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 JUNE 30, 2017
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

ryderlogoeverbetterwtma17.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, 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.
 
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨
 
(Do not check if a smaller reporting company)
Smaller reporting company ¨
Emerging growth company ¨
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨

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

The number of shares of Ryder System, Inc. Common Stock ($0.50 par value per share) outstanding at June 30, 2017 was 52,983,373.
 
 
 
 
 



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 June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands, except per share amounts)
Lease and rental revenues
$
797,014

 
798,387

 
$
1,564,604

 
1,566,141

Services revenue
871,027

 
785,791

 
1,722,894

 
1,544,918

Fuel services revenue
125,173

 
119,566

 
253,879

 
222,357

Total revenues
1,793,214

 
1,703,744

 
3,541,377

 
3,333,416

 
 
 
 
 
 
 
 
Cost of lease and rental
578,389

 
555,302

 
1,157,151

 
1,107,792

Cost of services
734,764

 
646,129

 
1,448,844

 
1,277,843

Cost of fuel services
121,604

 
115,478

 
247,454

 
214,379

Other operating expenses
27,406

 
27,796

 
58,677

 
57,947

Selling, general and administrative expenses
201,626

 
207,028

 
403,387

 
411,431

Non-operating pension costs
6,587

 
15,420

 
13,917

 
22,230

Used vehicle sales, net
15,322

 
(12,000
)
 
14,542

 
(31,129
)
Interest expense
34,852

 
37,268

 
69,738

 
75,157

Miscellaneous income, net
(8,028
)
 
(5,456
)
 
(12,981
)
 
(7,721
)
 
1,712,522

 
1,586,965

 
3,400,729

 
3,127,929

Earnings from continuing operations before income taxes
80,692

 
116,779

 
140,648

 
205,487

Provision for income taxes
29,349


42,737

 
51,026

 
75,260

Earnings from continuing operations
51,343


74,042

 
89,622

 
130,227

Loss from discontinued operations, net of tax
(527
)
 
(292
)
 
(657
)
 
(683
)
Net earnings
$
50,816

 
73,750

 
$
88,965

 
129,544

 
 
 
 
 
 
 
 
Earnings (loss) per common share — Basic
 
 
 
 
 
 
 
Continuing operations
$
0.97

 
1.39

 
$
1.69

 
2.45

Discontinued operations
(0.01
)
 
(0.01
)
 
(0.01
)
 
(0.01
)
Net earnings
$
0.96

 
1.39

 
$
1.68

 
2.43

 
 
 
 
 
 
 
 
Earnings (loss) per common share — Diluted
 
 
 
 
 
 
 
Continuing operations
$
0.97

 
1.38

 
$
1.68

 
2.43

Discontinued operations
(0.01
)
 
(0.01
)
 
(0.01
)
 
(0.01
)
Net earnings
$
0.96

 
1.38

 
$
1.67

 
2.42

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.44

 
0.41

 
$
0.88

 
0.82


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 June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
 
 
Net earnings
$
50,816

 
73,750

 
$
88,965

 
129,544

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Changes in currency translation adjustment and other
27,601

 
(32,264
)
 
43,343

 
(18,578
)
 
 
 
 
 
 
 
 
Amortization of pension and postretirement items
7,672

 
7,446

 
15,781

 
14,870

Income tax expense related to amortization of pension and postretirement items
(2,467
)
 
(2,479
)
 
(5,512
)
 
(5,187
)
   Amortization of pension and postretirement items, net of tax
5,205

 
4,967

 
10,269

 
9,682

 
 
 
 
 
 
 
 
Change in net actuarial loss and prior service cost
20

 
(17,367
)
 
20

 
(17,367
)
Income tax benefit related to change in net actuarial loss and prior service cost
180

 
6,345

 
180

 
6,345

Change in net actuarial loss and prior service cost, net of taxes
200

 
(11,022
)
 
200

 
(11,022
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of taxes
33,006

 
(38,319
)
 
53,812

 
(19,918
)
 
 
 
 
 
 
 
 
Comprehensive income
$
83,822

 
35,431

 
$
142,777

 
109,626

See accompanying notes to Consolidated Condensed Financial Statements.




