457 | | | 51,226 | | | | | |
Total SCS Revenues | $ | 628,447 | | | $ | 635,671 | | | | | |
Contract Balances
We record a receivable related to revenue recognized when we have an unconditional right to invoice. Refer to Note 4 for further information regarding our receivables.
Contract liabilities primarily relate to payments received in advance of performance under the contract. Changes in contract liabilities are due to our performance under the contract. Deferred revenue related to the maintenance services component of our ChoiceLease product line was $590 million and $587 million as of March 31, 2020 and December 31, 2019, respectively. Revenue recognized during the three months ended March 31, 2020 and March 31, 2019 was $59 million and $58 million, respectively, for the amounts recorded as deferred revenue at the beginning of each year. In addition, we deferred consideration of $67 million and $57 million during the three months ended March 31, 2020 and March 31, 2019, respectively, which was received in advance of performance resulting in an increase in 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 recognized as revenue in future periods as we provide maintenance services to our customers. Contracted not recognized revenue excludes variable consideration as it is not included in the transaction price consideration allocated at contract inception. Contracted not recognized revenue was $2.9 billion as of March 31, 2020. As practical expedients, 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 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.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)
Costs to Obtain and Fulfill a Contract
We capitalize incremental sales commissions paid as a result of obtaining ChoiceLease, SCS and DTS service contracts as contract costs. Capitalized sales commissions were $101 million and $105 million as of March 31, 2020 and December 31, 2019, respectively. Capitalized sales commissions include initial direct costs of our leases of $53 million and $55 million as of March 31, 2020 and December 31, 2019, respectively, related to incremental sales commissions paid to our sales force as a result of obtaining ChoiceLease contracts. Capitalized sales commissions are presented in “Sales-type leases and other assets” in our Condensed Consolidated Balance Sheets. For both the three months ended March 31, 2020 and 2019, sales commission expense was $11 million.
4. RECEIVABLES, NET
| | | | | | | | | | | | | | |
| | | | |
| | March 31, 2020 | | December 31, 2019 |
| | (In thousands) | | |
Trade | | $ | 1,039,932 | | | $ | 1,060,298 | |
Sales-type leases | | 140,440 | | | 135,353 | |
Other, primarily warranty and insurance | | 63,009 | | | 55,600 | |
| | 1,243,381 | | | 1,251,251 | |
Allowance for credit losses and other | | (40,562) | | | (22,761) | |
Total | | $ | 1,202,819 | | | $ | 1,228,490 | |
On January 1, 2020, we adopted the new accounting guidance related to the allowance for credit losses on our trade receivables and sales-type leases. As a result of the adoption, we increased our allowance for credit allowances and reduced retained earnings by an immaterial amount as of January 1, 2020. We maintain an allowance for credit losses and an allowance for billing adjustments related to certain discounts and other customer concessions. Estimates are updated regularly based on our review of historical loss rates, as well as current and expected events of our business segments, current collection trends and billing adjustments processed. Accounts are charged against the allowance when determined to be uncollectible.
When a business relationship with a customer is initiated, we evaluate collectibility from the customer and it is continuously monitored as services are provided. We have a credit rating system based on internally developed standards and ratings provided by third parties. Our credit rating system, along with monitoring for delinquent payments, allows us to make decisions as to whether collectibility is probable at the on-set of the relationship and subsequently as we offer services. Factors considered during this process include historical payment trends, industry risks, liquidity of the customer, years in business, and judgments, liens or bankruptcies. Payment terms vary by contract type, although terms generally include a requirement of payment within 30 to 90 days. When collectibility is not considered probable (typically when a customer is 120 days past due), revenue is not recognized until it is determined that the customer has the ability and intent to pay. Bad debt expense, which is recorded in selling, general and administrative expenses, was $19 million for the three months ended March 31, 2020, including impacts related to COVID-19. We continue to actively monitor the impact of the recent COVID-19 pandemic on expected credit losses.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)
5. REVENUE EARNING EQUIPMENT, NET
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | | | | December 31, 2019 | | | | |
| Cost | | Accumulated Depreciation | | Net Book Value (1) | | Cost | | Accumulated Depreciation | | Net Book Value (1) |
| (In thousands) | | | | | | | | | | |
Held for use: | | | | | | | | | | | |
ChoiceLease | $ | 12,031,414 | | | $ | (4,173,629) | | | $ | 7,857,785 | | | $ | 12,223,179 | | | $ | (4,125,342) | | | $ | 8,097,837 | |
Commercial rental | 2,986,622 | | | (1,000,206) | | | 1,986,416 | | | 3,200,403 | | | (1,049,850) | | | 2,150,553 | |
Held for sale | 927,277 | | | (737,862) | | | 189,415 | | | 748,435 | | | (569,161) | | | 179,274 | |
Total | $ | 15,945,313 | | | $ | (5,911,697) | | | $ | 10,033,616 | | | $ | 16,172,017 | | | $ | (5,744,353) | | | $ | 10,427,664 | |
————————————
(1)Revenue earning equipment, net includes vehicles under finance leases of $12 million, less accumulated depreciation of $8 million, as of March 31, 2020, and $12 million, less accumulated depreciation of $8 million, as of December 31, 2019.
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, which we refer to as "valuation adjustments," are recognized at the time they arrive at our used truck sales centers and are presented within “Used vehicle sales, net” in the Condensed 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. TheseExpected declines in market prices were also considered when valuing the vehicles held for sale.
In the first quarter of 2020, we revised our residual value estimates for vehicles that are expected to be sold in the near-term (mid-2021) and recorded valuation adjustments on our vehicles held for sale were classified within Level 3due to the expected negative impacts of the fair value hierarchy.COVID-19 pandemic on pricing and volume of used vehicle sales. We now expect lower used vehicle pricing in the second half of 2020 due to lower demand rather than our previous expectations of a modest increase during that time. As a result of these changes in estimated residual values, we recorded additional accelerated depreciation of $27 million and valuation adjustments of $21 million, which negatively impacted our FMS business segment results.
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, | | | | | Three months ended March 31, | |
| 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | | March 31, 2020 | | December 31, 2019 | | 2020 | | 2019 | |
| (In thousands) | | (In thousands) | |
Assets held for sale: | | | | | | | | | | | | Assets held for sale: | | |
Revenue earning equipment (1): | | | | | | | | | | | | Revenue earning equipment (1): | | |
Trucks | $ | 14,081 |
| | 17,091 |
| | $ | 6,215 |
| | 2,528 |
| | $ | 22,942 |
| | 6,842 |
| Trucks | $ | 46,129 | | | $ | 39,009 | | | $ | 11,062 | | | $ | 11,546 | | |
Tractors | 15,448 |
| | 61,480 |
| | 1,127 |
| | 7,985 |
| | 18,444 |
| | 22,073 |
| Tractors | 85,302 | | | 73,359 | | | 8,453 | | | 4,968 | | |
Trailers | 2,279 |
| | 2,563 |
| | 1,871 |
| | 1,152 |
| | 5,044 |
| | 2,589 |
| Trailers | 3,251 | | | 2,206 | | | 1,993 | | | 180 | | |
Total assets at fair value | | Total assets at fair value | $ | 134,682 | | | $ | 114,574 | | | $ | 21,508 | | | $ | 16,694 | | |
| | | | | | | | | | | | |
Total assets at fair value | $ | 31,808 |
| | 81,134 |
| | $ | 9,213 |
| | 11,665 |
| | $ | 46,430 |
| | 31,504 |
| |
————————————
| |
(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 which were less than fair value was $77 million and $76 million as of September 30, 2017 and 2016, 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. |
(1)Assets held for sale in the table above only include the portion of revenue earning equipment held for sale where net book values exceeded fair values and fair value valuation adjustments were recorded. The net book value of assets held for sale that were less than fair value was $55 million and $65 million as of March 31, 2020 and December 31, 2019, respectively.
(2)Total losses represent fair value valuation 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 components of gains on used vehicles, net were as follows:
|
| | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In thousands) |
Gains on vehicle sales, net | $ | (11,940 | ) | | (13,538 | ) | | $ | (34,615 | ) | | (64,506 | ) |
Losses from fair value adjustments | 9,213 |
| | 11,665 |
| | 46,430 |
| | 31,504 |
|
Used vehicle sales, net | $ | (2,727 | ) | | (1,873 | ) | | $ | 11,815 |
| | (33,002 | ) |
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
The components of used vehicle sales, net were as follows:
5. ACCRUED EXPENSES | | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | | | |
| 2020 | | 2019 | | | | |
| (In thousands) | | | | | | |
Losses (gains) on vehicle sales, net | $ | (824) | | | $ | (8,477) | | | | | |
Losses from valuation adjustments | 21,508 | | | 16,694 | | | | | |
Used vehicle sales, net | $ | 20,684 | | | $ | 8,217 | | | | | |
6. GOODWILL AND OTHER LIABILITIESINTANGIBLE ASSETS
The carrying amount of goodwill attributable to each reportable business segment with changes therein was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| FMS | | SCS | | DTS | | | | Total |
| (In thousands) | | | | | | | | |
| | | | | | | | | |
Balance at December 31, 2019 | $ | 243,702 | | | $ | 190,515 | | | $ | 40,808 | | | | | $ | 475,025 | |
Foreign currency translation adjustments | (398) | | | (448) | | | — | | | | | (846) | |
Balance at March 31, 2020 | $ | 243,304 | | | $ | 190,067 | | | $ | 40,808 | | | | | $ | 474,179 | |
| | | | | | | | | | | | | |
We assess goodwill for impairment on October 1st of each year or more often if deemed necessary. In the first quarter of 2020, we performed an interim impairment test of our FMS North America reporting unit (“FMS NA”) as a result of the decline in market conditions and our updated outlook as a result of the impact of COVID-19. Our valuation of fair value for FMS NA was determined based on a discounted future cash flow model (income approach) and the application of current market multiples for comparable publicly-traded companies (market approach). Based on our analysis, we determined that FMS NA goodwill was not impaired as of March 31, 2020. The estimated fair value of the FMS NA reporting unit exceeded its carrying value by approximately 5% as of March 31, 2020.
Given this level of fair value, in the event the financial performance of FMS NA does not meet our expectations in the future; we experience future prolonged market downturns, including in the used vehicle market or continued declines in our stock price; negative trends from the COVID-19 pandemic continue; or there are other negative revisions to key assumptions, we may be required to perform additional impairment analyses and could be required to recognize a non-cash goodwill impairment charge. As of March 31, 2020, there was $243 million of goodwill recorded related to FMS NA.
|
| | | | | | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Accrued Expenses | | Non-Current Liabilities | | Total | | Accrued Expenses | | Non-Current Liabilities | | Total |
| (In thousands) |
Salaries and wages | $ | 100,273 |
| | — |
| | 100,273 |
| | $ | 90,913 |
| | — |
| | 90,913 |
|
Deferred compensation | 3,990 |
| | 54,595 |
| | 58,585 |
| | 2,992 |
| | 46,541 |
| | 49,533 |
|
Pension benefits | 3,842 |
| | 462,935 |
| | 466,777 |
| | 3,796 |
| | 451,940 |
| | 455,736 |
|
Other postretirement benefits | 1,520 |
| | 19,163 |
| | 20,683 |
| | 1,506 |
| | 19,459 |
| | 20,965 |
|
Other employee benefits | 22,678 |
| | 2,958 |
| | 25,636 |
| | 29,358 |
| | 5,854 |
| | 35,212 |
|
Insurance obligations (1) | 133,855 |
| | 261,244 |
| | 395,099 |
| | 127,470 |
| | 234,336 |
| | 361,806 |
|
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 |
|
Income taxes | 2,570 |
| | 24,623 |
| | 27,193 |
| | 4,197 |
| | 23,174 |
| | 27,371 |
|
Interest | 26,066 |
| | — |
| | 26,066 |
| | 27,277 |
| | — |
| | 27,277 |
|
Customer deposits | 66,302 |
| | 4,089 |
| | 70,391 |
| | 61,225 |
| | 4,569 |
| | 65,794 |
|
Deferred revenue | 14,997 |
| | — |
| | 14,997 |
| | 14,064 |
| | — |
| | 14,064 |
|
Other | 47,397 |
| | 22,654 |
| | 70,051 |
| | 46,413 |
| | 11,549 |
| | 57,962 |
|
Total | $ | 529,171 |
| | 872,071 |
| | 1,401,242 |
| | $ | 507,189 |
| | 817,565 |
| | 1,324,754 |
|
————————————
| |
(1) | Insurance obligations are primarily comprised of self-insured claim liabilities. |
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
The following table includes the carrying value of our intangible assets attributable to each reportable business segment (in thousands):
6. DEBT | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | | | | | | |
| FMS | | SCS | | DTS | | CSS | | Total |
Indefinite lived intangible assets - Trade name | $ | — | | | $ | — | | | $ | — | | | $ | 8,731 | | | $ | 8,731 | |
Finite lived intangible assets: | | | | | | | | | | | | | | | | | | |
Customer relationship intangibles | 56,050 | | | | 49,518 | | | | 7,582 | | | | — | | | | 113,150 | |
Other intangibles, primarily trade name | 1,636 | | | | 731 | | | | — | | | | — | | | | 2,367 | |
| 57,686 | | | | 50,249 | | | | 7,582 | | | | 8,731 | | | | 124,248 | |
Accumulated amortization | (49,970) | | | | (21,222) | | | | (4,383) | | | | — | | | | (75,575) | |
Total | $ | 7,716 | | | $ | 29,027 | | | | $ | 3,199 | | | | $ | 8,731 | | | $ | 48,673 | |
| | | | | | | | | |
| December 31, 2019 | | | | | | | | |
| FMS | | SCS | | DTS | | CSS | | Total |
Indefinite lived intangible assets - Trade name | $ | — | | | $ | — | | | $ | — | | | $ | 8,731 | | | $ | 8,731 | |
Finite lived intangible assets: | | | | | | | | | | | | | | | | | | |
Customer relationship intangibles | 56,050 | | | | 49,518 | | | | 7,582 | | | | — | | | | 113,150 | |
Other intangibles, primarily trade name | 1,636 | | | | 731 | | | | — | | | | — | | | | 2,367 | |
| 57,686 | | | | 50,249 | | | | 7,582 | | | | 8,731 | | | 124,248 | |
Accumulated amortization | (49,031) | | | | (20,047) | | | | (4,265) | | | | — | | | | (73,343) | |
Total | $ | 8,655 | | | $ | 30,202 | | | | $ | 3,317 | | | | $ | 8,731 | | | $ | 50,905 | |
| | | | | | | | | |
|
| | | | | | | | | | | | |
| Weighted-Average Interest Rate | | | | | | |
| September 30, 2017 | | December 31, 2016 | | Maturities | | September 30, 2017 | | December 31, 2016 |
| | | | | | | (In thousands) |
Short-term debt and current portion of long-term debt: | | | | | | | | | |
Short-term debt | 1.57% | | 1.07% | |
| | $ | 59,410 |
| | 177,629 |
|
Current portion of long-term debt | | | | | | | 84,532 |
| | 613,781 |
|
Total short-term debt and current portion of long-term debt | | | | | | 143,942 |
| | 791,410 |
|
Long-term debt: | | | | | | | | | |
U.S. commercial paper (1) | 1.44% | | 0.87% | | 2020 | | 468,540 |
| | 342,480 |
|
Global revolving credit facility | 3.20% | | 2.06% | | 2020 | | 7,596 |
| | 4,703 |
|
Unsecured U.S. notes — Medium-term notes (1) | 2.69% | | 2.67% | | 2017-2025 | | 4,013,602 |
| | 4,113,421 |
|
Unsecured U.S. obligations | 2.52% | | 2.19% | | 2018 | | 50,000 |
| | 50,000 |
|
Unsecured foreign obligations | 1.50% | | 1.55% | | 2017-2020 | | 229,030 |
| | 232,092 |
|
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 |
|
Debt issuance costs | | | | | | | (14,762 | ) | | (14,221 | ) |
| | | | | | | 5,289,816 |
| | 5,213,645 |
|
Current portion of long-term debt | | | | | | | (84,532 | ) | | (613,781 | ) |
Long-term debt | | | | | | | 5,205,284 |
| | 4,599,864 |
|
Total debt | | | | | | | $ | 5,349,226 |
| | 5,391,274 |
|
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)
7. ACCRUED EXPENSES AND OTHER LIABILITIES
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | | | | December 31, 2019 | | | | |
| Accrued Expenses | | Non-Current Liabilities | | Total | | Accrued Expenses | | Non-Current Liabilities | | Total |
| (In thousands) | | | | | | | | | | |
Salaries and wages | $ | 95,604 | | | $ | — | | | $ | 95,604 | | | $ | 126,119 | | | $ | — | | | $ | 126,119 | |
Deferred compensation | 3,791 | | | 57,654 | | | 61,445 | | | 6,436 | | | 65,006 | | | 71,442 | |
Pension benefits | 3,829 | | | 411,684 | | | 415,513 | | | 3,863 | | | 413,829 | | | 417,692 | |
Other postretirement benefits | 1,464 | | | 19,624 | | | 21,088 | | | 1,478 | | | 20,187 | | | 21,665 | |
Other employee benefits | 6,629 | | | — | | | 6,629 | | | 21,577 | | | — | | | 21,577 | |
Insurance obligations (1) | 165,245 | | | 308,631 | | | 473,876 | | | 163,763 | | | 285,838 | | | 449,601 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Operating taxes | 116,514 | | | — | | | 116,514 | | | 116,003 | | | — | | | 116,003 | |
Income taxes | 7,590 | | | 17,972 | | | 25,562 | | | 2,873 | | | 17,484 | | | 20,357 | |
Interest | 45,224 | | | — | | | 45,224 | | | 46,032 | | | — | | | 46,032 | |
Deposits, mainly from customers | 78,033 | | | 3,250 | | | 81,283 | | | 82,573 | | | 3,065 | | | 85,638 | |
Operating lease liabilities | 70,314 | | | 157,581 | | | 227,895 | | | 72,285 | | | 151,361 | | | 223,646 | |
Deferred revenue (2) | 162,946 | | | 443,590 | | | 606,536 | | | 165,205 | | | 438,482 | | | 603,687 | |
| | | | | | | | | | | |
Restructuring liabilities (3) | 5,012 | | | — | | | 5,012 | | | 6,765 | | | — | | | 6,765 | |
Other | 58,062 | | | 52,298 | | | 110,360 | | | 61,105 | | | 46,751 | | | 107,856 | |
Total | $ | 820,257 | | | $ | 1,472,284 | | | $ | 2,292,541 | | | $ | 876,077 | | | $ | 1,442,003 | | | $ | 2,318,080 | |
————————————
| |
(1) | Amounts are net of unamortized original issue discounts of $7 million at September 30, 2017 and December 31, 2016. |
| |
(2) | 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. |
(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, 2019 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 2020.
8. INCOME TAXES
Effective Tax Rate
Our effective income tax rate from continuing operations for the first quarter of 2020 was a benefit of 4.0% as compared to an expense of 32.7% in the first quarter of 2019. In the first quarter of 2020, the tax rate was impacted by the reduction in earnings due to accelerated depreciation charges and the COVID-19 economic effects. Additionally, we recorded a valuation allowance of $13 million on the net deferred tax assets of our U.K. operations on a discrete basis.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)
9. LEASES
Leases as Lessor
The components of lease income were as follows:
| | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | | | | | |
| | 2020 | | 2019 | | | | |
| | (In thousands) | | | | | | |
Operating leases | | | | | | | | |
Lease income related to ChoiceLease | | $ | 399,588 | | | $ | 360,309 | | | | | |
Lease income related to commercial rental (1) | | 195,695 | | | 219,171 | | | | | |
| | | | | | | | |
Sales type leases | | | | | | | | |
| | | | | | | | |
Interest income related to net investment in leases | | $ | 11,644 | | | $ | 11,456 | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Variable lease income excluding commercial rental (1) | | $ | 65,507 | | | $ | 55,439 | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
————————————
(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, 2020 | | December 31, 2019 | | |
| (In thousands) | | | | |
Net investment in the lease — lease payment receivable | $ | 568,911 | | | $ | 553,076 | | | |
Net investment in the lease — unguaranteed residual value in assets | 42,920 | | | 44,952 | | | |
| | | | | |
| 611,831 | | | 598,028 | | | |
Estimated loss allowance (1) | (3,591) | | | (673) | | | |
Total (2) | $ | 608,240 | | | $ | 597,355 | | | |
————————————
(1)Amount as of March 31, 2020 reflects an immaterial cumulative-effect adjustment in connection with the adoption of the new credit loss standard (refer to Note 2 for further information).
