Document
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016
OR
¨
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

ryderlogoeverbetterwtma09.jpg
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)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ        NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ        NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
 
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) ¨ YES   þ NO

The number of shares of Ryder System, Inc. Common Stock ($0.50 par value per share) outstanding at September 30, 2016 was 53,468,413.
 
 
 
 
 



RYDER SYSTEM, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
 
 
 
 
 
 
Page No.  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


i


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(unaudited)

 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands, except per share amounts)
Lease and rental revenues
$
803,006

 
802,881

 
$
2,369,147

 
2,310,951

Services revenue
801,004

 
734,803

 
2,345,922

 
2,165,677

Fuel services revenue
120,408

 
131,382

 
342,765

 
422,522

Total revenues
1,724,418

 
1,669,066

 
5,057,834

 
4,899,150

 
 
 
 
 
 
 
 
Cost of lease and rental
557,901

 
550,541

 
1,665,693

 
1,600,271

Cost of services
658,793

 
606,364

 
1,936,636

 
1,792,182

Cost of fuel services
116,904

 
129,562

 
331,283

 
408,027

Other operating expenses
27,997

 
26,957

 
85,944

 
88,912

Selling, general and administrative expenses
198,805

 
203,093

 
632,466

 
624,566

Gains on used vehicles, net
(1,873
)
 
(24,965
)
 
(33,002
)
 
(82,158
)
Interest expense
37,440

 
38,986

 
112,597

 
114,863

Miscellaneous income, net
(3,247
)
 
(1,372
)
 
(10,968
)
 
(5,037
)
 
1,592,720

 
1,529,166

 
4,720,649

 
4,541,626

Earnings from continuing operations before income taxes
131,698

 
139,900

 
337,185

 
357,524

Provision for income taxes
46,560


49,089

 
121,820

 
127,470

Earnings from continuing operations
85,138


90,811

 
215,365

 
230,054

Loss from discontinued operations, net of tax
(386
)
 
(192
)
 
(1,069
)
 
(1,487
)
Net earnings
$
84,752

 
90,619

 
$
214,296

 
228,567

 
 
 
 
 
 
 
 
Earnings (loss) per common share — Basic
 
 
 
 
 
 
 
Continuing operations
$
1.60

 
1.71

 
$
4.05

 
4.35

Discontinued operations
(0.01
)
 
—

 
(0.02
)
 
(0.03
)
Net earnings
$
1.60

 
1.71

 
$
4.03

 
4.32

 
 
 
 
 
 
 
 
Earnings (loss) per common share — Diluted
 
 
 
 
 
 
 
Continuing operations
$
1.59

 
1.70

 
$
4.02

 
4.31

Discontinued operations
(0.01
)
 
—

 
(0.02
)
 
(0.03
)
Net earnings
$
1.59

 
1.69

 
$
4.00

 
4.28

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.44

 
0.41

 
$
1.26

 
1.15


See accompanying notes to consolidated condensed financial statements.

Note: EPS amounts may not be additive due to rounding


1

RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)

    
    
 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
 
 
 
 
 
 
 
 
Net earnings
$
84,752

 
90,619

 
$
214,296

 
228,567

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustment and other
(19,296
)
 
(42,748
)
 
(37,874
)
 
(73,093
)
 
 
 
 
 
 
 
 
Amortization of pension and postretirement items
7,171

 
6,873

 
22,040

 
20,765

Income tax expense related to amortization of pension and postretirement items
(2,667
)
 
(2,412
)
 
(7,854
)
 
(7,226
)
Amortization of pension and postretirement items, net of tax
4,504

 
4,461

 
14,186

 
13,539

 
 
 
 
 
 
 
 
Change in net actuarial loss and prior service cost
—

 
—

 
(17,367
)
 
(8,526
)
Income tax benefit related to change in net actuarial loss and prior service cost
—

 
—

 
6,345

 
3,205

Change in net actuarial loss and prior service cost, net of taxes
—

 
—

 
(11,022
)
 
(5,321
)
 
 
 
 
 
 
 
 
Other comprehensive loss, net of taxes
(14,792
)
 
(38,287
)
 
(34,710
)
 
(64,875
)
 
 
 
 
 
 
 
 
Comprehensive income
$
69,960

 
52,332

 
$
179,586

 
163,692

See accompanying notes to consolidated condensed financial statements.




2


RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
 
 
September 30,
2016
 
December 31,
2015
 
(Dollars in thousands, except per
share amount)
Assets:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
74,994


60,945

Receivables, net of allowance of $14,911 and $15,560, respectively
856,763


835,489

Inventories
67,335


63,725

Prepaid expenses and other current assets
138,467


138,143

Total current assets
1,137,559

 
1,098,302

Revenue earning equipment, net
8,274,832


8,184,735

Operating property and equipment, net of accumulated depreciation of $1,116,439 and $1,083,604, respectively
740,375


714,970

Goodwill
387,730


389,135

Intangible assets, net of accumulated amortization of $50,145 and $45,736, respectively
49,994


55,192

Direct financing leases and other assets
518,283


510,246

Total assets
$
11,108,773


10,952,580

 
 
 
 
Liabilities and shareholders’ equity:
 
 
 
Current liabilities:
 
 
 
Short-term debt and current portion of long-term debt
$
1,055,146


634,530

Accounts payable
457,843


502,373

Accrued expenses and other current liabilities
516,862


543,352

Total current liabilities
2,029,851

 
1,680,255

Long-term debt
4,464,495


4,868,097

Other non-current liabilities
817,232


829,595

Deferred income taxes
1,700,154


1,587,522

Total liabilities
9,011,732

 
8,965,469

 
 
 
 
Shareholders’ equity:
 
 
 
Preferred stock, no par value per share — authorized, 3,800,917; none outstanding,
September 30, 2016 or December 31, 2015
—

 
—

Common stock, $0.50 par value per share — authorized, 400,000,000; outstanding,
September 30, 2016 — 53,468,413; December 31, 2015 — 53,490,603
26,734

 
26,745

Additional paid-in capital
1,022,307

 
1,006,021

Retained earnings
1,795,445

 
1,667,080

Accumulated other comprehensive loss
(747,445
)
 
(712,735
)
Total shareholders’ equity
2,097,041


1,987,111

Total liabilities and shareholders’ equity
$
11,108,773


10,952,580

See accompanying notes to consolidated condensed financial statements.