2


RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
 
 
June 30,
2017
 
December 31,
2016
 
(Dollars in thousands, except per
share amount)
Assets:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
55,363


58,801

Receivables, net of allowance of $12,100 and $14,915, respectively
916,631


831,947

Inventories
67,239


69,529

Prepaid expenses and other current assets
137,455


141,280

Total current assets
1,176,688

 
1,101,557

Revenue earning equipment, net
8,206,841


8,147,722

Operating property and equipment, net of accumulated depreciation of $1,167,152 and $1,128,040, respectively
762,404


745,870

Goodwill
387,922


386,772

Intangible assets, net of accumulated amortization of $54,463 and $51,578, respectively
45,676


48,249

Direct financing leases and other assets
545,253


472,284

Total assets
$
11,124,784


10,902,454

 
 
 
 
Liabilities and shareholders’ equity:
 
 
 
Current liabilities:
 
 
 
Short-term debt and current portion of long-term debt
$
588,852


791,410

Accounts payable
536,443


445,470

Accrued expenses and other current liabilities
492,069


507,189

Total current liabilities
1,617,364

 
1,744,069

Long-term debt
4,795,992


4,599,864

Other non-current liabilities
866,003


817,565

Deferred income taxes
1,739,326


1,688,681

Total liabilities
9,018,685

 
8,850,179

 
 
 
 
Shareholders’ equity:
 
 
 
Preferred stock, no par value per share — authorized, 3,800,917; none outstanding,
June 30, 2017 or December 31, 2016
—

 
—

Common stock, $0.50 par value per share — authorized, 400,000,000; outstanding,
June 30, 2017 — 52,983,373; December 31, 2016 — 53,463,118
26,492

 
26,732

Additional paid-in capital
1,032,688

 
1,032,549

Retained earnings
1,827,139

 
1,827,026

Accumulated other comprehensive loss
(780,220
)
 
(834,032
)
Total shareholders’ equity
2,106,099


2,052,275

Total liabilities and shareholders’ equity
$
11,124,784


10,902,454

See accompanying notes to Consolidated Condensed Financial Statements.

3


RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
 
Six months ended June 30,
 
2017
 
2016
 
(In thousands)
Cash flows from operating activities from continuing operations:
 
 
 
Net earnings
$
88,965

 
129,544

Less: Loss from discontinued operations, net of tax
(657
)
 
(683
)
Earnings from continuing operations
89,622

 
130,227

Depreciation expense
621,020

 
581,043

Used vehicle sales, net
14,542

 
(31,129
)
Amortization expense and other non-cash charges, net
17,058

 
9,177

Non-operating pension costs and share-based compensation expense
23,979

 
32,231

Deferred income tax expense
43,009

 
67,031

Changes in operating assets and liabilities:
 
 
 
Receivables
(75,093
)
 
(39,071
)
Inventories
2,524

 
(2,633
)
Prepaid expenses and other assets
(1,115
)
 
(18,734
)
Accounts payable
7,666

 
68,584

Accrued expenses and other non-current liabilities
(11,517
)
 
(33,702
)
Net cash provided by operating activities from continuing operations
731,695

 
763,024

 
 
 
 
Cash flows from financing activities:
 
 
 
Net change in commercial paper borrowings and revolving credit facilities
329,268


162,105

Debt proceeds
575,528


298,254

Debt repaid
(925,999
)

(328,416
)
Dividends on common stock
(47,250
)
 
(44,261
)
Common stock issued
6,007

 
6,259

Common stock repurchased
(58,228
)
 
(21,899
)
Debt issuance costs
(1,285
)
 
(2,995
)
Net cash (used in) provided by financing activities
(121,959
)
 
69,047

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of property and revenue earning equipment
(855,252
)
 
(1,120,182
)
Sales of revenue earning equipment
202,033

 
245,681

Sales of operating property and equipment
3,960

 
6,322

Collections on direct finance leases and other items
32,829

 
43,957

Changes in restricted cash
259

 
886

Net cash used in investing activities
(616,171
)
 
(823,336
)
 
 
 
 
Effect of exchange rate changes on cash
3,352

 
(3,415
)
(Decrease)/Increase in cash and cash equivalents from continuing operations
(3,083
)
 
5,320

 
 
 
 
 
 
 
 
Decrease in cash and cash equivalents from discontinued operations
(355
)
 
(301
)
 
 
 
 
(Decrease)/Increase in cash and cash equivalents
(3,438
)
 
5,019

Cash and cash equivalents at January 1
58,801

 
60,945

Cash and cash equivalents at June 30
$
55,363

 
65,964

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 2016 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.


2. RECENT ACCOUNTING PRONOUNCEMENTS

Share-Based Compensation

In May 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The amendments in this update are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. We will adopt the standard as of January 1, 2018, on a prospective basis. We do not expect this standard to have an impact on our consolidated financial position, results of operations or cash flows.

Employee Benefits Plans

In March 2017, the FASB issued ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires an employer to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The standard is effective January 1, 2018, with early adoption as of January 1, 2017 permitted. We adopted the standard during the first quarter of 2017 and recorded the other components of net benefit cost within "Non-operating pension costs" in the Consolidated Condensed Statements of Earnings for both the current and prior year periods.

