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EX-32 - EXHIBIT 32 - RYDER SYSTEM INCryderex32-q12017.htm
EX-31.2 - EXHIBIT 31.2 - RYDER SYSTEM INCryderex312-q12017.htm
EX-31.1 - EXHIBIT 31.1 - RYDER SYSTEM INCryderex311-q12017.htm
EX-12.1 - EXHIBIT 12.1 - RYDER SYSTEM INCryderex121-q12017.htm
EX-10.4 (GG) - EXHIBIT 10.4 (GG) - RYDER SYSTEM INCryderex104gg-q12017.htm
EX-10.4 (FF) - EXHIBIT 10.4 (FF) - RYDER SYSTEM INCryderex104ff-q12017.htm
EX-10.4 (EE) - EXHIBIT 10.4 (EE) - RYDER SYSTEM INCryderex104ee-q12017.htm
EX-10.4 (DD) - EXHIBIT 10.4 (DD) - RYDER SYSTEM INCryderex104dd-q12017.htm
EX-10.4 (CC) - EXHIBIT 10.4 (CC) - RYDER SYSTEM INCryderex104cc-q12017.htm
 
 
 
 
 
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, 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

ryderlogoeverbetterwtma13.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 March 31, 2017, was 53,560,199.
 
 
 
 
 




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,
 
2017
 
2016
 
(In thousands, except per share amounts)
Lease and rental revenues
$
767,590

 
767,754

Services revenue
851,867

 
759,127

Fuel services revenue
128,706

 
102,791

Total revenues
1,748,163

 
1,629,672

 
 
 
 
Cost of lease and rental
578,762

 
552,490

Cost of services
714,080

 
631,714

Cost of fuel services
125,850

 
98,901

Other operating expenses
31,271

 
30,151

Selling, general and administrative expenses
201,761

 
204,403

Non-service retirement benefit costs
7,330

 
6,810

Used vehicle sales, net
(780
)
 
(19,129
)
Interest expense
34,886

 
37,889

Miscellaneous income, net
(4,953
)
 
(2,265
)
 
1,688,207

 
1,540,964

Earnings from continuing operations before income taxes
59,956

 
88,708

Provision for income taxes
21,677


32,523

Earnings from continuing operations
38,279


56,185

Loss from discontinued operations, net of tax
(130
)
 
(391
)
Net earnings
$
38,149

 
55,794

 
 
 
 
Earnings (loss) per common share — Basic
 
 
 
Continuing operations
$
0.72

 
1.06

Discontinued operations

 
(0.01
)
Net earnings
$
0.72

 
1.05

 
 
 
 
Earnings (loss) per common share — Diluted
 
 
 
Continuing operations
$
0.71

 
1.05

Discontinued operations

 
(0.01
)
Net earnings
$
0.71

 
1.04

 
 
 
 
Cash dividends declared per common share
$
0.44

 
0.41


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 March 31,
 
2017
 
2016
 
(In thousands)
 
 
 
 
Net earnings
$
38,149

 
55,794

 
 
 
 
Other comprehensive income:
 
 
 
 
 
 
 
Changes in currency translation adjustment and other
15,742

 
13,684

 
 
 
 
Amortization of pension and postretirement items
8,109

 
7,423

Income tax expense related to amortization of pension and postretirement items
(3,045
)
 
(2,708
)
   Amortization of pension and postretirement items, net of tax
5,064

 
4,715

 
 
 
 
Other comprehensive income, net of taxes
20,806

 
18,399

 
 
 
 
Comprehensive income
$
58,955

 
74,193

See accompanying notes to consolidated condensed financial statements.




2



RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
 
 
March 31,
2017
 
December 31,
2016
 
(Dollars in thousands, except per
share amount)
Assets:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
37,951


58,801

Receivables, net of allowance of $12,210 and $14,915, respectively
862,862


831,947

Inventories
67,732


69,529

Prepaid expenses and other current assets
144,795


141,280

Total current assets
1,113,340

 
1,101,557

Revenue earning equipment, net
8,171,176


8,147,722

Operating property and equipment, net of accumulated depreciation of $1,144,914 and $1,128,040, respectively
754,307


745,870

Goodwill
387,096


386,772

Intangible assets, net of accumulated amortization of $53,022 and $51,578, respectively
46,905


48,249

Direct financing leases and other assets
500,983


472,284

Total assets
$
10,973,807


10,902,454

 
 
 
 
Liabilities and shareholders’ equity:
 
 
 
Current liabilities:
 
 
 
Short-term debt and current portion of long-term debt
$
973,115


791,410

Accounts payable
536,225


445,470

Accrued expenses and other current liabilities
468,459


507,189

Total current liabilities
1,977,799

 
1,744,069

Long-term debt
4,353,110


4,599,864

Other non-current liabilities
852,835


817,565

Deferred income taxes
1,710,267


1,688,681

Total liabilities
8,894,011

 
8,850,179

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

 

Common stock, $0.50 par value per share — authorized, 400,000,000; outstanding,
March 31, 2017 — 53,560,199; December 31, 2016 — 53,463,118
26,781

 
26,732

Additional paid-in capital
1,037,127

 
1,032,549

Retained earnings
1,829,114

 
1,827,026

Accumulated other comprehensive loss
(813,226
)
 
(834,032
)
Total shareholders’ equity
2,079,796


2,052,275

Total liabilities and shareholders’ equity
$
10,973,807


10,902,454

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,
 
2017
 
2016
 
(In thousands)
Cash flows from operating activities from continuing operations:
 
 
 
Net earnings
$
38,149

 
55,794

Less: Loss from discontinued operations, net of tax
(130
)
 
(391
)
Earnings from continuing operations
38,279

 
56,185

Depreciation expense
311,207

 
287,170

Used vehicle sales, net
(780
)
 
(19,129
)
Share-based compensation expense
4,955

 
4,888

Amortization expense and other non-cash charges, net
8,841

 
6,248

Non-service retirement benefit costs
7,330

 
6,810

Deferred income tax expense
18,887

 
29,319

Changes in operating assets and liabilities:
 