3


RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
 
Nine months ended September 30,
 
2016
 
2015
 
(In thousands)
Cash flows from operating activities from continuing operations:
 
 
 
Net earnings
$
214,296

 
228,567

Less: Loss from discontinued operations, net of tax
(1,069
)
 
(1,487
)
Earnings from continuing operations
215,365

 
230,054

Depreciation expense
878,173

 
828,148

Gains on used vehicles, net
(33,002
)
 
(82,158
)
Share-based compensation expense
13,870

 
16,112

Amortization expense and other non-cash charges, net
49,869

 
46,272

Deferred income tax expense
109,191

 
111,609

Changes in operating assets and liabilities:
 
 
 
Receivables
(69,169
)
 
(23,751
)
Inventories
(3,524
)
 
1,275

Prepaid expenses and other assets
(24,241
)
 
(33,334
)
Accounts payable
68,599

 
(19,506
)
Accrued expenses and other non-current liabilities
(20,387
)
 
(3,385
)
Net cash provided by operating activities from continuing operations
1,184,744

 
1,071,336

 
 
 
 
Cash flows from financing activities:
 
 
 
Net change in commercial paper borrowings and revolving credit facilities
73,597


184,750

Debt proceeds
298,254


1,329,810

Debt repaid
(340,707
)

(795,837
)
Dividends on common stock
(67,651
)
 
(61,436
)
Common stock issued
9,626

 
20,397

Common stock repurchased
(25,658
)
 
(6,141
)
Excess tax benefits from share-based compensation and other items
(1,685
)
 
723

Debt issuance costs
(1,012
)
 
(7,483
)
Net cash (used in) provided by financing activities
(55,236
)
 
664,783

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of property and revenue earning equipment
(1,511,359
)
 
(2,087,294
)
Sales of revenue earning equipment
331,720

 
319,766

Sales of operating property and equipment
6,623

 
1,203

Collections on direct finance leases and other items
60,229

 
51,166

Changes in restricted cash
4,203

 
7,781

Net cash used in investing activities
(1,108,584
)
 
(1,707,378
)
 
 
 
 
Effect of exchange rate changes on cash
(5,567
)
 
(2,006
)
Increase in cash and cash equivalents from continuing operations
15,357

 
26,735

 
 
 
 
 
 
 
 
Decrease in cash and cash equivalents from discontinued operations
(1,308
)
 
(1,440
)
 
 
 
 
Increase in cash and cash equivalents
14,049

 
25,295

Cash and cash equivalents at January 1
60,945

 
50,092

Cash and cash equivalents at September 30
$
74,994

 
75,387

See accompanying notes to consolidated condensed financial statements.

4
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)


1. GENERAL

Interim Financial Statements

The accompanying unaudited Consolidated Condensed Financial Statements include the accounts of Ryder System, Inc. (Ryder) and all entities in which Ryder has a controlling voting interest (subsidiaries) and variable interest entities (VIEs) required to be consolidated in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The accompanying unaudited Consolidated Condensed Financial Statements have been prepared in accordance with the accounting policies described in our 2015 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 presentation 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.

Beginning in 2016, we reclassified the losses from fair value adjustments on our used vehicles from "Other operating expenses" to "Gains on used vehicles, net" within the Consolidated Condensed Statement of Earnings. Prior year amounts have been reclassified to conform to the current period presentation.


2. RECENT ACCOUNTING PRONOUNCEMENTS

Statement of Cash Flows

In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-15, Statement of Cash Flows, which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. The guidance will be effective January 1, 2018, with early adoption permitted. The standard is to be adopted on a retrospective basis. We do not expect this standard to have a material impact on the presentation of our consolidated cash flows.

Financial Instruments

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. The standard applies to financial instruments including, but not limited to, trade and other receivables, held-to-maturity debt securities, loans and net investments in leases. The standard requires estimating expected credit losses over the remaining life of an instrument or a portfolio of instruments with similar risk characteristics based on relevant information about past events, current conditions and reasonable forecasts. The initial estimate of and the subsequent changes in expected credit losses will be recognized as credit loss expense through current earnings and will be reflected as an allowance for credit losses offsetting the carrying value of the financial instrument(s) on the balance sheet. The standard is effective January 1, 2020, with early adoption as of January 1, 2019 permitted. The standard is to be applied using a modified retrospective transition method. We do not expect this standard to have a material impact on our consolidated financial position, results of operations or cash flows.

Share-Based Payments

In March 2016, the FASB issued ASU No. 2016-09, Stock Compensation, which is intended to simplify several aspects of the accounting for share-based payment award transactions. The guidance will be effective January 1, 2017. We do not expect this standard to have a material impact on our consolidated financial position, results of operations or cash flows.


5
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)



Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases. The standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases. This classification will determine whether the lease expense is recognized based on an effective interest method 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. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The standard is effective January 1, 2019, with early adoption permitted. The standard is to be applied using a modified retrospective transition method. We are evaluating the impact on our consolidated financial position, results of operations and cash flows.

Revenue Recognition

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, 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. The ASU is effective January 1, 2018, and will replace most existing revenue recognition guidance. The standard permits the use of either the modified retrospective or cumulative effect transition methods. We are evaluating transition methods and the impact on our consolidated financial position and results of operations.

Presentation of Debt Issuance Costs

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which required an entity to present debt issuance costs as a direct reduction from the carrying amount of the related debt liability on the balance sheet. We adopted this guidance on January 1, 2016 and reclassified $15 million from other assets to long-term debt in our December 31, 2015 balance sheet. Other than the change in presentation within the Consolidated Condensed Balance Sheets, this accounting guidance did not impact our consolidated financial position, results of operations or cash flows.