Intangibles - Goodwill and Other
     
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350), which requires an entity to perform a one-step quantitative impairment test, whereby a goodwill impairment loss will be measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). It eliminates the current two-step goodwill impairment test, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The standard is effective January 1, 2020, with early adoption as of January 1, 2017 permitted. We adopted the standard during the first quarter of 2017 and it did not have an impact on our consolidated financial position, results of operations or cash flows.




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



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 upon adoption of this standard on our consolidated financial position, results of operations or cash flows.

The new standard requires lessors to separate the lease component from the non-lease component (e.g., maintenance services) and 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 on the opening balance sheet for 2017 and restate all prior periods presented (2017 and 2018). We continue to evaluate the impact of adoption of this standard 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 (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. This standard will primarily impact our lease revenue from our ChoiceLease product line, specifically the non-lease component (mainly maintenance services) of the product line. In June 2017, the FASB provided further clarification guidance on the interaction of the transition provisions of the new revenue standard and the new lease standard. Based on this clarification, we will continue to apply the existing lease accounting guidance to our lease revenue upon adoption of the revenue standard. We will adopt the revenue standard on January 1, 2018, using the full retrospective transition method. With respect to other revenue sources, we do not expect the adoption of this standard to have a material impact on our consolidated financial position, results of operations or cash flows.


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



3. REVENUE EARNING EQUIPMENT

 
June 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
$
9,693,006

 
(3,200,466
)
 
6,492,540

 
$
9,486,977

 
(3,031,937
)
 
6,455,040

Commercial rental
2,532,681

 
(942,127
)
 
1,590,554

 
2,499,010

 
(935,346
)
 
1,563,664

Held for sale
495,334

 
(371,587
)
 
123,747

 
494,355

 
(365,337
)
 
129,018

Total
$
12,721,021

 
(4,514,180
)
 
8,206,841

 
$
12,480,342

 
(4,332,620
)
 
8,147,722

 ————————————
(1)
Revenue earning equipment, net includes vehicles acquired under capital leases of $36 million, less accumulated depreciation of $18 million, at June 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, some of our revenue earning equipment leases are classified as direct financing leases and, to a lesser extent, sales-type leases. As of June 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 deposits to be paid in advance in order to mitigate our credit risk. Additionally, our receivables are collateralized by the vehicles which further mitigates our credit risk.

As of June 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.

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


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



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)
 
June 30,
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Assets held for sale:
 
 
 
 
 
 
 
 
 
 
 
Revenue earning equipment (1):
 
 
 
 
 
 
 
 
 
 
 
Trucks
$
9,026

 
13,749

 
$
10,927

 
2,570

 
$
16,727

 
4,314

Tractors
23,726

 
51,795

 
12,134

 
9,206

 
17,317

 
14,088

Trailers
2,852

 
3,015

 
2,605

 
775

 
3,173

 
1,437

 
 
 
 
 
 
 
 
 
 
 
 
Total assets at fair value
$
35,604

 
68,559

 
$
25,666

 
12,551

 
$
37,217

 
19,839

 ————————————
(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 $88 million and $60 million as of June 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.

For the three and six months ended June 30, 2017 and 2016, the components of gains on used vehicles, net were as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Gains on vehicle sales, net
$
(10,344
)
 
(24,551
)
 
$
(22,675
)
 
(50,968
)
Losses from fair value adjustments
25,666

 
12,551

 
37,217

 
19,839

Used vehicle sales, net
$
15,322

 
(12,000
)
 
$
14,542

 
(31,129
)

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




4. GOODWILL

The carrying amount of goodwill attributable to each reportable business segment was as follows:
 
Fleet
Management
Solutions
 
Supply
Chain
Solutions
 
Dedicated
Transportation
Solutions
 
Total
 
(In thousands)
Balance at January 1, 2017:
 
 
 
 
 
 
 
  Goodwill
228,832

 
40,808

 
146,353

 
415,993

  Accumulated impairment losses
(10,322
)
 
—

 
(18,899
)
 
(29,221
)
 
218,510

 
40,808

 
127,454

 
386,772

Foreign currency translation adjustments
943

 
—

 
207

 
1,150

Balance at June 30, 2017:
 
 
 
 
 
 
 
  Goodwill
229,775

 
40,808

 
146,560

 
417,143

  Accumulated impairment losses
(10,322
)
 
—

 
(18,899
)
 
(29,221
)
 
219,453

 
40,808

 
127,661

 
387,922


We assess goodwill for impairment on April 1st of each year or more often if deemed necessary. In the second quarter of 2017, we completed our annual goodwill impairment test. We performed qualitative assessments for three reporting units, which considered individual factors such as macroeconomic conditions, changes in our industry and the markets in which we operate as well as our historical and expected future financial performance. After performing the qualitative assessments, we concluded it was more likely than not that fair value is greater than the carrying value and determined there was no impairment.

