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EX-32.1 - EXHIBIT - RYDER SYSTEM INCryderex32-q12015.htm
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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 MARCH 31, 2015
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

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 March 31, 2015 was 53,309,221.
 
 
 
 
 




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 March 31,
 
2015
 
2014
 
(In thousands, except per share amounts)
Lease and rental revenues
$
729,024

 
689,682

Services revenue
693,704

 
709,699

Fuel services revenue
144,425

 
211,356

Total revenues
1,567,153

 
1,610,737

 
 
 
 
Cost of lease and rental
519,174

 
493,043

Cost of services
582,330

 
606,229

Cost of fuel services
136,289

 
207,205

Other operating expenses
34,744

 
36,645

Selling, general and administrative expenses
206,605

 
191,702

Gains on vehicle sales, net
(29,579
)
 
(28,818
)
Interest expense
35,849

 
35,109

Miscellaneous income, net
(2,637
)
 
(5,382
)
 
1,482,775

 
1,535,733

Earnings from continuing operations before income taxes
84,378

 
75,004

Provision for income taxes
30,925


25,906

Earnings from continuing operations
53,453


49,098

Loss from discontinued operations, net of tax
(537
)
 
(866
)
Net earnings
$
52,916

 
48,232

 
 
 
 
Earnings (loss) per common share — Basic
 
 
 
Continuing operations
$
1.01

 
0.93

Discontinued operations
(0.01
)
 
(0.02
)
Net earnings
$
1.00

 
0.91

 
 
 
 
Earnings (loss) per common share — Diluted
 
 
 
Continuing operations
$
1.00

 
0.92

Discontinued operations
(0.01
)
 
(0.02
)
Net earnings
$
0.99

 
0.90

 
 
 
 
Cash dividends declared per common share
$
0.37

 
0.34


See accompanying notes to consolidated condensed financial statements.

1


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

    
    
 
Three months ended March 31,
 
2015
 
2014
 
(In thousands)
 
 
 
 
Net earnings
$
52,916

 
48,232

 
 
 
 
Other comprehensive loss:
 
 
 
 
 
 
 
Changes in cumulative translation adjustment and other
(57,372
)
 
(14,592
)
 
 
 
 
Amortization of pension and postretirement items
7,058

 
5,033

Income tax expense related to amortization of pension and postretirement items
(2,448
)
 
(1,906
)
Amortization of pension and postretirement items, net of taxes
4,610

 
3,127

 
 
 
 
Other comprehensive loss, net of taxes
(52,762
)
 
(11,465
)
 
 
 
 
Comprehensive income
$
154

 
36,767

See accompanying notes to consolidated condensed financial statements.




2



RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
 
 
March 31,
2015
 
December 31,
2014
 
(Dollars in thousands, except per
share amount)
Assets:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
72,199


50,092

Receivables, net of allowance of $15,372 and $16,388, respectively
778,280


794,864

Inventories
63,021


66,007

Prepaid expenses and other current assets
164,519


165,234

Total current assets
1,078,019

 
1,076,197

Revenue earning equipment, net of accumulated depreciation of $3,679,498 and $3,648,704, respectively
7,208,345


6,994,448

Operating property and equipment, net of accumulated depreciation of $1,046,137 and $1,035,028, respectively
700,118


699,594

Goodwill
391,082


393,029

Intangible assets
63,977


66,619

Direct financing leases and other assets
465,250


446,099

Total assets
$
9,906,791


9,675,986

 
 
 
 
Liabilities and shareholders’ equity:
 
 
 
Current liabilities:
 
 
 
Short-term debt and current portion of long-term debt
$
11,417


12,207

Accounts payable
625,473


560,852

Accrued expenses and other current liabilities
489,647


520,532

Total current liabilities
1,126,537

 
1,093,591

Long-term debt
4,692,503


4,500,275

Other non-current liabilities
788,094


786,676

Deferred income taxes
1,488,111


1,475,970

Total liabilities
8,095,245

 
7,856,512

 
 
 
 
Shareholders’ equity:
 
 
 
Preferred stock of no par value per share — authorized, 3,800,917; none outstanding,
   March 31, 2015 or December 31, 2014

 

Common stock of $0.50 par value per share — authorized, 400,000,000; outstanding,
   March 31, 2015 — 53,309,221; December 31, 2014 — 53,039,688
26,655

 
26,520

Additional paid-in capital
978,748

 
962,328

Retained earnings
1,479,175

 
1,450,896

Accumulated other comprehensive loss
(673,032
)
 
(620,270
)
Total shareholders’ equity
1,811,546


1,819,474

Total liabilities and shareholders’ equity
$
9,906,791


9,675,986

See accompanying notes to consolidated condensed financial statements.

3



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

 
Three months ended March 31,
 
2015
 
2014
 
(In thousands)
Cash flows from operating activities from continuing operations:
 
 
 
Net earnings
$
52,916

 
48,232

Less: Loss from discontinued operations, net of tax
(537
)
 
(866
)
Earnings from continuing operations
53,453

 
49,098

Depreciation expense
262,395

 
248,815

Gains on vehicle sales, net
(29,579
)
 
(28,818
)
Share-based compensation expense
5,665

 
4,858

Amortization expense and other non-cash charges, net
13,317

 
14,097

Deferred income tax expense
26,719

 
21,653

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Receivables
10,775

 
(41,526
)
Inventories
2,563

 
(629
)
Prepaid expenses and other assets
(17,093
)
 
(14,410
)
Accounts payable
(28,847
)
 
14,423

Accrued expenses and other non-current liabilities
(21,490
)
 
(29,901
)
Net cash provided by operating activities from continuing operations
277,878

 
237,660

 
 
 
 
Cash flows from financing activities from continuing operations:
 
 
 
Net change in commercial paper borrowings
204,750


142,834

Debt proceeds
455,111


366,612

Debt repaid, including capital lease obligations
(457,569
)

(252,845
)
Dividends on common stock
(20,084
)
 
(18,005
)
Common stock issued
11,846

 
18,526

Common stock repurchased
(6,141
)
 
(40,437
)
Excess tax benefits from share-based compensation
620

 
293

Debt issuance costs
(3,696
)
 
(1,809
)
Net cash provided by financing activities from continuing operations
184,837

 
215,169

 
 
 
 
Cash flows from investing activities from continuing operations:
 
 
 
Purchases of property and revenue earning equipment
(553,242
)
 
(578,722
)
Sales of revenue earning equipment
96,821

 
125,673

Sales of operating property and equipment
273

 
2,004

Acquisitions

 
(1,649
)
Collections on direct finance leases
16,243

 
16,184

Changes in restricted cash
(912
)
 
(4,087
)
Other

 
(1,250
)
Net cash used in investing activities from continuing operations
(440,817
)
 
(441,847
)
 
 
 
 
Effect of exchange rate changes on cash
756

 
1,369

Increase in cash and cash equivalents from continuing operations
22,654

 
12,351

 
 
 
 
Decrease in cash and cash equivalents from discontinued operations
(547
)
 
(1,127
)
 
 
 
 
Increase in cash and cash equivalents
22,107

 
11,224

Cash and cash equivalents at January 1
50,092

 
61,562

Cash and cash equivalents at March 31
$
72,199

 
72,786

See accompanying notes to consolidated condensed financial statements.