3. REVENUE EARNING EQUIPMENT

 
September 30, 2016
 
December 31, 2015
 
Cost
 
Accumulated
Depreciation
 
Net  Book
Value(1)
 
Cost
 
Accumulated
Depreciation
 
Net  Book
Value(1)
 
(In thousands)
Held for use:
 
Full service lease
$
9,460,749

 
(2,979,195
)
 
6,481,554

 
$
8,839,941

 
(2,723,605
)
 
6,116,336

Commercial rental
2,529,929

 
(893,545
)
 
1,636,384

 
2,811,715

 
(907,412
)
 
1,904,303

Held for sale
503,160

 
(346,266
)
 
156,894

 
496,634

 
(332,538
)
 
164,096

Total
$
12,493,838

 
(4,219,006
)
 
8,274,832

 
$
12,148,290

 
(3,963,555
)
 
8,184,735

 
————————————
(1)
Revenue earning equipment, net includes vehicles acquired under capital leases of $42.9 million, less accumulated depreciation of $21.6 million, at September 30, 2016, and $47.5 million, less accumulated depreciation of $22.2 million, at December 31, 2015.

We lease revenue earning equipment to customers for periods typically ranging from three to seven years for trucks and tractors and up to ten years for trailers. The majority of our leases are classified as operating leases. However, some of our revenue earning equipment leases are classified as direct financing leases and, to a lesser extent, sales-type leases. As of September 30, 2016 and December 31, 2015, the net investment in direct financing and sales-type leases was $418 million and $438 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 full service lease contract. For those customers who are designated as high risk, we typically require 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.


6
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)


As of September 30, 2016 and December 31, 2015, 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.

Revenue earning equipment held for sale is stated at the lower of carrying amount or fair value less costs to sell. Losses on vehicles held for sale for which carrying values exceeded fair value are recognized at the time they arrive at our used truck centers and are presented within “Gains on used vehicles, net ” in the Consolidated Condensed Statements of Earnings. For revenue earning equipment held for sale, we stratify our fleet by vehicle type (trucks, tractors and trailers), weight class, age and other relevant characteristics and create classes of similar assets for analysis purposes. For a certain population of our revenue earning equipment held for sale, fair value was determined based upon recent market prices obtained from our own sales experience for sales of each class of similar assets and vehicle condition. These vehicles held for sale were classified within Level 3 of the fair value hierarchy.

The following table presents our assets held for sale that are measured at fair value on a nonrecurring basis and considered a Level 3 fair value measurement:

 
 
 
Total Losses (2)
 
September 30,
 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Assets held for sale:
 
 
 
 
 
 
 
 
 
 
 
Revenue earning equipment (1):
 
 
 
 
 
 
 
 
 
 
 
Trucks
$
17,091

 
7,701

 
$
2,528

 
1,657

 
$
6,842

 
4,400

Tractors
61,480

 
10,093

 
7,985

 
2,062

 
22,073

 
3,970

Trailers
2,563

 
1,195

 
1,152

 
610

 
2,589

 
1,582

 
 
 
 
 
 
 
 
 
 
 
 
Total assets at fair value
$
81,134

 
18,989

 
$
11,665

 
4,329

 
$
31,504

 
9,952

 ————————————
(1)
Assets held for sale in the above table only include the portion of revenue earning equipment held for sale where net book values exceeded fair values and fair value adjustments were recorded. The net book value of assets held for sale not exceeding fair value was $75.8 million and $145.1 million as of September 30, 2016 and 2015, 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 carrying value.

For the three and nine months ended September 30, 2016 and 2015, the components of gains on used vehicles, net were as follows:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Gains on vehicle sales, net
$
(13,538
)
 
(29,294
)
 
$
(64,506
)
 
(92,110
)
Losses from fair value adjustments
11,665

 
4,329

 
31,504

 
9,952

Gains on used vehicles, net
$
(1,873
)
 
(24,965
)
 
$
(33,002
)
 
(82,158
)





7
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)


4. ACCRUED EXPENSES AND OTHER LIABILITIES

 
September 30, 2016
 
December 31, 2015
 
Accrued
Expenses
 
Non-Current
Liabilities
 
Total
 
Accrued
Expenses
 
Non-Current
Liabilities
 
Total
 
(In thousands)
Salaries and wages
$
88,592

 
—

 
88,592

 
$
99,032

 
—

 
99,032

Deferred compensation
2,874

 
44,702

 
47,576

 
2,252

 
41,691

 
43,943

Pension benefits
3,808

 
466,721

 
470,529

 
3,790

 
484,892

 
488,682

Other postretirement benefits
1,634

 
19,536

 
21,170

 
1,624

 
20,002

 
21,626

Other employee benefits
23,843

 
5,040

 
28,883

 
8,956

 
9,706

 
18,662

Insurance obligations (1)
140,528

 
221,254

 
361,782

 
157,014

 
213,256

 
370,270

Environmental liabilities
3,839

 
5,911

 
9,750

 
3,791

 
6,554

 
10,345

Operating taxes
96,813

 
—

 
96,813

 
101,649

 
—

 
101,649

Income taxes
444

 
23,467

 
23,911

 
3,378

 
22,366

 
25,744

Interest
37,128

 
—

 
37,128

 
31,218

 
—

 
31,218

Customer deposits
62,035

 
4,688

 
66,723

 
61,869

 
5,085

 
66,954

Deferred revenue
14,556

 
—

 
14,556

 
13,038

 
—

 
13,038

Restructuring liabilities (2)
2,391

 
—

 
2,391

 
12,333

 
—

 
12,333

Other
38,377

 
25,913

 
64,290

 
43,408

 
26,043

 
69,451

Total
$
516,862

 
817,232

 
1,334,094

 
$
543,352

 
829,595

 
1,372,947

 ————————————
(1)
Insurance obligations primarily represent claims for which we are self-insured.
(2)
The reduction in restructuring liabilities from December 31, 2015 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 2016.