We performed quantitative assessments on our other two reporting units, including FMS Europe, and determined there was no impairment. We estimated the fair value of the reporting units using a discounted cash flow model. The principal assumptions used in the discounted cash flow model are projected operating results, weighted-average cost of capital, and terminal value. As of April 1, 2017, there was $14 million of goodwill recorded in FMS Europe. Based on discounted cash flows, we determined the fair value of the FMS Europe reporting unit exceeded its carrying value by over 25% resulting in no impairment to goodwill. Due to this reporting unit's relatively low headroom, in the event that the financial performance of the reporting unit does not meet our expectations during 2017, we may be required to perform an interim impairment analysis with respect to the carrying value of goodwill for this reporting unit prior to our next annual test, and based on the outcome of that analysis, could be required to take a non-cash impairment charge as a result of any such test.


9
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)



5. ACCRUED EXPENSES AND OTHER LIABILITIES

 
June 30, 2017
 
December 31, 2016
 
Accrued
Expenses
 
Non-Current
Liabilities
 
Total
 
Accrued
Expenses
 
Non-Current
Liabilities
 
Total
 
(In thousands)
Salaries and wages
$
83,016

 
—

 
83,016

 
$
90,913

 
—

 
90,913

Deferred compensation
3,802

 
52,021

 
55,823

 
2,992

 
46,541

 
49,533

Pension benefits
3,823

 
460,551

 
464,374

 
3,796

 
451,940

 
455,736

Other postretirement benefits
1,512

 
19,023

 
20,535

 
1,506

 
19,459

 
20,965

Other employee benefits
17,071

 
2,625

 
19,696

 
29,358

 
5,854

 
35,212

Insurance obligations (1)
130,833

 
268,160

 
398,993

 
127,470

 
234,336

 
361,806

Operating taxes
94,140

 
—

 
94,140

 
92,150

 
—

 
92,150

Income taxes
683

 
25,267

 
25,950

 
4,197

 
23,174

 
27,371

Interest
27,054

 
—

 
27,054

 
27,277

 
—

 
27,277

Customer deposits
64,193

 
4,188

 
68,381

 
61,225

 
4,569

 
65,794

Deferred revenue
16,675

 
—

 
16,675

 
14,064

 
—

 
14,064

Other
49,267

 
34,168

 
83,435

 
52,241

 
31,692

 
83,933

Total
$
492,069

 
866,003

 
1,358,072

 
$
507,189

 
817,565

 
1,324,754

 ————————————
(1)
Insurance obligations are primarily comprised of self-insured claim liabilities.

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



6. DEBT
 
Weighted-Average
Interest Rate
 
 
 
 
 
 
 
June 30,
2017
 
December 31,
2016
 
Maturities
 
June 30,
2017
 
December 31,
2016
 
 
 
 
 
 
 
(In thousands)
Short-term debt and current portion of long-term debt:
 
 
 
 
 
 
 
 
 
Short-term debt
1.39%
 
1.07%
 

 
$
136,016

 
177,629

Current portion of long-term debt
 
 
 
 
 
 
452,836

 
613,781

Total short-term debt and current portion of long-term debt
 
 
 
 
 
588,852

 
791,410

Long-term debt:
 
 
 
 
 
 
 
 
 
U.S. commercial paper (1)
1.29%
 
0.87%
 
2020
 
724,618

 
342,480

Global revolving credit facility
—%
 
2.06%
 
2020
 
—

 
4,703

Unsecured U.S. notes — Medium-term notes (1)
2.71%
 
2.67%
 
2017-2025
 
3,713,858

 
4,113,421

Unsecured U.S. obligations
2.45%
 
2.19%
 
2018
 
50,000

 
50,000

Unsecured foreign obligations
1.50%
 
1.55%
 
2017-2020
 
223,707

 
232,092

Asset-backed U.S. obligations (2)
1.85%
 
1.80%
 
2017-2024
 
527,476

 
459,876

Capital lease obligations
3.29%
 
3.17%
 
2017-2023
 
22,894

 
24,184

Total before fair market value adjustment
 
 
 
 
 
 
5,262,553

 
5,226,756

Fair market value adjustment on notes subject to hedging (3)
 
 
 
 
 
100

 
1,110

Debt issuance costs
 
 
 
 
 
 
(13,825
)
 
(14,221
)
 
 
 
 
 
 
 
5,248,828

 
5,213,645

Current portion of long-term debt
 
 
 
 
 
 
(452,836
)
 
(613,781
)
Long-term debt
 
 
 
 
 
 
4,795,992

 
4,599,864

Total debt
 
 
 
 
 
 
$
5,384,844

 
5,391,274

 ————————————
(1)
Amounts are net of unamortized original issue discounts of $7 million at June 30, 2017 and December 31, 2016.
(2)
Asset-backed U.S. obligations are related to financing transactions involving revenue earning equipment.
(3)
The notional amount of the executed interest rate swaps designated as fair value hedges was $675 million and $825 million at June 30, 2017 and December 31, 2016, respectively.