4



RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS’ EQUITY
(unaudited)
 
 
Preferred
Stock
 
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
 
Amount
 
Shares
 
Par
 
 
(Dollars in thousands, except per share amount)
Balance at December 31, 2014
$

 
53,039,688

 
$
26,520

 
962,328

 
1,450,896

 
(620,270
)
 
1,819,474

Comprehensive income

 

 

 

 
52,916

 
(52,762
)
 
154

Common stock dividends declared — $0.37 per share

 

 

 

 
(19,746
)
 

 
(19,746
)
Common stock issued under employee stock option and stock purchase plans (1)

 
338,009

 
170

 
11,623

 

 

 
11,793

Benefit plan stock sales (2)

 
631

 

 
53

 

 

 
53

Common stock repurchases

 
(69,107
)
 
(35
)
 
(1,215
)
 
(4,891
)
 

 
(6,141
)
Share-based compensation

 

 

 
5,665

 

 

 
5,665

Tax benefits from share-based compensation

 

 

 
294

 

 

 
294

Balance at March 31, 2015
$

 
53,309,221

 
$
26,655

 
978,748

 
1,479,175

 
(673,032
)
 
1,811,546

————————————
(1)Net of common shares delivered as payment for the exercise price or to satisfy the option holders’ withholding tax liability upon exercise of options.
(2)Represents open-market transactions of common shares by the trustee of Ryder’s deferred compensation plans.
See accompanying notes to consolidated condensed financial statements.

5

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


(A) 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 2014 Annual Report on Form 10-K and should be read in conjunction with the Consolidated Financial Statements and notes thereto. 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.

During the first quarter of 2015, our management structure changed within the supply chain business. We created the role of President of Dedicated Transportation Solutions (DTS) for the dedicated product offering which was within Supply Chain Solutions (SCS). Beginning with the period ended March 31, 2015, we are reporting our financial performance based on our new segments: (1) Fleet Management Solutions (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 services provided as part of an integrated, multi-service, supply chain solution will continue to be reported in the SCS business segment where those services will continue to be managed. As a result, we recasted certain prior period amounts to conform to the way we internally manage and monitor segment performance during the year. This change impacted Note (F), "Goodwill," and Note (Q), "Segment Reporting," with no impact on consolidated revenues, net income or cash flows.


(B) RECENT ACCOUNTING PRONOUNCEMENTS

Presentation of Debt Issuance Costs
     
On April 7, 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires an entity to present debt issuance costs as a direct deduction from the carrying amount of the related debt liability on the balance sheet. The update requires retrospective application and represents a change in accounting principle. The update becomes effective January 1, 2016. Based on the balances as of March 31, 2015, the adoption of this ASU will require us to reclassify $18.7 million of unamortized debt issuance costs from "Direct financing leases and other assets" to "Long-term debt."

Revenue Recognition

On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which 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 will replace most existing revenue recognition guidance when it becomes effective January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition methods. We are evaluating the effect that this ASU will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our consolidated financial position and results of operations.



6

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


(C) 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. Awards under the Plans principally include at-the-money stock options, nonvested stock and cash awards. Nonvested stock awards include grants of market-based, performance-based, and time-vested restricted stock rights. Under the terms of our Plans, dividends may be paid on our nonvested stock awards but are not paid unless the 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 date of grant of the award until the date the shares underlying the award are delivered.

The following table provides information on share-based compensation expense and income tax benefits recognized during the periods:
 
Three months ended March 31,
 
2015
 
2014
 
(In thousands)
Stock option and stock purchase plans
$
2,301

 
2,237

Nonvested stock
3,364

 
2,621

Share-based compensation expense
5,665

 
4,858

Income tax benefit
(1,882
)
 
(1,676
)
Share-based compensation expense, net of tax
$
3,783

 
3,182


During the three months ended March 31, 2015 and 2014, approximately 358,000 and 405,000 stock options, respectively, were granted under the Plans. These awards generally vest evenly over a three year period beginning on the date of grant. The stock options have contractual terms of ten years. The fair value of each option award at the date of grant was estimated using a Black-Scholes-Merton option-pricing valuation model. Share-based compensation expense is recognized on a straight-line basis over the vesting period. The weighted-average fair value per option granted during the three months ended March 31, 2015 and 2014 was $18.46 and $14.99, respectively.

During the three months ended March 31, 2015 and 2014, approximately 19,000 and 22,000 market-based restricted stock rights were granted, respectively, under the Plans. The awards are segmented into three performance periods of one, two and three years. At the end of each performance period, up to 125% of the award may be earned based on Ryder's total shareholder return (TSR) compared to the target TSR of a peer group over the applicable performance period. If earned, employees will receive the grant of stock at the end of the relevant three year performance period provided they continue to be employed with Ryder, subject to Compensation Committee approval. The fair value of the market-based restricted stock rights was estimated using a lattice-based option-pricing valuation model that incorporates a Monte-Carlo simulation. The fair value of the market-based awards was determined on the grant date and considers the likelihood of Ryder achieving the market-based condition. Share-based compensation expense is recognized on a straight-line basis over the vesting period. The weighted-average fair value per market-based restricted stock right granted during the three months ended March 31, 2015 and 2014 was $89.40 and $61.07, respectively.


7

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


During the three months ended March 31, 2015 and 2014, approximately 35,000 and 42,000 performance-based restricted stock rights (PBRSRs), respectively, were awarded under the Plans. The awards are segmented into three one-year performance periods. For these awards, up to 125% of the awards may be earned based on Ryder's one-year adjusted return on capital (ROC) measured against an annual ROC target. If earned, employees will receive the grant of stock three years after the grant date, provided they continue to be employed with Ryder, subject to Compensation Committee approval. For accounting purposes, these awards are not considered granted until the Compensation Committee approves the annual ROC target. During the three months ended March 31, 2015 and 2014, approximately 42,000 and 30,000 PBRSRs, respectively, were considered granted for accounting purposes. The fair value of the PBRSRs is determined and fixed on the grant date based on Ryder's stock price on the date of grant. Share-based compensation expense is recognized on a straight-line basis over the vesting period, based upon the probability that the performance target will be met. The weighted-average fair value per PBRSR granted during the three months ended March 31, 2015 and 2014 was $93.04 and $71.43, respectively.

During the three months ended March 31, 2015 and 2014, approximately 68,000 and 87,000 time-vested restricted stock rights, respectively, were granted under the Plans. The time-vested restricted stock rights entitle the holder to shares of common stock when the awards generally vest at the end of the three-year period after the grant date. The fair value of the time-vested awards is determined and fixed on the date of grant based on Ryder’s stock price on the date of grant. Share-based compensation expense is recognized on a straight-line basis over the vesting period. The weighted-average fair value per time-vested restricted stock right granted during the three months ended March 31, 2015 and 2014 was $93.50 and $71.40, respectively.