8
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)


5. DEBT
 
Weighted-Average
Interest Rate
 
 
 
 
 
 
 
September 30,
2016
 
December 31,
2015
 
Maturities
 
September 30,
2016
 
December 31,
2015
 
 
 
 
 
 
 
(In thousands)
Short-term debt and current portion of long-term debt:
 
 
 
 
 
 
 
 
 
Short-term debt
0.92%
 
2.26%
 

 
$
133,713

 
35,947

Current portion of long-term debt
 
 
 
 
 
 
921,433

 
598,583

Total short-term debt and current portion of long-term debt
 
 
 
 
 
1,055,146

 
634,530

Long-term debt:
 
 
 
 
 
 
 
 
 
U.S. commercial paper (1)
0.76%
 
0.55%
 
2020
 
490,685

 
547,130

Global revolving credit facility
2.06%
 
2.31%
 
2020
 
60,885

 
25,291

Unsecured U.S. notes — Medium-term notes (1)
2.91%
 
2.84%
 
2016-2025
 
4,113,583

 
4,112,519

Unsecured U.S. obligations
2.09%
 
1.73%
 
2018
 
50,000

 
50,000

Unsecured foreign obligations
1.74%
 
1.92%
 
2017-2020
 
248,376

 
275,661

Asset-backed U.S. obligations (2)
1.77%
 
1.81%
 
2016-2022
 
395,898

 
434,001

Capital lease obligations
3.18%
 
3.31%
 
2016-2023
 
25,818

 
32,054

Total before fair market value adjustment
 
 
 
 
 
 
5,385,245

 
5,476,656

Fair market value adjustment on notes subject to hedging (3)
 
 
 
 
 
14,213

 
5,253

Debt issuance costs (4)
 
 
 
 
 
 
(13,530
)
 
(15,229
)
 
 
 
 
 
 
 
5,385,928

 
5,466,680

Current portion of long-term debt
 
 
 
 
 
 
(921,433
)
 
(598,583
)
Long-term debt
 
 
 
 
 
 
4,464,495

 
4,868,097

Total debt
 
 
 
 
 
 
$
5,519,641

 
5,502,627

 ————————————
(1)
Amounts are net of aggregate unamortized original issue discounts of $6.8 million and $7.7 million at September 30, 2016 and December 31, 2015, respectively.
(2)
Asset-backed U.S. obligations are related to financing transactions involving revenue earning equipment.
(3)
The notional amount of executed interest rate swaps designated as fair value hedges was $825 million at September 30, 2016 and December 31, 2015.
(4)
See Note 2, "Recent Accounting Pronouncements," for further discussion of the presentation of debt issuance costs.


We maintain a $1.2 billion global revolving credit facility with a syndicate of twelve 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 matures in January 2020. The agreement provides for annual facility fees which range from 7.5 basis points to 25 basis points based on Ryder's long-term credit ratings. The annual facility fee is currently 10 basis points, which applies to the total facility size of $1.2 billion.

The credit facility is used primarily to finance working capital but can also be used to issue up to $75 million in letters of credit (there were no letters of credit outstanding against the facility at September 30, 2016). At our option, the interest rate on borrowings under the credit facility is based on LIBOR, prime, federal funds or local equivalent rates. The credit facility contains no provisions limiting its availability in the event of a material adverse change to Ryder’s business operations; however, the credit facility does contain standard representations and warranties, events of default, cross-default provisions and certain affirmative and negative covenants.

In order to maintain availability of funding, we must maintain a ratio of debt to consolidated net worth of less than or equal to 300%. Net worth, as defined in the credit facility, represents shareholders' equity excluding any accumulated other comprehensive income or loss associated with our pension and other postretirement plans. The ratio at September 30, 2016 was 206%. At September 30, 2016, there was $514.4 million available under the credit facility.


9
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 as we have both the intent and ability to refinance on a long-term basis. In addition, we have the intent and ability to refinance the current portion of certain long-term debt on a long-term basis. At September 30, 2016, we classified $490.7 million of short-term commercial paper, $349.9 million of current debt obligations and $60.9 million of short-term borrowings under our global revolving credit facility as long-term. At December 31, 2015, we classified $547.1 million of short-term commercial paper, $300.0 million of current debt obligations and $25.3 million of short-term borrowings under our global revolving credit facility as long-term.

In February 2016, we issued $300 million of unsecured medium-term notes maturing in November 2021. The proceeds from these notes were used to pay off maturing debt and for general corporate purposes. If these notes are downgraded below investment grade following, and 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.

We have a trade receivables purchase and sale program, pursuant to which we sell certain of our domestic trade accounts receivable to a bankruptcy remote, consolidated subsidiary of Ryder, that in turn sells, on a revolving basis, an ownership interest in certain of these accounts receivable to a committed purchaser. The subsidiary is considered a VIE and is consolidated based on our control of the entity’s activities. We use this program to provide additional liquidity to fund our operations, particularly when it is cost effective to do so. The costs under the program may vary based on changes in interest rates. The available proceeds that may be received under the program are limited to $175 million. The program was renewed in October 2016. If no event occurs which causes early termination, the 364-day program will expire on October 23, 2017. The program contains provisions restricting its availability in the event of a material adverse change to our business operations or the collectibility of the collateralized receivables. Sales of receivables under this program are accounted for as secured borrowings based on our continuing involvement in the transferred assets. No amounts were outstanding under the program at September 30, 2016 or December 31, 2015.

At September 30, 2016 and December 31, 2015, we had letters of credit and surety bonds outstanding totaling $338.9 million and $345.7 million, respectively, which primarily guarantee the payment of insurance claims.

The fair value of total debt (excluding capital lease and asset-backed U.S. obligations) at September 30, 2016 and December 31, 2015 was approximately $5.21 billion and $5.06 billion, respectively. For publicly-traded debt, estimates of fair value were based on market prices. For other debt, fair value was estimated based on a model-driven approach using rates currently available to us for debt with similar terms and remaining maturities. The fair value measurements of our publicly-traded debt and other debt were classified within Level 2 of the fair value hierarchy. The carrying amounts reported in the Consolidated Condensed Balance Sheets for “Cash and cash equivalents,” “Receivables, net” and “Accounts payable” approximate fair value because of the immediate or short-term maturities of these financial instruments.

In February 2016, Ryder filed an automatic shelf registration statement on Form S-3 with the SEC. The registration is for an indeterminate number of securities and is effective for three years. Under this universal shelf registration statement, we have the capacity to offer and sell from time to time various types of securities, including common stock, preferred stock and debt securities, subject to market demand and ratings status.