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 expires 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 June 30, 2017). 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 June 30, 2017 was 198%. At June 30, 2017, there was $339 million available under the credit facility.


11
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, we have the intent and ability to refinance the current portion of certain long-term debt on a long-term basis. At June 30, 2017, we classified $725 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 February 2017, we issued $300 million of unsecured medium-term notes maturing in March 2022. 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.

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. 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 June 30, 2017 or December 31, 2016.

At June 30, 2017 and December 31, 2016, we had letters of credit and surety bonds outstanding totaling $358 million and $354 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 June 30, 2017 and December 31, 2016 was approximately $4.91 billion and $4.97 billion, respectively. For publicly-traded debt, estimates of fair value were based on market prices. For other debt, fair value was estimated based on a model-driven approach using rates currently available to us for debt with similar terms and remaining maturities. The fair value measurements of our publicly-traded debt and other debt were classified within Level 2 of the fair value hierarchy. The carrying amounts reported in the Consolidated Condensed Balance Sheets for “Cash and cash equivalents,” “Receivables, net” and “Accounts payable” approximate fair value because of the immediate or short-term maturities of these financial instruments.


12
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 June 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 $675 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 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 June 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. 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 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 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.  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’s quarterly blackout periods as set forth in the trading plan. 

During the six months ended June 30, 2017 and June 30, 2016, we repurchased approximately 828,000 shares for $58.2 million and 322,000 shares for $21.9 million, respectively.


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




9. 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, 2016
 
$
(206,610
)
 
(620,292
)
 
(7,130
)
 
(834,032
)
Amortization
 
—

 
10,159

 
110

 
10,269

Other current period change
 
43,343

 
200

 
—

 
43,543

June 30, 2017
 
$
(163,267
)
 
(609,933
)
 
(7,020
)
 
(780,220
)

 
 
Currency
Translation
Adjustments and Other
 
Net Actuarial
Loss (1)
 
Prior Service
Credit (1)
 
Accumulated
Other
Comprehensive
Loss
 
 
(In thousands)
December 31, 2015
 
$
(136,020
)
 
(576,993
)
 
278

 
(712,735
)
Amortization
 
—

 
9,754

 
(72
)
 
9,682

Other current period change
 
(18,578
)
 
(5,597
)
 
(5,425
)
 
(29,600
)
June 30, 2016
 
$
(154,598
)
 
(572,836
)
 
(5,219
)
 
(732,653
)
_______________________ 
(1)
These amounts are included in the computation of net pension expense. See Note 12, "Employee Benefit Plans," for further information.

The gain from currency translation adjustments in the six months ended June 30, 2017 of $43.3 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 six months ended June 30, 2016 of $18.6 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.



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



10. EARNINGS PER SHARE

The following table presents the calculation of basic and diluted earnings per common share from continuing operations:
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands, except per share amounts)
Earnings per share — Basic:
 
 
 
 
 
 
 
Earnings from continuing operations
$
51,343

 
74,042

 
$
89,622

 
130,227

Less: Earnings allocated to unvested stock
(186
)
 
(235
)
 
(317
)
 
(398
)
Earnings from continuing operations available to common shareholders — Basic
$
51,157

 
73,807

 
$
89,305

 
129,829

 
 
 
 
 
 
 
 
Weighted average common shares outstanding — Basic
52,663

 
53,057

 
52,804

 
53,067

 
 
 
 
 
 
 
 
Earnings from continuing operations per common share — Basic
$
0.97

 
1.39

 
$
1.69

 
2.45

 
 
 
 
 
 
 
 
Earnings per share — Diluted:
 
 
 
 
 
 
 
Earnings from continuing operations
$
51,343

 
74,042

 
$
89,622

 
130,227

Less: Earnings allocated to unvested stock
(186
)
 
(234
)
 
(317
)
 
(397
)
Earnings from continuing operations available to common shareholders — Diluted
$
51,157

 
73,808

 
$
89,305

 
129,830

 
 
 
 
 
 
 
 