(2)Net investment in the sales-type lease are included in "Receivables, net" and "Sales-type leases and other assets" in the Condensed Consolidated Balance Sheets.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)
10. DEBT
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| Weighted Average Interest Rate | | | | | | | | |
| March 31, 2020 | | | | Maturities | | March 31, 2020 | | December 31, 2019 |
| | | | | | | (In thousands) | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Debt: | | | | | | | | | |
U.S. commercial paper (1) | 2.05% | | | | 2023 | | $ | 713,464 | | | $ | 511,486 | |
Canadian commercial paper (1) | 1.72% | | | | 2023 | | 33,409 | | | 136,199 | |
Trade receivables program | 1.46% | | | | 2021 | | 300,000 | | | — | |
Global revolving credit facility | 2.70% | | | | 2023 | | 234,565 | | | 8,104 | |
Unsecured U.S. notes — Medium-term notes (1)(2) | 3.19% | | | | 2020-2026 | | 5,570,822 | | | 5,965,064 | |
Unsecured U.S. obligations | 3.41% | | | | 2024 | | 200,000 | | | 200,000 | |
Unsecured foreign obligations | 2.36% | | | | 2020-2024 | | 310,634 | | | 270,719 | |
Asset-backed U.S. obligations (3) | 2.50% | | | | 2020-2026 | | 784,632 | | | 807,374 | |
Finance lease obligations and other | | | | | 2020-2073 | | 50,584 | | | 51,717 | |
| | | | | | | 8,198,110 | | | 7,950,663 | |
Debt issuance costs | | | | | | | (23,740) | | | (25,875) | |
Total debt | | | | | | | 8,174,370 | | | 7,924,788 | |
Short-term debt and current portion of long-term debt | | | | | | | (853,527) | | | (1,154,564) | |
Long-term debt | | | | | | | $ | 7,320,843 | | | $ | 6,770,224 | |
| | | | | | | | | |
————————————
(1)Amounts are net of unamortized original issue discounts of $5 million and $6 million as of March 31, 2020 and December 31, 2019, respectively.
(2)Amounts are inclusive of the fair market values of our hedging instruments on our notes of assets of $6 million as of March 31, 2020. The fair market values of our hedging instruments were not material as of December 31, 2019. The notional amount of the executed interest rate swaps designated as fair value hedges was $375 million and $525 million as of March 31, 2020 and December 31, 2019, respectively.
(3)Asset-backed U.S. obligations are related to financing transactions backed by a portion of our revenue earning equipment.
The following table includes our proceeds from borrowings and repayment of debt for the three months ended March 31, 2020.
| | | | | | | | | | | | | | |
| | | | |
| | | | |
Debt Proceeds | | | Debt Repayments | |
| (in thousands) | | | (in thousands) |
Trade receivables program | $ | 300,000 | | | 2.65% Medium-term notes (due March 2020) | $ | 400,000 | |
Unsecured foreign term loans (1.71% due February 2021 and 1.89% due February 2023) | 177,926 | | | Unsecured foreign term loans (1.71% due March 2020 and 1.89% due March 2020) | 177,926 | |
Canada term loans (2.94% due February 2021 and 2.99% due February 2022) | 60,132 | | | Asset-backed U.S. obligations | 27,252 | |
Canada term loan (3.44% due February 2023) | 18,791 | | | Canada term loan, finance lease obligations, and other repayments | 22,523 | |
Total debt proceeds | $ | 556,849 | | | Total debt repaid | $ | 627,701 | |
| | | | |
We maintain a $1.2$1.4 billion global revolving credit facility with a syndicate of twelve12 lending institutions, led by Bank of America N.A., Bank of Tokyo-Mitsubishi UFJ, Ltd., BNP Paribas, Mizuho Corporate Bank, Ltd., Royal Bank of Canada, Lloyds Bank Plc, U.S. Bank National Association and Wells Fargo Bank, N.A. The facility expireswhich matures 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'sour long-term credit ratings. The annual facility fee is currently 10 basis points as of March 31, 2020, 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 no0 letters of credit outstanding against the facility at September 30, 2017)March 31, 2020). At our option, the interest rate on borrowings under the credit facility is based on LIBOR, prime, federal funds or local equivalent rates. The credit facility contains no provisions limiting its availability in the event of a material adverse change to Ryder’sour business operations; however, the credit facility does contain standard representations and warranties, events of default, cross-default provisions and certain affirmative and negative covenants. As of March 31, 2020, there was $419 million available under the credit facility.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)
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. TheAs of March 31, 2020, the ratio at September 30, 2017, was 192%242%. At September 30, 2017, there was $664 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 of working capital are classified as long-term obligations, as we have both the intent and ability to refinance on a long-term basis. In addition,As of March 31, 2020, we have reflected all maturities within the next twelve months in the current portion of long-term debt even though we may refinance these obligations on a long-term basis and have the ability to do so under our revolving credit facility. As of December 31, 2019, we classified $227 million of short-term commercial paper, $400 million of the current portion of long-term debt and $201 million of short-term debt as long-term debt as we had the intent and ability to refinance the current portion of certainthese long-term debt on a long-term basis. At September 30, 2017,
In April 2020, we classified $469issued $400 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 as long-term debt.
In August 2017, we issued $300 million of unsecured 4.625% medium-term notes maturing in September 2022. In February 2017, we issued $300June 2025 and executed a $400 million ofsenior floating-rate unsecured medium-term notes maturing in March 2022.364-day term loan. The proceeds fromof these notes were used to pay off maturing debtenhance our liquidity position and for working capital and other general corporate purposes. If these notes are downgraded below investment grade following, or as a result of, a change in control, the note holders can require us to repurchase all or a portion of the notes at a purchase price equal to 101% of principal value plus accrued and unpaid interest.
In June 2017, we received $98 million from financing transactions backed by a portion of our revenue earning equipment. The proceeds from these transactions were used for general corporate purposes. We have provided end of term guarantees for the residual value of the revenue earning equipment in these transactions. The transaction proceeds, along with the end of term residual value guarantees, have been included within "asset-backed U.S. obligations" in the preceding table.
We have a trade receivables purchase and sale program, pursuant to which we sell certain of our domestic trade accounts receivable to a bankruptcy remote, consolidated subsidiary of Ryder, that in turn sells, on a revolving basis, an ownership interest in certain of these accounts receivable to a committed purchaser. The subsidiary is considered a VIE and is consolidated based on our control of the entity’s activities. We use this program to provide additional liquidity to fund our operations, particularly when it is cost effective to do so. The costs under the program may vary based on changes in interest rates. TheIn February 2020, we increased the amount of available proceeds that may be received underfrom our trade receivables purchase and sale program to $300 million expiring in June 2020. In April, we extended the program are limited to $175 million. The program was renewed in October 2017. If no event occurs which causes early termination, the 364-day program will expire on October 22, 2018. The program contains provisions restricting its availability in the event of a material adverse change to our business operations or the collectibilitymaturity of the collateralized receivables. Sales oftrade 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 or December 31, 2016.to April 2021.
At September 30, 2017 and December 31, 2016, weWe had letters of credit and surety bonds outstanding totaling $357of $453 million as of both March 31, 2020 and $354 million, respectively,December 31, 2019, 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, 2017was approximately $7 billion as of both March 31, 2020 and December 31, 2016 was approximately $4.89 billion and $4.97 billion, respectively.2019. 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 Condensed 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. DERIVATIVES
From time to time, we enter into interest rate derivative contracts to manage our fixed and variable interest rate exposure and to better align 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 and 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, we had interest rate swaps outstanding, which are designated as fair value hedges for certain debt obligations, with a total notional value of $825 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 the interest rate swaps are recorded in "Direct financing leases and other assets" 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.
8.11. SHARE REPURCHASE PROGRAMS
In December 2015, our Board of Directors authorizedWe maintain a share repurchase program intended to mitigate the dilutive impact of shares issued under our employee stock plans (the program). Underplans. In December 2019, our Board of Directors authorized management to have the program, management is authorizedability 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'sour employee stock plans from December 1, 20152019 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.11, 2021. Share repurchases of common stock are made periodically in open-market transactions and are subject to market conditions, legal requirements, and other factors. Management may establish prearranged written plans for Ryder under Rule 10b5-1 of the Securities Exchange Act of 1934 as part of the program, which allow for share repurchases during Ryder’sour quarterly blackout periods as set forth in the trading plan.
During the ninethree months ended September 30, 2017March 31, 2020 and September 30, 2016,March 31, 2019, we repurchased approximately 933,000303,000 shares for $65.9$12 million and 380,000226,000 shares for $25.7$14 million, respectively. The 2019 share repurchase program has been put on hold temporarily due to the impact of COVID-19.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
9.12. 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 (1) | | | | | | Accumulated Other Comprehensive Loss |
| | (In thousands) | | | | | | | | | | |
December 31, 2019 | | $ | (169,032) | | | $ | (656,313) | | | $ | (11,146) | | | | | | | $ | (836,491) | |
Amortization | | — | | | 6,013 | | | 153 | | | | | | | 6,166 | |
| | | | | | | | | | | | |
Other current period change | | (84,620) | | | — | | | — | | | | | | | (84,620) | |
March 31, 2020 | | $ | (253,652) | | | $ | (650,300) | | | $ | (10,993) | | | | | | | $ | (914,945) | |
|
| | | | | | | | | | | | | |
| | Currency Translation Adjustments and Other | | Net Actuarial Loss (1) | | Prior Service (Cost)/ Credit (1) | | Accumulated Other Comprehensive Loss |
| | (In thousands) |
December 31, 2016 | | $ | (206,610 | ) | | (620,292 | ) | | (7,130 | ) | | (834,032 | ) |
Amortization | | — |
| | 15,252 |
| | 165 |
| | 15,417 |
|
Other current period change | | 70,991 |
| | 810 |
| | — |
| | 71,801 |
|
September 30, 2017 | | $ | (135,619 | ) | | (604,230 | ) | | (6,965 | ) | | (746,814 | ) |
| | | | | | | | | | | | Currency Translation Adjustments and Other | | Net Actuarial Loss (1) | | Prior Service Cost (1) | | | Accumulated Other Comprehensive Loss |
| | Currency Translation Adjustments and Other | | Net Actuarial Loss (1) | | Prior Service Credit (1) | | Accumulated Other Comprehensive Loss | | | (In thousands) | |
December 31, 2018 | | December 31, 2018 | | $ | (199,713) | | | $ | (700,384) | | | $ | (11,537) | | | | $ | (911,634) | |
Amortization | | Amortization | | — | | | 5,307 | | | 147 | | | | 5,454 | |
| | (In thousands) | |
December 31, 2015 | | $ | (136,020 | ) | | (576,993 | ) | | 278 |
| | (712,735 | ) | |
Amortization | | — |
| | 14,052 |
| | 134 |
| | 14,186 |
| |
Other current period change | | (37,874 | ) | | (5,495 | ) | | (5,527 | ) | | (48,896 | ) | Other current period change | | 15,762 | | | — | | | — | | | | 15,762 | |
September 30, 2016 | | $ | (173,894 | ) | | (568,436 | ) | | (5,115 | ) | | (747,445 | ) | |
| March 31, 2019 | | March 31, 2019 | | $ | (183,951) | | | $ | (695,077) | | | $ | (11,390) | | | | $ | (890,418) | |
_______________________
| |
(1) | These amounts are included in the computation of net pension expense. See Note 12, "Employee Benefit Plans," for further information. |
(1)These amounts are included in the computation of net pension expense. See Note 15, "Employee Benefit Plans," for additional information.
The loss from currency translation adjustments and other in the three months ended March 31, 2020 of approximately $85 million primarily consists of currency translation adjustments of $75 million due to the weakening of the British Pound and Canadian Dollar against the U.S. Dollar. 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 loss from currency translation adjustments in the nine months ended September 30, 2016 of $37.9 million was due to the weakening of the British Pound against the U.S. Dollar, partially offset by the strengthening of the Canadian Dollar against the U.S. Dollar.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
10.13. EARNINGS PER SHARE
The following table presents the calculation of basic and diluted earnings (loss) per common share from continuing operations:
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | | | |
| 2020 | | 2019 | | | | |
| (In thousands, except per share amounts) | | | | | | |
Earnings (loss) per share — Basic: | | | | | | | |
Earnings (loss) from continuing operations | $ | (109,129) | | | $ | 45,890 | | | | | |
Less: Distributed and undistributed earnings allocated to unvested stock | (118) | | | (177) | | | | | |
Earnings (loss) from continuing operations available to common shareholders — Basic | $ | (109,247) | | | $ | 45,713 | | | | | |
| | | | | | | |
Weighted average common shares outstanding — Basic | 52,284 | | | 52,418 | | | | | |
| | | | | | | |
Earnings (loss) from continuing operations per common share — Basic | $ | (2.09) | | | $ | 0.87 | | | | | |
| | | | | | | |
Earnings (loss) per share — Diluted: | | | | | | | |
Earnings (loss) from continuing operations | $ | (109,129) | | | $ | 45,890 | | | | | |
Less: Distributed and undistributed earnings allocated to unvested stock | (118) | | | (177) | | | | | |
Earnings (loss) from continuing operations available to common shareholders — Diluted | $ | (109,247) | | | $ | 45,713 | | | | | |
| | | | | | | |
Weighted average common shares outstanding — Basic | 52,284 | | | 52,418 | | | | | |
Effect of dilutive equity awards | — | | | 223 | | | | | |
Weighted average common shares outstanding — Diluted | 52,284 | | | 52,641 | | | | | |
| | | | | | | |
Earnings (loss) from continuing operations per common share — Diluted | $ | (2.09) | | | $ | 0.87 | | | | | |
| | | | | | | |
Anti-dilutive equity awards not included above | 3,134 | | | 1,682 | | | | | |
|
| | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In thousands, except per share amounts) |
Earnings per share — Basic: | | | | | | | |
Earnings from continuing operations | $ | 58,913 |
| | 85,138 |
| | $ | 148,535 |
| | 215,365 |
|
Less: Earnings allocated to unvested stock | (222 | ) | | (261 | ) | | (536 | ) | | (674 | ) |
Earnings from continuing operations available to common shareholders — Basic | $ | 58,691 |
| | 84,877 |
| | $ | 147,999 |
| | 214,691 |
|
| | | | | | | |
Weighted average common shares outstanding — Basic | 52,405 |
| | 52,953 |
| | 52,671 |
| | 53,029 |
|
| | | | | | | |
Earnings from continuing operations per common share — Basic | $ | 1.12 |
| | 1.60 |
| | $ | 2.81 |
| | 4.05 |
|
| | | | | | | |
Earnings per share — Diluted: | | | | | | | |
Earnings from continuing operations | $ | 58,913 |
| | 85,138 |
| | $ | 148,535 |
| | 215,365 |
|
Less: Earnings allocated to unvested stock | (222 | ) | | (260 | ) | | (536 | ) | | (672 | ) |
Earnings from continuing operations available to common shareholders — Diluted | $ | 58,691 |
| | 84,878 |
| | $ | 147,999 |
| | 214,693 |
|
| | | | | | | |
Weighted average common shares outstanding — Basic | 52,405 |
| | 52,953 |
| | 52,671 |
| | 53,029 |
|
Effect of dilutive equity awards | 371 |
| | 338 |
| | 356 |
| | 315 |
|
Weighted average common shares outstanding — Diluted | 52,776 |
| | 53,291 |
| | 53,027 |
| | 53,344 |
|
| | | | | | | |
Earnings from continuing operations per common share — Diluted | $ | 1.11 |
| | 1.59 |
| | $ | 2.79 |
| | 4.02 |
|
| | | | | | | |
Anti-dilutive equity awards not included above | 843 |
| | 653 |
| | 889 |
| | 836 |
|
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
11.14. 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 and 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 are not paid unless the stock award vests. Upon vesting, the amount of the dividends paid is equal to the aggregate dividends declared on common shares during the period from the grant date of the award until the date the shares underlying the award are delivered.
The following table provides information on share-based compensation expense and income tax benefits recognized during the periods:
| | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | | | | | |
| 2020 | | 2019 | | | | | | |
| (In thousands) | | | | | | | | |
Stock option and stock purchase plans | $ | 1,357 | | | $ | 1,819 | | | | | | | |
Unvested stock awards | 1,734 | | | 5,580 | | | | | | | |
Share-based compensation expense | 3,091 | | | 7,399 | | | | | | | |
Income tax benefit | (178) | | | (1,160) | | | | | | | |
Share-based compensation expense, net of tax | $ | 2,913 | | | $ | 6,239 | | | | | | | |
|
| | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In thousands) |
Stock option and stock purchase plans | $ | 1,953 |
| | 1,633 |
| | $ | 5,811 |
| | 5,410 |
|
Unvested stock | 2,618 |
| | 2,237 |
| | 8,823 |
| | 8,460 |
|
Share-based compensation expense | 4,571 |
| | 3,870 |
|
| 14,634 |
|
| 13,870 |
|
Income tax benefit | (1,608 | ) | | (1,321 | ) | | (5,090 | ) | | (4,691 | ) |
Share-based compensation expense, net of tax | $ | 2,963 |
| | 2,549 |
|
| $ | 9,544 |
|
| 9,179 |
|
The following table is a summary of compensation expense recognized for market-based cash awards in addition to the share-based compensation expense reported in 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 |
|
Total unrecognized pre-tax compensation expenseexpense related to all share-based compensation arrangements at September 30, 2017March 31, 2020 was $23.3$66 million and is expected to be recognized over a weighted-average period of 1.9 years.2.4 years.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)
The following table is a summary of the awards granted under the Plans during the periods presented:
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | | | |
| 2020 | | | | | | |
| Shares Granted | | | | Weighted-Average Fair Market Value | | |
| (Shares in thousands) | | | | | | |
| | | | | | | |
| | | | | | | |
Performance-based restricted stock rights | 292 | | | | $ | 37.47 | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Time-vested restricted stock rights | 557 | | | | 38.45 | | | |
Total | 849 | | | | $ | 38.11 | | | |
Performance-based restricted stock awards (PBRSRs) include a performance-based vesting condition. PBRSRs are awarded based on various revenue, return-based and cash flow performance targets and a majority of PBRSRs include a total shareholder return (TSR) modifier. The fair values of the PBRSRs that include a TSR modifier are estimated using a lattice-based option-pricing valuation model that incorporates a Monte-Carlo simulation. The fair value of PBRSRs that do not include a TSR modifier is determined and fixed on the grant date based on our 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.
Restricted stock awards are unvested stock rights that are granted to employees and entitle the holder to shares of common stock as the award vests. Time-vested restricted stock rights typically vest ratably over three years regardless of company performance. The fair value of the time-vested awards is determined and fixed based on our stock price on the date of grant.
|
| | | | | |
| 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 CONDENSED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
12.15. 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 | | 2020 | | 2019 | |
| (In thousands) | | (In thousands) | |
Pension Benefits | | | | | | | | Pension Benefits | | |
Company-administered plans: | | | | | | | | Company-administered plans: | | |
Service cost | $ | 3,165 |
| | 2,660 |
| | $ | 9,431 |
| | 9,065 |
| Service cost | $ | 3,213 | | | $ | 3,032 | | |
Interest cost | 21,609 |
| | 22,754 |
| | 64,524 |
| | 72,086 |
| Interest cost | 17,532 | | | 21,469 | | |
| Expected return on plan assets | (22,822 | ) | | (22,601 | ) | | (68,012 | ) | | (68,353 | ) | Expected return on plan assets | (24,263) | | | (22,676) | | |
Amortization of: | | | | | | | | Amortization of: | | |
| Net actuarial loss | 8,336 |
| | 7,324 |
| | 24,863 |
| | 23,889 |
| Net actuarial loss | 7,715 | | | 7,610 | | |
Prior service cost | 133 |
| | 320 |
| | 399 |
| | 3,060 |
| Prior service cost | 187 | | | 179 | | |
| 10,421 |
| | 10,457 |
| | 31,205 |
| | 39,747 |
| | 4,384 | | | 9,614 | | |
Union-administered plans | 7,873 |
| | 2,493 |
| | 12,996 |
| | 7,221 |
| Union-administered plans | 2,779 | | | 2,457 | | |
Net pension expense | $ | 18,294 |
| | 12,950 |
| | $ | 44,201 |
| | 46,968 |
| Net pension expense | $ | 7,163 | | | $ | 12,071 | | |
| | | | | | | | | | | | |
Company-administered plans: | | | | | | | | Company-administered plans: | | |
U.S. | $ | 10,929 |
| | 10,952 |
| | $ | 32,787 |
| | 41,389 |
| U.S. | $ | 6,778 | | | $ | 11,473 | | |
Non-U.S. | (508 | ) | | (495 | ) | | (1,582 | ) | | (1,642 | ) | Non-U.S. | (2,394) | | | (1,859) | | |
| 10,421 |
| | 10,457 |
| | 31,205 |
| | 39,747 |
| | 4,384 | | | 9,614 | | |
Union-administered plans | 7,873 |
| | 2,493 |
| | 12,996 |
| | 7,221 |
| Union-administered plans | 2,779 | | | 2,457 | | |
Net pension expense | $ | 18,294 |
| | 12,950 |
| | $ | 44,201 |
| | 46,968 |
| Net pension expense | $ | 7,163 | | | $ | 12,071 | | |
| | | | | | | | |
|
Non-operating pension costs include the amortization of net actuarial loss and prior service cost, interest cost and expected return on plan assets components of pension and postretirement benefit costs, as well as any significant charges for settlements or curtailments if recognized. During the ninethree months ended September 30, 2017,March 31, 2020, we contributed $10.6$1 million to our pension plans. In 2017,2020, the expected total contributions to our pension plans are approximately $22$37 million. We also maintain other postretirement benefit plans that are not reflected in the above table.table above. The amount of postretirement benefit expense was not material for the three or nine months ended September 30, 2017.March 31, 2020 and 2019.
