A class action lawsuit has been filed on behalf of the Key West Police & Fire Pension Fund against Ryder System Inc. alleging the transport company and its top executives committed securities fraud by overstating the residual value of its trucking fleet, which artificially inflated its financial results.
According to the complaint, which also names CEO Robert Sanchez, former chief financial officer (CFO) Art Garcia, and current CFO Scott Parker as defendants, the company assigns residual values to its trucks for depreciation purposes and then sells those vehicles at the end of their useful lives. Ryder calculates its depreciation expense by subtracting the residual value from the present value of its trucks and dividing that number by the number of years in the trucks’ useful lives.
The higher the residual value assigned to Ryder’s trucking fleet, the less depreciation expense the company records, which increases its pre-tax earnings on a dollar-for-dollar basis. The lawsuit alleges that Ryder overstated the residual value of its trucking fleet, which allowed it to record smaller depreciation expenses on those assets each year, and thus artificially inflated Ryder’s earnings.
According to the complaint, Ryder represented to investors that its 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.
“While Ryder kept increasing the expected residual value of its trucking fleet, the actual amount Ryder was receiving from sales of its used trucks had started to decrease beginning in 2015,” the complaint said.
The lawsuit cites a company earnings call in July 2016 during which Sanchez said that he “wouldn’t envision an increase or decrease in residual values out over the next four, five years” when asked about the residual values of the company’s trucks.
“These and similar statements during the class period were false and misleading because defendants knew or recklessly disregarded that the residual values that Ryder assigned to its trucking fleet were grossly overstated,” the complaint said. “As a result of these misrepresentations, shares of Ryder common stock traded at artificially inflated prices during the class period,” which is from July 23, 2015 to Feb. 13, 2020.
According the lawsuit, the “truth emerged” through a series of disclosures beginning at the end of July 2019 when Ryder “drastically reduced” its full-year 2019 earnings forecast, which management attributed primarily to declining valuations of its trucks.
In October 2019, in its earnings report for the third quarter of 2019 Ryder said “our residual value estimates likely exceeded the expected future values that would be realized upon the sale of power vehicles in our fleet.” As a result, Ryder lowered the residual value of its trucking fleet and incurred $177 million in additional depreciation expenses in the third quarter of 2019.
The lawsuit alleges that as a result of the October 2019 disclosure and another in February of this year, the price of Ryder common stock “declined precipitously.”
In response to a request for a comment on the lawsuit and its allegations, a spokesperson for Ryder said the company does not comment on pending litigation.