 
 
Receivables
(27,348
)
 
3,709

Inventories
1,876

 
(1,558
)
Prepaid expenses and other assets
(7,577
)
 
(21,234
)
Accounts payable
13,966

 
49,206

Accrued expenses and other non-current liabilities
(38,287
)
 
(33,612
)
Net cash provided by operating activities from continuing operations
331,349

 
368,002

 
 
 
 
Cash flows from financing activities from continuing operations:
 
 
 
Net change in commercial paper borrowings and revolving credit facilities
9,513


98,580

Debt proceeds
477,550


298,254

Debt repaid
(555,671
)

(312,400
)
Dividends on common stock
(23,907
)
 
(22,482
)
Common stock issued
3,992

 
1,492

Common stock repurchased
(16,846
)
 

Debt issuance costs and other items
(846
)
 
(2,932
)
Net cash (used in) provided by financing activities
(106,215
)
 
60,512

 
 
 
 
Cash flows from investing activities from continuing operations:
 
 
 
Purchases of property and revenue earning equipment
(361,339
)
 
(575,031
)
Sales of revenue earning equipment
95,617

 
119,188

Sales of operating property and equipment
892

 
1,410

Collections on direct finance leases and other items
16,265

 
25,610

Changes in restricted cash
1,435

 
(221
)
Net cash used in investing activities
(247,130
)
 
(429,044
)
 
 
 
 
Effect of exchange rate changes on cash
1,501

 
(3,508
)
Decrease in cash and cash equivalents from continuing operations
(20,495
)
 
(4,038
)
 
 
 
 
 
 
 
 
Decrease in cash and cash equivalents from discontinued operations
(355
)
 
(101
)
 
 
 
 
Decrease in cash and cash equivalents
(20,850
)
 
(4,139
)
Cash and cash equivalents at January 1
58,801

 
60,945

Cash and cash equivalents at March 31
$
37,951

 
56,806

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

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 amendments in this update also allow only the service cost component to be eligible for capitalization when applicable. 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-service retirement benefit 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, 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 Step 2 of 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 a material impact on our consolidated financial position, results of operations and cash flows.

Statement of Cash Flows

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows, which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. 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.



5

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


Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases. The standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. We will adopt the standard effective January 1, 2019, using the modified retrospective transition method. We do not anticipate a material impact upon adoption of the 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, which together with related, subsequently issued guidance, requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The adoption of ASU 2014-09 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 vehicle lease portion of the product line on a straight-line basis. Revenue from the non-lease portion of the product line, primarily 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. Under current GAAP, substantially all revenues from our ChoiceLease arrangements are recognized on a straight line basis over the term of the lease. We will adopt the standard on January 1, 2018, using the full retrospective transition method, which will result in a cumulative-effect adjustment to recognize deferred revenue on the opening balance sheet for 2016 and the restatement of the financial statements for all prior periods presented (2016 and 2017). We continue to evaluate the impact of adoption of this standard on our consolidated financial position, results of operations and cash flows.
 

3. REVENUE EARNING EQUIPMENT

 
March 31, 2017
 
December 31, 2016
 
Cost
 
Accumulated
Depreciation
 
Net  Book
Value (1)
 
Cost
 
Accumulated
Depreciation
 
Net  Book
Value (1)
 
(In thousands)
Held for use:
 
ChoiceLease
$
9,664,962

 
(3,159,228
)
 
6,505,734

 
$
9,486,977

 
(3,031,937
)
 
6,455,040

Commercial rental
2,492,992

 
(942,309
)
 
1,550,683

 
2,499,010

 
(935,346
)
 
1,563,664

Held for sale
439,022

 
(324,263
)
 
114,759

 
494,355

 
(365,337
)
 
129,018

Total
$
12,596,976

 
(4,425,800
)
 
8,171,176

 
$
12,480,342

 
(4,332,620
)
 
8,147,722

 
————————————
(1)
Revenue earning equipment, net book value includes vehicles acquired under capital leases of $37 million, less accumulated depreciation of $17 million, at March 31, 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 March 31, 2017 and December 31, 2016, the net investment in direct financing and sales-type leases was $404 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.


6

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

As of March 31, 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.

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)
 
March 31,
 
Three months ended March 31,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Assets held for sale:
 
 
 
 
 
 
 
Revenue earning equipment (1):
 
 
 
 
 
 
 
Trucks
$
12,228

 
11,538

 
$
5,800

 
1,744

Tractors
38,383

 
39,739

 
5,183

 
4,882

Trailers
2,303

 
3,153

 
568

 
662

Total assets at fair value
$
52,914

 
54,430

 
$
11,551

 
7,288

 ————————————
(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 $62 million and $120 million as of March 31, 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 carrying value.

For the three months ended March 31, 2017 and 2016, the components of used vehicle sales, net were as follows:
 
Three months ended March 31,
 
2017
 
2016

(In thousands)
Gains on vehicle sales, net
$
(12,331
)
 
(26,417
)
Losses from fair value adjustments
11,551

 
7,288

Used vehicle sales, net
$
(780
)
 
(19,129
)



7

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

4. ACCRUED EXPENSES AND OTHER LIABILITIES

 
March 31, 2017
 
December 31, 2016
 
Accrued
Expenses
 
Non-Current
Liabilities
 
Total
 
Accrued
Expenses
 
Non-Current
Liabilities
 
Total
 
(In thousands)
Salaries and wages
$
68,831

 

 
68,831

 
$
90,913

 

 
90,913

Deferred compensation
3,548

 
48,550

 
52,098

 
2,992

 
46,541

 
49,533

Pension benefits
3,808

 
455,625

 
459,433

 
3,796

 
451,940

 
455,736

Other postretirement benefits
1,507

 
19,365

 
20,872

 
1,506

 
19,459

 
20,965

Other employee benefits
11,437

 
2,325

 
13,762

 
29,358

 
5,854

 
35,212

Insurance obligations (1)
126,520

 
265,466

 
391,986

 
127,470

 
234,336

 
361,806

Operating taxes
98,717

 