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, 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.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
13.16. OTHER ITEMS IMPACTING COMPARABILITY
Our primary measure of segment performance as shown in Note 16,19, "Segment Reporting," excludes certain items we do not believe are representative of the ongoing operations of the segment. Excluding these items from our segment measure of performance allows for better year over year comparison:
| | | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | | | | |
| 2020 | | 2019 | | | | | |
| (In thousands) | | | | | | | |
Restructuring and other, net | $ | 11,263 | | | $ | 2,588 | | | | | | |
ERP implementation costs | 10,326 | | | 3,590 | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total other items impacting comparability | $ | 21,589 | | | $ | 6,178 | | | | | | |
|
| | | | | | | | | | | | | |
| 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 |
|
_______________
| |
(1) | Refer to Note 12, Employee Benefit Plans for additional information. |
During the thirdthree months ended March 31, 2020 and 2019, other items impacting comparability included:
•Restructuring and other, net — For the three months ended March 31, 2020, this primarily included expenses related to restructuring activities undertaken in late 2019 and professional fees related to the pursuit of a commercial claim, as well as net losses related to our ChoiceLease insurance liability program which was discontinued in January 2020. The exit of this program is estimated to be completed in the second quarter of 2017, we incurred charges of $4.3 million2021. For the three months ended March 31, 2019, this primarily related to consulting fees associated with a cost-savings program. These items were reflected within “Selling, general and administrative expenses” in our Consolidated Condensed Statement of Earnings.
During the first quarter of 2017, we determined that certain operating tax expenses related to prior periods had not been recognized in prior period earnings. We recorded a one-time charge of $2.2 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 millioncost saving initiatives, professional fees related to the gains on salepursuit of certain UK facilitiesa commercial claim, and income from our Singapore operations that were closed as partshut down in 2019.
•ERP implementation costs — Related to charges with the implementation of prior year restructuring activities. These items were reflected within "Miscellaneous income, net" in our Consolidated Condensed Statement of Earnings.an Enterprise Resource Planning (ERP) system.
14.17. 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 condensed 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.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
15.18. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information was as follows: | | | | | | | | | | | | | |
| Three months ended March 31, | | | | |
| 2020 | | 2019 | | |
| (In thousands) | | | | |
Interest paid | $ | 60,566 | | | $ | 52,490 | | | |
Income taxes paid | 5,096 | | | 3,611 | | | |
Right-of-use assets obtained in exchange for lease obligations: | | | | | |
Finance leases | 3,744 | | | 2,026 | | | |
Operating leases | 23,877 | | | 16,605 | | | |
| | | | | |
| March 31, 2020 | | December 31, 2019 | | |
| (In thousands) | | | | |
Capital expenditures acquired but not yet paid | $ | 144,538 | | | $ | 185,264 | | | |
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| 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 |
|
16.19. SEGMENT REPORTING
Ryder is a global leader in transportation and supply chain management solutions. Our operating segments are aggregated into reportable business segments based upon similar economic characteristics, products, services, customers and delivery methods. We report our financial performance in threebased on 3 business segments: (1) 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),SCS, which provides vehicles and drivers as part of a dedicated transportation solution in the U.S.; and (3) Supply Chain Solutions (SCS), which provides comprehensive supply chainintegrated logistics solutions, including distribution, management, dedicated transportation and transportationprofessional services in North AmericaAmerica; and Asia.(3) DTS, which provides turnkey transportation solutions in the U.S. that includes dedicated vehicles, drivers and engineering, and administrative support. Dedicated transportation services provided as part of an operationally integrated, multi-service, supply chain solution to SCS customers are primarily reported in the SCS business segment.
Our primary measurement of segment financial performance, defined as segment “Earnings Before Tax” (EBT) from continuing operations before taxes” (EBT), includes an allocation of Central Support Services (CSS) and excludes non-operating pension costs and restructuring andcertain other items net, as discussed in Note 13,16, "Other Items Impacting Comparability." CSS represents those costs incurred to support all business segments, including finance and procurement, corporate services, human resources, finance, corporate services,information technology, public affairs, information technology, health and safety, legal, marketing and corporate communications. The objective of the EBT measurement is to provide clarity on the profitability of each business segment and, ultimately, to hold leadership of each segment accountable for their allocated share of CSS costs. Certain costs are considered to be overhead not attributable to any segment and remain unallocated in CSS. Included among the unallocated overhead remaining within CSS, are theincluding costs for investor relations, public affairs and certain executive compensation. CSS costs attributable to the business segments are predominantly allocated to FMS, DTSSCS and SCSDTS as follows:
•Finance, corporate services, and health and safety — allocated 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 andas well as provides rental vehicles, fuel, maintenance and other ancillary services to the SCS and DTS and SCS segments. Inter-segment revenue and EBT are accounted for at rates similar to those executed with third parties. EBT related to inter-segment equipment and services billed to DTSSCS and SCSDTS customers (equipment contribution) are included in both FMS and the segment that served the customer and then eliminated upon consolidation (presented as “Eliminations"“Eliminations”).Inter-segment EBT allocated to SCS and DTS includes earnings related to equipment used in the table below).providing services to SCS and DTS customers.
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, 2017 and 2016.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(unaudited)
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. Prior period SegmentWe do not record right-of-use assets or liabilities for our intercompany operating leases between FMS and SCS and DTS business segments.
The following table sets forth financial information for each of our segments and provide a reconciliation between segment EBT amounts and non-operatingearnings from continuing operations before income taxes.
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| | Three months ended March 31, | | | | | | |
| | 2020 | | 2019 | | | | |
| | (In thousands) | | | | | | |
Revenue: | | | | | | | | |
Fleet Management Solutions: | | | | | | | | |
ChoiceLease | | $ | 792,206 | | | $ | 740,059 | | | | | |
SelectCare | | 136,146 | | | 135,779 | | | | | |
Commercial rental | | 205,766 | | | 236,148 | | | | | |
Other | | 23,426 | | | 23,227 | | | | | |
Fuel services revenue | | 173,335 | | | 207,866 | | | | | |
ChoiceLease liability insurance revenue (1) | | 9,358 | | | 8,520 | | | | | |
Fleet Management Solutions | | 1,340,237 | | | 1,351,599 | | | | | |
Supply Chain Solutions | | 628,447 | | | 635,671 | | | | | |
Dedicated Transportation Solutions | | 334,888 | | | 349,621 | | | | | |
Eliminations | | (142,266) | | | (156,564) | | | | | |
Total revenue | | $ | 2,161,306 | | | $ | 2,180,327 | | | | | |
| | | | | | | | |
Earnings (Loss) Before Taxes: | | | | | | | | |
Fleet Management Solutions | | $ | (114,574) | | | $ | 60,911 | | | | | |
Supply Chain Solutions | | 31,025 | | | 32,317 | | | | | |
Dedicated Transportation Solutions | | 12,180 | | | 17,412 | | | | | |
Eliminations | | (10,069) | | | (17,302) | | | | | |
| | (81,438) | | | 93,338 | | | | | |
Unallocated Central Support Services | | (9,386) | | | (12,547) | | | | | |
Non-operating pension costs (2) | | (1,221) | | | (6,462) | | | | | |
Other items impacting comparability, net (3) | | (21,589) | | | (6,178) | | | | | |
Earnings (loss) from continuing operations before income taxes | | $ | (113,634) | | | $ | 68,151 | | | | | |
_______________
(1)In the first quarter of 2020, we announced our plan to exit the extension of our liability insurance coverage for ChoiceLease customers. The exit of this program is estimated to be completed in the second quarter of 2021. We have reclassed the revenues associated with this program from our ChoiceLease revenues for better comparability of our on-going operations as this is now consistent with management reporting.
(2)Non-operating pension costs have been reclassifiedinclude the amortization of net actuarial loss and prior service costs, interest cost and expected return on plan assets
components of pension and postretirement benefit costs and pension settlement charges if one has occurred.
(3)Refer to conform toNote 16, “Other Items Impacting Comparability,” for a discussion of items excluded from our primary measure of segment performance.
The following table sets forth the current period presentation. These reclassifications were immaterial to the financial statements taken as a whole.capital expenditures paid for each of our segments.
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| | FMS | | SCS | | DTS | | CSS | | | | Total |
| | (In thousands) | | | | | | | | | | |
Three months ended March 31, 2020 | | | | | | | | | | | | |
Capital expenditures paid | | $ | 423,116 | | | | 6,006 | | | | 424 | | | | 1,414 | | | | | | $ | 430,960 | |
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Three months ended March 31, 2019 | | | | | | | | | | | | |
Capital expenditures paid | | $ | 1,006,129 | | | | 12,756 | | | | 343 | | | | 7,483 | | | | | | $ | 1,026,711 | |
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| 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 |
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Segment EBT | $ | 100,693 |
| | 13,770 |
| | 22,052 |
| | (14,464 | ) | | 122,051 |
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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 |
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Segment capital expenditures paid | $ | 431,093 |
| | 1,878 |
| | 16,705 |
| | — |
| | 449,676 |
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Unallocated CSS capital expenditures paid | | | | | | | | | 7,917 |
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Capital expenditures paid | | | | | | | | | $ | 457,593 |
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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 |
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Segment EBT | $ | 112,507 |
| | 17,584 |
| | 30,956 |
| | (12,606 | ) | | 148,441 |
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Unallocated CSS | | | | | | | | | (9,275 | ) |
Non-operating pension costs | | | | | | | | | (7,468 | ) |
Earnings from continuing operations before income taxes | | | | | | | | | $ | 131,698 |
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Segment capital expenditures paid | $ | 375,779 |
| | 1,060 |
| | 8,181 |
| | — |
| | 385,020 |
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Unallocated CSS capital expenditures paid | | | | | | | | | 6,157 |
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Capital expenditures paid | | | | | | | | | $ | 391,177 |
|
————————————
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(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)
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| 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 |
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Inter-segment revenue | 343,038 |
| | — |
| | — |
| | (343,038 | ) | | — |
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Total revenue | $ | 3,491,847 |
| | 811,620 |
| | 1,429,477 |
| | (343,038 | ) | | 5,389,906 |
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Segment EBT | $ | 220,973 |
| | 39,892 |
| | 75,359 |
| | (38,053 | ) | | 298,171 |
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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 |
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Segment capital expenditures paid | $ | 1,255,789 |
| | 2,989 |
| | 34,839 |
| | — |
| | 1,293,617 |
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Unallocated CSS capital expenditures paid | | | | | | | | | 19,228 |
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Capital expenditures paid | | | | | | | | | $ | 1,312,845 |
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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 |
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Segment EBT | $ | 306,554 |
| | 48,300 |
| | 79,105 |
| | (37,116 | ) | | 396,843 |
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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 |
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Segment capital expenditures paid | $ | 1,438,104 |
| | 1,940 |
| | 52,643 |
| | — |
| | 1,492,687 |
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Unallocated CSS capital expenditures paid | | | | | | | | | 18,672 |
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Capital expenditures paid | | | | | | | | | $ | 1,511,359 |
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————————————
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(1) | Refer to Note 13, Other Items Impacting Comparability for additional information. |
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(2) | 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. |
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 Condensed Consolidated Condensed Financial Statements and notes thereto included under Item 1. 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 20162019 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), which provides full service leasing and leasing with flexible maintenance options, commercial rental, and contract or transactional maintenance services of trucks, tractors and trailers to customers principally in the U.S., Canada and the U.K.; (2) Supply Chain Solutions (SCS), which provides integrated logistics solutions, including distribution, management, dedicated transportation and professional services in North America; and (3) Dedicated Transportation Solutions (DTS), which provides vehicles and drivers as part of a dedicatedturnkey transportation solutionsolutions in the U.S.; that includes dedicated vehicles, drivers and (3) Supply Chain Solutions (SCS), which provides comprehensive supply chain solutions including distributionengineering, and transportation services in North America and Asia.administrative support. Dedicated transportation services provided as part of an operationally integrated, multi-service, supply chain solution to SCS customers are primarily reported in the SCS business segment.
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,services.
Our results of operations and paperfinancial condition are influenced by a number of factors including, but not limited to: used vehicle sales; macroeconomic and publishing.other market conditions, including pricing and demand; customer contracting activity and retention; rental demand; maintenance costs; residual value estimates and other depreciation changes; currency exchange rate fluctuations; customer preferences; inflation; fuel and energy prices; general economic conditions; insurance costs; interest rates; labor costs; unemployment; tax rates; changes in accounting or regulatory requirements; and cybersecurity attacks. In 2020, our business has, and will continue, to be impacted by the coronavirus (COVID-19) pandemic. For a detailed discussion of its impact on our results and future considerations, refer to our "Consolidated Results" and "Operating Results by Business Segment" discussions below. In addition, for a detailed description of certain risk factors that impact our business, including those related to COVID-19, refer to “Item 1A-Risk Factors” and "Special Note Regarding Forward-Looking Statements" sections included in this Quarterly Report on Form 10-Q and in our 2019 Annual Report on Form 10-K.
In 2016, we expanded our full service lease product line to provide lease customers additional flexibility, choice and
control in fleet management, 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.
This MD&A includes certain non-GAAP financial measures. Please referRefer 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:
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| Three months ended March 31, | | | | | | | | 2020/2019 | | |
| 2020 | | 2019 | | | | | | Three Months | | |
| (In thousands, except per share amounts) | | | | | | | | | | |
Total revenue | $ | 2,161,306 | | | $ | 2,180,327 | | | | | | | (1)% | | |
Operating revenue (1) | 1,771,247 | | | 1,750,487 | | | | | | | 1% | | |
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Earnings (loss) from continuing operations before income taxes (EBT) | $ | (113,634) | | | $ | 68,151 | | | | | | | NM | | |
Comparable EBT (2)(3) | (90,824) | | | 80,791 | | | | | | | NM | | |
Earnings (loss) from continuing operations (2) | (109,129) | | | 45,890 | | | | | | | NM | | |
Comparable earnings (loss) from continuing operations (2)(3) | (72,104) | | | 58,462 | | | | | | | NM | | |
Net earnings (loss) (2) | (109,613) | | | 45,316 | | | | | | | NM | | |
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Earnings (loss) per common share (EPS) — Diluted (2) | | | | | | | | | | | |
Continuing operations | $ | (2.09) | | | $ | 0.87 | | | | | | | NM | | |
Comparable (3) | (1.38) | | | 1.11 | | | | | | | NM | | |
Net earnings (loss) | (2.10) | | | 0.86 | | | | | | | NM | | |
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| Three months ended September 30, | | Nine months ended September 30, | | Change 2017/2016 |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | Nine Months |
| (In thousands, except per share amounts) | | | |
Total revenue | $ | 1,848,529 |
| | 1,724,418 |
| | $ | 5,389,906 |
| | 5,057,834 |
| | 7 | % | 7 | % |
Operating revenue (1) | 1,525,453 |
| | 1,468,293 |
| | 4,453,768 |
| | 4,324,019 |
| | 4 | % | 3 | % |
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EBT | $ | 94,343 |
| | 131,698 |
| | $ | 234,991 |
| | 337,185 |
| | (28 | )% | (30 | )% |
Comparable EBT (2) | 111,010 |
| | 139,141 |
| | 265,206 |
| | 366,858 |
| | (20 | )% | (28 | )% |
Earnings from continuing operations | 58,913 |
| | 85,138 |
| | 148,535 |
| | 215,365 |
| | (31 | )% | (31 | )% |
Comparable earnings from continuing operations (2) | 70,820 |
| | 89,558 |
| | 168,079 |
| | 233,039 |
| | (21 | )% | (28 | )% |
Net earnings | 58,623 |
| | 84,752 |
| | 147,588 |
| | 214,296 |
| | (31 | )% | (31 | )% |
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Earnings per common share (EPS) — Diluted |
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Continuing operations | $ | 1.11 |
| | 1.59 |
| | $ | 2.79 |
| | 4.02 |
| | (30 | )% | (31 | )% |
Comparable (2) | 1.33 |
| | 1.67 |
| | 3.16 |
| | 4.35 |
| | (20 | )% | (27 | )% |
Net earnings | 1.11 |
| | 1.59 |
| | 2.77 |
| | 4.00 |
| | (30 | )% | (31 | )% |
————————————
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(1) | Non-GAAP financial measure. Refer to the“Non-GAAP Financial Measures” section of this MD&A for a reconciliation of total revenue to operating revenue and the reasons why management believes this measure is important to investors. |
| |
(2) | Non-GAAP financial measures. Refer to the “Non-GAAP Financial Measures” section for a reconciliation of EBT, net earnings and earnings per diluted common share to the comparable measures and the reasons why management believes these measures are important to investors. |
(1)Non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section of this MD&A for a reconciliation of total revenue to operating revenue and the reasons why management believes this measure is important to investors.
(2)Includes higher depreciation expense of $80 million related to the change in estimated vehicle residual values in the third quarter of 2019, which impacted diluted EPS from continuing operations by $1.13, and approximately $70 million related to estimated impacts from the COVID-19 pandemic.
(3)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.
NM - Not meaningful
Total revenue decreased 1% and operating revenue (a non-GAAP measure excluding fuel, subcontracted transportation and subcontracted transportation)ChoiceLease liability insurance revenues) increased 7%1% in the first quarter of 2020. For three months ended March 31, 2020, operating revenue increased in the FMS and 4%, respectively,DTS business segments, which was partially offset by a decrease in the SCS business segment compared to the prior year period.
EBT decreased to a loss of ($114) million in the first quarter as compared to earnings of $68 million in the prior year period. The decrease was primarily due to higher depreciation expense related to the change in residual value estimates in the third quarter of 2017. For2019, estimated impacts from the nine months ended September 30, 2017, total revenueCOVID-19 pandemic of approximately $70 million, and operating revenue increased 7% and 3%, respectively. Total revenue in both periods increased due to higher operating revenue and increased subcontracted transportation passed through to customers, reflecting new business and higher volumes, as well as higher fuel costs passed through to customers. Operating revenue in both periods increased due to higher revenuea decline in the SCS business segment and higher contractual ChoiceLease revenue. Operating revenue growth was partially offset by lowerFMS commercial rental revenuebusiness. For more information on the higher depreciation expense related to the change in the nine months ended September 30, 2017.
EBT decreased 28%residual value estimates in the third quarter of 2017, reflecting2019, refer to “Critical Accounting Estimates — Depreciation and Residual Value Estimates” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2019 Annual Report on Form 10-K.
The coronavirus (COVID-19) pandemic has negatively impacted several areas of our businesses, including lower year over year operating resultsdemand for commercial rental and declines in all segments, a $5.5 million estimated pension settlement chargevolumes in our used vehicle sales, which we also expect to impact pricing (refer to Note 5, "Revenue Earning Equipment," in our Condensed Consolidated Financial Statements 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 decreasedadditional information), 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,our Fleet Management Solutions (FMS) business segment; deterioration in Supply Chain Solutions (SCS) volumes, primarily due to production shut downs in the timingautomotive industry; sales growth opportunities in all of incentive compensationour businesses; and higher salesbad debt expenses related to increased concerns around customers' ability to pay invoices. With respect to our ChoiceLease product line, our customers have signed long-term lease contracts and, marketing expense. DTS EBT decreasedtherefore, we do not expect our revenue and cash flows to be materially affected provided our customers remain solvent and continue to make their payments. We have attempted to mitigate the adverse impacts from the pandemic through cost reduction measures and reduction in capital expenditures.
On March 27, 2020, the third quarter dueCoronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to higher insurance premiums, higher maintenance costs onthe COVID-19 pandemic. The CARES Act, among other things, provides for an acceleration of alternative minimum tax credit refunds, the deferral of certain older model year vehiclesemployer payroll taxes and expands the availability of net operating loss usage. In addition, other governments in state, local and foreign jurisdictions in which we operate have also enacted certain relief measures. We are currently evaluating the impact of one less work day. SCS EBT decreased in the third quarter primarily dueCARES Act and these other measures but do not currently expect the provisions to the operating performance of two customer accounts, includinghave a particularly challenging start-up, and higher overhead spending, primarily for planned investments in information technology and sales. The netmaterial impact of hurricanes was neutral in the third quarter of 2017, as hurricane-related increases in commercial rental demand were offset by property losses.on our financial statements or liquidity position.
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.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -— (Continued)
Depending on the extent and duration of the pandemic, it may have a further impact on our significant judgments and estimates, including those related to goodwill and other asset impairments, residual values and other depreciation assumptions, deferred income taxes and annual effective tax rates, variable revenue considerations, the valuation of our pension plans, and allowance for credit losses.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
CONSOLIDATED RESULTS
Lease & Related Maintenance and Rental
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | | | | | Change 2020/2019 | | |
| 2020 | | 2019 | | | | | | Three Months | | |
| (In thousands) | | | | | | | | | | |
Lease & related maintenance and rental revenues | $ | 927,756 | | | $ | 899,559 | | | | | | | 3% | | |
Cost of lease & related maintenance and rental | 818,292 | | | 664,289 | | | | | | | 23% | | |
Gross margin | $ | 109,464 | | | $ | 235,270 | | | | | | | (53)% | | |
Gross margin % | 12 | % | | 26 | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | Change 2017/2016 |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | | Nine Months |
| (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 | % |
Gross margin | 234,571 |
| | 245,105 |
| | 642,024 |
| | 703,454 |
| | (4 | )% | | (9 | )% |
Gross margin % | 28 | % | | 31 | % | | 27 | % | | 30 | % | | | | |
Lease & related maintenance and rental revenues represent revenuerevenues from our ChoiceLease and commercial rental product offerings within our FMS business segment. Revenues increased 3% to $823$928 million in the thirdfirst quarter and 1% to $2.39 billion in the nine months ended September 30, 2017,of 2020 driven by growth in the ChoiceLease fleet and higher prices on replacement vehicles in the ChoiceLease product offering. In the nine months ended September 30, 2017, ChoiceLease revenue growth, was partially offset by lower commercial rental revenue reflecting lower demand.revenue.