During the three months ended March 31, 2015 and 2014, employees received market-based cash awards. The cash awards have the same vesting provisions as the market-based restricted stock rights. The cash awards are accounted for as liability awards under the share-based compensation accounting guidance as the awards are based upon the performance of our common stock and are settled in cash. As a result, the liability is adjusted to reflect fair value at the end of each reporting period. The fair value of the cash awards was estimated using a lattice-based option-pricing valuation model that incorporates a Monte-Carlo simulation. Share-based compensation expense is recognized on a straight-line basis over the vesting period.

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 March 31,
 
2015
 
2014
 
(In thousands)
Cash awards
$
172

 
523


Total unrecognized pre-tax compensation expense related to all share-based compensation arrangements at March 31, 2015 was $38.5 million and is expected to be recognized over a weighted-average period of 2.0 years.





8

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


(D) EARNINGS PER SHARE

The following table presents the calculation of basic and diluted earnings per common share from continuing operations:
 
Three months ended March 31,
 
2015
 
2014
 
(In thousands, except per share amounts)
Earnings per share — Basic:
 
 
 
Earnings from continuing operations
$
53,453

 
49,098

Less: Distributed and undistributed earnings allocated to nonvested stock
(147
)
 
(255
)
Earnings from continuing operations available to common shareholders — Basic
$
53,306

 
48,843

 
 
 
 
Weighted average common shares outstanding — Basic
52,596

 
52,660

 
 
 
 
Earnings from continuing operations per common share — Basic
$
1.01

 
0.93

 
 
 
 
Earnings per share — Diluted:
 
 
 
Earnings from continuing operations
$
53,453

 
49,098

Less: Distributed and undistributed earnings allocated to nonvested stock
(145
)
 
(255
)
Earnings from continuing operations available to common shareholders — Diluted
$
53,308

 
48,843

 
 
 
 
Weighted average common shares outstanding — Basic
52,596

 
52,660

Effect of dilutive equity awards
510

 
463

Weighted average common shares outstanding — Diluted
53,106

 
53,123

 
 
 
 
Earnings from continuing operations per common share — Diluted
$
1.00

 
0.92

 
 
 
 
Anti-dilutive equity awards not included above
184

 
215


9

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


(E) REVENUE EARNING EQUIPMENT

 
March 31, 2015
 
December 31, 2014
 
Cost
 
Accumulated
Depreciation
 
Net  Book
Value(1)
 
Cost
 
Accumulated
Depreciation
 
Net  Book
Value(1)
 
(In thousands)
Held for use:
 
Full service lease
$
8,042,352

 
(2,614,711
)
 
5,427,641

 
$
7,918,497

 
(2,591,688
)
 
5,326,809

Commercial rental
2,513,888

 
(830,133
)
 
1,683,755

 
2,411,957

 
(830,683
)
 
1,581,274

Held for sale
331,603

 
(234,654
)
 
96,949

 
312,698

 
(226,333
)
 
86,365

Total
$
10,887,843

 
(3,679,498
)
 
7,208,345

 
$
10,643,152

 
(3,648,704
)
 
6,994,448

 ————————————
(1)
Revenue earning equipment, net includes vehicles acquired under capital leases of $48.4 million, less accumulated depreciation of $24.3 million, at March 31, 2015, and $47.8 million, less accumulated depreciation of $22.5 million, at December 31, 2014.

At the end of 2014, we completed our annual review of residual values and useful lives of revenue earning equipment. Based on the results of our analysis, we adjusted the estimated residual values of certain classes of revenue earning equipment effective January 1, 2015. The change in estimated residual values and useful lives increased pre-tax earnings for the first quarter of 2015 by approximately $10.0 million.

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 March 31, 2015 and December 31, 2014, the net investment in direct financing and sales-type leases was $422.2 million and $417.0 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 upon signing of 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, based on their estimated fair values, which further mitigates our credit risk.

As of March 31, 2015 and December 31, 2014, 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. The allowance for credit losses was $0.3 million as of March 31, 2015 and December 31, 2014.

    


10

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


(F) GOODWILL

The carrying amount of goodwill attributable to each reportable business segment with changes therein was as follows:

 
Fleet
Management
Solutions
 
Dedicated
Transportation
Solutions
 
Supply
Chain
Solutions
 
Total
 
 
Balance at January 1, 2015:
 
 
 
 
 
 
 
Goodwill
$
233,217

 
40,808

 
148,225

 
422,250

Accumulated impairment losses
(10,322
)
 

 
(18,899
)
 
(29,221
)
 
222,895

 
40,808

 
129,326

 
393,029

Foreign currency translation adjustments
(1,321
)
 

 
(626
)
 
(1,947
)
Balance at March 31, 2015:
 
 
 
 
 
 
 
Goodwill
231,896

 
40,808

 
147,599

 
420,303

Accumulated impairment losses
(10,322
)
 

 
(18,899
)
 
(29,221
)
 
$
221,574

 
40,808

 
128,700

 
391,082


As discussed in Note (Q), "Segment Reporting", we disaggregated our SCS business segment into DTS and SCS. This resulted in a change in our SCS U.S. operating segments and reporting units. We allocated goodwill to our DTS reporting unit using a relative fair value approach. In addition, we completed an assessment of any potential goodwill impairment for the SCS U.S. reporting unit immediately prior to and following the reallocation and determined that no impairment existed.

(G) ACCRUED EXPENSES AND OTHER LIABILITIES
 
March 31, 2015
 
December 31, 2014
 
Accrued
Expenses
 
Non-Current
Liabilities
 
Total
 
Accrued
Expenses
 
Non-Current
Liabilities
 
Total
 
(In thousands)
Salaries and wages
$
81,267

 

 
81,267

 
$
114,446

 

 
114,446

Deferred compensation
2,197

 
40,641

 
42,838

 
3,209

 
37,093

 
40,302

Pension benefits
3,681

 
445,789

 
449,470

 
3,739

 
444,657

 
448,396

Other postretirement benefits
2,094

 
26,442

 
28,536

 
2,112

 
26,889

 
29,001

Other employee benefits
1,344

 
15,967

 
17,311

 
7,172

 
19,276

 
26,448

Insurance obligations (1)
135,652

 
192,773

 
328,425

 
132,246

 
189,431

 
321,677

Environmental liabilities
3,879

 
7,360

 
11,239

 
3,877

 
8,002

 
11,879

Operating taxes
106,159

 

 
106,159

 
92,330

 

 
92,330

Income taxes
2,854

 
23,875

 
26,729

 
5,066

 
22,843

 
27,909

Interest
28,020

 

 
28,020

 
32,441

 

 
32,441

Deposits, mainly from customers
60,654

 
5,752

 
66,406

 
59,388

 
5,929

 
65,317

Deferred revenue
11,624

 

