Ryder faces securities lawsuit for misrepresenting truck values

Ryder is facing a multimillion dollar federal lawsuit filed by shareholders for allegedly cooking its books that artificially raised stock prices, which dropped once the error was discovered.

On May 20, the Key West Police and Fire Pension Fund filed a securities class action lawsuit against Miami, Fla.-based Ryder Systems Inc. The lawsuit claims that Ryder violated the Securities Exchange Act. Plaintiffs include those that purchased shares between July 2015 and February 2020. The complaint was filed in the U.S. District Court of the Southern District of Florida.

The lawsuit claims that Ryder misrepresented the value of its truck assets. For each year between 2011 and 2016, Ryder allegedly adjusted residual values of truck assets from $10 million to $40 million higher, according to the complaint. A residual value is the actual value of an asset after factoring in depreciation.

By increasing the residual value, Ryder was able to decrease the incremental depreciation charge ire records on an asset each year. According to the lawsuit, depreciation is calculated as the present value of the asset, minus the residual value, divided by the number of years in the asset’s useful life. Therefore, the higher a company reports its assets’ residual value, the less depreciation the company must record per year. Consequently, this will increase earnings on a dollar-for-dollar basis.

As a result, the company received a benefit valued at $158 million, or $1.92 per share, over the six-year span.

“Defendants misrepresented Ryder’s true financial condition by overstating the residual value of its trucking fleet, which allowed the company to record smaller depreciation expense on those assets each year, and artificially inflated Ryder’s earnings,” shareholders allege in the lawsuit.

The shareholders’ lawsuit further claims that this false information was presented to investors to suggest Ryder’s financial results “benefited from lower depreciation associated with increased residual values” and that it had been “conservative” in establishing the residual values of its vehicles. However, the lawsuit claims that while Ryder was increasing the expected residual value of its trucking fleet, the actual amount it was receiving from sales of the used trucks began to decrease beginning in 2015.

Despite the decreasing sales price, Ryder CEO Robert Sanchez told a different story when asked about residual values during a July 2016 earning call.

“I wouldn’t envision an increase or decrease in residual values out over the next four, five years,” Sanchez said then.

It July 2019, when Ryder reduced its full-year 2019 earnings forecast. Management indicated that the majority of the lowered amount reflected Ryder’s weaker valuations of its tractors. Consequently, the company’s stock price plummeted by 10% from $59.32 per share to $53.38 per share. That was not the end of the damage, the lawsuit contends.

In October 2019, Ryder made further statements regarding the lower residual value estimates. Subsequently, it lowered the residual values of all vehicles. This led to $177 million in additional depreciation expenses in the third quarter of that year. As a result, Ryder’s stock dropped by more than 12% within two trading days from $55.12 per share to $48.44. Again, there was more, according to the lawsuit.

In February 2020, Ryder revealed the effects of the significant reductions to truck residual values. The company had incurred $357 million in depreciation expense for 2019. Additionally, Ryder reported a loss of about $58 million on the sale of used vehicles. Furthermore, Ryder expects to experience another $275 million in depreciation expense for 2020.  Another $20 million in losses on used vehicle sales also is expected. This revelation led to a 20% decrease in stock value in just two days from $50.19 to $40.12.

Ryder’s operations are split into three main segments: fleet management solutions, dedicated transportation solutions and supply chain solutions. At the heart of the case is the fleet management solutions segment, which provides tractor and trailer leasing.

According to the lawsuit, the fleet management solutions segment accounts for about 60% of companywide revenue.

The lawsuit accuses Ryder of two counts of violating the Securities Exchange Act. Plaintiffs are seeking compensatory damages to be determined by a jury trial. In addition to Sanchez, former Ryder Chief Financial Officer Art Garcia and current CFO Scott Parker also are named defendants.