 
98,717

 
92,150

 

 
92,150

Income taxes
1,784

 
24,091

 
25,875

 
4,197

 
23,174

 
27,371

Interest
28,807

 

 
28,807

 
27,277

 

 
27,277

Customer deposits
63,320

 
4,501

 
67,821

 
61,225

 
4,569

 
65,794

Deferred revenue
14,758

 

 
14,758

 
14,064

 

 
14,064

Restructuring liabilities (2)
4,387

 

 
4,387

 
7,278

 

 
7,278

Other
41,035

 
32,912

 
73,947

 
44,963

 
31,692

 
76,655

Total
$
468,459

 
852,835

 
1,321,294

 
$
507,189

 
817,565

 
1,324,754

 ————————————
(1)
Insurance obligations are primarily comprised of self-insured claim liabilities.
(2)
The reduction in restructuring liabilities from December 31, 2016, principally represents cash payments for employee termination costs. The majority of the balance remaining in restructuring liabilities is expected to be paid by the end of 2017.


8

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

5. DEBT
 
Weighted-Average
Interest Rate
 
 
 
 
 
 
 
March 31,
2017
 
December 31,
2016
 
Maturities
 
March 31,
2017
 
December 31,
2016
 
 
 
 
 
 
 
(In thousands)
Short-term debt and current portion of long-term debt:
 
 
 
 
 
 
 
 
 
Short-term debt
1.06%
 
1.07%
 

 
$
190,252

 
177,629

Current portion of long-term debt
 
 
 
 
 
 
782,863

 
613,781

Total short-term debt and current portion of long-term debt
 
 
 
 
 
973,115

 
791,410

Long-term debt:
 
 
 
 
 
 
 
 
 
U.S. commercial paper (1)
1.04%
 
0.87%
 
2020
 
349,510

 
342,480

Global revolving credit facility
—%
 
2.06%
 
2020
 

 
4,703

Unsecured U.S. notes — Medium-term notes (1)
2.72%
 
2.67%
 
2017-2025
 
4,063,395

 
4,113,421

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

 
50,000

Unsecured foreign obligations
1.55%
 
1.55%
 
2017-2020
 
216,624

 
232,092

Asset-backed U.S. obligations (2)
1.80%
 
1.80%
 
2017-2022
 
449,033

 
459,876

Capital lease obligations
3.20%
 
3.17%
 
2017-2023
 
23,448

 
24,184

Total before fair market value adjustment
 
 
 
 
 
 
5,152,010

 
5,226,756

Fair market value adjustment on notes subject to hedging (3)
 
 
 
 
 
(946
)
 
1,110

Debt issuance costs
 
 
 
 
 
 
(15,091
)
 
(14,221
)
 
 
 
 
 
 
 
5,135,973

 
5,213,645

Current portion of long-term debt
 
 
 
 
 
 
(782,863
)
 
(613,781
)
Long-term debt
 
 
 
 
 
 
4,353,110

 
4,599,864

Total debt
 
 
 
 
 
 
$
5,326,225

 
5,391,274

 ————————————
(1)
Amounts are net of unamortized original issue discounts of $7 million at March 31, 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 $825 million at March 31, 2017 and December 31, 2016.

We maintain a $1.2 billion global revolving credit facility with a syndicate of twelve lending institutions led by Bank of America N.A., Bank of Tokyo-Mitsubishi UFJ, Ltd., BNP Paribas, Mizuho Corporate Bank, Ltd., Royal Bank of Canada, Lloyds Bank Plc, U.S. Bank National Association and Wells Fargo Bank, N.A. The facility matures in January 2020. The agreement provides for annual facility fees which range from 7.5 basis points to 25 basis points based on Ryder's long-term credit ratings. The annual facility fee is currently 10 basis points, which applies to the total facility size of $1.2 billion.

The credit facility is used primarily to finance working capital but can also be used to issue up to $75 million in letters of credit (there were no letters of credit outstanding against the facility at March 31, 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 March 31, 2017 was 197%. At March 31, 2017, there was $660 million available under the credit facility.







9

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

Our global revolving credit facility enables us to refinance short-term obligations on a long-term basis. Short-term commercial paper obligations not expected to require the use of working capital are classified as long-term as we have both the intent and ability to refinance on a long-term basis. In addition, we have the intent and ability to refinance the current portion of certain long-term debt on a long-term basis. At March 31, 2017, we classified $350 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.

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 March 31, 2017 or December 31, 2016.

At March 31, 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 March 31, 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.


10

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

6. DERIVATIVES

From time to time, we enter into interest rate derivatives to manage our fixed and variable interest rate exposure and to better match the repricing of debt instruments to that of our portfolio of assets. We assess the risk that changes in interest rates will have either on the fair value of debt obligations or on the amount of future interest payments by monitoring changes in interest rate exposures and by evaluating hedging opportunities. We regularly monitor interest rate risk attributable to both our outstanding or forecasted debt obligations as well as any offsetting hedge positions. This risk management process involves the use of analytical techniques, including cash flow sensitivity analyses, to estimate the expected impact of changes in interest rates on our future cash flows.
 
As of March 31, 2017, we had interest rate swaps outstanding which are designated as fair value hedges for certain debt obligations, with a total notional value of $825 million and maturities through 2020. Interest rate swaps are measured at fair value on a recurring basis using Level 2 fair value inputs. The fair value of these interest rate swaps was a liability of $1 million and an asset of $1 million as of March 31, 2017 and December 31, 2016, respectively. The amounts are presented in "Other non-current liabilities" and "Direct financing leases and other assets" in our Consolidated Condensed Balance Sheets. Changes in the fair value of our interest rate swaps were offset by changes in the fair value of the hedged debt instruments. Accordingly, there was no ineffectiveness related to the interest rate swaps.