 
11,624

 
11,759

 

 
11,759

Acquisition holdbacks
5,714

 

 
5,714

 
3,817

 
2,187

 
6,004

Other
44,508

 
29,495

 
74,003

 
48,930

 
30,369

 
79,299

Total
$
489,647

 
788,094

 
1,277,741

 
$
520,532

 
786,676

 
1,307,208

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


11

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


(H) DEBT
 
Weighted-Average
Interest Rate
 
 
 
 
 
 
 
March 31,
2015
 
December 31,
2014
 
Maturities
 
March 31,
2015
 
December 31,
2014
 
 
 
 
 
 
 
(In thousands)
Short-term debt and current portion of long-term debt:
 
 
 
 
 
 
 
 
 
Short-term debt
1.77%
 
1.30%
 
2015
 
$
2,550

 
3,773

Current portion of long-term debt, including capital leases
 
 
 
 
 
 
8,867

 
8,434

Total short-term debt and current portion of long-term debt
 
 
 
 
 
 
11,417

 
12,207

Long-term debt:
 
 
 
 
 
 
 
 
 
U.S. commercial paper (1)
0.46%
 
0.35%
 
2020
 
481,410

 
276,694

Global revolving credit facility
2.67%
 
1.60%
 
2020
 
22,710

 
11,190

Unsecured U.S. notes — Medium-term notes (1)
3.25%
 
3.29%
 
2015-2025
 
3,822,369

 
3,772,159

Unsecured U.S. obligations
1.49%
 
0.76%
 
2018
 
50,000

 
110,500

Unsecured foreign obligations
1.92%
 
2.01%
 
2015-2020
 
279,992

 
295,776

Capital lease obligations
3.57%
 
3.65%
 
2015-2019
 
35,004

 
37,560

Total before fair market value adjustment
 
 
 
 
 
 
4,691,485

 
4,503,879

Fair market value adjustment on notes subject to hedging (2)
 
 
 
 
 
9,885

 
4,830

 
 
 
 
 
 
 
4,701,370

 
4,508,709

Current portion of long-term debt, including capital leases
 
 
 
 
 
 
(8,867
)
 
(8,434
)
Long-term debt
 
 
 
 
 
 
4,692,503

 
4,500,275

Total debt
 
 
 
 
 
 
$
4,703,920

 
4,512,482

 ————————————
(1)
We had unamortized original issue discounts of $7.7 million and $7.9 million at March 31, 2015 and December 31, 2014, respectively.
(2)
The notional amount of executed interest rate swaps designated as fair value hedges was $600 million at March 31, 2015 and December 31, 2014.


12

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


We maintain a 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, Royal Bank of Scotland Plc, U.S. Bank National Association and Wells Fargo Bank, N.A. The availability under our credit facility is $1.2 billion and 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 March 31, 2015). 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 March 31, 2015 was 197%. At March 31, 2015, there was $695.3 million available under the credit facility, net of outstanding commercial paper borrowings.

Our global revolving credit facility enables us to refinance short-term obligations on a long-term basis. Settlement of 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 long-term debt on a long-term basis. At March 31, 2015, we classified $504.1 million of short-term commercial paper and amounts drawn under the global revolving credit facility and $609.9 million of the current portion of long-term debt as long-term debt. At December 31, 2014, we classified $276.7 million of short-term commercial paper, $60.0 million of trade receivables borrowings and $698.5 million of the current portion of long-term debt as long-term debt.

In February 2015, we issued $400 million of unsecured medium-term notes maturing in March 2020. The proceeds from the notes were used to payoff maturing debt and for general corporate purposes. If the notes are downgraded below investment grade following, and as a result of, a change in control, the note holder can require us to repurchase all or a portion of the notes at a purchase price equal to 101% of principal 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 receivables conduit or committed purchasers. 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. If no event occurs that causes early termination, the 364-day program will expire October 2015. 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. No amounts were outstanding under the program at March 31, 2015. At December 31, 2014, $60.0 million was outstanding under the program. Sales of receivables under this program are accounted for as secured borrowings based on our continuing involvement in the transferred assets.

At March 31, 2015 and December 31, 2014, we had letters of credit and surety bonds outstanding totaling $343.0 million and $334.3 million, respectively, which primarily guarantee the payment of insurance claims.


13

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


(I) FAIR VALUE MEASUREMENTS

The assets and liabilities measured at fair value on a recurring basis consist primarily of interest rate swaps and investments held in Rabbi Trusts.  These amounts as of March 31, 2015 are not material to our consolidated financial position and operations and have not changed significantly from the amounts reported as of December 31, 2014.  

The following tables present our assets that are measured at fair value on a nonrecurring basis and considered a Level 3 fair value measurement:
 
 
 
 
 
Total Losses (2)
 
March 31,
 
Three months ended March 31,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Assets held for sale:
 
 
 
 
 
 
 
Revenue earning equipment: (1)
 
 
 
 
 
 
 
Trucks
$
5,298

 
11,928

 
$
1,228

 
1,882

Tractors
4,611

 
7,495

 
827

 
1,632

Trailers
1,231

 
742

 
316

 
161

Total assets at fair value
$
11,140

 
20,165

 
$
2,371

 
3,675

 
 ————————————
(1)
Represents the portion of all revenue earning equipment held for sale that is recorded at fair value, less costs to sell.
(2)
Total losses represent fair value adjustments for all vehicles held for sale throughout the period for which fair value was less than carrying value.

Revenue earning equipment held for sale is stated at the lower of carrying amount or fair value less costs to sell. Only certain vehicles held for sale have carrying amounts greater than the fair value and losses are recorded at the time they arrive at our used truck centers. We typically record gains on the remaining vehicles with carrying amounts lower than fair value at the time they are sold. Losses to reflect changes in fair value are presented within “Other operating expenses” 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. 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. Therefore, our revenue earning equipment held for sale was classified within Level 3 of the fair value hierarchy.

Fair value of total debt (excluding capital lease obligations) at March 31, 2015 and December 31, 2014 was approximately $4.79 billion and $4.59 billion, respectively. For publicly-traded debt, estimates of fair value were based on market prices. Since our publicly-traded debt is not actively traded, the fair value measurement was classified within Level 2 of the fair value hierarchy. 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. Therefore, the fair value measurement of our other debt was 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.


14

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


(J) DERIVATIVES

We have interest rate swaps outstanding, which are designated as fair value hedges whereby we receive fixed interest rate payments in exchange for making variable interest rate payments. The differential to be paid or received is accrued and recognized as interest expense. Fair value was based on a model-driven income approach using the LIBOR rate at each interest payment date, which was observable at commonly quoted intervals for the full term of the swaps. Therefore, our interest rate swaps were classified within Level 2 of the fair value hierarchy. The fair value amounts of the interest rate swaps are reported in the Consolidated Condensed Balance Sheets within "Prepaid expenses and other current assets," "Direct financing leases and other assets," and "Other non-current liabilities." As of March 31, 2015, these amounts are not material to our consolidated financial position and operations and have not changed significantly from the amounts reported at December 31, 2014.