10
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)


6. DERIVATIVES

From time to time, we enter into interest rate derivatives to manage our fixed and variable interest rate exposure and to better match the repricing of debt instruments to that of our portfolio of assets. We assess the risk that changes in interest rates will have either on the fair value of debt obligations or on the amount of future interest payments by monitoring changes in interest rate exposures and by evaluating hedging opportunities. We regularly monitor interest rate risk attributable to both our outstanding or forecasted debt obligations as well as 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, 2016, 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 2020. Interest rate swaps are measured at fair value on a recurring basis using Level 2 fair value inputs. The fair value of these interest rate swaps was approximately $14.2 million and $5.4 million as of September 30, 2016 and December 31, 2015, respectively. The amounts are presented in "Direct financing leases and other assets" in our Consolidated Condensed Balance Sheets. 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.


7. SHARE REPURCHASE PROGRAMS

In December 2015, our Board of Directors authorized a share repurchase program intended to mitigate the dilutive impact of shares issued under our employee stock plans (the program).  Under the program, management is authorized to repurchase (i) up to 1.5 million shares of common stock, the sum of which will not exceed the number of shares issued to employees under the Company’s employee stock plans from December 1, 2015 to December 9, 2017,  plus (ii) 0.5 million shares issued to employees that were not repurchased under the Company’s previous share repurchase program.  The 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 the Company under Rule 10b5-1 of the Securities Exchange Act of 1934 as part of the program, which allow for share repurchases during Ryder’s quarterly blackout periods as set forth in the trading plan. 

During the nine months ended September 30, 2016 and September 30, 2015, we repurchased 379,896 shares for $25.7 million and 69,107 shares for $6.1 million, respectively.


8. ACCUMULATED OTHER COMPREHENSIVE LOSS

The following summary sets forth the components of accumulated other comprehensive loss, net of tax:
 
 
Currency
Translation
Adjustments and Other
 
Net Actuarial
Loss (1)
 
Prior Service (Cost)/
Credit (1)
 
Accumulated
Other
Comprehensive
Loss
 
 
(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
)
September 30, 2016
 
$
(173,894
)
 
(568,436
)
 
(5,115
)
 
(747,445
)








11
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)



 
 
Currency
Translation
Adjustments and Other
 
Net Actuarial
Loss (1)
 
Prior Service
Credit (1)
 
Accumulated
Other
Comprehensive
Loss
 
 
(In thousands)
December 31, 2014
 
$
(36,087
)
 
(585,941
)
 
1,758

 
(620,270
)
Amortization
 
—

 
14,605

 
(1,066
)
 
13,539

Other current period change
 
(73,093
)
 
(5,321
)
 
—

 
(78,414
)
September 30, 2015
 
$
(109,180
)
 
(576,657
)
 
692

 
(685,145
)
_______________________ 
(1)
These amounts are included in the computation of net pension expense. See Note 11, "Employee Benefit Plans," for further information.

The loss from currency translation adjustments in the nine months ended September 30, 2016 of $37.9 million was primarily 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. The loss from currency translation adjustments in the nine months ended September 30, 2015 of $73.1 million was due to the weakening of the Canadian Dollar and British Pound against the U.S. Dollar.


9. EARNINGS PER SHARE

The following table presents the calculation of basic and diluted earnings per common share from continuing operations:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands, except per share amounts)
Earnings per share — Basic:
 
 
 
 
 
 
 
Earnings from continuing operations
$
85,138

 
90,811

 
$
215,365

 
230,054

Less: Earnings allocated to unvested stock
(261
)
 
(266
)
 
(674
)
 
(654
)
Earnings from continuing operations available to common shareholders — Basic
$
84,877

 
90,545

 
$
214,691

 
229,400

 
 
 
 
 
 
 
 
Weighted average common shares outstanding — Basic
52,953

 
52,888

 
53,029

 
52,770

 
 
 
 
 
 
 
 
Earnings from continuing operations per common share — Basic
$
1.60

 
1.71

 
$
4.05

 
4.35

 
 
 
 
 
 
 
 
Earnings per share — Diluted:
 
 
 
 
 
 
 
Earnings from continuing operations
$
85,138

 
90,811

 
$
215,365

 
230,054

Less: Earnings allocated to unvested stock
(260
)
 
(265
)
 
(672
)
 
(649
)
Earnings from continuing operations available to common shareholders — Diluted
$
84,878

 
90,546

 
$
214,693

 
229,405

 
 
 
 
 
 
 
 
Weighted average common shares outstanding — Basic
52,953

 
52,888

 
53,029

 
52,770

Effect of dilutive equity awards
338

 
445

 
315

 
476

Weighted average common shares outstanding — Diluted
53,291

 
53,333

 
53,344

 
53,246

 
 
 
 
 
 
 
 
Earnings from continuing operations per common share — Diluted
$
1.59

 
1.70

 
$
4.02

 
4.31

 
 
 
 
 
 
 
 
Anti-dilutive equity awards not included above
653

 
352

 
836

 
300


12
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)


10. 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 September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Stock option and stock purchase plans
$
1,633

 
1,948

 
$
5,410

 
6,205

Unvested stock
2,237

 
2,995

 
8,460

 
9,907

Share-based compensation expense
3,870

 
4,943


13,870


16,112

Income tax benefit
(1,321
)
 
(1,652
)
 
(4,691
)
 
(5,395
)
Share-based compensation expense, net of tax
$
2,549

 
3,291


$
9,179


10,717


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,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Cash awards
$
119

 
197

 
$
447

 
661


Total unrecognized pre-tax compensation expense related to all share-based compensation arrangements at September 30, 2016 was $21.2 million and is expected to be recognized over a weighted-average period of 1.8 years.