7. SHARE REPURCHASE PROGRAMS


In December 2015, our Board of Directors authorized a share repurchase program intended to mitigate the dilutive impact of shares issued under our employee stock plans (the program).  Under the program, management is authorized to repurchase (i) up to 1.5 million shares of common stock, the sum of which will not exceed the number of shares issued to employees under the Company’s employee stock plans from December 1, 2015 to December 9, 2017,  plus (ii) 0.5 million shares issued to employees that were not repurchased under the Company’s previous share repurchase program.  The program limits aggregate share repurchases to no more than 2 million shares of Ryder common stock.  Share repurchases of common stock are made periodically in open-market transactions and are subject to market conditions, legal requirements and other factors. Management may establish prearranged written plans for the Company under Rule 10b5-1 of the Securities Exchange Act of 1934 as part of the program, which allow for share repurchases during Ryder’s quarterly blackout periods as set forth in the trading plan. 

During the three months ended March 31, 2017, we repurchased approximately 221,000 shares for $17 million. We did not repurchase any shares during the three months ended March 31, 2016.


11

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


8. ACCUMULATED OTHER COMPREHENSIVE LOSS

The following summary sets forth the components of accumulated other comprehensive loss, net of tax:
 
 
Currency
Translation
Adjustments and Other
 
Net Actuarial
Loss (1)
 
Prior Service (Cost)/
Credit (1)
 
Accumulated
Other
Comprehensive
Loss
 
 
(In thousands)
December 31, 2016
 
$
(206,610
)
 
(620,292
)
 
(7,130
)
 
(834,032
)
Amortization
 

 
5,011

 
53

 
5,064

Other current period change
 
15,742

 

 

 
15,742

March 31, 2017
 
$
(190,868
)
 
(615,281
)
 
(7,077
)
 
(813,226
)

 
 
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
 

 
4,752

 
(37
)
 
4,715

Other current period change
 
13,684

 

 

 
13,684

March 31, 2016
 
$
(122,336
)
 
(572,241
)
 
241

 
(694,336
)
_______________________ 
(1)
These amounts are included in the computation of net pension expense. See Note 11, "Employee Benefit Plans," for further information.

The gain from currency translation adjustments in the three months ended March 31, 2017 of $15.7 million was primarily due to the strengthening of the British Pound and the Canadian Dollar against the U.S. Dollar. The gain from currency translation adjustments in the three months ended March 31, 2016 of $13.7 million was due to the strengthening of the Canadian Dollar against the the U.S. Dollar, partially offset by the weakening of the British Pound against the U.S. Dollar.



12

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

9. 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,
 
2017
 
2016
 
(In thousands, except per share amounts)
Earnings per share — Basic:
 
 
 
Earnings from continuing operations
$
38,279

 
56,185

Less: Earnings allocated to unvested stock
(130
)
 
(166
)
Earnings from continuing operations available to common shareholders — Basic
$
38,149

 
56,019

 
 
 
 
Weighted average common shares outstanding — Basic
52,945

 
53,076

 
 
 
 
Earnings from continuing operations per common share — Basic
$
0.72

 
1.06

 
 
 
 
Earnings per share — Diluted:
 
 
 
Earnings from continuing operations
$
38,279

 
56,185

Less: Earnings allocated to unvested stock
(130
)
 
(166
)
Earnings from continuing operations available to common shareholders — Diluted
$
38,149

 
56,019

 
 
 
 
Weighted average common shares outstanding — Basic
52,945

 
53,076

Effect of dilutive equity awards
451

 
287

Weighted average common shares outstanding — Diluted
53,396

 
53,363

 
 
 
 
Earnings from continuing operations per common share — Diluted
$
0.71

 
1.05

 
 
 
 
Anti-dilutive equity awards not included above
591

 
1,186



13

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


10. SHARE-BASED COMPENSATION PLANS

Share-based incentive awards are provided to employees under the terms of various share-based compensation plans (collectively, the “Plans”). The Plans are administered by the Compensation Committee of the Board of Directors and principally include at-the-money stock options, unvested stock and cash awards. Unvested stock awards include grants of market-based, performance-based and time-vested restricted stock rights. Under the terms of our Plans, dividends are not paid unless the stock award vests. Upon vesting, the amount of the dividends paid is equal to the aggregate dividends declared on common shares during the period from the grant date of the award until the date the shares underlying the award are delivered.

The following table provides information on share-based compensation expense and income tax benefits recognized during the periods:
 
Three months ended March 31,
 
2017
 
2016
 
(In thousands)
Stock option and stock purchase plans
$
1,905

 
1,873

Unvested stock
3,050

 
3,015

Share-based compensation expense
4,955

 
4,888

Income tax benefit
(1,734
)
 
(1,655
)
Share-based compensation expense, net of tax
$
3,221

 
3,233


During the three months ended March 31, 2017 and 2016, approximately 462,000 and 513,000 stock options, respectively, were granted under the Plans. These awards generally vest in equal annual installments 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, 2017 and 2016 was $15.71 and $12.53, respectively.

During the three months ended March 31, 2017 and 2016, approximately 45,000 and 34,000 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 150% of the award in 2017 and 125% in 2016 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, 2017 and 2016 was $73.43 and $54.10, respectively.

During the three months ended March 31, 2017 and 2016, approximately 142,000 and 58,000 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 150% of the awards in 2017 and 125% in 2016 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, 2017 and 2016, approximately 79,000 and 45,000 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, 2017 and 2016 was $76.49 and $55.32, respectively.

During the three months ended March 31, 2017 and 2016, approximately 85,000 and 111,000 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 based on Ryder’s stock price on the date of grant. Share-based compensation expense is

14

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


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, 2017 and 2016 was $76.57 and $55.32, respectively.

During the three months ended March 31, 2016, 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. There were no market-based cash awards granted in 2017.