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.financing, which are reported within "Interest Expense" in our Condensed Consolidated Statements of Earnings. Cost of lease & related maintenance and rental increased 6%23% in the thirdfirst quarter and 5% in the nine months ended September 30, 2017, primarilyof 2020 due to higher depreciation and maintenance costs from a larger average lease fleet and normalized maintenance spending associated with vehicles being preparedexpense of $80 million related to changes in our vehicle residual value estimates for sale. During the nine months ended, cost ofour lease and commercial rental also increased due to higher maintenance costs on certain older model year vehicles. Cost 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 millionfleet in the third quarter of 2017 and $3 million2019. The increase in the ninethree months ended September 30, 2017, dueMarch 31, 2020 also reflected higher depreciation expense from the COVID-19 pandemic and a prior year benefit from a significant maintenance cost recovery item. Refer to changes in estimated residual values effective January 1, 2017.our FMS business segment operating results section below for further discussion on COVID-19 impacts.
LeaseDuring the first quarter of 2020, lease & related maintenance and rental gross margin decreased 4% in the third quarter53% and 9% in the nine months ended September 30, 2017. Lease and rental gross margin as a percentage of revenue decreased to 28% in the third quarter and to 27% in the nine months ended September 30, 2017. The decrease in gross margin dollars and as a percentage of revenue in the third 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.12%. 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,first quarter was primarily due to higher maintenance costsdepreciation as a result of changes in our vehicle residual value estimates in the third quarter of 2019 and accelerated depreciation.COVID-19, as well as the impact from lower commercial rental revenue.
Services
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | | | | | Change 2020/2019 | | |
| 2020 | | 2019 | | | | | | Three Months | | |
| (In thousands) | | | | | | | | | | |
Services revenue | $ | 1,112,188 | | | $ | 1,132,048 | | | | | | | (2)% | | |
Cost of services | 954,429 | | | 971,690 | | | | | | | (2)% | | |
Gross margin | $ | 157,759 | | | $ | 160,358 | | | | | | | (2)% | | |
Gross margin % | 14 | % | | 14 | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | Change 2017/2016 |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | | Nine Months |
| (Dollars in thousands) | |
|
| | |
Services revenue | $ | 896,245 |
| | 801,004 |
| | $ | 2,619,139 |
| | 2,345,922 |
| | 12 | % | | 12 | % |
Cost of services | 761,470 |
| | 658,793 |
| | 2,210,314 |
| | 1,936,636 |
| | 16 | % | | 14 | % |
Gross margin | 134,775 |
| | 142,211 |
| | 408,825 |
| | 409,286 |
| | (5 | )% | | — | % |
Gross margin % | 15 | % | | 18 | % | | 16 | % | | 17 | % | | | | |
Services revenue represents all the revenues associated with our SCS and DTS and SCSbusiness segments, as well as SelectCare and fleet support services associated with our FMS business segment. Services revenue increased 12%decreased 2% in the thirdfirst quarter primarily driven by a decrease in revenue in SCS due to newlost business in theand COVID-19 impacts. Refer to our SCS and DTS segments. Services revenue increased 12% in the nine months ended September 30, 2017, primarily due to new business and increased volumes in the SCS and DTS segments. Services revenue also benefited from higher fuel costs passed through to our customers in both the three and nine months ended September 30, 2017.segment operating results sections below for further discussion on COVID-19 impacts.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
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%decreased 2% in the thirdfirst quarter and 14% in the nine months ended September 30, 2017, primarily due to higher volumes in SCS and SelectCare and higher fuellower costs in SCS and DTS. Cost of services also increased in both periods due to lost business, partially offset by higher overhead 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.
ServicesDuring the first quarter of 2020, services gross margin decreased 5% in the third quarter of 20172% and remained unchanged in the nine months ended September 30, 2017. Services gross margin as a percentage of revenue decreased to 15%remained unchanged at 14%. Gross margin dollars reflects lower revenues in both DTS and SCS for the third quarter and to 16% in the ninethree months ended September 30, 2017. The decrease in gross margin dollars and as a percentage of revenue 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.March 31, 2020.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Fuel
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | | | | | Change 2020/2019 | | |
| 2020 | | 2019 | | | | | | Three Months | | |
| (In thousands) | | | | | | | | | | |
Fuel services revenue | $ | 121,362 | | | $ | 148,720 | | | | | | | (18)% | | |
Cost of fuel services | 120,449 | | | 143,275 | | | | | | | (16)% | | |
Gross margin | $ | 913 | | | $ | 5,445 | | | | | | | (83)% | | |
Gross margin % | 1 | % | | 4 | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | Change 2017/2016 |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | | Nine Months |
| (Dollars in thousands) | |
|
| | |
Fuel services revenue | $ | 129,087 |
| | 120,408 |
| | $ | 382,966 |
| | 342,765 |
| | 7 | % | | 12 | % |
Cost of fuel services | 124,562 |
| | 116,904 |
| | 372,016 |
| | 331,283 |
| | 7 | % | | 12 | % |
Gross margin | 4,525 |
| | 3,504 |
| | 10,950 |
| | 11,482 |
| | 29 | % | | (5 | )% |
Gross margin % | 4 | % | | 3 | % | | 3 | % | | 3 | % | | | | |
Fuel services revenue represents fuel services provided to our FMS customers. Fuel services revenue increased 7%decreased 18% 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 and lower 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 16% in the thirdfirst quarter and 12% in the nine months ended September 30, 2017, as a result of higherlower revenue and fuel costs.inventory adjustments.
Fuel services gross margin increased 29%decreased in the third quarter and decreased 5% in the nine months ended September 30, 2017.first quarter. Fuel services gross margin as a percentage of revenue increasedalso decreased to 4%1% in the third quarter and remained at 3% in the nine months ended September 30, 2017, compared to the same periods of 2016.first quarter. 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 was impacted by these price change dynamics as fuel prices fluctuated during the period, as well as timing of certain fuel inventory adjustments.
|
| | | | | | | | | | | | | | | | | | | |
| 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 2020/2019 | | |
| 2020 | | 2019 | | | | | | Three Months | | |
| (In thousands) | | | | | | | | | | |
Other operating expenses | $ | 33,565 | | | $ | 33,626 | | | | | | | —% | | |
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 $87.1remained flat at $34 million in the nine months ended September 30, 2017.first quarter.
Selling, General and Administrative Expenses
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | | | | | Change 2020/2019 | | |
| 2020 | | 2019 | | | | | | Three Months | | |
| (In thousands) | | | | | | | | | | |
Selling, general and administrative expenses (SG&A) | $ | 224,119 | | | $ | 231,325 | | | | | | | (3)% | | |
Percentage of total revenue | 10 | % | | 11 | % | | | | | | | | |
| | | | | | | | | | | |
SG&A expenses decreased 3% in the first quarter. The decrease in SG&A expenses primarily reflects lower compensation related charges and professional services fees partially offset by higher bad debt expense. SG&A expenses as a percentage of total revenue decreased to 10% the first quarter.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -— (Continued)
Non-Operating Pension Costs
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | | | | | Change 2020/2019 | | | | |
| 2020 | | 2019 | | | | | | Three Months | | | | |
| (In thousands) | | | | | | | | | | | | |
Non-operating pension costs | $ | 1,221 | | | $ | 6,462 | | | | | | | NM | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | Change 2017/2016 |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | | Nine Months |
| (Dollars in thousands) | |
|
| | |
Selling, general and administrative expenses (SG&A) | $ | 216,653 |
| | 191,337 |
| | $ | 620,041 |
| | 602,768 |
| | 13 | % | | 3 | % |
Percentage of total revenue | 12 | % | | 11 | % | | 12 | % | | 12 | % | | | | |
SG&A expenses in the third 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% in the nine months ended September 30, 2017 compared to the same period in 2016.
|
| | | | | | | | | | | | | | | | | | |
| 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 | )% |
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.cost, as well as settlement or curtailment charges. Non-operating pension costs decreased $0.5$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 favorable asset returns in 2019 and a one-time charge of $7.7 milliondecrease in the second quarter of 2016 to fully reflect pension benefit improvements made in 2009 in our pension benefit obligation.interest rates.
Losses on Used Vehicle Sales, Net |
| | | | | | | | | | | | | | | | | | | |
| 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 2020/2019 | | | | |
| 2020 | | 2019 | | | | | | Three Months | | | | |
| (In thousands) | | | | | | | | | | | | |
Losses on used vehicle sales, net | $ | 20,684 | | | $ | 8,217 | | | | | | | NM | | | | |
UsedLosses on 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 held for sale to fair market values. Usedvalues (referred to as "valuation adjustments"). Losses on used vehicle sales, net increased to a gain of $2.7$21 million in the thirdfirst quarter primarily due to higher valuation adjustments from lower expected sales prices as a result of 2017 and decreased to a loss of $11.8 milliondecrease in the nine months ended September 30, 2017. The quarterly increase isdemand driven by lower fair market value write-downs on vehicles held for sale, partially offset by lower tractor and truckthe COVID-19 pandemic. Average proceeds per unit resulting in 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 first quarter decreased from the prior year reflecting higher sales volumes in the wholesale markets which generally has lower proceeds per unit and lower market value of tractors and trucks, which resulted in lower gains on sales and greater fair market value write-downs on vehicles held for sale. pricing.
The following table presents the used vehicle pricing changes for the threefirst quarter of 2020 compared with the prior year:
| | | | | | | |
| Proceeds per unit change 2020/2019 | | |
| Three Months | | |
| | | |
Tractors | (26)% | | |
Trucks | (6)% | | |
Interest expense
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | | | | | Change 2020/2019 | | |
| 2020 | | 2019 | | | | | | Three Months | | |
| (In thousands) | | | | | | | | | | |
Interest expense | $ | 62,566 | | | $ | 55,336 | | | | | | | 13% | | |
Effective interest rate | 3.1 | % | | 3.2 | % | | | | | | | | |
Interest expense increased 13% in the first quarter reflecting higher average outstanding debt partially offset by a lower effective interest rate. The increase in average outstanding debt reflects higher vehicle capital spending in 2019 and nine months ended September 30, 2017.additional borrowings under our trade receivable program and global revolving credit facility in 2020. The lower effective interest rate in 2020 reflects the impact on variable rate debt during a lower interest rate environment.
|
| | | | | |
| 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)
|
| | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | Change 2017/2016 |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | | Nine Months |
| (Dollars in thousands) | | | | |
Interest expense | $ | 34,854 |
| | 37,440 |
| | $ | 104,591 |
| | 112,597 |
| | (7 | )% | | (7 | )% |
Effective interest rate | 2.6 | % | | 2.7 | % | | 2.6 | % | | 2.7 | % | | | | |
Interest expense decreased 7% in the third quarter of 2017 and in the nine months ended September 30, 2017, reflecting lower average outstanding debt and a lower effective interest rate. The decrease in average outstanding debt reflects lower planned vehicle capital spending. The lower effective interest rate in 2017 reflects the replacement of higher interest rate debt with debt issuances at lower 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) | | | | |
Miscellaneous income, net | $ | 4,655 |
| | 3,247 |
| | $ | 17,636 |
| | 10,968 |
| | 43 | % | | 61 | % |
Miscellaneous income, net
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | | | | | Change 2020/2019 | | | | |
| 2020 | | 2019 | | | | | | Three Months | | | | |
| (In thousands) | | | | | | | | | | | | |
Miscellaneous (income) loss, net | $ | 8,668 | | | $ | (8,222) | | | | | | | NM | | | | |
Miscellaneous (income) loss, net consists of investment income on securities used to fund certain benefit plans, interest income,
gains from sales of operating property, foreign currency transaction gainsremeasurement and other non-operating items. The increaseMiscellaneous (income) loss, net was a loss of $9 million in the thirdfirst quarter as compared to income of $8 million in the prior year primarily reflecting a foreign currency transaction remeasurement losses in 2020 and nine months ended September 30, 2017 is driven by increasedhigher rabbi trust investment income gains on salesin 2019.
Restructuring and other items, net
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | | | | | Change 2020/2019 | | |
| 2020 | | 2019 | | | | | | Three Months | | |
| (In thousands) | | | | | | | | | | |
Restructuring and other items, net | $ | 30,947 | | | $ | 6,178 | | | | | | | NM | | |
Restructuring and other items, net in 2020 included expenses related to our ChoiceLease insurance liability program which was discontinued in January 2020, the implementation of propertiesan Enterprise Resource Planning system, restructuring activities that began in late 2019. In 2019, the amount primarily included consulting fees related to cost saving initiatives, professional fees related to the pursuit of $0.6 milliona commercial claim, and income from our Singapore operations that shut down in 2019. Both years include professional fees related to the third quarter and $3.7 million in the nine months ended September 30, 2017, respectively, and recoveries from business interruption claimspursuit of $3.2 million in the nine months ended September 30, 2017.a commercial claim.
|
| | | | | | | | | | | | | | | | | | | |
| 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 | % | | | | |
Provision for income taxes decreased 24% in the third quarter
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | | | | | Change 2020/2019 | | |
| 2020 | | 2019 | | | | | | Three Months | | |
| (In thousands) | | | | | | | | | | |
Provision for (benefit from) income taxes | $ | (4,505) | | | $ | 22,261 | | | | | | | NM | | |
Effective tax rate from continuing operations | 4.0 | % | | 32.7 | % | | | | | | | | |
We recorded a benefit of 2017 and 29% in the nine months ended September 30, 2017. The decrease in the provision$5 million for income taxes reflects lower taxable earnings, partially offset by a higher effectivein the first quarter as compared to an expense of $22 million in the prior period. The tax rate primarilywas impacted by the reduction of earnings due to accelerated depreciation charges and the COVID-19 economic effects. Additionally, a state$13 million valuation allowance was recorded against our U.K. deferred tax law change in the third quarter.assets on a discrete basis.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -— (Continued)
OPERATING RESULTS BY BUSINESS SEGMENT
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | | | | | Change 2020/2019 | | |
| 2020 | | 2019 | | | | | | Three Months | | |
| (In thousands) | | | | | | | | | | |
Total Revenue: | | | | | | | | | | | |
Fleet Management Solutions | $ | 1,340,237 | | | $ | 1,351,599 | | | | | | | (1)% | | |
Supply Chain Solutions | 628,447 | | | 635,671 | | | | | | | (1)% | | |
Dedicated Transportation Solutions | 334,888 | | | 349,621 | | | | | | | (4)% | | |
Eliminations | (142,266) | | | (156,564) | | | | | | | 9% | | |
Total | $ | 2,161,306 | | | $ | 2,180,327 | | | | | | | (1)% | | |
Operating Revenue: (1) | | | | | | | | | | | |
Fleet Management Solutions | $ | 1,157,544 | | | $ | 1,135,213 | | | | | | | 2% | | |
Supply Chain Solutions | 467,311 | | | 477,089 | | | | | | | (2)% | | |
Dedicated Transportation Solutions | 236,685 | | | 235,620 | | | | | | | —% | | |
Eliminations | (90,293) | | | (97,435) | | | | | | | 7% | | |
Total | $ | 1,771,247 | | | $ | 1,750,487 | | | | | | | 1% | | |
| | | | | | | | | | | |
Earnings (Loss) Before Taxes: | | | | | | | | | | | |
Fleet Management Solutions | $ | (114,574) | | | $ | 60,911 | | | | | | | NM | | |
Supply Chain Solutions | 31,025 | | | 32,317 | | | | | | | (4)% | | |
Dedicated Transportation Solutions | 12,180 | | | 17,412 | | | | | | | (30)% | | |
Eliminations | (10,069) | | | (17,302) | | | | | | | 42% | | |
| (81,438) | | | 93,338 | | | | | | | NM | | |
Unallocated Central Support Services | (9,386) | | | (12,547) | | | | | | | 25% | | |
Non-operating pension costs | (1,221) | | | (6,462) | | | | | | | 81% | | |
Other items impacting comparability, net (2) | (21,589) | | | (6,178) | | | | | | | NM | | |
Earnings (loss) from continuing operations before income taxes | $ | (113,634) | | | $ | 68,151 | | | | | | | NM | | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | Change 2017/2016 |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | | Nine Months |
| (Dollars in thousands) | | | | |
Total Revenue: | | | | | | | | | | | |
Fleet Management Solutions | $ | 1,195,798 |
| | 1,155,011 |
| | $ | 3,491,847 |
| | 3,404,452 |
| | 4 | % | | 3 | % |
Dedicated Transportation Solutions | 272,334 |
| | 260,921 |
| | 811,620 |
| | 764,025 |
| | 4 |
| | 6 |
|
Supply Chain Solutions | 496,004 |
|
| 416,898 |
| | 1,429,477 |
| | 1,207,665 |
| | 19 |
| | 18 |
|
Eliminations | (115,607 | ) |
| (108,412 | ) | | (343,038 | ) | | (318,308 | ) | | 7 |
| | 8 |
|
Total | $ | 1,848,529 |
|
| 1,724,418 |
| | $ | 5,389,906 |
| | 5,057,834 |
| | 7 | % | | 7 | % |
Operating Revenue: (1) |
|
|
| | | | |
|
|
| |
|
|
Fleet Management Solutions | $ | 1,026,011 |
|
| 997,903 |
| | $ | 2,986,792 |
| | 2,955,465 |
|
| 3 | % | | 1 | % |
Dedicated Transportation Solutions | 197,917 |
|
| 196,648 |
| | 591,045 |
| | 581,213 |
|
| 1 |
| | 2 |
|
Supply Chain Solutions | 376,429 |
|
| 345,453 |
| | 1,096,899 |
| | 999,427 |
|
| 9 |
| | 10 |
|
Eliminations | (74,904 | ) |
| (71,711 | ) | | (220,968 | ) | | (212,086 | ) |
| 4 |
| | 4 |
|
Total | $ | 1,525,453 |
|
| 1,468,293 |
| | $ | 4,453,768 |
| | 4,324,019 |
|
| 4 | % | | 3 | % |
EBT: | | | | | | | | | | |
|
|
Fleet Management Solutions | $ | 100,693 |
|
| 112,507 |
| | $ | 220,973 |
| | 306,554 |
| | (11 | )% | | (28 | )% |
Dedicated Transportation Solutions | 13,770 |
| | 17,584 |
| | 39,892 |
| | 48,300 |
| | (22 | ) | | (17 | ) |
Supply Chain Solutions | 22,052 |
|
| 30,956 |
| | 75,359 |
| | 79,105 |
| | (29 | ) | | (5 | ) |
Eliminations | (14,464 | ) |
| (12,606 | ) | | (38,053 | ) | | (37,116 | ) | | 15 |
| | 3 |
|
| 122,051 |
|
| 148,441 |
|
| 298,171 |
|
| 396,843 |
| | (18 | ) | | (25 | ) |
Unallocated Central Support Services | (11,041 | ) |
| (9,275 | ) | | (32,965 | ) | | (29,960 | ) | | 19 |
| | 10 |
|
Non-operating pension costs | (6,958 | ) |
| (7,468 | ) | | (20,875 | ) | | (22,048 | ) | | (7 | ) | | (5 | ) |
Restructuring and other items, net | (9,709 | ) |
| — |
| | (9,340 | ) | | (7,650 | ) | | NM |
| | NM |
|
Earnings from continuing operations before income taxes | $ | 94,343 |
|
| 131,698 |
|
| $ | 234,991 |
|
| 337,185 |
| | (28 | )% | | (30 | )% |
————————————
| |
(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. |
NM - Not meaningful
(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, SCS and DTS, as well as the reasons why management believes these measures are important to investors.
(2)Refer to Note 16, "Other Items Impacting Comparability," and below for a discussion of items excluded from our primary measure of segment performance.
As part of management’s evaluation of segment operating performance, we define the primary measurement of our segment financial performance as segment “Earnings Before Taxes” (EBT) from continuing operations before taxes” (EBT), which includes an allocation of Central Support Services (CSS), and excludes non-operating pension costs and restructuring andcertain other items netas discussed in Note 16, "Segment Reporting,"Other Items Impacting Comparability," in the Notes to Condensed Consolidated Condensed Financial Statements. CSS represents those costs incurred to support all business segments, including finance and procurement, corporate services, human resources, finance, corporate services andinformation technology, public affairs, information technology, health and safety, legal, marketing, and corporate communications.