The following table provides a detail of the swaps outstanding and the related hedged items as of March 31, 2015:
 
 
 
Maturity date
 
Face value of medium-term notes
 
Aggregate 
notional
amount of interest rate swaps
 
Fixed interest 
rate
 
Weighted-average variable
interest rate on hedged debt
as of March 31,
Issuance date
 
 
 
 
 
2015
 
2014
 
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
May 2011
 
June 2017
 
$350,000
 
$150,000
 
3.50%
 
1.42%
 
1.44%
November 2013
 
November 2018
 
$300,000
 
$100,000
 
2.45%
 
1.20%
 
1.19%
February 2014
 
June 2019
 
$350,000
 
$100,000
 
2.55%
 
1.13%
 
1.10%
May 2014
 
September 2019
 
$400,000
 
$100,000
 
2.45%
 
0.89%
 
—%
February 2015
 
March 2020
 
$400,000
 
$150,000
 
2.65%
 
1.14%
 
—%

The amount of gains (losses) on interest rate swap agreements designated as fair value hedges and related hedged items are reported in the Consolidated Condensed Statements of Earnings within "Interest expense." Changes in the fair value of our interest rate swaps are offset by changes in the fair value of the debt instrument. Accordingly, there is no ineffectiveness related to the interest rate swaps.



15

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


(K) SHARE REPURCHASE PROGRAMS

In December 2013, our Board of Directors authorized a share repurchase program intended to mitigate the dilutive impact of shares issued under our various employee stock, stock option and employee stock purchase plans. Under the December 2013 program, management is authorized to repurchase shares of common stock in an amount not to exceed the number of shares issued to employees under the Company’s various employee stock, stock option and employee stock purchase plans from December 1, 2013 through December 31, 2015. The December 2013 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 established prearranged written plans for the Company under Rule 10b5-1 of the Securities Exchange Act of 1934 as part of the December 2013 program, which allow for share repurchases during Ryder’s quarterly blackout periods as set forth in the trading plan. Early in the first quarter of 2015, we temporarily paused anti-dilutive share repurchase activity for the first half of 2015. For the three months ended March 31, 2015 and 2014, we repurchased and retired 69,107 shares and 562,683 shares, respectively under the program at an aggregate cost of $6.1 million and $40.4 million, respectively.


(L) 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
Credit (1)
 
Accumulated
Other
Comprehensive
Loss
 
 
(In thousands)
December 31, 2014
 
$
(36,087
)
 
(585,941
)
 
1,758

 
(620,270
)
Amortization
 

 
4,961

 
(351
)
 
4,610

Other current period change
 
(57,372
)
 

 

 
(57,372
)
March 31, 2015
 
$
(93,459
)
 
(580,980
)
 
1,407

 
(673,032
)


 
 
Currency
Translation
Adjustments and Other
 
Net Actuarial
Loss (1)
 
Prior Service
Credit (1)
 
Accumulated
Other
Comprehensive
Loss
 
 
(In thousands)
December 31, 2013
 
$
35,875


(477,883
)
 
3,760

 
(438,248
)
Amortization
 


3,807


(680
)
 
3,127

Other current period change
 
(14,592
)




 
(14,592
)
March 31, 2014
 
$
21,283

 
(474,076
)
 
3,080

 
(449,713
)

_______________________ 

(1)
These amounts are included in the computation of net periodic benefit cost. See Note (M), "Employee Benefit Plans," for further information.

The loss from currency translation adjustments in the three months ended March 31, 2015 of $57.4 million was due primarily to the weakening of the Canadian Dollar and British Pound against the U.S. Dollar. The loss from currency translation adjustments in the three months ended March 31, 2014 of $14.6 million was due to the weakening of the Canadian Dollar compared to the U.S. Dollar.



16

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


(M) EMPLOYEE BENEFIT PLANS

Components of net periodic benefit cost were as follows:
 
Pension Benefits
 
Postretirement Benefits
 
Three months ended March 31,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Company-administered plans:
 
 
 
 
 
 
 
Service cost
$
3,627

 
3,423

 
$
111

 
135

Interest cost
21,887

 
25,561

 
284

 
365

Expected return on plan assets
(24,900
)
 
(28,718
)
 

 

Amortization of:
 
 
 
 
 
 
 
Net actuarial loss/(gain)
7,808

 
6,235

 
(196
)
 
(129
)
Prior service credit
(76
)
 
(458
)
 
(478
)
 
(615
)
 
8,346

 
6,043

 
(279
)
 
(244
)
Union-administered plans
2,172

 
2,091

 

 

Net periodic benefit cost
$
10,518

 
8,134

 
$
(279
)
 
(244
)
 
 
 
 
 
 
 
 
Company-administered plans:
 
 
 
 
 
 
 
U.S.
$
8,892

 
6,287

 
$
(415
)
 
(397
)
Non-U.S.
(546
)
 
(244
)
 
136

 
153

 
8,346

 
6,043

 
(279
)
 
(244
)
Union-administered plans
2,172

 
2,091

 

 

 
$
10,518

 
8,134

 
$
(279
)
 
(244
)
 
 
 
 
 
 
 
 
During the three months ended March 31, 2015, we contributed $3.9 million to our pension plans. In 2015, we expect total contributions to our pension plans to be approximately $39 million.

(N) OTHER ITEMS IMPACTING COMPARABILITY

Our primary measure of segment performance excludes certain items we do not believe are representative of the ongoing operations of the segment. We believe that excluding these items from our segment measure of performance allows for better comparison of results. During the three months ended March 31, 2015, we incurred charges of $1.8 million related to professional fees associated with cost savings initiatives. This charge was recorded within "Selling, general and administrative expenses" in our Condensed Consolidated Statement of Earnings.


17

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


(O) SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information was as follows:
 
Three months ended March 31,
 
2015
 
2014
 
(In thousands)
Interest paid
$
38,381

 
41,180

Income taxes paid
3,590

 
1,534

Changes in accounts payable related to purchases of revenue earning equipment
99,972

 
16,918

Operating and revenue earning equipment acquired under capital leases

 
2,245


During the three months ended March 31, 2014, we paid $1.6 million related to acquisitions completed in prior years. No payments related to acquisitions completed in prior years were made during the three months ended March 31, 2015.


(P) MISCELLANEOUS INCOME, NET
 
Three months ended March 31,
 
2015
 
2014
 
(In thousands)
Rabbi trust investment income
$
1,067

 
500

Insurance proceeds
314

 

Gains on sales of operating property and equipment
183

 
1,304

Foreign currency translation benefit
129

 
(406
)
Contract settlement
15

 
2,908

Other, net
929

 
1,076

Total
$
2,637

 
5,382





18

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


(Q) SEGMENT REPORTING

Our operating segments are aggregated into reportable business segments based upon similar economic characteristics, products, services, customers and delivery methods. During the first quarter of 2015, our management structure changed within the supply chain business. We created the role of President of DTS for the dedicated product offering which was within SCS. Beginning with the three-month period ended March 31, 2015, we are reporting our financial performance based on three business 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 services provided as part of an integrated, multi-service, supply chain solution will continue to be reported in the SCS business segment where those services will continue to be managed.