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,
 
2017
 
2016
 
(In thousands)
Cash awards
$
77

 
151


Total unrecognized pre-tax compensation expense related to all share-based compensation arrangements at March 31, 2017 was $34.7 million and is expected to be recognized over a weighted-average period of 2.2 years.



11. EMPLOYEE BENEFIT PLANS

Components of net pension expense were as follows:
 
Three months ended March 31,
 
2017
 
2016
 
(In thousands)
Pension Benefits
 
 
 
Company-administered plans:
 
 
 
Service cost
$
3,249

 
3,400

Interest cost
21,489

 
22,240

Expected return on plan assets
(22,478
)
 
(23,085
)
Amortization of:
 
 
 
Net actuarial loss
8,450

 
7,965

Prior service cost
145

 

 
10,855

 
10,520

Union-administered plans
2,502

 
2,322

Net pension expense
$
13,357

 
12,842

 
 
 
 
Company-administered plans:
 
 
 
U.S.
$
11,311

 
11,175

Non-U.S.
(456
)
 
(655
)
 
10,855

 
10,520

Union-administered plans
2,502

 
2,322

Net pension expense
$
13,357

 
12,842



15

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

During the three months ended March 31, 2017, we contributed $3.7 million to our pension plans. In 2017, the expected total contributions to our pension plans are approximately $23.7 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 months ended March 31, 2017.

12. OTHER ITEMS IMPACTING COMPARABILITY

During the three months ended March 31, 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 is not material to the first quarter 2017 results.

13. 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.


14. SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information was as follows:
 
Three months ended March 31,
 
2017
 
2016
 
(In thousands)
Interest paid
$
31,441

 
34,421

Income taxes paid
3,107

 
4,750

Changes in accounts payable related to purchases of revenue earning equipment
74,766

 
(77,486
)
Operating and revenue earning equipment acquired under capital leases
1,607

 
240




16

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

15. 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) 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) DTS, which provides vehicles and drivers as part of a dedicated transportation solution in the U.S.; and (3) SCS, which provides comprehensive supply chain solutions including distribution and transportation services in North America and Asia. Dedicated transportation services provided as part of an integrated, multi-service, supply chain solution to SCS customers are reported in the SCS business segment.

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 the operating tax adjustment discussed in Note 12 "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.

























17

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 months ended March 31, 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 March 31, 2017
 
 
 
 
 
 
 
 
Revenue from external customers
$
1,018,740

 
266,674

 
462,749

 

 
1,748,163

Inter-segment revenue
113,730

 

 

 
(113,730
)
 

Total revenue
$
1,132,470

 
266,674

 
462,749

 
(113,730
)
 
1,748,163

 
 
 
 
 
 
 
 
 
 
Segment EBT
$
52,108

 
11,279

 
27,446

 
(11,216
)
 
79,617

Unallocated CSS
 
 
 
 
 
 
 
 
(10,213
)
     Non-operating pension costs 
 
 
 
 
 
 
 
 
(7,243
)
Other items (1)
 
 
 
 
 
 
 
 
(2,205
)
Earnings from continuing operations before income taxes
 
 
 
 
 
 
 
 
$
59,956

 
 
 
 
 
 
 
 
 
 
   Segment capital expenditures paid (2)
$
344,355

 
768

 
10,998

 

 
356,121

Unallocated CSS capital expenditures paid
 
 
 
 
 
 
 
 
5,218

Capital expenditures paid
 
 
 
 
 
 
 
 
$
361,339

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the three months ended March 31, 2016
 
 
 
 
 
 
 
 
Revenue from external customers
$
996,115

 
244,842

 
388,715

 

 
1,629,672

Inter-segment revenue
101,813

 

 

 
(101,813
)
 

Total revenue
$
1,097,928

 
244,842

 
388,715

 
(101,813
)
 
1,629,672

 
 
 
 
 
 
 
 
 
 
Segment EBT
$
83,301

 
14,268

 
19,796

 
(11,744
)
 
105,621

Unallocated CSS
 
 
 
 
 
 
 
 
(10,045
)
Non-operating pension costs 
 
 
 
 
 
 
 
 
(6,868
)
Earnings from continuing operations before income taxes
 
 
 
 
 
 
 
 
$
88,708

 
 
 
 
 
 
 
 
 
 
  Segment capital expenditures paid (2)
$
560,285

 
517

 
7,323

 

 
568,125

Unallocated CSS capital expenditures paid
 
 
 
 
 
 
 
 
6,906

Capital expenditures paid
 
 
 
 
 
 
 
 
$
575,031

————————————
(1)
See Note 12, "Other Items Impacting Comparability," for additional information.
(2)
Excludes revenue earning equipment acquired under capital leases.




18

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) 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) DTS, which provides vehicles and drivers as part of a dedicated transportation solution in the U.S.; and (3) SCS, which provides comprehensive supply chain solutions including distribution and transportation services in North America and Asia. Dedicated transportation services provided as part of an integrated, multi-service, supply chain solution to SCS customers are reported in the SCS business segment.

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

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 the lease product to ChoiceLease. Our ChoiceLease product line allows customers to select the 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 and renamed our historical contract maintenance and our contract-related maintenance product offerings to 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 reporting using these new product names.

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.


19

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
 
2017
 
2016
 
2017/2016
 
(In thousands, except per share amounts)
 
 
Total revenue
$
1,748,163

 
1,629,672

 
   7
 %
Operating revenue (1)
1,445,126

 
1,406,013

 
   3
 %



 


 
 



 


 
 
EBT
$
59,956

 
88,708

 
   (32
)%
Comparable EBT (2)
69,404

 
95,576

 
   (27
)%
Earnings from continuing operations
38,279

 
56,185

 
   (32
)%
Comparable earnings from continuing operations (2)
44,164

 
60,145

 
   (27
)%
Net earnings
38,149

 
55,794

 
   (32
)%


 

 
 


 

 
 
Earnings per common share (EPS) — Diluted

 

 
 
Continuing operations
$
0.71

 
1.05

 
   (32
)%
Comparable (2)
0.82

 
1.12

 
   (27
)%
Net earnings
0.71

 
1.04

 
   (32
)%
  ————————————
(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 7% and 3%, respectively, in the first quarter of 2017. Total revenue 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 increased due to higher ChoiceLease revenue and higher revenue in the SCS and DTS business segments, partially offset by lower commercial rental revenue and, to a lesser extent, negative impacts from foreign exchange. EBT decreased 32% in the first quarter of 2017, reflecting lower commercial rental and used vehicle sales results in FMS and higher insurance and vehicle maintenance costs in DTS, partially offset by increased volumes and higher pricing in SCS.