The objective of the EBT measurement is to provide clarity on the profitability of each 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 19, "Segment Reporting," in the Notes to Condensed Consolidated Financial Statements for a description of the methodology for allocating the remainder of CSS costs to the business segments.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Our FMS segment leases revenue earning equipment, as well as provides rental vehicles, fuel, maintenance and EBT are accounted for at rates similarother ancillary services to those executed with third parties.the SCS and DTS segments. EBT related to inter-segment equipment and services billed to DTSSCS and SCSDTS customers (equipment contribution) are included in both FMS and the segment that served the customer and then eliminated upon consolidation (presented as “Eliminations”).Inter-segment EBT allocated to SCS and DTS includes earnings related to equipment used in providing services to SCS and DTS customers.
The following table sets forth the benefits from equipment contribution included in EBT for our SCS and DTS business segments:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | | | | | Change 2020/2019 | | |
| 2020 | | 2019 | | | | | | Three Months | | |
| (In thousands) | | | | | | | | | | |
Equipment Contribution: | | | | | | | | | | | |
Supply Chain Solutions | $ | 4,560 | | | $ | 7,642 | | | | | | | (40)% | | |
Dedicated Transportation Solutions | 5,509 | | | 9,660 | | | | | | | (43)% | | |
Total (1) | $ | 10,069 | | | $ | 17,302 | | | | | | | (42)% | | |
———————————
(1)Total amount is included in FMS EBT.
The decrease in SCS and DTS equipment contribution for the three months ended March 31, 2020 is primarily related to the impact of higher depreciation expense due to the change in estimate for residual values in the table above). Prior year amounts have been reclassifiedthird quarter of 2019 on vehicles used to conformprovide services to SCS and DTS customers.
Items excluded from our segment EBT measure and their classification within our Condensed Consolidated Statements of Earnings follow:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three months ended March 31, | | | | | | |
Description | | Classification | | 2020 | | 2019 | | | | |
| | | | (In thousands) | | | | | | |
Restructuring and other, net (1) | | Revenue and Restructuring and other items, net | | $ | (11,263) | | | | $ | (2,588) | | | | | |
| | | | | | | | | | |
ERP implementation costs (1) | | Restructuring and other items, net | | (10,326) | | | | (3,590) | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Other items impacting comparability, net | | | | (21,589) | | | | (6,178) | | | | | |
Non-operating pension costs | | Non-operating pension costs | | (1,221) | | | | (6,462) | | | | | |
| | | | $ | (22,810) | | | | $ | (12,640) | | | | | |
———————————
(1)See Note 16, “Other Items Impacting Comparability,” in the current period presentation.Notes to Condensed Consolidated Financial Statements for additional information.
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 segments:
|
| | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | Change 2017/2016 |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | | Nine Months |
| (Dollars in thousands) | | | | |
Equipment Contribution: | | | | | | | | | | | |
Dedicated Transportation Solutions | $ | 8,320 |
| | 8,047 |
| | $ | 22,532 |
| | 24,214 |
| | 3 | % | | (7 | )% |
Supply Chain Solutions | 6,144 |
| | 4,559 |
| | 15,521 |
| | 12,902 |
| | 35 |
| | 20 |
|
Total (1) | $ | 14,464 |
| | 12,606 |
| | $ | 38,053 |
| | 37,116 |
| | 15 | % | | 3 | % |
———————————
| |
(1) | Total amount is included in FMS EBT. |
DTS equipment contribution increased slightly in the third quarter and decreased in the nine months ended September 30, 2017. The decrease in the nine months ended 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 quarter and in the nine months ended is primarily driven by increased volumes.
The following table sets forth items excluded from our segment EBT measure and their classification within our Consolidated Condensed Statements of Earnings:
|
| | | | | | | | | | | | | | | | |
| | | | 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 | ) |
———————————
| |
(1) | See Note 16, “Segment Reporting ," in the Notes to Consolidated Condensed Financial Statements for a discussion of adjustments. |
| |
(2) | See Note 12, “Employee Benefit Plans,��� in the Notes to Consolidated Condensed Financial Statements for a discussion of adjustments. |
| |
(3) | See Note 13, “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 2020/2019 | |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | | Nine Months | | 2020 | | 2019 | | | Three Months | |
| (Dollars in thousands) | | |
| | | | (In thousands) | | | |
ChoiceLease | $ | 673,882 |
|
| 649,208 |
| | $ | 1,992,656 |
| | 1,918,418 |
| | 4 | % | | 4 | % | ChoiceLease | $ | 792,206 | | | $ | 740,059 | | | | 7% | |
SelectCare | 116,986 |
|
| 113,093 |
| | 347,979 |
| | 341,350 |
| | 3 |
| | 2 |
| SelectCare | 136,146 | | | 135,779 | | | | —% | |
Commercial Rental | 216,015 |
|
| 216,592 |
| | 589,353 |
| | 636,028 |
| | — |
| | (7 | ) | |
Commercial rental | | Commercial rental | 205,766 | | | 236,148 | | | | (13)% | |
Other | 19,128 |
|
| 19,010 |
| | 56,804 |
| | 59,669 |
| | 1 |
| | (5 | ) | Other | 23,426 | | | 23,227 | | | | 1% | |
Fuel services revenue | 169,787 |
|
| 157,108 |
| | 505,055 |
| | 448,987 |
| | 8 |
| | 12 |
| Fuel services revenue | 173,335 | | | 207,866 | | | | (17)% | |
ChoiceLease liability insurance revenue (1) | | ChoiceLease liability insurance revenue (1) | 9,358 | | | 8,520 | | | | 10% | |
FMS total revenue (1)(2) | $ | 1,195,798 |
| | 1,155,011 |
|
| $ | 3,491,847 |
| | 3,404,452 |
| | 4 | % | | 3 | % | $ | 1,340,237 | | | $ | 1,351,599 | | | | (1)% | |
| | | | | | | | | | | | | | | | | | | |
FMS operating revenue (2)(3) | $ | 1,026,011 |
| | 997,903 |
| | $ | 2,986,792 |
| | 2,955,465 |
| | 3 |
| | 1 |
| $ | 1,157,544 | | | $ | 1,135,213 | | | | 2% | |
| | | | | | | | | | |
|
| | | | | | | | |
FMS EBT | $ | 100,693 |
|
| 112,507 |
| | $ | 220,973 |
| | 306,554 |
| | (11 | )% | | (28 | )% | FMS EBT | $ | (114,574) | | | $ | 60,911 | | | | NM | |
| FMS EBT as a % of FMS total revenue | 8.4 | % |
| 9.7 | % | | 6.3 | % | | 9.0 | % | | (130) bps | | (270) bps | FMS EBT as a % of FMS total revenue | (8.5)% | | 4.5% | | | (1,300) bps | |
FMS EBT as a % of FMS operating revenue (2) | 9.8 | % |
| 11.3 | % | | 7.4 | % | | 10.4 | % | | (150) bps | | (300) bps | |
| FMS EBT as a % of FMS operating revenue (3) | | FMS EBT as a % of FMS operating revenue (3) | (9.9)% | | 5.4% | | | (1,530) 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. |
(1)In the first quarter of 2020, we announced our plan to exit the extension of our liability insurance coverage for ChoiceLease customers. The exit of this program is estimated to be completed in the second quarter of 2021. We have revised our definition of operating revenues to exclude the revenues associated with this program for better comparability of our on-going operations.
(2)Includes intercompany fuel sales from FMS to SCS and DTS.
(3)Non-GAAP financial measures. Reconciliations of FMS total revenue to FMS operating revenue and FMS EBT as a % of FMS total revenue to FMS EBT as a % of FMS operating revenue, as well as the reasons why management believes these measures are important to investors are included in the “Non-GAAP Financial Measures” section of this MD&A.
The following table summarizes the components of the change in FMS revenue on a percentage basis versus the prior year:
| | | | | | | | | | | | | | | |
| Three months ended March 31, 2020 | | | | | | |
| Total | | Operating (1) | | | | |
Organic, including price and volume | 2% | | 2% | | | | |
Fuel | (3)% | | —% | | | | |
| | | | | | | |
Net increase (decrease) | (1)% | | 2% | | | | |
|
| | | | | | | | | | | |
| Three months ended September 30, 2017 | | Nine months ended September 30, 2017 |
| Total | | Operating (1) | | Total | | Operating (1) |
Organic, including price and volume | 3 | % | | 3 | % | | 2 | % | | 2 | % |
Fuel | 1 |
| | — |
| | 2 |
| | — |
|
Foreign exchange | — |
| | — |
| | (1 | ) | | (1 | ) |
Net increase | 4 | % | | 3 | % | | 3 | % | | 1 | % |
————————————
| |
(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. |
(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 increaseddecreased to $1.20$1.3 billion in the thirdfirst quarter of 2017,primarily due to higher FMS operating revenue (a non-GAAP measure excluding fuel) andlower fuel services revenue. FMS total revenue increased to $3.49 billion in the nine months ended September 30, 2017, due to higher fuel services revenue and FMS operating revenue partially offset by negative impacts from foreign exchange.higher operating revenue. 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 revenuefirst quarter increased to $1.2 billion primarily from growth wasin ChoiceLease partially offset by lowera decline in our 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 line.
ChoiceLease revenue increased 4%7% in both the thirdfirst quarter and the nine months ended September 30, 2017, reflectingprimarily due to a larger average fleet size andas well as higher prices on replacementnew vehicles. Foreign exchange negatively impacted ChoiceLeaseSelectCare revenue growth by 100 basis pointsremained unchanged in the nine months ended September 30, 2017. We expect favorable ChoiceLeasefirst quarter. Commercial rental revenue comparisons to continue through the end of the year based on sales activity. SelectCare revenue increased 3%decreased 13% in the thirdfirst quarter and 2% in the nine months ended September 30, 2017,primarily due to new business and increased volumes,lower demand, partially offset by negative impacts from foreign exchange year-to-date. Commercial rentalhigher pricing. Fuel services revenue was unchangeddecreased 17% in the thirdfirst quarter primarily reflecting lower fuel costs passed through to customers and decreased 7% in the nine months ended September 30, 2017, due to lower demand. We expect favorable commercial rental revenue comparisons in the fourth quarter given the current rental demand environment.gallons sold.
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 2020/2019 | |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | | Nine Months | | 2020 | | 2019 | | | Three Months | |
| (Dollars in thousands) | | | | | | (In thousands) | | | |
Rental revenue from non-lease customers | $ | 138,887 |
| | 141,836 |
| | $ | 372,853 |
| | 397,305 |
| | (2 | )% | | (6 | )% | Rental revenue from non-lease customers | $ | 125,285 | | | $ | 129,548 | | | | (3)% | |
Rental revenue from lease customers (1) | $ | 77,128 |
| | 74,756 |
| | $ | 216,500 |
| | 238,723 |
| | 3 | % | | (9 | )% | Rental revenue from lease customers (1) | $ | 80,481 | | | $ | 106,600 | | | | (25)% | |
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) | | Average commercial rental power fleet size — in service (2) (3) | 33,400 | | | 34,700 | | | | (4)% | |
Commercial rental utilization — power fleet (2) | 78.0 | % |
| 76.7 | % | | 73.7 | % | | 73.9 | % | | 130 bps | | (20) bps | Commercial rental utilization — power fleet (2) | 64.4% | | 74.9% | | | (1,050) 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. |
(1)Represents revenue from rental vehicles provided to our existing ChoiceLease customers, generally in place of a lease vehicle.
(2)Number of units rounded to nearest hundred and calculated using quarterly average unit counts.
(3)Excluding trailers.
FMS EBT decreased 11%to a loss of ($115) million in the first quarter from earnings before taxes of $61 million in the prior year period. The decrease reflects higher depreciation expense of $80 million resulting from the changes in vehicle residual value estimates in the third quarter of 2017, reflecting2019. Earnings were also negatively impacted by an estimated impact of approximately $60 million from the COVID-19 impacts to ChoiceLeasedescribed below and lower commercial rental gross marginperformance, partially offset by an increase in lease results. Lease results benefited from fleet growth and higher pricing for the three months ended March 31, 2020. Commercial rental performance declined reflecting lower utilization in the first quarter of 2020, partially offset by higher pricing. Rental power fleet utilization decreased to 64.4% for the first quarter from 74.9% in the prior year. The COVID-19 impacts included additional accelerated depreciation of $4$27 million onand higher valuation adjustments of $21 million reflecting lower used vehicle pricing expected in the second half of 2020, incremental lower rental demand and higher bad debt reserves reflecting slower customer payment activity. Both lease and rental performance in the first quarter of 2019 benefited from a significant maintenance cost recovery item.
As a result of the COVID-19 pandemic, demand for commercial rental vehicles expected to be made available for sale through June 2018, and more normalized maintenance spending associated with vehicles being prepared for sale. FMS EBT was also impacted by higher overhead spendinghas decreased significantly due to a substantial reduction in business activity. We expect lower demand conditions to continue through the timingbalance of incentive compensationthe year and higher salesare taking actions to redeploy rental vehicles to fulfill new lease contracts and marketing expense. These items were partially offset by improved performance across all product lines. Commercial rental performance improved due to highersupport the SCS and DTS segments. In addition, as discussed above, we expect lower used vehicle pricing and a 130 basis point improvement in utilization, reflecting fleet right-sizing actions taken earlier in the year. Used vehicle results improved modestlysecond half of 2020 due to lower fair market value write-downs on vehicles held for sale, partially offsetdemand. ChoiceLease operations have not been materially impacted to date by lower proceeds per unit.
FMS EBT decreased 28% in the nine months ended September 30, 2017,pandemic, however due to slower payment activity with certain customers, we established additional reserves for bad debts. In addition, we expect lower used vehiclelease 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 resultedactivity 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, 2017.2020.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -— (Continued)
Our global fleet of owned and leased revenue earning equipment and SelectCare vehicles, including vehicles under on-demand maintenance, is summarized as follows (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, 2020 | | December 31, 2019 | | March 31, 2019 | | 2020/Dec. 2019 | | 2020/ 2019 |
End of period vehicle count | | | | | | | | | | End of period vehicle count | | | | | | | | | |
By type: | | | | | | | | | | By type: | |
Trucks (1) | 75,700 |
| | 73,300 |
| | 73,500 |
| | 3 | % | | 3 | % | Trucks (1) | 84,800 | | | 85,200 | | | 83,000 | | | —% | | 2% |
Tractors (2) | 65,600 |
| | 67,900 |
| | 68,600 |
| | (3 | ) | | (4 | ) | Tractors (2) | 81,600 | | | 82,400 | | | 78,400 | | | (1)% | | 4% |
Trailers (3), (4) | 42,200 |
| | 42,800 |
| | 42,300 |
| | (1 | ) | | — |
| |
Trailers (3) | | Trailers (3) | 45,500 | | | 45,400 | | | 45,000 | | | —% | | 1% |
Other | 1,200 |
| | 1,100 |
| | 1,200 |
| | 9 |
| | — |
| Other | 800 | | | 800 | | | 1,200 | | | —% | | (33)% |
Total | 184,700 |
| | 185,100 |
| | 185,600 |
| | — | % | | — | % | Total | 212,700 | | | 213,800 | | | 207,600 | | | (1)% | | 2% |
| | | | | | | | | | | | | | | | |
By ownership: | | | | | | | | | | |
Owned | 183,400 |
| | 183,700 |
| | 184,100 |
| | — | % | | — | % | |
Leased | 1,300 |
| | 1,400 |
| | 1,500 |
| | (7 | ) | | (13 | ) | |
Total | 184,700 |
| | 185,100 |
| | 185,600 |
| | — | % | | — | % | |
| | | | | | | | | | |
By product line: (4) | | | | | | | | | | |
By product line: | | By product line: | |
ChoiceLease | 137,300 |
| | 136,500 |
| | 136,600 |
| | 1 | % | | 1 | % | ChoiceLease | 158,800 | | | 159,800 | | | 153,500 | | | (1)% | | 3% |
Commercial rental | 37,800 |
| | 37,800 |
| | 38,000 |
| | — |
| | (1 | ) | Commercial rental | 39,600 | | | 41,900 | | | 43,800 | | | (5)% | | (10)% |
Service vehicles and other | 3,300 |
| | 3,300 |
| | 3,500 |
| | — |
| | (6 | ) | Service vehicles and other | 2,700 | | | 2,700 | | | 2,700 | | | —% | | —% |
Active units | 178,400 |
| | 177,600 |
| | 178,100 |
| | — |
| | — |
| |
| | | 201,100 | | | 204,400 | | | 200,000 | | | (2)% | | 1% |
Held for sale | 6,300 |
| | 7,500 |
| | 7,500 |
| | (16 | ) | | (16 | ) | Held for sale | 11,600 | | | 9,400 | | | 7,600 | | | 23% | | 53% |
Total | 184,700 |
| | 185,100 |
| | 185,600 |
| | — | % | | — | % | Total | 212,700 | | | 213,800 | | | 207,600 | | | (1)% | | 2% |
| | | | | | | | | | | | | | | | |
Customer vehicles under SelectCare contracts | 54,400 |
| | 49,000 |
| | 49,300 |
| | 11 | % | | 10 | % | |
Active ChoiceLease vehicles (4) | | Active ChoiceLease vehicles (4) | 148,400 | | | 147,400 | | | 142,800 | | | 1% | | 4% |
| | | | | | | | |
Customer vehicles under SelectCare contracts (6) | | Customer vehicles under SelectCare contracts (6) | 56,900 | | | 55,800 | | | 55,900 | | | 2% | | 2% |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
Quarterly average vehicle count | | | | | | | | | | Quarterly average vehicle count | |
By product line: | | | | | | | | | | By product line: | |
ChoiceLease | 137,200 |
| | 136,500 |
| | 135,100 |
| | 1 | % | | 2 | % | ChoiceLease | 159,600 | | | 160,200 | | | 151,400 | | | —% | | 5% |
Commercial rental | 37,600 |
| | 37,800 |
| | 38,300 |
| | (1 | ) | | (2 | ) | Commercial rental | 40,500 | | | 43,300 | | | 43,000 | | | (6)% | | (6)% |
Service vehicles and other | 3,300 |
| | 3,400 |
| | 3,300 |
| | (3 | ) | | — |
| Service vehicles and other | 2,700 | | | 2,700 | | | 2,800 | | | —% | | (4)% |
Active units | 178,100 |
| | 177,700 |
| | 176,700 |
| | — |
| | 1 |
| |
| | | 202,800 | | | 206,200 | | | 197,200 | | | (2)% | | 3% |
Held for sale | 6,900 |
| | 7,500 |
| | 8,700 |
| | (8 | ) | | (21 | ) | Held for sale | 10,300 | | | 8,200 | | | 7,300 | | | 26% | | 41% |
Total | 185,000 |
| | 185,200 |
| | 185,400 |
| | — | % | | — | % | Total | 213,100 | | | 214,400 | | | 204,500 | | | (1)% | | 4% |
| | | | | | | | | | | | | | | | | | |
Customer vehicles under SelectCare contracts | 52,800 |
| | 49,200 |
| | 49,600 |
| | 7 | % | | 6 | % | |
Active ChoiceLease vehicles (4) | | Active ChoiceLease vehicles (4) | 148,200 | | | 146,900 | | | 141,100 | | | 1% | | 5% |
Revenue per active ChoiceLease vehicle (5) | | Revenue per active ChoiceLease vehicle (5) | $ | 5,350 | | | $ | 5,500 | | | $ | 5,240 | | | NM | | 2% |
| | | | | | | | | | | | | | | | |
Customer vehicles under SelectCare on-demand (5) | 8,700 |
| | 7,800 |
| | 8,000 |
| | 12 | % | | 9 | % | |
Customer vehicles under SelectCare contracts (6) | | Customer vehicles under SelectCare contracts (6) | 56,400 | | | 56,900 | | | 56,200 | | | (1)% | | —% |
| Customer vehicles under SelectCare on-demand (7) | | Customer vehicles under SelectCare on-demand (7) | 8,100 | | | 8,500 | | | 9,000 | | | (5)% | | (10)% |
| | | | | | | | | | | | | | | | |
Total vehicles serviced | 246,500 |
| | 242,200 |
| | 243,000 |
| | 2 | % | | 1 | % | Total vehicles serviced | 277,600 | | | 279,800 | | | 269,700 | | | (1)% | | 3% |
| | | | | | | | | | |
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. |
| |
(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. |
(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)Active ChoiceLease vehicles are calculated as those units currently earning revenue and not classified as not yet earning or no longer earning units.
(5)Calculated based on the reported quarterly ChoiceLease revenue.
(6)Excludes customer vehicles under SelectCare on-demand contracts.