Our primary measurement of segment financial performance, defined as “Earnings Before Tax” (EBT) from continuing operations, includes an allocation of Central Support Services (CSS) and excludes non-operating pension costs, restructuring and other charges, net and other items discussed in Note (N), "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 business segment and, ultimately, to hold leadership of each business segment and each operating segment within each business 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.

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 business segment which served the customer and then eliminated (presented as “Eliminations”). 

19

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


The following tables set forth financial information for each of our business segments and provides a reconciliation between segment EBT and earnings from continuing operations before income taxes for the three months ended March 31, 2015 and 2014. 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
 
 
 
 
For the three months ended March 31, 2015
 
 
 
 
 
 
 
 
Revenue from external customers
$
983,440

 
212,659

 
371,054

 

 
1,567,153

Inter-segment revenue
103,710

 

 

 
(103,710
)
 

Total revenue
$
1,087,150

 
212,659

 
371,054

 
(103,710
)
 
1,567,153

 
 
 
 
 
 
 
 
 
 
Segment EBT
$
89,919

 
8,970

 
15,689

 
(11,534
)
 
103,044

Unallocated CSS
 
 
 
 
 
 
 
 
(11,942
)
     Non-operating pension costs 
 
 
 
 
 
 
 
 
(4,883
)
Restructuring and other charges, net and other items (1)
 
 
 
 
 
 
 
 
(1,841
)
Earnings from continuing operations before income taxes
 
 
 
 
 
 
 
 
$
84,378

 
 
 
 
 
 
 
 
 
 
Segment capital expenditures paid (2)
$
538,743

 
709

 
5,987

 

 
545,439

Unallocated CSS
 
 
 
 
 
 
 
 
7,803

Capital expenditures paid
 
 
 
 
 
 
 
 
$
553,242

 
 
 
 
 
 
 
 
 
 
For the three months ended March 31, 2014
 
 
 
 
 
 
 
 
Revenue from external customers
$
1,013,396

 
215,962

 
381,379

 

 
1,610,737

Inter-segment revenue
121,691

 

 

 
(121,691
)
 

Total revenue
$
1,135,087

 
215,962

 
381,379

 
(121,691
)
 
1,610,737

 
 
 
 
 
 
 
 
 
 
Segment EBT
$
76,991

 
8,686

 
13,098

 
(9,628
)
 
89,147

Unallocated CSS
 
 
 
 
 
 
 
 
(10,829
)
Non-operating pension costs 
 
 
 
 
 
 
 
 
(3,314
)
Earnings from continuing operations before income taxes
 
 
 
 
 
 
 
 
$
75,004

 
 
 
 
 
 
 
 
 
 
Segment capital expenditures paid (2), (3)
$
568,239

 
250

 
3,622

 

 
572,111

Unallocated CSS
 
 
 
 
 
 
 
 
6,611

Capital expenditures paid
 
 
 
 
 
 
 
 
$
578,722

 ————————————
(1)
See Note (N), "Other Items Impacting Comparability," for additional information.
(2)
Excludes revenue earning equipment acquired under capital leases.
(3)
Excludes acquisition payments of $1.6 million during the three months ended March 31, 2014.




20

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


(R) 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 where a reserve has not been established and for which we believe a loss is reasonably possible, as well as for matters where a reserve has been recorded but for which an exposure to loss in excess of the amount accrued is reasonably possible, we believe that such losses will not have a material effect on our consolidated 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, for matters where a reserve has not been established and for which we believe a loss is reasonably possible, as well as for matters where a reserve has been recorded but for which an exposure to loss in excess of the amount accrued is reasonably possible, we believe that such losses will not have a material effect on our consolidated financial statements.

In Brazil, we were assessed $5 million (before and after tax) in prior years for various federal income taxes and social contribution taxes for the 1997 and 1998 tax years. We successfully overturned these federal tax assessments in the lower courts; however, there is a reasonable possibility that these rulings could be reversed and we would be required to pay the assessments. We believe it is more likely than not that our position will ultimately be sustained if appealed and no amounts have been reserved for these matters. We are entitled to indemnification for a portion of any resulting liability on these federal tax claims which, if honored, would reduce the estimated loss.



21

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 2014 Annual Report on Form 10-K.

Ryder System, Inc. (Ryder) is a global leader in transportation and supply chain management solutions. Our operating segments are aggregated into reportable business segments based upon similar economic characteristics, products, services, customers and delivery methods. During the first quarter of 2015, our management structure changed within the supply chain business. We created the role of President of Dedicated Transportation Solutions (DTS) for the dedicated product offering which was within Supply Chain Solutions (SCS). Beginning with the three-month period ended March 31, 2015, we are reporting our financial performance based on three business segments: (1) Fleet Management Solutions (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 services provided as part of an integrated, multi-service, supply chain solution will continue to be reported in the SCS business segment where those services will continue to be managed.

In addition, we revised the reporting of operating revenue, a non-GAAP financial measure. Beginning this quarter, in addition to excluding FMS fuel services revenue and subcontracted transportation from the calculation of operating revenue, we will also exclude DTS and SCS fuel costs. Prior year amounts have been revised to conform to the current period presentation. The revisions were not material and did not impact segment earnings.

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, transportation and warehousing, technology and healthcare, retail, housing, business and personal services, and paper and publishing.


22

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

Operating results were as follows:
 
Three months ended March 31,
 
Change
 
2015
 
2014
 
2015/2014
 
(In thousands, except per share amounts)
 
 
Total revenue
$
1,567,153

 
1,610,737

 
   (3)%
Operating revenue (1)
1,300,286

 
1,242,771

 
   5%
 
 
 
 
 
 
 
 
 
 
 
 
EBT
$
84,378

 
75,004

 
   12%
Comparable EBT (2)
91,102

 
78,318

 
   16%
Earnings from continuing operations
53,453

 
49,098

 
   9%
Comparable earnings from continuing operations (2)
57,406

 
49,210

 
   17%
Net earnings
52,916

 
48,232

 
   10%
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per common share (EPS) — Diluted
 
 
 
 
 
Continuing operations
$
1.00

 
0.92

 
   9%
Comparable (2)
1.08

 
0.92

 
   17%
Net earnings
0.99

 
0.90

 
   10%
  ————————————
(1)
We use operating revenue, a non-GAAP financial measure, to evaluate the operating performance of our core businesses and as a measure of sales activity. Commencing this quarter, in addition to excluding FMS fuel services revenue and subcontracted transportation from the calculation of operating revenue, we will also be excluding DTS and SCS fuel.  DTS and SCS fuel, similar to FMS fuel services revenue, is an ancillary service that we provide our customers and is impacted by fluctuations in market fuel prices.  Therefore, these items are excluded from operating revenue as the costs are largely a pass-through to our customers, resulting in minimal changes in our profitability during periods of steady market fuel prices. However, profitability may be positively or negatively impacted by rapid changes in market fuel prices during a short period of time as customer pricing for fuel services is established based on trailing market fuel costs. We also exclude subcontracted transportation from the calculation of operating revenue as this service is also typically a pass-through to our customers and therefore fluctuations result in minimal changes to our profitability.  Refer to the section titled “Non-GAAP Financial Measures” for a reconciliation of total revenue to operating revenue.
(2)
Non-GAAP financial measure. We believe comparable EBT, comparable earnings and comparable earnings per diluted common share, all from continuing operations, provide useful information to investors because they exclude non-operating pension costs, which we consider to be those impacted by financial market performance and outside the operational performance of the business, and other significant items that are unrelated to our ongoing business operations. Refer to the section titled “Non-GAAP Financial Measures” for a reconciliation of EBT, net earnings and earnings per diluted common share to the comparable measures.