20

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
 
2017
 
2016
 
2017/2016
 
(Dollars in thousands)
 
 
Lease and rental revenues
$
767,590

 
767,754

 
 %
Cost of lease and rental
578,762

 
552,490

 
   5
 %
Gross margin
188,828

 
215,264

 
   (12
)%
Gross margin %
25
%
 
28
%
 
 

Lease and rental revenues represent revenues from our ChoiceLease and commercial rental product offerings within our FMS segment. Revenues were approximately $768 million in the first quarter of 2017, consistent with the first quarter of 2016. For 2017, higher ChoiceLease revenue, driven by growth in the ChoiceLease fleet and higher prices on replacement vehicles, was offset by lower commercial rental revenue reflecting lower demand and, to a lesser extent, a negative impact from foreign exchange. For the first quarter, foreign exchange negatively impacted revenue growth by 100 basis points.

Cost of lease and rental represents the direct costs related to lease and rental revenues. These costs consist of depreciation of revenue earning equipment, maintenance costs (primarily repair parts and labor), and other costs such as licenses, insurance and operating taxes. Cost of lease and rental excludes interest costs from vehicle financing. Cost of lease and rental increased 5% in the first quarter, primarily due to higher depreciation and maintenance costs from a larger average lease fleet (3% higher in the first quarter) and accelerated depreciation on vehicles expected to be made available for sale through June 2018 of $9 million, partially offset by lower depreciation on a smaller average rental fleet (9% lower in the first quarter). Cost of lease and rental also increased by approximately $1 million in the first quarter of 2017, due to changes in estimated residual values effective January 1, 2017. For the first quarter, foreign exchange also reduced cost of lease and rental by 100 basis points.

Lease and rental gross margin decreased 12% in the first quarter of 2017 to $188.8 million and gross margin as a percentage of revenue decreased to 25% in the first quarter of 2017. The decrease in gross margin dollars and as a percentage of revenue in the first quarter of 2017 was due to lower commercial rental demand and higher maintenance costs.

Services
 
Three months ended March 31,
 
Change
 
2017
 
2016
 
2017/2016
 
(Dollars in thousands)
 


Services revenue
$
851,867

 
759,127

 
   12
%
Cost of services
714,080

 
631,714

 
   13
%
Gross margin
137,787

 
127,413

 
   8
%
Gross margin %
16
%
 
17
%
 
 

Services revenue represents all the revenues associated with our DTS and SCS segments, as well as SelectCare and fleet support services associated with our FMS segment. Services revenue increased 12% in the first quarter, primarily due to increased volumes, new business and higher pricing in the SCS and DTS segments. Services revenue also benefited from higher fuel prices passed through to our DTS and SCS customers. For the first quarter, foreign exchange negatively impacted revenue growth by 100 basis points.

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), fuel, vehicle liability costs and maintenance costs. Cost of services increased 13% in the first quarter of 2017 due to higher volumes and higher fuel costs in SCS and DTS and higher insurance and vehicle maintenance costs in DTS. For the first quarter, foreign exchange reduced cost of services by 100 basis points.




21

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




Services gross margin increased 8% to $137.8 million and decreased as a percentage of revenue to 16%. The increase in gross margin dollars reflects benefits from increased volumes, new business and higher pricing in our SCS segment, partially offset by higher insurance and vehicle maintenance costs in DTS. The decline in gross margin as a percentage of revenue reflects higher insurance costs and lost business in DTS.

Fuel
 
Three months ended March 31,
 
Change
 
2017
 
2016
 
2017/2016
 
(Dollars in thousands)
 
 
Fuel services revenue
$
128,706

 
102,791

 
   25
 %
Cost of fuel services
125,850

 
98,901

 
   27
 %
Gross margin
2,856

 
3,890

 
   (27
)%
Gross margin %
2
%
 
4
%
 
 

Fuel services revenue represents fuel services provided to our FMS customers. Fuel services revenue increased 25% in the first quarter due to higher 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 services increased 27% in the first quarter as a result of higher fuel prices.

Fuel services gross margin decreased 27% to $2.9 million and fuel services gross margin as a percentage of revenue decreased to 2% in the first quarter of 2017. 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 trailing market fuel costs. Fuel services gross margin in the first quarter of 2017 was adversely impacted by these price change dynamics as compared to the first quarter of 2016.

Three months ended March 31,
 
Change

2017
 
2016
 
2017/2016

(Dollars in thousands)
 


Other operating expenses
$
31,271

 
30,151

 
4
%

Other operating expenses include costs related to our owned and leased facilities within the FMS segment, such as facility depreciation, rent, purchased insurance, utilities and taxes. These facilities are utilized to provide maintenance to our ChoiceLease, rental, and SelectCare customers. Other operating expenses increased to $31.3 million due to higher utility costs for FMS facilities.


Three months ended March 31,
 
Change

2017
 
2016
 
2017/2016

(Dollars in thousands)
 


Selling, general and administrative expenses (SG&A)
$
201,761

 
204,403

 
(1
)%
Percentage of total revenue
12
%
 
13
%
 
 

SG&A expenses decreased 1% in the first quarter primarily due to lower compensation-related expenses and foreign exchange. Foreign exchange reduced the growth in SG&A expenses by 100 basis points. SG&A expenses as a percent of total revenue decreased to 12% due to lower compensation-related expenses.