The following table is a summary of the awards granted under the Plans during the periods presented:
 
Nine months ended September 30,
 
2016
 
2015
 
(Shares in thousands)
Stock options
513

 
362

Market-based restricted stock rights
34

 
19

Performance-based restricted stock rights
45

 
42

Time-vested restricted stock rights
129

 
87

Total
721


510



13
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)


11. EMPLOYEE BENEFIT PLANS

Components of net pension expense were as follows:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Pension Benefits
 
 
 
 
 
 
 
Company-administered plans:
 
 
 
 
 
 
 
Service cost
$
2,660

 
3,612

 
$
9,065

 
10,805

Interest cost
22,754

 
21,777

 
72,086

 
65,712

Expected return on plan assets
(22,601
)
 
(24,697
)
 
(68,353
)
 
(74,618
)
Amortization of:
 
 
 
 
 
 
 
Net actuarial loss
7,324

 
7,665

 
23,889

 
23,137

Prior service cost/(credit)
320

 
(80
)
 
3,060

 
(230
)
 
10,457

 
8,277

 
39,747

 
24,806

Union-administered plans
2,493

 
1,772

 
7,221

 
6,057

Net pension expense
$
12,950

 
10,049

 
$
46,968

 
30,863

 
 
 
 
 
 
 
 
Company-administered plans:
 
 
 
 
 
 
 
U.S.
$
10,952

 
8,746

 
$
41,389

 
26,237

Non-U.S.
(495
)
 
(469
)
 
(1,642
)
 
(1,431
)
 
10,457

 
8,277

 
39,747

 
24,806

Union-administered plans
2,493

 
1,772

 
7,221

 
6,057

Net pension expense
$
12,950

 
10,049

 
$
46,968

 
30,863

 
 
 
 
 
 
 
 

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 is 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.

During the third quarter of 2015, we recorded adjustments of $0.5 million to previously recorded, estimated pension settlement charges related to the exit from U.S. multi-employer pension plans.

During the nine months ended September 30, 2016, we contributed $65.3 million to our pension plans. In 2016, the expected total contributions to our pension plans are approximately $80 million. We also maintain other postretirement benefit plans that are not reflected in the above table. The amount of postretirement benefit expense was not material for the three or nine months ended September 30, 2016.


14
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)



12. OTHER MATTERS

We are a party to various claims, complaints and proceedings arising in the ordinary course of our continuing business operations including, but not limited to, those relating to commercial and employment claims, environmental matters, risk management matters (e.g., vehicle liability, workers’ compensation, etc.) and administrative assessments primarily associated with operating taxes. We have established loss provisions for matters in which losses are probable and can be reasonably estimated. For matters from continuing operations, we believe that the resolution of these claims, complaints and legal proceedings will not have a material effect on our consolidated 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.

Although we discontinued our South American operations in 2009, we continue to be party to various federal, state and local legal proceedings involving labor matters, tort claims and tax assessments. We have established loss provisions for any matters where we believe a loss is probable and can be reasonably estimated. Other than with respect to the matters discussed below, we believe that such losses will not have a material effect on our consolidated condensed financial statements.

In Brazil, various matters related to income taxes and social contribution taxes, as well as tax credits used to offset those taxes, were assessed by the Revenue Department for the 1997, 1998, 2004, 2005 and 2006 tax years. When available and appropriate, we have entered into various amnesty programs offered by the Brazilian tax authorities to settle some of these assessments at a discount and continue to evaluate these when offered.  Payments to resolve open matters through these amnesty programs were not material and were reflected as costs in discontinued operations.  Open matters, combined, total approximately $4 million in assessments, penalties and interest and are pending at various levels of the administrative tax courts.  We believe it is more likely than not that our position will ultimately be sustained either in these administrative courts or in actions before the judicial courts, if required.



13. SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information was as follows:
 
Nine months ended September 30,
 
2016
 
2015
 
(In thousands)
Interest paid
$
100,903

 
110,141

Income taxes paid
12,250

 
13,635

Changes in accounts payable related to purchases of revenue earning equipment
(107,177
)
 
18,307

Operating and revenue earning equipment acquired under capital leases
947

 
5,956





15
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)


14. SEGMENT REPORTING

Our primary measurement of segment financial performance, defined as segment “Earnings Before Tax” (EBT) from continuing operations, includes an allocation of Central Support Services (CSS) and excludes non-operating pension costs and certain professional fees associated with cost savings initiatives. Fleet Management Solutions (FMS) EBT, Dedicated Transportation Solutions (DTS) EBT and Supply Chain Solutions (SCS) EBT are our primary measures of segment performance. CSS represents those costs incurred to support all business segments, including human resources, finance, corporate services, public affairs, information technology, health and safety, legal, marketing and corporate communications. The objective of the EBT measurement is to provide clarity on the profitability of each segment and, ultimately, to hold leadership of each segment accountable for their allocated share of CSS costs. Certain costs are not attributable to any segment and remain unallocated in CSS, including costs for investor relations, public affairs and certain executive compensation.

Our FMS segment leases revenue earning equipment and provides fuel, maintenance and other ancillary services to the DTS and SCS segments. Inter-segment revenue and EBT are accounted for at rates similar to those executed with third parties. EBT related to inter-segment equipment and services billed to customers (equipment contribution) are included in both FMS and the segment which served the customer and then eliminated (presented as “Eliminations”). 

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, 2016 and 2015. 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.

16
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)


 
FMS
 
DTS
 
SCS
 
Eliminations
 
Total
 
(In thousands)
For the three months ended September 30, 2016
 
 
 
 
 
 
 
 
Revenue from external customers
$
1,046,599

 
260,921

 
416,898

 
—

 
1,724,418

Inter-segment revenue
108,412

 
—

 
—

 
(108,412
)
 
—

Total revenue
$
1,155,011

 
260,921

 
416,898

 
(108,412
)
 
1,724,418

 
 
 
 
 
 
 
 
 
 
Segment EBT
$
112,282

 
17,587

 
30,954

 
(12,606
)
 
148,217

Unallocated CSS
 
 
 
 
 
 
 
 
(9,313
)
     Non-operating pension costs 
 
 
 
 
 
 
 
 
(7,206
)
Earnings from continuing operations before income taxes
 
 
 
 
 
 
 
 
$
131,698

 
 
 
 
 
 
 
 
 
 
   Segment capital expenditures paid (1)
$
375,779

 
1,060

 
8,181

 
—

 
385,020

Unallocated CSS capital expenditures paid
 
 
 
 
 
 
 
 
6,157

Capital expenditures paid
 
 
 
 
 
 
 
 
$
391,177

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the three months ended September 30, 2015
 
 
 
 
 
 
 