(7)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 end of period global fleet count (number of units rounded to nearest hundred):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Change | | |
| March 31, 2020 | | December 31, 2019 | | March 31, 2019 | | 2020/Dec. 2019 | | 2020/ 2019 |
Not yet earning revenue (NYE) | 2,600 | | | 3,500 | | | 5,200 | | | (26)% | | (50)% |
| | | | | | | | | |
No longer earning revenue (NLE): | | | | | | | | | |
Units held for sale | 11,600 | | | 9,400 | | | 7,600 | | | 23% | | 53% |
Other NLE units | 9,000 | | | 8,400 | | | 6,200 | | | 7% | | 45% |
Total NLE | 20,600 | | | 17,800 | | | 13,800 | | | 16% | | 49% |
Total | 23,200 | | | 21,300 | | | 19,000 | | | 9% | | 22% |
|
| | | | | | | | | | | |
| | | | | | | Change |
| September 30, 2017 | | December 31, 2016 | | September 30, 2016 | | Sept. 2017/Dec. 2016 | | Sept. 2017/Sept. 2016 |
Not yet earning revenue (NYE) | 2,100 | | 1,700 | | 1,900 | | 24 | % | | 11 | % |
No longer earning revenue (NLE): | | | | | | | | | |
Units held for sale | 6,300 | | 7,500 | | 7,500 | | (16 | ) | | (16 | ) |
Other NLE units | 3,900 | | 4,400 | | 5,000 | | (11 | ) | | (22 | ) |
Total | 12,300 | | 13,600 | | 14,400 | | (10 | )% | | (15 | )% |
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 decreased 50% compared to March 31, 2019 reflecting lower lease sales and faster customer fulfillment activities.
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 49% compared to September 30, 2016,March 31, 2019, reflecting lower used vehicle inventories, which are at the midpoint of our target range, and a lowerhigher number of unitsvehicles being prepared for sale. We expect NLE levels to decline through the end of the year.sale or redeployment and held for sale, as well as slowing demand in our used vehicle market.
Dedicated Transportation
Supply Chain Solutions
|
| | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | Change 2017/2016 |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | | Nine Months |
| (Dollars in thousands) | | | | |
DTS total revenue | $ | 272,334 |
| | 260,921 |
| | $ | 811,620 |
|
| 764,025 |
| | 4 | % | | 6 | % |
| | | | | | | | | | | |
DTS operating revenue (1) | $ | 197,917 |
|
| 196,648 |
|
| $ | 591,045 |
|
| 581,213 |
| | 1 | % | | 2 | % |
| | | | | | | | | | | |
DTS EBT | $ | 13,770 |
| | 17,584 |
| | $ | 39,892 |
| | 48,300 |
| | (22 | )% | | (17 | )% |
DTS EBT as a % of DTS total revenue | 5.1 | % | | 6.7 | % | | 4.9 | % | | 6.3 | % | | (160) bps | | (140) bps |
DTS EBT as a % of DTS operating revenue (1) | 7.0 | % | | 8.9 | % | | 6.7 | % | | 8.3 | % | | (190) bps | | (160) bps |
| | | | | | | | | | | |
Memo: | | | | | | | | | | | |
Average fleet | 8,200 |
| | 8,300 |
| | 8,200 |
| | 8,200 |
| | (1 | )% | | — | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | | | | | Change 2020/2019 | | |
| 2020 | | 2019 | | | | | | Three Months | | |
| (In thousands) | | | | | | | | | | |
Automotive | $ | 171,741 | | | $ | 176,525 | | | | | | | (3)% | | |
Technology and healthcare | 57,666 | | | 78,751 | | | | | | | (27)% | | |
Consumer product goods and retail | 188,036 | | | 178,472 | | | | | | | 5% | | |
Industrial and other | 49,868 | | | 43,341 | | | | | | | 15% | | |
Subcontracted transportation | 135,728 | | | 127,995 | | | | | | | 6% | | |
Fuel | 25,408 | | | 30,587 | | | | | | | (17)% | | |
SCS total revenue | $ | 628,447 | | | $ | 635,671 | | | | | | | (1)% | | |
| | | | | | | | | | | |
SCS operating revenue (1) | $ | 467,311 | | | $ | 477,089 | | | | | | | (2)% | | |
| | | | | | | | | | | |
SCS EBT | $ | 31,025 | | | $ | 32,317 | | | | | | | (4)% | | |
SCS EBT as a % of SCS total revenue | 4.9% | | 5.1% | | | | | | (20) bps | | |
| | | | | | | | | | | |
SCS EBT as a % of SCS operating revenue (1) | 6.6% | | 6.8% | | | | | | (20) bps | | |
| | | | | | | | | | | |
Memo: | | | | | | | | | | | |
Average fleet | 9,600 | | 9,700 | | | | | | (1)% | | |
————————————
| |
(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. |
(1)Non-GAAP financial measures. Reconciliations of SCS total revenue to SCS operating revenue and SCS EBT as a % of SCS total revenue to SCS EBT as a % of SCS operating revenue, as well as the reasons why management believes these measures are important to investors are included in the “Non-GAAP Financial Measures” section of this MD&A.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -— (Continued)
The following table summarizes the components of the change in SCS revenue on a percentage basis versus the prior year:
| | | | | | | | | | | | | | | |
| Three months ended March 31, 2020 | | | | | | |
| Total | | Operating (1) | | | | |
Organic, including price and volume | (1)% | | (2)% | | | | |
Subcontracted transportation | 1% | | —% | | | | |
| | | | | | | |
| | | | | | | |
Fuel | (1)% | | —% | | | | |
Net increase (decrease) | (1)% | | (2)% | | | | |
————————————
(1)Non-GAAP financial measure. A reconciliation of SCS total revenue to SCS operating revenue, as well as the reasons why management believes this measure is important to investors is included in the "Non-GAAP Financial Measures" section of this MD&A.
SCS total revenue and operating revenue (a non-GAAP measure excluding fuel and subcontracted transportation) decreased 1% and 2%, respectively, in the first quarter reflecting lost business and lower volume in our automotive vertical due to production shutdowns related to the COVID-19 pandemic, partially offset by increased pricing and higher volumes in several verticals.
SCS EBT decreased 4% in the first quarter primarily due to the impacts of COVID-19, particularly in the automotive vertical, lost business and higher overhead costs, partially offset by higher pricing and increased volumes in non-automotive verticals. Higher overhead costs related to foreign currency remeasurement losses, favorable developments of insurance reserves recognized in the prior year and higher medical expenses.
SCS customer volumes in the automotive vertical have declined significantly due to production shutdowns beginning late in the first quarter related to the COVID-19 pandemic. Although our automotive customers generally expect to resume production in May, this is subject to change and could have a material effect on SCS revenue and earnings. Lower expected economic activity is anticipated to reduce customer volumes through at least the second quarter.
Dedicated Transportation Solutions
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | | | | | Change 2020/2019 | | |
| 2020 | | 2019 | | | | | | Three Months | | |
| (In thousands) | | | | | | | | | | |
DTS total revenue | $ | 334,888 | | | $ | 349,621 | | | | | | | (4)% | | |
| | | | | | | | | | | |
DTS operating revenue (1) | $ | 236,685 | | | $ | 235,620 | | | | | | | —% | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
DTS EBT | $ | 12,180 | | | $ | 17,412 | | | | | | | (30)% | | |
DTS EBT as a % of DTS total revenue | 3.6% | | 5.0% | | | | | | (140) bps | | |
| | | | | | | | | | | |
DTS EBT as a % of DTS operating revenue (1) | 5.1% | | 7.4% | | | | | | (230) bps | | |
| | | | | | | | | | | |
Memo: | | | | | | | | | | | |
Average fleet | 9,400 | | 9,500 | | | | | | (1)% | | |
————————————
(1)Non-GAAP financial measures. Reconciliations of DTS total revenue to DTS operating revenue and DTS EBT as a % of DTS total revenue to DTS EBT as a % of DTS operating revenue, as well as the reasons why management believes these measures are important to investors are included in the “Non-GAAP Financial Measures” section of this MD&A.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
The following table summarizes the components of the change in DTS revenue on a percentage basis versus the prior year:
| | | | | | | | | | | | | | | |
| Three months ended March 31, 2020 | | | | | | |
| Total | | Operating (1) | | | | |
Organic including price and volume | —% | | —% | | | | |
Subcontracted transportation | (3)% | | —% | | | | |
Fuel | (1)% | | —% | | | | |
Net increase (decrease) | (4)% | | —% | | | | |
|
| | | | | | | | | | | |
| Three months ended September 30, 2017 | | Nine months ended September 30, 2017 |
| Total | | Operating (1) | | Total | | Operating (1) |
Organic, including price and volume | 3 | % | | 1 | % | | 5 | % | | 2 | % |
Fuel | 1 |
| | — |
| | 1 |
| | — |
|
Net increase | 4 | % | | 1 | % | | 6 | % | | 2 | % |
————————————
| |
(1) | (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 to DTS operating revenue, as well as the reasons why management believes this measure is important to investors is included in the "Non-GAAP Financial Measures" section of this MD&A.
DTS total revenue decreased 4% in the first quarter due to lower subcontracted transportation and fuel revenue. DTS operating revenue (a non-GAAP measure excluding fuel and subcontracted transportation) slightly increased 4%in the first quarter primarily reflecting higher pricing and 1%, respectively, primarilyvolumes offset by lost business.
DTS EBT decreased 30% in the first quarter due to new business,higher overhead costs and a decrease in equipment contribution of $4 million (see further discussions on equipment contribution above), partially offset by one less work dayhigher pricing and volume. Higher overhead costs were attributable to favorable developments of insurance reserves recognized 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 vehicles 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. We expect DTS total revenue comparisons for the remainder of the year to be consistent with the prior year, higher medical expenses and higher bad debt expense.
Lower expected economic activity from COVID-19 is anticipated to reduce customer volumes through at least the second quarter, which will negatively impact DTS operating revenue comparisons to remain favorable through the end of the year. DTS EBT decreased 17%and EBT.
Central Support Services
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | | | | | Change 2020/2019 | | |
| 2020 | | 2019 | | | | | | Three Months | | |
| (In thousands) | | | | | | | | | | |
Human resources | $ | 5,853 | | | $ | 5,280 | | | | | | | 11% | | |
Finance and procurement | 19,239 | | | 18,007 | | | | | | | 7% | | |
Corporate services and public affairs | 1,984 | | | 2,320 | | | | | | | (14)% | | |
Information technology | 20,213 | | | 21,277 | | | | | | | (5)% | | |
Legal and safety | 7,963 | | | 6,947 | | | | | | | 15% | | |
Marketing | 5,275 | | | 4,732 | | | | | | | 11% | | |
Other | 8,202 | | | 9,210 | | | | | | | (11)% | | |
Total CSS | 68,729 | | | 67,773 | | | | | | | 1% | | |
Allocation of CSS to business segments | (59,343) | | | (55,226) | | | | | | | 7% | | |
Unallocated CSS | $ | 9,386 | | | $ | 12,547 | | | | | | | (25)% | | |
Total CSS costs slightly increased 1% in the nine months ended September 30, 2017, primarily due to higher maintenance costs on certain older model year vehicles and higher insurance costs duringfirst quarter. Unallocated CSS was $9 million in the first halfquarter, a decrease of 25% from the year.
Supply Chain Solutionsprior year period, primarily related to lower compensation-related expenses in 2020.
|
| | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | Change 2017/2016 |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | | Nine Months |
| (Dollars in thousands) | | | | |
Automotive | $ | 135,853 |
| | 140,785 |
| | $ | 420,113 |
| | 407,083 |
| | (4 | )% | | 3 | % |
Technology and healthcare | 68,008 |
| | 61,425 |
| | 194,561 |
| | 177,138 |
| | 11 |
| | 10 |
|
CPG and Retail | 130,528 |
| | 110,840 |
| | 365,185 |
| | 324,814 |
| | 18 |
| | 12 |
|
Industrial and other | 42,040 |
| | 32,403 |
| | 117,040 |
| | 90,392 |
| | 30 |
| | 29 |
|
Subcontracted transportation | 101,740 |
|
| 56,089 |
| | 279,326 |
| | 162,743 |
| | 81 |
| | 72 |
|
Fuel | 17,835 |
|
| 15,356 |
| | 53,252 |
| | 45,495 |
| | 16 |
| | 17 |
|
SCS total revenue | $ | 496,004 |
| | 416,898 |
|
| $ | 1,429,477 |
| | 1,207,665 |
| | 19 | % | | 18 | % |
| | | | | | | | | | | |
SCS operating revenue (1) | $ | 376,429 |
|
| 345,453 |
| | $ | 1,096,899 |
| | 999,427 |
| | 9 | % | | 10 | % |
| | | | | | | | | | |
|
|
SCS EBT | $ | 22,052 |
|
| 30,956 |
| | $ | 75,359 |
| | 79,105 |
| | (29 | )% | | (5 | )% |
SCS EBT as a % of SCS total revenue | 4.4 | % |
| 7.4 | % | | 5.3 | % | | 6.6 | % | | (300) bps | | (130) bps |
SCS EBT as a % of SCS operating revenue (1) | 5.9 | % |
| 9.0 | % | | 6.9 | % | | 7.9 | % | | (310) bps | | (100) bps |
| | | | | | | | | | | |
Memo: | | | | | | | | |
| | |
Average fleet | 7,900 |
| | 7,400 |
| | 7,800 |
| | 7,100 |
| | 7 | % | | 10 | % |
————————————
| |
(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)
FINANCIAL RESOURCES AND LIQUIDITY
Cash Flows
The following table summarizes the componentsis a summary of the change in SCS revenue on a percentage basis versus the prior year:our cash flows from continuing operations:
| | | | | | | | | | | |
| Three months ended March 31, | | |
| 2020 | | 2019 |
| (In thousands) | | |
Net cash provided by (used in): | | | |
Operating activities | $ | 438,586 | | | $ | 485,330 | |
Investing activities | (332,978) | | | (923,244) | |
Financing activities | 217,620 | | | 434,288 | |
Effect of exchange rate changes on cash | 725 | | | (1,551) | |
Net change in cash and cash equivalents | $ | 323,953 | | | $ | (5,177) | |
| | | |
| Three months ended March 31, | | |
| 2020 | | 2019 |
| (In thousands) | | |
Net cash provided by operating activities | | | |
Earnings (loss) from continuing operations | $ | (109,129) | | | $ | 45,890 | |
Non-cash and other, net | 599,779 | | | 469,513 | |
Collections on sales-type leases | 26,597 | | | 34,017 | |
Changes in operating assets and liabilities: | | | |
Receivables | (14,634) | | | 26,181 | |
Accounts payable | (25,707) | | | 18,586 | |
Changes in other assets and liabilities | (38,320) | | | (108,857) | |
Cash flows from operating activities from continuing operations | $ | 438,586 | | | $ | 485,330 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
| | | | | | | | | | | |
| Three months ended September 30, 2017 | | Nine months ended September 30, 2017 |
| Total | | Operating (1) | | Total | | Operating (1) |
Organic, including price and volume | 18 | % | | 8 | % | | 18 | % | | 10 | % |
Fuel | — |
| | — |
| | — |
| | — |
|
Foreign exchange | 1 |
| | 1 |
| | — |
| | — |
|
Net increase | 19 | % |
| 9 | % |
| 18 | % |
| 10 | % |
————————————
| |
(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%, and SCSCash provided by operating revenue (a non-GAAP measure excluding fuel and subcontracted transportation) increased 9%, primarily reflecting new business. SCS EBTactivities decreased 29%to $439 million in the third quarterthree months ended March 31, 2020 compared with $485 million in 2019, reflecting lower cash earnings along with higher working capital needs. Our working capital needs are primarily driven by the timing of 2017, primarily related to the performancecollections of two customer accounts, including a particularly challenging start-up. Additionally, results were impacted by higher overhead spending,our receivables and payments of our trade payables, as well as other changes in operating assets and liabilities. The unfavorable impact in receivables was primarily due to planned investmentslonger collection periods in information technologyour segments, which was impacted by COVID-19. The unfavorable impact from trade payables was due to timing of payments. In addition, the favorable impact from changes in other assets and sales.
Inliabilities was driven by lower payments related to our pension and compensation plans and a decrease in inventories in 2020. Cash used in investing activities decreased to $333 million in the ninethree months ended September 30, 2017, SCS total revenue increased 18%, reflecting organic growth. SCS operating revenue increased 10%March 31, 2020 compared with $923 million in 2019, primarily due to new business, increased volumes and higher pricing. We expect SCS total revenue and SCS operating revenue comparisonsa planned decrease in capital expenditures. Cash provided by financing activities decreased to remain favorable through the end of the year. SCS EBT decreased 5%$218 million in the ninethree months ended September 30, 2017, primarily related to a particularly challenging start-upMarch 31, 2020 compared with $434 million in the third quarter, higher costs incurred during the start-up phase of certain new accounts in the first half of the year, as well as planned investments in information technology and sales and higher compensation-related costs.
Central Support Services
|
| | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | Change 2017/2016 |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | | Nine Months |
| (Dollars in thousands) | | | | |
Human resources | $ | 3,778 |
| | 4,184 |
| | $ | 12,186 |
| | 12,968 |
| | (10 | )% | | (6 | )% |
Finance | 14,426 |
| | 15,143 |
| | 43,604 |
| | 44,267 |
| | (5 | ) | | (1 | ) |
Corporate services and public affairs | 2,618 |
| | 2,471 |
| | 7,612 |
| | 7,463 |
| | 6 |
| | 2 |
|
Information technology | 22,265 |
| | 20,466 |
| | 64,744 |
| | 60,369 |
| | 9 |
| | 7 |
|
Legal and safety | 6,246 |
| | 5,711 |
| | 19,109 |
| | 17,798 |
| | 9 |
| | 7 |
|
Marketing | 4,556 |
| | 4,336 |
| | 13,290 |
| | 14,220 |
| | 5 |
| | (7 | ) |
Other | 8,318 |
| | 4,911 |
| | 23,597 |
| | 19,317 |
| | 69 |
| | 22 |
|
Total CSS | 62,207 |
| | 57,222 |
|
| 184,142 |
| | 176,402 |
| | 9 |
| | 4 |
|
Allocation of CSS to business segments | (51,166 | ) |
| (47,947 | ) | | (151,177 | ) | | (146,442 | ) |
| 7 |
| | 3 |
|
Unallocated CSS | $ | 11,041 |
| | 9,275 |
|
| $ | 32,965 |
| | 29,960 |
|
| 19 | % | | 10 | % |
Total CSS costs increased 9% in the third quarter of 2017,2019 due to higher information technology, compensation-related and professional services costs associated with strategic initiatives. Total CSS costs increased 4% in the nine months ended September 30, 2017, due to higher information technology and professional services costs associated with strategic initiatives. Unallocated CSS increased 19% in the third quarter and 10% in the nine months ended September 30, 2017, driven by higher professional services costs associated with strategic initiatives.debt repayments.
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, |
| 2017 | | 2016 |
| (In thousands) |
Net cash (used in) provided by: | | | |
Operating activities | $ | 1,166,191 |
| | 1,185,062 |
|
Financing activities | (191,255 | ) | | (55,554 | ) |
Investing activities | (962,191 | ) | | (1,108,584 | ) |
Effect of exchange rates on cash | (5,226 | ) | | (5,567 | ) |
Net change in cash and cash equivalents | $ | 7,519 |
| | 15,357 |
|
Cash provided by operating activities decreased 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 million in the nine months ended September 30, 2017, compared with $56 million in 2016, due to lower borrowing needs from lower capital spending. Cash used in investing activities decreased to $962 million in the nine months ended September 30, 2017, compared with $1.11 billion in 2016, primarily due to lower payments for capital expenditures.
The following table shows our free cash flow computation: | | | | | | | | | Three months ended March 31, | |
| Nine months ended September 30, | | 2020 | | 2019 |
| 2017 | | 2016 | | (In thousands) | |
Net cash provided by operating activities | | Net cash provided by operating activities | $ | 438,586 | | | $ | 485,330 | |
Sales of revenue earning equipment (1) | | Sales of revenue earning equipment (1) | 101,099 | | | 101,549 | |
| (In thousands) | |
Net cash provided by operating activities from continuing operations | $ | 1,166,191 |
|
| 1,185,062 |
| |
Sales of revenue earning equipment (1) | 289,432 |
|
| 331,720 |
| |
Sales of operating property and equipment (1) | 12,541 |
|
| 6,623 |
| Sales of operating property and equipment (1) | 1,883 | | | 1,918 | |
Collections on direct finance leases and other items (1) | 54,227 |
|
| 60,229 |
| |
| Total cash generated (2) | 1,522,391 |
|
| 1,583,634 |
| Total cash generated (2) | 541,568 | | | 588,797 | |
Purchases of property and revenue earning equipment (1) | (1,312,845 | ) |
| (1,511,359 | ) | Purchases of property and revenue earning equipment (1) | (430,960) | | | (1,026,711) | |
Free cash flow (2) | $ | 209,546 |
|
| 72,275 |
| Free cash flow (2) | $ | 110,608 | | | $ | (437,914) | |
| | | | |
Memo: | | | | |
Net cash used in financing activities | $ | (191,255 | ) | | (55,554 | ) | |
Net cash used in investing activities | $ | (962,191 | ) | | (1,108,584 | ) | |
|
———————————
| |
(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. |
(1)Included in cash flows from investing activities.
(2)Non-GAAP financial measures. Reconciliations of net cash provided by operating activities to total cash generated and to free cash flow are set forth in this table. Refer to the “Non-GAAP Financial Measures” section of this MD&A for the reasons why management believes these measures are important to investors.
Free cash flow increased to $111 million in three months ended March 31, 2020 from a use of $438 million in 2019 primarily due to lower capital expenditures, partially offset by higher cash flows from operations in 2019.