22

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


 
Three months ended March 31,
 
Change
 
2017
 
2016
 
2017/2016
 
(Dollars in thousands)
 
 
Non-service retirement benefit costs
$
7,330

 
6,810

 
8
%

Non-service retirement benefit costs includes the components of our net periodic benefit cost other than service cost. These components include interest cost, expected return on plan assets, amortization of actuarial loss and prior service cost. Non-service retirement benefit costs increased $0.5 million from the prior year due to the impact of a lower asset return assumption.

 
Three months ended March 31,
 
Change
 
2017
 
2016
 
2017/2016
 
(Dollars in thousands)
 

Used vehicle sales, net
$
780

 
19,129

 
(96
)%

Used vehicle sales, net includes gains from sales of used vehicles as well as the selling costs associated with used vehicles and write-downs of vehicles to fair market values. Gains on used vehicles, net decreased to $0.8 million in the first quarter of 2017, primarily due to a drop in the market value of trucks and tractors. Global average proceeds per unit in the first quarter decreased from the prior year reflecting a 20% decrease in truck proceeds per unit and a 16% decrease in tractor proceeds per unit.

 
Three months ended March 31,
 
Change
 
2017
 
2016
 
2017/2016
 
(Dollars in thousands)
 
 
Interest expense
$
34,886

 
37,889

 
(8
)%
Effective interest rate
2.6
%
 
2.7
%
 
 

Interest expense decreased 8% to $34.9 million in the first quarter of 2017 reflecting a lower effective interest rate and a lower average outstanding debt. The lower effective interest rate in 2017 reflects the replacement of higher interest rate debt with debt issuances at lower rates. The decrease in average outstanding debt reflects lower planned vehicle capital spending.
 
Three months ended March 31,
 
Change
 
2017
 
2016
 
2017/2016
 
(Dollars in thousands)
 
 
Miscellaneous income, net
$
4,953

 
2,265

 
119
%
  
Miscellaneous income, net consists of investment income on securities used to fund certain benefit plans, interest income,
gains from sales of operating property, foreign currency transaction gains (losses) and other non-operating items. The increase in the first quarter is primarily driven by increased rabbi trust investment income, partially offset by foreign currency transaction losses.

 
Three months ended March 31,
 
Change
 
2017
 
2016
 
2017/2016
 
(Dollars in thousands)
 
Provision for income taxes
$
21,677

 
32,523

 
(33
)%
Effective tax rate from continuing operations
36.2
%
 
36.7
%
 
 

Provision for income taxes decreased 33% in the first quarter. The decrease in the provision for income taxes reflects lower taxable earnings and a lower effective income tax rate. The decrease in the effective tax rate reflects the reduction of the valuation allowance for foreign deferred income tax assets.

23

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

                        
OPERATING RESULTS BY SEGMENT
 
Three months ended March 31,
 
Change
 
2017
 
2016
 
2017/2016
 
(Dollars in thousands)
 
 
Total Revenue:
 
 
 
 
 
Fleet Management Solutions
$
1,132,470

 
1,097,928

 
  3
 %
Dedicated Transportation Solutions
266,674

 
244,842

 
  9

Supply Chain Solutions
462,749


388,715

 
  19

Eliminations
(113,730
)

(101,813
)
 
  12

Total
$
1,748,163


1,629,672

 
  7
 %
Operating Revenue: (1)






Fleet Management Solutions
$
962,216


962,324


 %
Dedicated Transportation Solutions
193,356


190,273


  2

Supply Chain Solutions
361,756


322,416


  12

Eliminations
(72,202
)

(69,000
)

  5

Total
$
1,445,126


1,406,013


  3
 %
EBT:
 
 
 
 
 
Fleet Management Solutions
$
52,108


83,301

 
  (37
)%
Dedicated Transportation Solutions
11,279

 
14,268

 
  (21
)
Supply Chain Solutions
27,446


19,796

 
  39

Eliminations
(11,216
)

(11,744
)
 
  (4
)
 
79,617


105,621

 
  (25
)
Unallocated Central Support Services
(10,213
)

(10,045
)
 
  2

Non-operating pension costs
(7,243
)

(6,868
)
 
  5

Other items
(2,205
)


 
NM

Earnings from continuing operations before income taxes
$
59,956


88,708

 
  (32
)%
  ————————————
(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 segment total revenue to segment operating revenue for FMS, DTS and SCS, as well as the reasons why management believes these measures are important to investors.

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 and other items discussed in Note 15, "Segment Reporting," in the Notes to Consolidated Condensed Financial Statements. CSS represents those costs incurred to support all 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 segment and, ultimately, to hold leadership of each 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 not attributable to any segment and remain unallocated in CSS, including 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 DTS and SCS customers (equipment contribution) are included in both FMS and the segment that served the customer and then eliminated (presented as “Eliminations” in the table above).


24

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 segments:
 
Three months ended March 31,
 
Change
 
2017
 
2016
 
2017/2016
 
(Dollars in thousands)
 
 
Equipment Contribution:
 
 
 
 
 
    Dedicated Transportation Solutions
$
6,655

 
7,718

 
  (14
)%
    Supply Chain Solutions
4,561

 
4,026

 
  13

Total (1)
$
11,216

 
11,744

 
  (4
)%
———————————
(1)
Total amount is included in FMS EBT.

The decrease in DTS equipment contribution is primarily driven by higher maintenance costs on an older vehicle fleet used in DTS operations. The increase in SCS equipment contribution is primarily driven by higher volumes.

Items excluded from our segment EBT measure and their classification within our Consolidated Condensed Statements of Earnings follow: 
 
 
 
 
Three months ended March 31,
Description
 
Classification
 
2017
 
2016
 
 
 
 
(In thousands)
Non-operating pension costs
 
Non-service retirement benefit costs
 
$
(7,243
)
 
(6,868
)
Operating tax adjustment(1)
 
SG&A
 
(2,205
)
 

 
 
 
 
$
(9,448
)
 
(6,868
)
———————————
(1)
See Note 12, “Other Items Impacting Comparability,” in the Notes to Consolidated Condensed Financial Statements for a discussion of adjustments.