Total revenue decreased 3% and operating revenue increased 5% for the three months ended March 31, 2015. Total revenue declined due to lower fuel prices largely passed through to customers and foreign exchange. The increase in operating revenue was driven by growth in the FMS, DTS, and SCS business segments partially offset by a 200 basis point negative impact from foreign exchange. FMS operating revenue growth was driven by higher prices on lease replacement vehicles, a larger full service lease fleet, increased North American rental demand and higher rental pricing. DTS and SCS operating revenue growth was due to new business and increased volumes. EBT for the three months ended March 31, 2015, increased due to improved performance in the FMS business segment driven by strong commercial rental performance and higher full service lease results and improved SCS performance.

23

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


CONSOLIDATED RESULTS

Lease and Rental
 
Three months ended March 31,
 
Change
 
2015
 
2014
 
2015/2014
 
(Dollars in thousands)
 
 
Lease and rental revenues
$
729,024

 
689,682

 
   6%
Cost of lease and rental
519,174

 
493,043

 
   5%
Gross margin
209,850

 
196,639

 
   7%
Gross margin %
29
%
 
29
%
 
 

Lease and rental revenues represent full service lease and commercial rental product offerings within our FMS business segment. Revenues increased 6% in the first quarter of 2015 to $729.0 million primarily driven by higher prices on full service lease vehicles, 3% full service lease fleet growth, and increased commercial rental revenue partially offset by a 200 basis point negative impact from foreign exchange. Commercial rental revenue grew due to increased North American demand and higher rental pricing (up 5% in the first quarter of 2015).

Cost of lease and rental represents the direct costs related to lease and rental revenues. These costs are comprised of depreciation of revenue earning equipment, maintenance costs (primarily repair parts and labor), and other fixed costs such as licenses, insurance and operating taxes. Cost of lease and rental excludes interest costs from vehicle financing. Cost of lease and rental grew 5% to $519.2 million in the first quarter of 2015 due to higher depreciation and higher maintenance costs on a 3% larger average lease fleet and a 5% larger average rental fleet. Cost of lease and rental benefited by $10.0 million in the first quarter of 2015 due to changes in estimated residual values and useful lives of revenue earning equipment effective January 1, 2015.

Lease and rental gross margin increased 7% in the first quarter of 2015 to $209.9 million. Lease and rental gross margin as a percentage of revenue remained at 29% in the first quarter of 2015. The increase in margin dollars was due to higher per-vehicle pricing as well as benefits from improved residual values.

Services
 
Three months ended March 31,
 
Change
 
2015
 
2014
 
2015/2014
 
(Dollars in thousands)
 
Services revenue
$
693,704

 
709,699

 
   (2)%
Cost of services
582,330

 
606,229

 
   (4)%
Gross margin
111,374

 
103,470

 
   8%
Gross margin %
16
%
 
15
%
 
 

Services revenue represents all the revenues associated with our DTS and SCS business segments as well as contract maintenance, contract-related maintenance and fleet support services associated with our FMS business segment. Services revenue decreased 2% in the first quarter of 2015 to $693.7 million due to impacts from lower fuel prices passed through to our DTS and SCS customers and a 200 basis point impact from foreign exchange partially offset by new business and higher volumes in our DTS and SCS business segments.

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 of services decreased 4% in the first quarter of 2015 to $582.3 million due to lower revenue as well as prior year severe winter weather-related costs and lower start-up costs partially offset by higher compensation-related costs and increased insurance costs.


24

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

Services gross margin increased 8% to $111.4 million in the first quarter of 2015, and services gross margin as a percentage of revenue increased to 16% in the first quarter of 2015. The increase in gross margin dollars and as a percentage of revenue reflects improved operating performance primarily in our SCS business segment. Prior year SCS gross margin was negatively impacted by severe winter weather and start-up costs.

Fuel
 
Three months ended March 31,
 
Change
 
2015
 
2014
 
2015/2014
 
(Dollars in thousands)
 
Fuel services revenue
$
144,425

 
211,356

 
   (32)%
Cost of fuel services
136,289

 
207,205

 
   (34)%
Gross margin
8,136

 
4,151

 
   96%
Gross margin %
6
%
 
2
%
 
 

Fuel services revenue represents fuel services provided to our FMS customers. Fuel services revenue decreased 32% in the first quarter of 2015 to $144.4 million due to lower fuel prices passed through to customers.

Cost of fuel services includes the direct costs associated with providing our customers with fuel. These costs include fuel, salaries and employee-related costs of fuel island attendants and depreciation of our fueling facilities and equipment. Cost of fuel decreased 34% in the first quarter of 2015 to $136.3 million caused by lower fuel prices.

Fuel services gross margin increased 96% to $8.1 million and fuel services margin as a percentage of revenue increased to 6% in the first quarter of 2015. Fuel is largely a pass-through to customers for which we realize minimal changes in margin during periods of steady market fuel prices. However, fuel services margin is impacted by sudden increases or decreases in market fuel prices during a short period of time as customer pricing for fuel is established based on market fuel costs. Fuel services margin was favorably impacted by rapid decreases in market fuel prices during the first quarter of 2015.
 
Three months ended March 31,
 
Change
 
2015
 
2014
 
2015/2014
 
(In thousands)
 
Other operating expenses
$
34,744

 
36,645

 
(5)%

Other operating expenses include costs related to our owned and leased facilities within the FMS business segment such as facility depreciation, rent, insurance, utilities and taxes. These facilities are utilized to provide maintenance to our lease, rental, contract maintenance, contract-related maintenance and on-demand customers. Other operating expenses also include the costs associated with used vehicle sales such as write-downs of used vehicles to fair market value and facilities costs. Other operating expenses decreased 5% to $34.7 million in the first quarter of 2015 primarily due to a $1.3 million reduction in write-downs on vehicles held for sale as well as lower maintenance costs for FMS facilities due to severe winter weather-related costs in the prior year.