Weighted average common shares outstanding — Basic
52,663

 
53,057

 
52,804

 
53,067

Effect of dilutive equity awards
244

 
320

 
348

 
303

Weighted average common shares outstanding — Diluted
52,907

 
53,377

 
53,152

 
53,370

 
 
 
 
 
 
 
 
Earnings from continuing operations per common share — Diluted
$
0.97

 
1.38

 
$
1.68

 
2.43

 
 
 
 
 
 
 
 
Anti-dilutive equity awards not included above
1,231

 
699

 
911

 
928


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



11. 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 June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Stock option and stock purchase plans
$
1,953

 
1,904

 
$
3,858

 
3,777

Unvested stock
3,154

 
3,209

 
6,204

 
6,224

Share-based compensation expense
5,107

 
5,113


10,062


10,001

Income tax benefit
(1,760
)
 
(1,715
)
 
(3,482
)
 
(3,370
)
Share-based compensation expense, net of tax
$
3,347

 
3,398


$
6,580


6,631


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 June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Cash awards
$
44

 
177

 
$
121

 
328


Total unrecognized pre-tax compensation expense related to all share-based compensation arrangements at June 30, 2017 was $29.2 million and is expected to be recognized over a weighted-average period of 2.1 years.

The following table is a summary of the awards granted under the Plans during the periods presented:
 
Six months ended June 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
107

 
129

Total
697


721



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



12. EMPLOYEE BENEFIT PLANS

Components of net pension expense were as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Pension Benefits
 
 
 
 
 
 
 
Company-administered plans:
 
 
 
 
 
 
 
Service cost
$
3,017

 
3,005

 
$
6,266

 
6,405

Interest cost
21,426

 
27,093

 
42,915

 
49,332

Expected return on plan assets
(22,712
)
 
(22,667
)
 
(45,190
)
 
(45,752
)
Amortization of:
 
 
 
 
 
 
 
Net actuarial loss
8,077

 
8,600

 
16,527

 
16,565

Prior service cost
121

 
2,740

 
266

 
2,740

 
9,929

 
18,771

 
20,784

 
29,290

Union-administered plans
2,621

 
2,406

 
5,123

 
4,728

Net pension expense
$
12,550

 
21,177

 
$
25,907

 
34,018

 
 
 
 
 
 
 
 
Company-administered plans:
 
 
 
 
 
 
 
U.S.
$
10,547

 
19,263

 
$
21,858

 
30,437

Non-U.S.
(618
)
 
(492
)
 
(1,074
)
 
(1,147
)
 
9,929

 
18,771

 
20,784

 
29,290

Union-administered plans
2,621

 
2,406

 
5,123

 
4,728

Net pension expense
$
12,550

 
21,177

 
$
25,907

 
34,018

 
 
 
 
 
 
 
 

During the six months ended June 30, 2017, we contributed $7.2 million to our pension plans. In 2017, the expected total contributions to our pension plans are approximately $23 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 six months ended June 30, 2017.

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.



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





13. OTHER ITEMS IMPACTING COMPARABILITY

Our primary measure of segment performance as shown in Note 16, "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 June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Operating tax adjustment
$
—

 
—

 
$
2,205

 
—

Restructuring
(2,574
)
 
—

 
(2,574
)
 
—

Pension-related adjustments (1)

—

 
7,650

 
—

 
7,650

Restructuring and other items, net
$
(2,574
)
 
7,650

 
$
(369
)
 
7,650

_______________
(1)
Refer to Note 12, Employee Benefit Plans for additional information.

During the second quarter of 2017, we realized restructuring credits of $2.6 million related to the gains on sale of certain UK facilities that were closed as part of prior year restructuring activities. These items were reflected within "Miscellaneous income, net" 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.


14. OTHER MATTERS

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

Our estimates regarding potential losses and materiality are based on our judgment and assessment of the claims utilizing currently available information. Although we will continue to reassess our reserves and estimates based on future developments, our objective assessment of the legal merits of such claims may not always be predictive of the outcome and actual results may vary from our current estimates.


18
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)



15. SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information was as follows:
 
Six months ended June 30,
 
2017
 
2016
 
(In thousands)
Interest paid
$
66,188

 
71,141

Income taxes paid
9,086

 
10,233

Changes in accounts payable related to purchases of revenue earning equipment
77,717

 
(105,480
)
Operating and revenue earning equipment acquired under capital leases
3,424

 
777




16. SEGMENT REPORTING

Our operating segments are aggregated into reportable business segments based upon similar economic characteristics, products, services, customers and delivery methods. We report our financial performance in three business segments: (1) Fleet Management Solutions (FMS), which provides leasing, commercial rental and maintenance of trucks, tractors and trailers to customers principally in the U.S., Canada and the U.K.; (2) Dedicated Transportation Solutions (DTS), 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 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.