Fleet Management Solutions
  
Three months ended March 31,
 
Change
  
2017
 
2016
 
2017/2016
 
(Dollars in thousands)
 
 

ChoiceLease
$
656,312


622,863

 
  5
 %
SelectCare
113,609


114,387

 
  (1
)
Commercial Rental
174,006


204,837

 
  (15
)
Other
18,289


20,237

 
  (10
)
Fuel services revenue
170,254


135,604

 
  26

FMS total revenue (1)
$
1,132,470


1,097,928

 
  3
 %
 
 
 
 
 
 
 FMS operating revenue (2)
$
962,216


962,324

 

 
 
 
 
 
 
FMS EBT
$
52,108


83,301

 
  (37
)%
FMS EBT as a % of FMS total revenue
4.6
%

7.6
%
 
  (300) bps
FMS EBT as a % of FMS operating revenue (2)
5.4
%

8.7
%
 
  (330) bps
————————————
(1)
Includes intercompany fuel sales from FMS to DTS and SCS.
(2)
Non-GAAP financial measures. Reconciliations of FMS total revenue to FMS operating revenue, FMS EBT as a % of FMS total revenue to FMS EBT as a % of FMS operating revenue, as well as the reasons why management believes these measures are important to investors are included in the “Non-GAAP Financial Measures” section of this MD&A.

25

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


The following table summarizes the components of the change in FMS revenue on a percentage basis versus the prior year:
 
Three months ended March 31, 2017
 
Total
 
Operating (1)
Organic, including price and volume
1
 %
 
1
 %
Fuel
3

 

Foreign exchange
(1
)
 
(1
)
Net increase
3
 %
 
 %
  ————————————
(1)
Non-GAAP financial measure. A reconciliation of FMS total revenue to FMS operating revenue as well as the reasons why management believes this measure is important to investors is included in the "Non-GAAP Financial Measures" section of this MD&A.

FMS total revenue increased 3% in the first quarter due to higher fuel services revenue, partially offset by negative impacts from foreign exchange. FMS operating revenue in the first quarter was consistent with the prior year as organic growth in the ChoiceLease product line was offset by lower commercial rental revenue and negative impacts from foreign exchange. In the first quarter of 2017, foreign exchange negatively impacted both total and operating revenue growth by 100 basis points.

ChoiceLease revenue increased 5% in the first quarter, reflecting a larger average fleet size and higher prices on replacement vehicles. Foreign exchange negatively impacted ChoiceLease revenue growth by 100 basis points in the first quarter of 2017. We expect favorable ChoiceLease revenue comparisons to continue through the end of the year based on sales activity. Commercial rental revenue decreased 15% in the first quarter due to lower demand. We expect unfavorable commercial rental revenue comparisons through the end of the year based on a weaker demand environment. SelectCare revenue decreased 1% in the first quarter as steady volumes were negatively impacted by foreign exchange.

The following table provides commercial rental statistics on our global fleet: 
 
Three months ended March 31,
 
Change
 
2017
 
2016
 
2017/2016
 
(Dollars in thousands)
 
Rental revenue from non-lease customers
$
106,437

 
120,702

 
(12
)%
Rental revenue from lease customers (1)
$
67,569

 
84,135

 
(20
)%
Average commercial rental power fleet size — in service (2) (3)
29,540

 
32,900

 
(10
)%
Commercial rental utilization — power fleet (2)
67.2
%

70.4
%
 
(320) bps
————————————
(1)
Represents revenue from rental vehicles provided to our existing ChoiceLease customers, generally in place of a lease vehicle.
(2)
Number of units rounded to nearest hundred and calculated using quarterly average unit counts.
(3)
Excluding trailers.

FMS EBT decreased 37% in the first quarter of 2017, reflecting lower commercial rental and used vehicle sales results and accelerated depreciation on vehicles expected to be made available for sale through June 2018 of $9 million, partially offset by lower compensation-related costs including cost savings initiatives. Used vehicle sales results decreased primarily due to lower pricing in the first quarter. Commercial rental results declined from lower demand. Commercial rental utilization declined 320 basis points to 67.2%. ChoiceLease and commercial rental results were negatively impacted by approximately $1 million of higher depreciation in the first quarter, due to residual value changes implemented January 1, 2017.



26

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


Our global fleet of revenue earning equipment, SelectCare vehicles including vehicles under on-demand maintenance is summarized as follows (number of units rounded to the nearest hundred):
 
 
 
 
 
 
 
Change
 
March 31, 2017
 
December 31, 2016
 
March 31, 2016
 
March 2017/Dec. 2016
 
March 2017/March 2016
End of period vehicle count
 
 
 
 
 
 
 
 
 
By type:
 
 
 
 
 
 
 
 
 
Trucks (1)
74,500

 
73,300

 
72,900

 
  2
 %
 
  2
 %
Tractors (2)
66,800

 
67,900

 
69,000

 
  (2
)
 
  (3
)
Trailers (3), (4)
42,800

 
42,800

 
42,200

 

 
  1

Other
1,200

 
1,100

 
1,300

 
  9

 
  (8
)
Total
185,300

 
185,100

 
185,400

 
 %
 
 %
 
 
 
 
 
 
 
 
 
 
By ownership:
 
 
 
 
 
 
 
 
 
Owned
183,900

 
183,700

 
183,900

 
 %
 
 %
Leased
1,400

 
1,400

 
1,500

 

 
  (7
)
Total
185,300

 
185,100

 
185,400

 
 %
 
 %
 
 
 
 
 
 
 
 
 
 
By product line: (4)
 
 
 
 
 
 
 
 
 
ChoiceLease
137,900

 
136,500

 
133,300

 
  1
 %
 
  3
 %
Commercial rental
37,300

 
37,800

 
40,100

 
  (1