 
Revenue from external customers
$
1,054,840

 
226,921

 
387,305

 
—

 
1,669,066

Inter-segment revenue
102,738

 
—

 
—

 
(102,738
)
 
—

Total revenue
$
1,157,578

 
226,921

 
387,305

 
(102,738
)
 
1,669,066

 
 
 
 
 
 
 
 
 
 
Segment EBT
$
126,433

 
13,296

 
26,573

 
(11,998
)
 
154,304

Unallocated CSS
 
 
 
 
 
 
 
 
(10,070
)
Non-operating pension costs 
 
 
 
 
 
 
 
 
(4,780
)
Other items (2)
 
 
 
 
 
 
 
 
446

Earnings from continuing operations before income taxes
 
 
 
 
 
 
 
 
$
139,900

 
 
 
 
 
 
 
 
 
 
  Segment capital expenditures paid (1)
$
740,049

 
1,175

 
4,195

 
—

 
745,419

Unallocated CSS capital expenditures paid
 
 
 
 
 
 
 
 
12,657

Capital expenditures paid
 
 
 
 
 
 
 
 
$
758,076

 ————————————
(1)
Excludes revenue earning equipment acquired under capital leases.
(2)
Consists of pension-related adjustments and certain professional fees associated with cost savings initiatives.




17
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)


 
FMS
 
DTS
 
SCS
 
Eliminations
 
Total
 
(In thousands)
For the nine months ended September 30, 2016
 
 
 
 
 
 
 
 
Revenue from external customers
$
3,086,144

 
764,025

 
1,207,665

 
—

 
5,057,834

Inter-segment revenue
318,308

 
—

 
—

 
(318,308
)
 
—

Total revenue
$
3,404,452

 
764,025

 
1,207,665

 
(318,308
)
 
5,057,834

 
 
 
 
 
 
 
 
 
 
Segment EBT
$
306,387

 
48,327

 
79,121

 
(37,116
)
 
396,719

Unallocated CSS
 
 
 
 
 
 
 
 
(30,193
)
     Non-operating pension costs
 
 
 
 
 
 
 
 
(21,691
)
Pension-related adjustments (1)
 
 
 
 
 
 
 
 
(7,650
)
Earnings from continuing operations before income taxes
 
 
 
 
 
 
 
 
$
337,185

 
 
 
 
 
 
 
 
 
 
  Segment capital expenditures paid (2)
$
1,438,104

 
1,940

 
52,643

 
—

 
1,492,687

Unallocated CSS capital expenditures paid
 
 
 
 
 
 
 
 
18,672

Capital expenditures paid
 
 
 
 
 
 
 
 
$
1,511,359

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the nine months ended September 30, 2015
 
 
 
 
 
 
 
 
Revenue from external customers
$
3,080,756

 
663,094

 
1,155,300

 
—

 
4,899,150

Inter-segment revenue
313,321

 
—

 
—

 
(313,321
)
 
—

Total revenue
$
3,394,077

 
663,094

 
1,155,300

 
(313,321
)
 
4,899,150

 
 
 
 
 
 
 
 
 
 
Segment EBT
$
338,603

 
34,701

 
69,961

 
(35,120
)
 
408,145

Unallocated CSS
 
 
 
 
 
 
 
 
(32,936
)
Non-operating pension costs
 
 
 
 
 
 
 
 
(14,351
)
Other items (3)
 
 
 
 
 
 
 
 
(3,334
)
Earnings from continuing operations before income taxes
 
 
 
 
 
 
 
 
$
357,524

 
 
 
 
 
 
 
 
 
 
  Segment capital expenditures paid (2)
$
2,040,334

 
2,530

 
13,752

 
—

 
2,056,616

Unallocated CSS capital expenditures paid
 
 
 
 
 
 
 
 
30,678

Capital expenditures paid
 
 
 
 
 
 
 
 
$
2,087,294

 ————————————
(1)
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.
(2)
Excludes revenue earning equipment acquired under capital leases.
(3)
Consists of pension-related adjustments and certain professional fees associated with cost savings initiatives.


18
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS



OVERVIEW

The following discussion should be read in conjunction with the unaudited 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 2015 Annual Report on Form 10-K.

Ryder System, Inc. (Ryder) is a global leader in transportation and supply chain management solutions. We report our financial performance based on three segments: (1) FMS, which provides full service leasing, commercial rental, contract maintenance, and contract-related maintenance of trucks, tractors and trailers to customers principally in the U.S., Canada and the U.K.; (2) DTS, which provides vehicles and drivers as part of a dedicated transportation solution in the U.S.; and (3) SCS, which provides comprehensive supply chain solutions including distribution and transportation services in North America and Asia. Dedicated transportation services provided as part of an integrated, multi-service, supply chain solution to SCS customers are reported in the SCS business segment.

We operate in highly competitive markets. Our customers select us based on numerous factors including service quality, price, technology and service offerings. As an alternative to using our services, customers may choose to provide these services for themselves, or may choose to obtain similar or alternative services from other third-party vendors. Our customer base includes enterprises operating in a variety of industries including automotive, industrial, food and beverage service, consumer packaged goods (CPG), transportation and warehousing, technology and healthcare, retail, housing, business and personal services, and paper and publishing.

This Management’s Discussion and Analysis (MD&A) includes certain non-GAAP financial measures.  Please refer to the “Non-GAAP Financial Measures” section of this MD&A for information on the non-GAAP measures included in the MD&A, reconciliations to the most comparable GAAP financial measure and the reasons why we believe each measure is useful to investors.