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 restructuring and other items, net, as discussed in Note 13, "Other Items Impacting Comparability." 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 considered to be overhead not attributable to any segment and remain unallocated in CSS. Included among the unallocated overhead remaining within CSS are the costs for investor relations, public affairs and certain executive compensation. CSS costs attributable to the business segments are predominantly allocated to FMS, DTS and SCS as follows:

•Finance, corporate services, and health and safety — allocated based upon estimated and planned resource utilization;

•Human resources — individual costs within this category are allocated under various methods, including allocation based on estimated utilization and number of personnel 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. Expenses, where allocated, are based primarily on the number of personnel supported.








19
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)


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

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 six months ended June 30, 2017 and 2016. Segment results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented.
 
FMS
 
DTS
 
SCS
 
Eliminations
 
Total
 
(In thousands)
For the three months ended June 30, 2017
 
 
 
 
 
 
 
 
Revenue from external customers
$
1,049,878

 
272,612

 
470,724

 
—

 
1,793,214

Inter-segment revenue
113,701

 
—

 
—

 
(113,701
)
 
—

Total revenue
$
1,163,579

 
272,612

 
470,724

 
(113,701
)
 
1,793,214

 
 
 
 
 
 
 
 
 
 
Segment EBT
$
68,090

 
14,849

 
25,858

 
(12,373
)
 
96,424

Unallocated CSS
 
 
 
 
 
 
 
 
(11,719
)
     Non-operating pension costs (1)
 
 
 
 
 
 
 
 
(6,587
)
Restructuring and other items, net
 
 
 
 
 
 
 
 
2,574

Earnings from continuing operations before income taxes
 
 
 
 
 
 
 
 
$
80,692

 
 
 
 
 
 
 
 
 
 
   Segment capital expenditures paid (2)
$
480,340

 
343

 
7,136

 
—

 
487,819

Unallocated CSS capital expenditures paid
 
 
 
 
 
 
 
 
6,094

Capital expenditures paid
 
 
 
 
 
 
 
 
$
493,913

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the three months ended June 30, 2016
 
 
 
 
 
 
 
 
Revenue from external customers
$
1,043,430

 
258,262

 
402,052

 
—

 
1,703,744

Inter-segment revenue
108,083

 
—

 
—

 
(108,083
)
 
—

Total revenue
$
1,151,513

 
258,262

 
402,052

 
(108,083
)
 
1,703,744

 
 
 
 
 
 
 
 
 
 
Segment EBT
$
111,155

 
16,460

 
28,362

 
(12,766
)
 
143,211

Unallocated CSS
 
 
 
 
 
 
 
 
(11,012
)
Non-operating pension costs (1)
 
 
 
 
 
 
 
 
(7,770
)
Pension-related charge (3)
 
 
 
 
 
 
 
 
(7,650
)
Earnings from continuing operations before income taxes
 
 
 
 
 
 
 
 
$
116,779

 
 
 
 
 
 
 
 
 
 
  Segment capital expenditures paid (2)
$
502,040

 
363

 
37,139

 
—

 
539,542

Unallocated CSS capital expenditures paid
 
 
 
 
 
 
 
 
5,609

Capital expenditures paid
 
 
 
 
 
 
 
 
$
545,151

 ————————————
(1)
Non-operating pension costs include 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.
(2)
Excludes revenue earning equipment acquired under capital leases.
(3)
During the second quarter of 2016, we determined that certain pension benefit improvements made in 2009 were not fully reflected in our projected benefit obligation. We recognized a charge of $7.7 million related to these benefit improvements.



20
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)



 
FMS
 
DTS
 
SCS
 
Eliminations
 
Total
 
(In thousands)
For the six months ended June 30, 2017
 
 
 
 
 
 
 
 
Revenue from external customers
$
2,068,618

 
539,286

 
933,473

 
—

 
3,541,377

Inter-segment revenue
227,431

 
—

 
—

 
(227,431
)
 
—

Total revenue
$
2,296,049

 
539,286

 
933,473

 
(227,431
)
 
3,541,377

 
 
 
 
 
 
 
 
 
 
Segment EBT
$
120,280

 
26,122

 
53,307

 
(23,589
)
 
176,120

Unallocated CSS
 
 
 
 
 
 
 
 
(21,924
)
     Non-operating pension costs (1)
 
 
 
 
 
 
 
 
(13,917
)
Restructuring and other items, net
 
 
 
 
 
 
 
 
369

Earnings from continuing operations before income taxes
 
 
 
 
 
 
 
 
$
140,648

 
 