Capital expenditures generally represent the purchase of revenue earning equipment (trucks, tractors and trailers) within our FMS segment. These expenditures primarily support the ChoiceLease and commercial rental product lines. The level of capital required to support the ChoiceLease product line varies based on customer contract signings for replacement vehicles and growth. These contracts are long-term agreements that result in predictable cash flows typically over three to seven years for trucks and tractors and ten years for trailers. We utilize capital for the purchase of vehicles in our commercial rental product line to replenish and expand the fleet available for shorter-term use by contractual or occasional customers. Operating property and equipment expenditures primarily relate to spending on items such as vehicle maintenance facilities and equipment, computer and telecommunications equipment, investments in technologies, and warehouse facilities and equipment.
The following table provides a summary of capital expenditures:
| | | | | | | | | | | |
| Three months ended March 31, | | |
| 2020 | | 2019 |
| (In thousands) | | |
Revenue earning equipment: | | | |
ChoiceLease | $ | 312,873 | | | $ | 817,027 | |
Commercial rental | 52,886 | | | 256,671 | |
| 365,759 | | | 1,073,698 | |
Operating property and equipment | 26,231 | | | 40,066 | |
Total capital expenditures (1) | 391,990 | | | 1,113,764 | |
Changes in accounts payable related to purchases of revenue earning equipment | 38,970 | | | (87,053) | |
Cash paid for purchases of property and revenue earning equipment | $ | 430,960 | | | $ | 1,026,711 | |
———————————
(1)Non-cash additions exclude approximately $4 million and $2 million during the three months ended March 31, 2020 and 2019, respectively, of assets held under finance leases resulting from new or the extension of existing finance leases and other additions.
Capital expenditures decreased 65% to $392 million in the three months ended March 31, 2020 reflecting lower planned investments in the ChoiceLease and rental fleets. In relation to the COVID-19 pandemic, we have cancelled or postponed vehicle orders, where possible, which will result in significantly reduced capital expenditures during 2020.
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, |
| 2017 | | 2016 |
| (In thousands) |
Revenue earning equipment: | | | |
ChoiceLease | $ | 985,541 |
| | 1,223,141 |
|
Commercial rental | 295,638 |
| | 79,204 |
|
| 1,281,179 |
| | 1,302,345 |
|
Operating property and equipment | 94,850 |
| | 101,837 |
|
Total capital expenditures | 1,376,029 |
|
| 1,404,182 |
|
Changes in accounts payable related to purchases of revenue earning equipment | (63,184 | ) | | 107,177 |
|
Cash paid for purchases of property and revenue earning equipment | $ | 1,312,845 |
|
| 1,511,359 |
|
Capital expenditures in the nine months ended September 30, 2017 of $1.38 billion, were largely unchanged from 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 2017 capital expenditures to be approximately $1.9 billion. We expect to fund 2017 capital expenditures primarily with internally generated funds and additional debt financing.
Financing and Other Funding Transactions
We utilize external capital primarily to support working capital needs and growth in our asset-based product lines. The variety of debt financing alternatives typically available to fund our capital needs include commercial paper, long-term and medium-term public and private debt, asset-backed securities, bank term loans, leasing arrangements and bank credit facilities. Our principal sources of financing are issuances of commercial paper and medium-term notes.
Cash and cash equivalents totaled $397 million as of March 31, 2020. As of March 31, 2020, approximately $36 million was held outside the U.S. and is available to fund operations and other growth of non-U.S. subsidiaries. If we decide to repatriate cash and cash equivalents held outside the U.S., we may be subject to additional income taxes and foreign withholding taxes. However, our intent is to permanently reinvest these foreign amounts outside the U.S. and our current plans do not demonstrate a need to repatriate these foreign amounts to fund our U.S. operations.
We believe that our operating cash flows, together with our access to the public debt.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 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 and/or by seeking other funding sources. In April 2020, in response to the COVID-19 pandemic, we issued $400 million of unsecured 4.625% medium-term notes maturing in June 2025 and executed a $400 million senior floating-rate unsecured 364-day term loan, which provides us with liquidity flexibility when combined with our $1.4 billion global revolving credit facility. The expanded liquidity will be used for working capital purposes and to fund debt maturities. As of April 28, 2020, we had a balance of cash and cash equivalents in the U.S. of approximately $1 billion as well as $565 million of availability under our global revolving credit facility and $100 million of availability under our trade receivable facility.
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 our 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 global 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, 2017,March 31, 2020 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Rating Summary | | | | | | | |
| Short-TermShort-term | | Long-TermShort-term Outlook | | | Long-term | | Long-term Outlook |
Fitch Ratings(1) | F-2F2 | | A-Stable | | | A- | | Stable |
Standard & Poor’s Ratings Services | A-2A2 | | BBB+Stable | | | BBB | | Stable |
Moody’s Investors Service | P-2P2 | | Baa1Stable | | | Baa1 | | Under Review |
DBRS | R-1 (Low) | | Stable | | | A (Low) | | Stable |
———————————
Cash and cash equivalents totaled $65 million as of September 30, 2017. (1)Subsequent to March 31, 2020, Fitch Ratings downgraded our long-term rating to BBB+ with a negative outlook.
As of September 30, 2017, approximately $29 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)
As of September 30, 2017,March 31, 2020, we had the following amounts available to fund operations under the following facilities:
| | | | | |
| (In millions) |
| |
| (In millions) |
Global revolving credit facility | $664 | 419 | |
Trade receivables program | $175 | — | |
See Note 6, "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:
|
| | | | | | |
| Nine months ended September 30, |
| 2017 | | 2016 |
| (In thousands) |
Debt balance at January 1 | $ | 5,391,274 |
| | 5,502,627 |
|
Cash-related changes in debt: | | | |
Net change in commercial paper borrowings | 2,153 |
| | 73,597 |
|
Proceeds from issuance of medium-term notes | 595,785 |
| | 298,254 |
|
Proceeds from issuance of other debt instruments | 277,517 |
| | — |
|
Retirement of medium term notes | (700,000 | ) | | (300,000 | ) |
Other debt repaid | (238,160 | ) | | (40,707 | ) |
Debt issuance costs paid | (1,379 | ) | | (622 | ) |
| (64,084 | ) | | 30,522 |
|
Non-cash changes in debt: | | | |
Fair value adjustment on notes subject to hedging | (3,168 | ) | | 8,960 |
|
Addition of capital lease obligations | 6,209 |
| | 948 |
|
Changes in foreign currency exchange rates and other non-cash items | 18,995 |
| | (23,416 | ) |
Total changes in debt | (42,048 | ) | | 17,014 |
|
Debt balance at September 30 | $ | 5,349,226 |
| | 5,519,641 |
|
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%23% and 17% as of September 30, 2017March 31, 2020 and December 31, 2016.2019, respectively.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Refer to Note 6, “Debt,10, “Debt,” in the Notes to Condensed 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’sOur debt to equity ratios were 246% ratio was 364% and 263%320% as of September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively. The debt to equity ratio represents total debt divided by total equity. The Company's target debtincrease is due to the reduction in equity related to higher non-cash depreciation expense from our estimated residual change in the third quarter of 2019. Debt to equity ratio is 250% to 300%.as of March 31, 2020 also reflects a higher than normal cash balance which increased debt-to-equity by an estimated 15 percentage points.
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 2017,2020, the expected total contributions to our pension plans are approximately $22$37 million. During the ninethree months ended September 30, 2017,March 31, 2020, we contributed $10.6$1 million to our pensionpension plans. Changes in interest rates and the market value of the securities held by the plans during 20172020 could materially change, positively or negatively, the funded status of the plans and affect the level of pension expense and contributions in 20172020 and beyond. As of March 31, 2020, we have experienced a decline in the market prices of our assets as a result of the COVID-19 pandemic and related economic downturn, which may have an adverse impact on our pension plans if it were to continue through the end of the year. As a result, our contributions may need to increase in 2021 and these changes may negatively impact accumulated other comprehensive income and shareholders’ equity on our balance sheet when it is remeasured in December 2020. See Note 12,15, “Employee Benefit Plans,” in the Notes to Condensed Consolidated Condensed Financial Statements for additional information.
Share Repurchases and Cash Dividends
See Note 11, “Share Repurchase Programs,” in the Notes to Condensed Consolidated Financial Statements for a discussion of share repurchases. The share repurchase program has been put on hold temporarily due to the impact of COVID-19.
In February 2020 and 2019, our Board of Directors declared quarterly cash dividends of $0.56 and $0.54 per share of common stock, respectively. The dividends were paid during the first quarter of each respective year.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions.Certain of these policies require the application of subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. These estimates and assumptions are based on historical experience, changes in the business environment and other factors that we believe to be reasonable under the circumstances. Different estimates that could have been applied in the current period or changes in the accounting estimates that are reasonably likely can result in a material impact on our financial condition and operating results in the current and future periods.
The following discussion, which should be read in conjunction with the descriptions in the Notes to Condensed Consolidated Financial Statements and our Annual Report on Form 10-K, is furnished for additional insight into certain accounting estimates that have been updated since our 2019 Annual Report.
Goodwill Impairment. We assess goodwill for impairment on October 1st of each year or more often if deemed necessary. In evaluating goodwill for impairment, we have the option to first assess qualitative factors to determine whether further impairment testing is necessary, such as macroeconomic conditions, changes in our industry and the markets in which we operate, and our market capitalization as well as our reporting units' historical and expected future financial performance. If we conclude that it is more likely than not that a reporting unit's fair value is less than its carrying value or we bypass the optional qualitative assessment, recoverability is assessed by comparing the fair value of the reporting unit with its carrying amount. If a reporting unit's carrying value exceeds its fair value, we will measure any goodwill impairment losses as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -— (Continued)
For quantitative tests, we estimate the fair value of the reporting units using a combination of both an income and market approach. We perform our quantitative impairment test with the assistance of a third-party specialist. Under the market approach, we use a selection of comparable publicly-traded companies that correspond to the reporting unit to derive a market-based multiple. Under the income approach, the fair value of the reporting unit is estimated based on the discounted present value of the projected future cash flows. Rates used to discount cash flows are dependent upon interest rates and the cost of capital based on our industry and capital structure, adjusted for equity and size risk premiums based on market capitalization. Estimates of future cash flows are dependent on our knowledge and experience about past and current events and significant judgments and assumptions about conditions we expect to exist, including revenue growth rates, margins, long-term growth rates, capital requirements, proceeds from the sale of used vehicles, the ability to utilize our tax net operating losses, and the discount rate. Our estimates of cash flows are also based on historical and future operating performance, economic conditions and actions we expect to take. In addition to these factors, our SCS and DTS reporting units are dependent on several key customers or industry sectors. The loss of a key customer may have a significant impact to our SCS or DTS reporting units, causing us to assess whether or not the event resulted in a goodwill impairment loss.
Share RepurchasesIn making our assessments of fair value, we rely on our knowledge and Cash Dividends
See Note 8, “Share Repurchase Programs,”experience about past and current events and assumptions about conditions we expect to exist in the Notesfuture. These assumptions are based on a number of factors, including future operating performance, economic conditions, actions we expect to Consolidated Condensed Financial Statementstake and present value techniques. There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of goodwill impairment. It is possible that assumptions underlying the impairment analysis will change in such a manner that impairment in value may occur in the future. We conduct additional sensitivity analyses to assess the risk for a discussion of share repurchases.potential impairment based upon changes in the key assumptions in our goodwill valuation test, including long-term growth rates and discount rates.
In October 2017,the first quarter of 2020, we performed an interim impairment test of our BoardFMS North America reporting unit (“FMS NA”) as a result of Directors declaredthe decline in market conditions and our updated outlook as a quarterlyresult of the impact of COVID-19. Our valuation of fair value for FMS NA was determined based on a discounted future cash dividendflow model (income approach) and the application of $0.46 per common sharecurrent market multiples for comparable publicly-traded companies (market approach). Based on our analysis, we determined that FMS NA goodwill was not impaired as of common stock.March 31, 2020, however the fair value was not substantially in excess of its carrying value. The estimated fair value of the FMS NA reporting unit exceeded its carrying value by approximately 5% as of March 31, 2020.
Given this level of fair value, in the event the financial performance of FMS NA does not meet our expectations in the future; we experience future prolonged market downturns, including in the used vehicle market or continued declines in our stock price; negative trends from the COVID-19 pandemic continue; or there are other negative revisions to key assumptions, we may be required to perform additional impairment analyses and could be required to recognize a non-cash goodwill impairment charge. As of March 31, 2020, there was $243 million of goodwill recorded related to FMS NA. As of March 31, 2020, we assessed that it was not more likely than not that our SCS and DTS reporting units fair value was less than its carrying value.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2, “Recent Accounting Pronouncements," in the Notes to Condensed 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 condensed 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.section or in our results and liquidity discussions above. 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:
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| | | | |
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 |
SCS EBT as a % of SCS Operating Revenue | SCS EBT as a % of SCS Total Revenue |
DTS EBT as a % of DTS Operating Revenue | DTS EBT as a % of DTS Total Revenue |
SCS EBT as a % of SCS Operating Revenue | SCS EBT as a % of SCS Total Revenue |
Comparable Earnings Measures: | |
Comparable Earnings (Loss) Before Income Tax | Earnings (Loss) Before Income Tax |
Comparable Earnings (Loss) | Earnings (Loss) from Continuing Operations |
Comparable EPS | EPS from Continuing Operations |
Comparable Tax Rate | Effective Tax Rate from Continuing Operations |
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. |
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| Operating Revenue Measures: Measures: | | | |
| Operating Revenue FMS Operating Revenue SCS Operating Revenue DTS Operating Revenue SCS Operating Revenue
FMS EBT as a % of FMS Operating Revenue SCS EBT as a % of SCS Operating Revenue DTS EBT as a % of DTS Operating Revenue SCS EBT as a % of SCS Operating Revenue
| Operating revenue is defined as total revenue for Ryder System, Inc. or each business segment (FMS, DTSSCS and SCS), respectively,DTS) excluding any (1) fuel and (2) subcontracted transportation.transportation, as well as (3) revenue from our ChoiceLease liability insurance program which was discontinued in early 2020. We believe operating revenue provides useful information to investors as we use it to evaluate the operating performance of our core businesses and as a measure of sales activity at the consolidated level for Ryder System, Inc., as well as for each of our business segments. We also use segment EBT as a percentage of segment operating revenue for each business segment for the same reason. Note: FMS EBT, DTSSCS EBT and SCSDTS EBT, our primary measures of segment performance, are not non-GAAP measures. Fuel:
Fuel: We exclude FMS, DTSSCS and SCSDTS fuel from the calculation of our operating revenue measures, as fuel is an ancillary service that we provide our customers, which is impacted by fluctuations in market fuel prices and the costs are largely a pass-through to our customers, resulting in minimal changes in our profitability during periods of steady market fuel prices. However, profitability may be positively or negatively impacted by rapid changes in market fuel prices during a short period of time, as customer pricing for fuel services is established based on trailing market fuel costs.
Subcontracted transportation:transportation: We also exclude subcontracted transportation from the calculation of our operating revenue measures, as these services are also typically a pass-through to our customers and, therefore, fluctuations result in minimal changes to our profitability. While our DTSSCS and SCSDTS business segments subcontract certain transportation services to third party providers, our FMS business segment does not engage in subcontracted transportation and, therefore, this item is not applicable to FMS.
ChoiceLease liability insurance: We exclude ChoiceLease liability insurance as we announced our plan in the first quarter of 2020 to exit the extension of our liability insurance coverage for ChoiceLease customers. The exit of this program is estimated to be completed in the second quarter of 2021. We are excluding the revenues associated with this program for better comparability of our on-going operations. | | |
| Comparable Earnings Measures: Measures: | | | |
| Comparable earnings (loss) before taxincome taxes (EBT) Comparable Earningsearnings (loss) Comparable earnings (loss) per diluted common share (EPS) Comparable tax rate
| 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: Costs: Our comparable earnings measures exclude non-operating pension costs, which include the amortization of net actuarial loss and prior service cost, interest cost and expected return on plan assets components of pension and postretirement benefit costs.costs, as well as a settlement or curtailment of a plan. We exclude non-operating pension costs because we consider these to be impacted by financial market performance and outside the operational performance of our business.
Other Significant Items Impacting Comparability: Our comparable and adjusted earnings measures also exclude other significant items that are not representative of our business operations.operations as detailed in the reconciliation table below. 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.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
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| (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: 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)
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Cash Flow Measures: 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: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: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”.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 ofand operating property and equipment, (4) collections on direct finance leases and (5)(3) other cash inflows from investing activities, less (6)(4) 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. * See Total Cash Generated and Free Cash Flow reconciliations in the Financial Resources and Liquidity section of Management's Discussion and Analysis. | | |
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 (loss) before taxes (EBT), earnings (loss), and earnings (loss) per diluted share (EPS) from continuing operations to comparable EBT, comparable earnings (loss) and comparable EPS from continuing operations which was not provided withinfor the MD&A discussion.
three months ended March 31, 2020 and 2019. 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 Condensed Consolidated Condensed Financial Statements:
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| EBT | | | | Earnings (Loss) | | | | Diluted EPS | | |
| 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
Three months ended March 31, | (In thousands, except per share amounts) | | | | | | | | | | |
Continuing operations (GAAP) | $ | (113,634) | | | $ | 68,151 | | | $ | (109,129) | | | $ | 45,890 | | | $ | (2.09) | | | $ | 0.87 | |
Non-operating pension costs | 1,221 | | | 6,462 | | | 100 | | | 4,562 | | | — | | | 0.09 | |
Restructuring and other, net (1) | 11,263 | | | 2,588 | | | 8,898 | | | 1,842 | | | 0.17 | | | 0.04 | |
ERP implementation costs (1) | 10,326 | | | 3,590 | | | 7,664 | | | 2,660 | | | 0.15 | | | 0.05 | |
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| | | | | | | | | | | |
Tax adjustments (2) | — | | | — | | | 20,363 | | | 3,508 | | | 0.39 | | | 0.06 | |
Comparable (non-GAAP) | $ | (90,824) | | | $ | 80,791 | | | $ | (72,104) | | | $ | 58,462 | | | $ | (1.38) | | | $ | 1.11 | |
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| 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 |
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Nine months ended September 30, | | | | | | | | | | | |
EBT/Earnings/EPS | $ | 234,991 |
| | 337,185 |
| | $ | 148,535 |
| | 215,365 |
| | $ | 2.79 |
| | 4.02 |
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Non-operating pension costs | 20,875 |
| | 22,023 |
| | 12,065 |
| | 12,857 |
| | 0.24 |
| | 0.24 |
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Pension settlement charge | 5,454 |
| | — |
| | 3,303 |
| | — |
| | 0.06 |
| | — |
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Fees related to cost-savings program | 4,255 |
| | — |
| | 2,740 |
| | — |
| | 0.05 |
| | — |
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Operating tax adjustment | 2,205 |
| | — |
| | 1,677 |
| | — |
| | 0.03 |
| | — |
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Restructuring | (2,574 | ) | | — |
| | (2,085 | ) | | — |
| | (0.04 | ) | | — |
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Tax law change - rate increase | — |
| | — |
| | 1,844 |
| | — |
| | 0.03 |
| | — |
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Pension-related adjustment | — |
| | 7,650 |
| | — |
| | 4,817 |
| | — |
| | 0.09 |
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Comparable EBT/ Earnings/ EPS | $ | 265,206 |
| | 366,858 |
| | $ | 168,079 |
| | 233,039 |
| | $ | 3.16 |
| | 4.35 |
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(1)Refer to Note 16, “Other Items Impacting Comparability,” in the Notes to Condensed Consolidated Financial Statements for additional information.
(2)In the three months ended March 31, 2020, we recorded charges of $7 million and $13 million to our tax provision for income taxes due to expiring state net operating losses and a valuation allowance on our U.K. deferred tax assets, respectively. 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 offset by a $1 million benefit to our provision due to a tax law change.
The following table provides a reconciliation of the provision for income taxes to the comparable provision for income taxes:
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| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (Dollars in thousands) |
Provision for income taxes (1) | $ | (35,430 | ) | | (46,560 | ) | | $ | (86,456 | ) | | (121,820 | ) |
Income tax effects of non-GAAP adjustments (1) | (4,760 | ) | | (3,023 | ) | | (10,671 | ) | | (11,999 | ) |
Comparable provision for income taxes (1) | $ | (40,190 | ) | | (49,583 | ) | | $ | (97,127 | ) | | (133,819 | ) |
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| Three months ended March 31, | | | | | | |
| 2020 | | 2019 | | | | |
| (In thousands) | | | | | | |
Benefit from (provision for) income taxes | $ | 4,505 | | | $ | (22,261) | | | | | |
Tax adjustments | 20,363 | | | | 3,508 | | | | | |
Income tax effects of non-GAAP adjustments | (6,148) | | | | (3,576) | | | | | |
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Comparable benefit from (provision for) income taxes (1) | $ | 18,720 | | | $ | (22,329) | | | | | |
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(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. |
(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.