19
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)

Operating results were as follows:
 
Three months ended September 30,
 
Nine months ended September 30,
 
Change 2016/2015
 
2016
 
2015
 
2016
 
2015
 
Three Months
Nine Months
 
(In thousands, except per share amounts)
 
 
 
Total revenue
$
1,724,418

 
1,669,066

 
$
5,057,834

 
4,899,150

 
   3
 %
   3
 %
Operating revenue (1)
1,468,293

 
1,426,465

 
4,324,019

 
4,119,369

 
   3
 %
   5
 %



 


 
 
 
 
 


 



 


 
 
 
 
 


 
EBT
$
131,698

 
139,900

 
$
337,185

 
357,524

 
   (6
)%
   (6
)%
Comparable EBT (2)
138,904

 
144,234

 
366,526

 
375,209

 
   (4
)%
   (2
)%
Earnings from continuing operations
85,138

 
90,811

 
215,365

 
230,054

 
   (6
)%
   (6
)%
Comparable earnings from continuing operations (2)
89,354

 
93,268

 
232,835

 
238,499

 
   (4
)%
   (2
)%
Net earnings
84,752

 
90,619

 
214,296

 
228,567

 
   (6
)%
   (6
)%


 

 
 
 
 
 


 


 

 
 
 
 
 


 
Earnings per common share (EPS) — Diluted

 

 
 
 
 
 


 
Continuing operations
$
1.59

 
1.70

 
$
4.02

 
4.31

 
   (6
)%
   (7
)%
Comparable (2)
1.67

 
1.74

 
4.35

 
4.47

 
   (4
)%
   (3
)%
Net earnings
1.59

 
1.69

 
4.00

 
4.28

 
   (6
)%
   (7
)%
  ————————————
(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.

Total revenue and operating revenue (a non-GAAP measure excluding fuel and subcontracted transportation) increased 3% in the third quarter of 2016. For the nine months ended September 30, 2016, total revenue increased 3% and operating revenue increased 5%. Total revenue and operating revenue growth in both periods was due to growth in the full service lease fleet and higher prices on replacement vehicles in FMS and new business, increased volumes and higher pricing in SCS and DTS. These increases were partially offset by lower demand in the commercial rental product line and negative impacts from foreign exchange. Increased total revenue was also partially offset by lower fuel costs passed through to customers.

EBT decreased 6% in both the third quarter of 2016 and nine months ended September 30, 2016, reflecting lower used vehicle and commercial rental results, partially offset by higher full service lease results in FMS, lower insurance costs in DTS and increased pricing, new business and increased volumes in DTS and SCS. The 2016 EBT decrease in the nine months ended September 30, 2016, also reflects a $7.7 million pension charge related to certain 2009 pension benefit improvements that were not fully reflected in our pension benefit obligation. EBT was negatively impacted by foreign exchange in the three and nine months ended September 30, 2016, by 100 basis points.

20
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)


CONSOLIDATED RESULTS

Lease and Rental
 
Three months ended September 30,
 
Nine months ended September 30,
 
Change 2016/2015
 
2016
 
2015
 
2016
 
2015
 
Three Months
 
Nine Months
 
(Dollars in thousands)
 
 
 
 
Lease and rental revenues
$
803,006

 
802,881

 
$
2,369,147

 
2,310,951

 
—
 %
 
   3
 %
Cost of lease and rental
557,901

 
550,541

 
1,665,693

 
1,600,271

 
   1
 %
 
   4
 %
Gross margin
245,105

 
252,340

 
703,454

 
710,680

 
   (3
)%
 
   (1
)%
Gross margin %
31
%
 
31
%
 
30
%
 
31
%
 
 
 
 

Lease and rental revenues represent full service lease and commercial rental product offerings within our FMS segment. Revenues were approximately $803 million in the third quarter of 2016, consistent with the third quarter of 2015. For 2016, higher full service lease revenue, driven by growth in the average full service lease fleet and higher prices on replacement vehicles, was offset by lower commercial rental revenue reflecting lower demand and a negative impact from foreign exchange. Revenues increased 3% in the nine months ended September 30, 2016, primarily driven by a larger average full service lease fleet and higher prices on replacement vehicles, partially offset by lower commercial rental revenue reflecting lower demand and a negative impact from foreign exchange. Foreign exchange negatively impacted revenue growth by 100 basis points in both periods.

Cost of lease and rental represents the direct costs related to lease 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 and rental excludes interest costs from vehicle financing. Cost of lease and rental increased 1% in the third quarter and 4% in the nine months ended September 30, 2016, primarily due to higher depreciation and maintenance costs from a larger average lease fleet, partially offset by lower depreciation on a smaller average rental fleet (13% lower in the third quarter and 6% lower in the nine months ended September 30, 2016). Cost of lease and rental benefited by approximately $9 million in the third quarter of 2016 and $26 million in the nine months ended September 30, 2016, due to changes in estimated residual values effective January 1, 2016. Foreign exchange also reduced cost of lease and rental by 100 basis points in both periods.

Lease and rental gross margin decreased 3% in the third quarter and 1% in the nine months ended September 30, 2016. Lease and rental gross margin as a percentage of revenue remained at 31% in the third quarter and decreased to 30% in the nine months ended September 30, 2016. The decrease in gross margin dollars in the third quarter of 2016 and the nine months ended September 30, 2016 was due to lower commercial rental demand, partially offset by higher prices on lease replacement vehicles and lease fleet growth, as well as benefits from improved residual values. The decrease in gross margin as a percentage of revenue in the nine months ended September 30, 2016, reflects lower commercial rental fleet utilization, partially offset by benefits from improved residual values.

Services

Three months ended September 30,
 
Nine months ended September 30,
 
Change 2016/2015

2016
 
2015
 
2016
 
2015
 
Three Months
 
Nine Months

(Dollars in thousands)
 


 
 
Services revenue
$
801,004

 
734,803

 
$
2,345,922

 
2,165,677

 
   9
%
 
   8
%
Cost of services
658,793

 
606,364

 
1,936,636

 
1,792,182

 
   9
%
 
   8
%
Gross margin
142,211

 
128,439

 
409,286

 
373,495

 
   11
%
 
   10
%
Gross margin %
18
%
 
17
%
 
17
%
 
17
%
 
 
 
 

Services revenue represents all the revenues associated with our DTS and SCS segments, as well as contract maintenance, contract-related maintenance and fleet support services associated with our FMS segment. Services revenue increased 9% in the third quarter and 8% in the nine months ended September 30, 2016, due to new business, increased volumes and higher pricing in the DTS and SCS segments. The contract-related maintenance and contract maintenance product lines benefited from growth in fleet size, and contract-related maintenance revenue also increased from higher volumes. These increases were partially offset


21
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)


by lower fuel prices passed through to our DTS and SCS customers. Foreign exchange also negatively impacted revenue growth by 200 basis points in both periods.

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) and maintenance costs. Cost