25

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

 
Three months ended March 31,
 
Change
 
2015
 
2014
 
2015/2014
 
(Dollars in thousands)
 
Selling, general and administrative expenses (SG&A)
$
206,605

 
191,702

 
8%
Percentage of total revenue
13
%
 
12
%
 
 
Percentage of operating revenue
16
%
 
15
%
 
 

SG&A expenses increased 8% to $206.6 million in the first quarter of 2015. The increase in SG&A expenses in the first quarter of 2015 was driven by higher compensation-related and pension expenses partially offset by a 100 basis point impact from foreign exchange. Pension expense, which primarily impacts SG&A expenses, increased $2.4 million in the first quarter of 2015 due to a lower asset return assumption and the year-end adoption of new mortality assumptions that reflected improved trends in longevity. SG&A expenses as a percent of total revenue and as a percent of operating revenue increased to 13% and 16%, respectively, during the first quarter of 2015 due to the increase in SG&A expenses and the negative impact of lower fuel prices on total revenue and foreign exchange on total and operating revenue.
 
Three months ended March 31,
 
Change
 
2015
 
2014
 
2015/2014
 
(In thousands)
 
Gains on vehicle sales, net
$
29,579

 
28,818

 
3%

Gains on vehicle sales, net increased 3% in the first quarter of 2015 to $29.6 million due to higher average proceeds per unit partially offset by lower sales volume. Global average proceeds per unit increased 16% in the first quarter of 2015 reflecting increases in average truck, tractor and trailer proceeds per unit. Lower sales volume in 2015 (down 23%) reflects lower average used vehicle inventories.

 
Three months ended March 31,
 
Change
 
2015
 
2014
 
2015/2014
 
(Dollars in thousands)
 
Interest expense
$
35,849

 
35,109

 
2%
Effective interest rate
3.1
%
 
3.3
%
 
 

Interest expense increased 2% in the first quarter of 2015 to $35.8 million reflecting higher average outstanding debt partially offset by a lower effective interest rate. The increase in average outstanding debt reflects planned higher vehicle capital spending. The lower effective interest rate in 2015 reflects the replacement of higher interest rate debt with debt issuances at lower rates.

 
Three months ended March 31,
 
Change
 
2015
 
2014
 
2015/2014
 
(Dollars in thousands)
 
 
Miscellaneous income, net
$
2,637

 
5,382

 
(51)%

Refer to Note (P), "Miscellaneous Income, Net" in the Notes to Consolidated Condensed Financial Statements for detail of the components within miscellaneous income.

26

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

 
Three months ended March 31,
 
Change
 
2015
 
2014
 
2015/2014
 
(Dollars in thousands)
 
Provision for income taxes
$
30,925

 
25,906

 
19%
Effective tax rate from continuing operations
36.7
%
 
34.5
%
 
 

Our effective income tax rate from continuing operations for the first quarter of 2015 was 36.7% compared with 34.5% in the same period of the prior year. The effective tax rate in the first quarter of 2014 benefited from a tax law change in the state of New York which decreased the provision for income taxes by $1.8 million, or 2.4% of earnings before tax.
 
Three months ended March 31,
 
Change
 
2015
 
2014
 
2015/2014
 
(Dollars in thousands)
 
 
Loss from discontinued operations, net of tax
$
(537
)
 
(866
)
 
(38)%

Results of discontinued operations in the first quarter of 2015 reflect losses related to adverse legal developments and professional and administrative fees associated with our discontinued South American operations.


27

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


OPERATING RESULTS BY BUSINESS SEGMENT
 
Three months ended March 31,
 
Change
 
2015
 
2014
 
2015/2014
 
(Dollars in thousands)
 
Revenue:
 
 
 
 
 
Fleet Management Solutions
$
1,087,150

 
1,135,087

 
  (4)%
Dedicated Transportation Solutions
212,659

 
215,962

 
  (2)
Supply Chain Solutions
371,054


381,379

 
  (3)
Eliminations
(103,710
)

(121,691
)
 
  (15)
Total
$
1,567,153


1,610,737

 
  (3)%
Operating Revenue:
 
 
 
 
 
Fleet Management Solutions
$
899,187


859,916

 
  5%
Dedicated Transportation Solutions
165,830

 
156,240

 
  6
Supply Chain Solutions
295,441


284,491

 
  4
Eliminations
(60,172
)

(57,876
)
 
  4
Total
$
1,300,286


1,242,771

 
  5%
EBT:
 
 
 
 
 
Fleet Management Solutions
$
89,919


76,991

 
  17%
Dedicated Transportation Solutions
8,970

 
8,686

 
  3
Supply Chain Solutions
15,689


13,098

 
  20
Eliminations
(11,534
)

(9,628
)
 
  20
 
103,044


89,147

 
  16
Unallocated Central Support Solutions
(11,942
)

(10,829
)
 
  10
Non-operating pension costs
(4,883
)

(3,314
)
 
  47
Restructuring and other charges, net and other items
(1,841
)


 
NM
Earnings from continuing operations before income taxes
$
84,378


75,004

 
  12%

As part of management’s evaluation of segment operating performance, we define the primary measurement of our segment financial performance as “Earnings Before Taxes” (EBT) from continuing operations, which includes an allocation of Central Support Services (CSS), and excludes non-operating pension costs, restructuring and other charges, net and the item discussed in Note (N), "Other Items Impacting Comparability," in the Notes to Consolidated Condensed Financial Statements. CSS represents those costs incurred to support all business segments, including human resources, finance, corporate services and public affairs, information technology, health and safety, legal, marketing and corporate communications.

The objective of the EBT measurement is to provide clarity on the profitability of each business segment and, ultimately, to hold leadership of each business segment and each operating segment within each business segment accountable for their allocated share of CSS costs. Segment results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented. Certain costs are considered to be overhead not attributable to any segment and remain unallocated in CSS. Included within the unallocated overhead remaining within CSS are the costs for investor relations, public affairs and certain executive compensation.

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 FMS, DTS and SCS and then eliminated (presented as “Eliminations” in the table above). Prior year amounts have been revised to conform to the current period presentation.


28

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

The following table sets forth equipment contribution included in EBT for our DTS and SCS business segments:
 
Three months ended March 31,
 
Change
 
2015
 
2014
 
2015/2014
 
(Dollars in thousands)
 
 
Equipment Contribution:
 
 
 
 
 
    Dedicated Transportation Solutions
$
7,804

 
6,239

 
  25%
    Supply Chain Solutions
3,730

 
3,389

 
  10%
Total
$
11,534

 
9,628

 
  20%

The following table provides a reconciliation of items excluded from our segment EBT measure to their classification within our Consolidated Condensed Statements of Earnings: 
 
 
 
 
Three months ended March 31,
Description
 
Consolidated
Condensed Statements of Earnings Line Item
 
2015
 
2014
 
 
 
 
(In thousands)
 
 
Non-operating pension costs
 
SG&A
 
$
(4,883
)
 
(3,314
)
Professional fees(1)
 
SG&A
 
(1,841
)