The following table provides a reconciliation of total revenue to operating revenue:
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | | | |
| 2020 | | 2019 | | | | |
| (In thousands) | | | | | | |
Total revenue | $ | 2,161,306 | | | $ | 2,180,327 | | | | | |
Fuel | (178,748) | | | (216,543) | | | | | |
Subcontracted transportation | (201,953) | | | (204,777) | | | | | |
ChoiceLease liability insurance revenue (1) | (9,358) | | | (8,520) | | | | | |
Operating revenue | $ | 1,771,247 | | | $ | 1,750,487 | | | | | |
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(1)In the first quarter of 2020, we announced our plan to exit the extension of our liability insurance coverage for ChoiceLease customers. The exit of this program is estimated to be completed in the second quarter of 2021. We have revised our definition of operating revenues to exclude the revenues associated with this program for better comparability of our on-going operations.
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:
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| Nine months ended September 30, |
| 2017 | | 2016 |
| (In thousands) |
Net cash provided by operating activities from continuing operations | $ | 1,166,191 |
| | 1,185,062 |
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Sales of revenue earning equipment (1) | 289,432 |
| | 331,720 |
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Sales of operating property and equipment (1) | 12,541 |
| | 6,623 |
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Collections on direct finance leases and other items (1) | 54,227 |
| | 60,229 |
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Total cash generated | 1,522,391 |
| | 1,583,634 |
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Purchases of property and revenue earning equipment (1) | (1,312,845 | ) | | (1,511,359 | ) |
Free cash flow | $ | 209,546 |
| | 72,275 |
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Memo: | | | |
Net cash (used in) provided by financing activities | $ | (191,255 | ) | | (55,554 | ) |
Net cash used in investing activities | $ | (962,191 | ) | | (1,108,584 | ) |
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(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:
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| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In thousands) |
Total revenue | $ | 1,848,529 |
| | 1,724,418 |
| | $ | 5,389,906 |
| | 5,057,834 |
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Fuel | (175,106 | ) | | (162,293 | ) | | (519,979 | ) | | (464,176 | ) |
Subcontracted transportation | (147,970 | ) | | (93,832 | ) | | (416,159 | ) | | (269,639 | ) |
Operating revenue | $ | 1,525,453 |
| | 1,468,293 |
| | $ | 4,453,768 |
| | 4,324,019 |
|
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 | | 2020 | | 2019 | |
| (In thousands) | | (In thousands) | |
FMS total revenue | $ | 1,195,798 |
| | 1,155,011 |
| | $ | 3,491,847 |
| | 3,404,452 |
| FMS total revenue | $ | 1,340,237 | | | $ | 1,351,599 | | |
Fuel (1) | (169,787 | ) | | (157,108 | ) | | (505,055 | ) | | (448,987 | ) | Fuel (1) | (173,335) | | | (207,866) | | |
ChoiceLease liability insurance revenue (2) | | ChoiceLease liability insurance revenue (2) | (9,358) | | | (8,520) | | |
FMS operating revenue | $ | 1,026,011 |
| | 997,903 |
| | $ | 2,986,792 |
| | 2,955,465 |
| FMS operating revenue | $ | 1,157,544 | | | $ | 1,135,213 | | |
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FMS EBT | $ | 100,693 |
| | 112,507 |
| | $ | 220,973 |
| | 306,554 |
| FMS EBT | $ | (114,574) | | | $ | 60,911 | | |
FMS EBT as a % of FMS total revenue | 8.4 | % | | 9.7 | % | | 6.3 | % | | 9.0 | % | FMS EBT as a % of FMS total revenue | (8.5) | % | | 4.5 | % | |
FMS EBT as a % of FMS operating revenue | 9.8 | % | | 11.3 | % | | 7.4 | % | | 10.4 | % | FMS EBT as a % of FMS operating revenue | (9.9) | % | | 5.4 | % | |
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(1) | Includes intercompany fuel sales from FMS to DTS and SCS. |
(1)Includes intercompany fuel sales from FMS to DTS and SCS.
(2)In the first quarter of 2020, we announced our plan to exit the extension of our liability insurance coverage for ChoiceLease customers. The exit of this program is estimated to be completed in the second quarter of 2021. We have revised our definition of operating revenues to exclude the revenues associated with this program for better comparability of our on-going operations.
The following table provides a reconciliation of SCS total revenue to SCS operating revenue:
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | | | |
| 2020 | | 2019 | | | | |
| (In thousands) | | | | | | |
SCS total revenue | $ | 628,447 | | | $ | 635,671 | | | | | |
Subcontracted transportation | (135,728) | | | (127,995) | | | | | |
Fuel | (25,408) | | | (30,587) | | | | | |
SCS operating revenue | $ | 467,311 | | | $ | 477,089 | | | | | |
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SCS EBT | $ | 31,025 | | | $ | 32,317 | | | | | |
SCS EBT as a % of SCS total revenue | 4.9 | % | | 5.1 | % | | | | |
SCS EBT as a % of SCS operating revenue | 6.6 | % | | 6.8 | % | | | | |
The following table provides a reconciliation of DTS total revenue to DTS operating revenue:
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| Three months ended March 31, | | | | | | |
| 2020 | | 2019 | | | | |
| (In thousands) | | | | | | |
DTS total revenue | $ | 334,888 | | | $ | 349,621 | | | | | |
Subcontracted transportation | (66,225) | | | (76,782) | | | | | |
Fuel | (31,978) | | | (37,219) | | | | | |
DTS operating revenue | $ | 236,685 | | | $ | 235,620 | | | | | |
| | | | | | | |
DTS EBT | $ | 12,180 | | | $ | 17,412 | | | | | |
DTS EBT as a % of DTS total revenue | 3.6 | % | | 5.0 | % | | | | |
DTS EBT as a % of DTS operating revenue | 5.1 | % | | 7.4 | % | | | | |
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:
|
| | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In thousands) |
DTS total revenue | $ | 272,334 |
| | 260,921 |
| | $ | 811,620 |
| | 764,025 |
|
Subcontracted transportation | (46,230 | ) | | (37,743 | ) | | (136,833 | ) | | (106,896 | ) |
Fuel | (28,187 | ) | | (26,530 | ) | | (83,742 | ) | | (75,916 | ) |
DTS operating revenue | $ | 197,917 |
| | 196,648 |
| | $ | 591,045 |
| | 581,213 |
|
| | | | | | | |
DTS EBT | $ | 13,770 |
| | 17,584 |
| | $ | 39,892 |
| | 48,300 |
|
DTS EBT as a % of DTS total revenue | 5.1 | % | | 6.7 | % | | 4.9 | % | | 6.3 | % |
DTS EBT as a % of DTS operating revenue | 7.0 | % | | 8.9 | % | | 6.7 | % | | 8.3 | % |
The following table provides a reconciliation of SCS total revenue to SCS operating revenue, which was not provided within the MD&A discussion:
|
| | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In thousands) |
SCS total revenue | $ | 496,004 |
| | 416,898 |
| | $ | 1,429,477 |
| | 1,207,665 |
|
Subcontracted transportation | (101,740 | ) | | (56,089 | ) | | (279,326 | ) | | (162,743 | ) |
Fuel | (17,835 | ) | | (15,356 | ) | | (53,252 | ) | | (45,495 | ) |
SCS operating revenue | $ | 376,429 |
| | 345,453 |
| | $ | 1,096,899 |
| | 999,427 |
|
| | | | | | | |
SCS EBT | $ | 22,052 |
| | 30,956 |
| | $ | 75,359 |
| | 79,105 |
|
SCS EBT as a % of SCS total revenue | 4.4 | % | | 7.4 | % | | 5.3 | % | | 6.6 | % |
SCS EBT as a % of SCS operating revenue | 5.9 | % | | 9.0 | % | | 6.9 | % | | 7.9 | % |
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 of the impact of the COVID-19 pandemic on our financial results and operations, including with regard to our revenue, cash flows, commercial rental demand, residual values and depreciation assumptions, and lease sales;
•our expectations in our FMS business segment regarding anticipated ChoiceLease revenue and commercial rental revenue and demand;
•our expectations in our DTSSCS and SCSDTS business segments regarding anticipated totalcustomer volumes, revenue and operating revenue trends and growth rates;earnings;
•our expectations of the long-term residual values of revenue earning equipment;
•the anticipated decline in NLE vehicles inexpected pricing, demand and inventory through the end of the year;levels for used vehicles;
•our expectations of operating cash flow and capital expenditures through the end of 2017;2020;
•the adequacy of our accounting estimates and reserves for pension expense, compensation expense and employee benefit plan obligations, depreciation and residual value guarantees, goodwill impairment, accounting changes, and income taxes;
•our expected future contractual cash obligations and commitments;
•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;
•our expected level of use and availability of outside funding sources and anticipated future payments under debt and lease agreements;
•our beliefs regarding our credit ratings;
•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 and exchange rate fluctuations;
•our expectations as to return on pension plan assets, future pension expense and estimated contributions;
•our expectations regarding the scope and anticipated outcomes and the adequacy of our loss provisions with respect to certain claims, proceedingscomplaints and lawsuits;legal proceedings;
•the ultimate disposition of estimated environmental liabilities;
•our expectations about the need to repatriate foreign cash to the U.S.;
•our ability to access commercial paper and other available debt financing in the capital markets;
•our expected cost savings from workforce reductions and restructuring actions;
•our expectations regarding restructuring charges;
•the status of our unrecognized tax benefits related to the U.S. federal, state and foreign tax positions;
•our estimates for self-insurance loss reserves;
•our expectations regarding the future usecompletion and availabilityultimate outcome of funding sources;certain tax audits; 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:
•The severity and duration of the COVID-19 pandemic and the governmental responses thereto.
•Changes in general economic and financial conditions in the U.S. and worldwide leading to decreased demand for our services, lower profit margins, increased levels of bad debt and reduced access to credit and financial markets.
•Decreases in freight demand which would impact both our transactional and variable-based contractual business.
•Changes in our customers’ operations, financial condition or business environment that may limit their demand for, or ability to purchase, our services.
•Decreases in market demand affecting the commercial rental market and used vehicle sales as well as global economic conditions.
•Volatility in customer volumes and shifting customer demand in the industries serviced by our SCS business.
•Changes in current financial, tax or regulatory requirements that could negatively impact our financial results.
•Competition:
•Advances in technology may impact demand for our services or may require increased investments to remain competitive, and our customers may not be willing to accept higher prices to cover the cost of these investments.
•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.
•Continued consolidation in the markets in which we operate which may create large competitors with greater financial resources.
•Our inability to maintain current pricing levels due to economic conditions, demand for services, customer acceptance or competition.
•Profitability:
•Our inability to obtain adequate profit margins for our services.
•Lower than expected sales volumes or customer retention levels.
•Decreases in commercial rental fleet utilization and pricing.
•Lower than expected used vehicle sales pricing levels and fluctuations in the anticipated proportion of retail versus wholesale sales.
•Loss of key customers in our SCS and DTS business segments.
•Our inability to adapt our product offerings to meet changing consumer preferences on a cost-effective basis.
•The inability of our legacy information technology systems to provide timely access to data.
•Sudden changes in fuel prices and fuel shortages.
•Higher prices for vehicles, diesel engines and fuel as a result of new environmental standards.
•Higher than expected maintenance costs and lower than expected benefits associated with our maintenance initiatives.
•Our inability to successfully execute our asset management initiatives, maintain our fleet at normalized levels and right-size our fleet in line with demand.
•Our key assumptions and pricing structure of our SCS and DTS contracts prove to be inaccurate.
•Increased unionizing, labor strikes and work stoppages.
•Difficulties in attracting and retaining drivers and technicians due to driver and technician shortages, which may result in higher costs to procure drivers and technicians and higher turnover rates affecting our customers.
•Our inability to manage our cost structure.
•Our inability to limit our exposure for customer claims.
•Unfavorable or unanticipated outcomes legal or regulatory proceedings or uncertain positions.
|
| | | |
| 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 |
|
| | | |
| 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 need for, or ability to purchase, our services |
|
| | | |
| Ÿ | | Further decreases in market demand affecting the commercial rental market and used vehicle sales as well as global economic conditions |
|
| | | |
| Ÿ | | Volatility in customer volumes and shifting customer demand in the industries serviced by our SCS business |
|
| | | |
| Ÿ | | Changes in current financial, tax or regulatory requirements that could negatively impact the leasing market |
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 |
|
| | | |
| 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)
•Business interruptions or expenditures due to severe weather or natural occurrences.
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, and values of used vehicles |
|
| | | |
| 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 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 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 |
•Unanticipated interest rate and currency exchange rate fluctuations.•Negative funding status of our pension plans caused by lower than expected returns on invested assets and unanticipated changes in interest rates. |
| | | |
| Ÿ | | Unanticipated interest rate and currency exchange rate fluctuations |
•Withdrawal liability as a result of our participation in multi-employer plans.•Instability in U.S. and worldwide credit markets, resulting in higher borrowing costs and/or reduced access to credit. |
| | | |
| 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:
•Reductions in residual values or useful lives of revenue earning equipment. |
| | | |
| Ÿ | | Impact of unusual items resulting from ongoing evaluations of business strategies, asset valuations, acquisitions, divestitures and our organizational structure |
•Increases in compensation levels, retirement rate and mortality resulting in higher pension expense; regulatory changes affecting pension estimates, accruals and expenses.•Changes in accounting rules, assumptions and accruals. |
| | | |
| Ÿ | | Reductions in residual values or useful lives of revenue earning equipment |
•Difficulties and delays in implementing our Enterprise Resource Planning system and related processes. |
| | | |
| 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 20162019 Annual Report on Form 10-K.10-K and in "Item 1A.-Risk Factors" of this Quarterly Report.
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, 2016.2019. Please refer to the 20162019 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 2017,2020, 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 2017,2020, 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
During the three months ended September 30, 2017,March 31, 2020, 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. Risk Factors of our Annual Report on Form 10-K, filed with the SEC on February 27, 2020, includes a discussion of our risk factors. The information presented below updates, and should be read in conjunction with, the risk factors and information disclosed in our Form 10-K. 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, as presented below, there have been no material changes in the risk factors described in our Form 10-K.
The coronavirus pandemic has adversely impacted, and is expected to continue to adversely impact, our business, results of operations and financial condition, and the ultimate impact on our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted.
Our business is highly susceptible to changes in economic conditions. Our products and services are directly tied to the production and sale of goods and, more generally, to the North American economy. The rapid spread of the novel coronavirus (COVID-19), and the measures taken in response, have severely disrupted economic and commercial activity tied to the production and sale of goods, which have impacted supply chains and routes, and, as a result, transportation and supply chain companies such as ours have experienced slowdowns and reduced demand.
Furthermore, quarantines, shelter in place orders, labor shortages due to illness and otherwise, business and facility closures or other disruptions to our operations, or our customers’ operations, have also adversely impacted demand for our services and our ability to provide services to our customers. We have seen deterioration in our Supply Chain Solutions (SCS) volumes primarily due to production shut downs in the automotive industry which represents a significant portion of our SCS revenue. Although our automotive customers generally expect to resume production in May, this is subject to change based upon evolving conditions related to the pandemic. This could have a material negative impact on our SCS revenues and earnings.
We are seeing varying impacts with our SCS customers in non-automotive industries as well as with our Dedicated Transportation Solutions (DTS) customers, with some customers and industries experiencing lower volumes and others like consumer packaged goods experiencing significant volume increases. However, due to the expected reduction in economic activity, we expect to have net lower volumes for SCS/DTS customers through the second quarter of 2020. Lower volumes and revenues in our non-automotive SCS industries and in DTS have a lesser impact on our earnings as our fees are less transaction based.
Furthermore, as a result of government actions taken, such as mandated shelter in place orders as well as the significant reduction in business activity across the United States, demand for our commercial rental trucks has decreased significantly negatively impacting our earnings. If such decrease in demand were to continue for a prolonged period or further deteriorate, it could have further adverse impacts on our financial results. We have also experienced a furthering weakening of market conditions in used vehicle sales, requiring us to increase accelerated depreciation and write down the value of used vehicles in our inventory at quarter-end to reflect lower expected pricing. We expect demand for our used vehicles to be adversely affected through the remainder of 2020 and, any further decline in demand or in the event such decline in demand were to continue for a prolonged period, it could have an adverse impact on our financial results.
With respect to our ChoiceLease product line, our customers have signed long-term lease contracts and, therefore, we do not expect our revenue and cash flows to be materially affected provided our customers remain solvent and continue to make their payments on their contractual obligations. However, there is no guarantee that this trend will continue, as the COVID-19 pandemic may impact our customers' solvency, ability to make payments and spending decisions. We are also expecting a decrease in new ChoiceLease sales and any prolonged decrease in sales activity could adversely affect our growth prospects.
The extent to which the COVID-19 outbreak impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to the duration, spread, severity and impact of the COVID-19 outbreak, the effects of the outbreak on our customers and suppliers and the remedial actions and stimulus measures adopted by local and federal governments, and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result of any economic recession or depression that has occurred or may occur in the future. Furthermore, the financial condition of our customers may be adversely impacted which may result in an increase in bankruptcies or insolvencies, or a delay in payments, which may, in turn, impact our business, results of operations and financial condition.
We have established additional bad debt reserves due to our expectations for slower COVID-19 related payment activity with certain customers and may need to increase our bad debt reserves if economic conditions worsen for our customers. Further, in the event of a prolonged material economic downturn which has a material negative impact on our earnings and free cash flow, we may not be able to comply with our financial covenant in our global revolving credit facility which, in the absence of a bank waiver, would negatively impact our ability to borrow under that facility and negatively impact our liquidity position.
We periodically evaluate factors, including, but not limited to macroeconomic conditions, changes in our industry and the markets in which we operate and our market capitalization, as well as our reporting units’ expected future financial performance for purposes of evaluating asset impairments, including goodwill. We believe that the impact of COVID-19 will negatively affect certain key assumptions used in our analysis; however, we will need to assess the severity and nature of the long-term impacts to determine if we may be required to record charges for asset impairments in the future. While we have undertaken an interim goodwill impairment test related to our FMS NA reporting unit as of March 31, 2020 and concluded that no impairment was necessary, we may determine that impairment is necessary in future periods. At this time, it remains uncertain whether and to what extent we may need to record charges for impairments in the future as a result of the ongoing COVID-19 outbreak.
In addition to the operational impacts described above, the COVID-19 pandemic may present or heighten other operational risks to our business. Remote working arrangements may decrease employee productivity, increase cybersecurity risks and the strain on our technology systems and adversely affect our internal controls over financial reporting. Further, our business may be adversely affected if key personnel become ill from COVID-19 and are unable to work.
In addition, due to the increase in claims as a result of the impacts of the COVID-19 pandemic, insurance companies may limit or stop offering coverage to companies like ours or increase the cost of such insurance so that it is no longer available at commercially reasonable rates. This trend could adversely affect our ability to obtain suitable insurance coverage or increase the cost for such coverage significantly, each of which may adversely affect our financial condition, results of operations, liquidity or cash flows.
To the extent to which the COVID-19 outbreak adversely affects our business, results of operations and financial condition, it may also have the effect of heightening many of the other risks described in the section entitled Risk Factors of our 2019 Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q.
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, 2017:March 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2020 | — | | | $ | — | | | — | | | 1,500,000 | |
February 1 through February 29, 2020 | 384,724 | | | 41.30 | | | 303,098 | | | 1,196,902 | |
March 1 through March 31, 2020 | 1,660 | | | 36.09 | | | — | | | 1,196,902 | |
Total | 386,384 | | | $ | 41.28 | | | 303,098 | | | |
|
| | | | | | | | | | | | |
| 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 |
| | |
————————————
| |
(1) | During the three months ended September 30, 2017, we purchased an aggregate of 8,892 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, our Board of Directors authorized a new share repurchase program intended to mitigate the dilutive impact of shares issued under our employee stock plans. Under the December 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's employee stock plans from December 1, 2015 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. 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 Ryder 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. |
(1)During the three months ended March 31, 2020, we purchased an aggregate of 83,286 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 2019, our Board of Directors authorized a new share repurchase program intended to mitigate the dilutive impact of shares issued under our employee stock plans. Under the December 2019 program, management is authorized to repurchase up to 1.5 million shares of common stock issued to employees under our employee stock plans from December 1, 2019 to December 11, 2021. Share repurchases are made periodically in open-market transactions using the Company's working capital, and are subject to market conditions, legal requirements, and other factors. In addition, management has been granted the authority to establish prearranged written trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934 as part of the repurchase program. The share repurchase program has been put on hold temporarily due to the impact of COVID-19.
ITEM 6. EXHIBITS
|
| | | | | | | |
Exhibit Number | | Description |
12.1 |
| | |
31.1 | | |
31.1 |
| | |
| | |
31.2 |
| | |
| | |
32 |
| | |
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101.INS | | XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document |
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101.SCH | | XBRL Taxonomy Extension Schema Document |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
| | |
104 | | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101). |
| | |
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) | |
| | |
| RYDER SYSTEM, INC. |
Date: | (Registrant)May 1, 2020 | By: | /s/ Scott T. Parker |
| | | Scott T. Parker |
Date: October 24, 2017 | By: | /s/ Art A. Garcia |
| | Art A. Garcia |
| | Executive Vice President and Chief Financial Officer |
| | | (Principal Financial Officer) |
| | | |
Date: October 24, 2017 | May 1, 2020 | By: | /s/ Frank J. Mullen |
| | | Frank J. Mullen |
| | | Vice President and Controller |
| | | (Principal Accounting Officer) |
| | | |
| | | |
| | | |
| | | |
| | | |