 
 
 
 
 
 
 
 
  Segment capital expenditures paid (2)
$
824,695

 
1,111

 
18,134

 
—

 
843,940

Unallocated CSS capital expenditures paid
 
 
 
 
 
 
 
 
11,312

Capital expenditures paid
 
 
 
 
 
 
 
 
$
855,252

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the six months ended June 30, 2016
 
 
 
 
 
 
 
 
Revenue from external customers
$
2,039,545

 
503,104

 
790,767

 
—

 
3,333,416

Inter-segment revenue
209,896

 
—

 
—

 
(209,896
)
 
—

Total revenue
$
2,249,441

 
503,104

 
790,767

 
(209,896
)
 
3,333,416

 
 
 
 
 
 
 
 
 
 
Segment EBT
$
194,047

 
30,716

 
48,149

 
(24,510
)
 
248,402

Unallocated CSS
 
 
 
 
 
 
 
 
(20,685
)
Non-operating pension costs (1)
 
 
 
 
 
 
 
 
(14,580
)
Pension-related charge (3)

 
 
 
 
 
 
 
 
(7,650
)
Earnings from continuing operations before income taxes
 
 
 
 
 
 
 
 
$
205,487

 
 
 
 
 
 
 
 
 
 
  Segment capital expenditures paid (2)
$
1,062,325

 
880

 
44,462

 
—

 
1,107,667

Unallocated CSS capital expenditures paid
 
 
 
 
 
 
 
 
12,515

Capital expenditures paid
 
 
 
 
 
 
 
 
$
1,120,182

 ————————————
(1)
Non-operating pension costs include 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.
(2)
Excludes revenue earning equipment acquired under capital leases.
(3)
During the second quarter of 2016, we determined that certain pension benefit improvements made in 2009 were not fully reflected in our projected benefit obligation. We recognized a charge of $7.7 million related to these benefit improvements.


21
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS



OVERVIEW

The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the unaudited Consolidated Condensed Financial Statements and notes thereto included under Item 1. 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 2016 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) Fleet Management Solutions (FMS), which provides leasing, commercial rental, and maintenance of trucks, tractors and trailers to customers principally in the U.S., Canada and the U.K.; (2) Dedicated Transportation Solutions (DTS), 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 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.

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 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.



22
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)



Operating results were as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
Change 2017/2016
 
2017
 
2016
 
2017
 
2016
 
Three Months
Six Months
 
(In thousands, except per share amounts)
 
 
 
Total revenue
$
1,793,214

 
1,703,744

 
$
3,541,377

 
3,333,416

 
   5
 %
   6
 %
Operating revenue (1)
1,483,189

 
1,449,713

 
2,928,315

 
2,855,726

 
   2
 %
   3
 %



 


 
 
 
 
 


 



 


 
 
 
 
 


 
EBT
$
80,692

 
116,779

 
$
140,648

 
205,487

 
   (31
)%
   (32
)%
Comparable EBT (2)
84,705

 
132,199

 
154,196

 
227,717

 
   (36
)%
   (32
)%
Earnings from continuing operations
51,343

 
74,042

 
89,622

 
130,227

 
   (31
)%
   (31
)%
Comparable earnings from continuing operations (2)
53,097

 
83,307

 
97,262

 
143,481

 
   (36
)%
   (32
)%
Net earnings
50,816

 
73,750

 
88,965

 
129,544

 
   (31
)%
   (31
)%


 

 
 
 
 
 


 


 

 
 
 
 
 


 
Earnings per common share (EPS) — Diluted

 

 
 
 
 
 


 
Continuing operations
$
0.97

 
1.38

 
$
1.68

 
2.43

 
   (30
)%
   (31
)%
Comparable (2)
1.00

 
1.56

 
1.82

 
2.68

 
   (36
)%
   (32
)%
Net earnings
0.96

 
1.38

 
1.67

 
2.42

 
   (30
)%
   (31
)%
  ————————————
(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 5% and 2%, respectively, in the second quarter of 2017. For the first half of 2017, total revenue increased 6% and operating revenue increased 3%. 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. Total revenue growth was partially offset by negative impacts from foreign exchange. Operating revenue in both periods increased due to higher revenue in the SCS and DTS business segments and higher ChoiceLease revenue, partially offset by lower commercial rental revenue and negative impacts from foreign exchange.

EBT decreased 31% and 32% in the second quarter and first half of 2017, respectively, primarily reflecting lower used vehicle sales and rental results.

23
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)



CONSOLIDATED RESULTS

Lease and Rental
 
Three months ended June 30,
 
Six months ended June 30,
 
Change 2017/2016
 
2017
 
2016
 
2016
 
2015