Ryder 1st Quarter 2014 10-Q

 
 
 
 
 
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, 2014
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, 2014 was 53,184,496.
 
 
 
 
 



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,
 
2014
 
2013
 
(In thousands, except per share amounts)
Lease and rental revenues
$
689,682

 
659,708

Services revenue
709,699

 
689,461

Fuel services revenue
211,356

 
213,848

Total revenues
1,610,737

 
1,563,017

 
 
 
 
Cost of lease and rental
493,043

 
473,077

Cost of services
606,229

 
583,589

Cost of fuel services
207,205

 
210,293

Other operating expenses
36,645

 
37,599

Selling, general and administrative expenses
191,702

 
189,073

Gains on vehicle sales, net
(28,818
)
 
(23,006
)
Interest expense
35,109

 
34,454

Miscellaneous income, net
(5,382
)
 
(4,570
)
 
1,535,733

 
1,500,509

Earnings from continuing operations before income taxes
75,004

 
62,508

Provision for income taxes
25,906


21,706

Earnings from continuing operations
49,098


40,802

Loss from discontinued operations, net of tax
(866
)
 
(878
)
Net earnings
$
48,232

 
39,924

 
 
 
 
Earnings (loss) per common share — Basic
 
 
 
Continuing operations
$
0.93

 
0.79

Discontinued operations
(0.02
)
 
(0.02
)
Net earnings
$
0.91

 
0.77

 
 
 
 
Earnings (loss) per common share — Diluted
 
 
 
Continuing operations
$
0.92

 
0.79

Discontinued operations
(0.02
)
 
(0.02
)
Net earnings
$
0.90

 
0.77

 
 
 
 
Cash dividends declared per common share
$
0.34

 
0.31


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,
 
2014
 
2013
 
(In thousands)
 
 
 
 
Net earnings
$
48,232

 
39,924

 
 
 
 
Other comprehensive income:
 
 
 
 
 
 
 
Changes in cumulative translation adjustment and other, before and after tax
(14,592
)
 
(33,704
)
 
 
 
 
Amortization of pension and postretirement items
5,033

 
8,354

Income tax expense related to amortization of pension and postretirement items
(1,906
)
 
(2,935
)
Amortization of pension and postretirement items, net of taxes
3,127

 
5,419

 
 
 
 
Other comprehensive loss, net of taxes
(11,465
)
 
(28,285
)
 
 
 
 
Comprehensive income
$
36,767

 
11,639

See accompanying notes to consolidated condensed financial statements.




2


RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
 
 
March 31,
2014
 
December 31,
2013
 
(Dollars in thousands, except per
share amount)
Assets:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
72,786


61,562

Receivables, net
822,010


777,370

Inventories
64,758


64,298

Prepaid expenses and other current assets
157,562


159,263

Total current assets
1,117,116

 
1,062,493

Revenue earning equipment, net of accumulated depreciation of $3,587,031 and
   $3,596,102, respectively
6,687,976


6,490,837

Operating property and equipment, net of accumulated depreciation of $1,006,105 and $991,117, respectively
636,632


633,826

Goodwill
383,200


383,719

Intangible assets
70,411


72,406

Direct financing leases and other assets
472,148


460,501

Total assets
$
9,367,483


9,103,782

 
 
 
 
Liabilities and shareholders’ equity:
 
 
 
Current liabilities:
 
 
 
Short-term debt and current portion of long-term debt
$
400,846


259,438

Accounts payable
505,779


475,364

Accrued expenses and other current liabilities
465,997


496,337

Total current liabilities
1,372,622

 
1,231,139

Long-term debt
4,045,751


3,929,987

Other non-current liabilities
617,281


616,305

Deferred income taxes
1,433,288


1,429,637

Total liabilities
7,468,942

 
7,207,068

 
 
 
 
Shareholders’ equity:
 
 
 
Preferred stock of no par value per share — authorized, 3,800,917; none outstanding,
   March 31, 2014 or December 31, 2013
—

 
—

Common stock of $0.50 par value per share — authorized, 400,000,000; outstanding,
   March 31, 2014 — 53,184,496; December 31, 2013 — 53,335,386
26,591

 
26,667

Additional paid-in capital
931,353

 
917,539

Retained earnings
1,390,310

 
1,390,756

Accumulated other comprehensive loss
(449,713
)
 
(438,248
)
Total shareholders’ equity
1,898,541


1,896,714

Total liabilities and shareholders’ equity
$
9,367,483


9,103,782

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,
 
2014
 
2013
 
(In thousands)
Cash flows from operating activities from continuing operations:
 
 
 
Net earnings
48,232

 
39,924

Less: Loss from discontinued operations, net of tax
(866
)
 
(878
)
Earnings from continuing operations
49,098

 
40,802

Depreciation expense
248,815

 
231,541

Gains on vehicle sales, net
(28,818
)
 
(23,006
)
Share-based compensation expense
4,858

 
4,609

Amortization expense and other non-cash charges, net
14,097

 
13,432

Deferred income tax expense
21,653

 
18,593

Changes in operating assets and liabilities:
 
 
 
Receivables
(41,526
)
 
(8,677
)
Inventories
(629
)
 
902

Prepaid expenses and other assets
(14,410
)
 
(17,353
)
Accounts payable
14,423

 
36,405

Accrued expenses and other non-current liabilities
(29,901
)
 
(48,320
)
Net cash provided by operating activities from continuing operations
237,660

 
248,928

 
 
 
 
Cash flows from financing activities from continuing operations:
 
 
 
Net change in commercial paper borrowings
142,834


112,938

Debt proceeds
366,612


249,723

Debt repaid, including capital lease obligations
(252,845
)

(317,344
)
Dividends on common stock
(18,005
)
 
(15,980
)
Common stock issued
18,526

 
22,529

Common stock repurchased
(40,437
)
 
(104
)
Excess tax benefits from share-based compensation
293

 
1,575

Debt issuance costs
(1,809
)
 
(1,767
)
Net cash provided by financing activities from continuing operations
215,169

 
51,570

 
 
 
 
Cash flows from investing activities from continuing operations:
 
 
 
Purchases of property and revenue earning equipment
(578,722
)
 
(420,054
)
Sales of revenue earning equipment
125,673

 
112,425

Sales of operating property and equipment
2,004

 
916

Acquisitions
(1,649
)
 
(1,420
)
Collections on direct finance leases
16,184

 
27,411

Changes in restricted cash
(4,087
)
 
(18,979
)
Insurance recoveries and other
(1,250
)
 
3,767

Net cash used in investing activities from continuing operations
(441,847
)
 
(295,934
)
 
 
 
 
Effect of exchange rate changes on cash
1,369

 
6,257

Increase in cash and cash equivalents from continuing operations
12,351

 
10,821

 
 
 
 
Cash flows from discontinued operations:
 
 
 
Operating cash flows
(906
)
 
(726
)
Effect of exchange rate changes on cash
(221
)
 
2

Decrease in cash and cash equivalents from discontinued operations
(1,127
)
 
(724
)
 
 
 
 
Increase in cash and cash equivalents
11,224

 
10,097

Cash and cash equivalents at January 1
61,562

 
66,392

Cash and cash equivalents at March 31
$
72,786

 
76,489

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, 2013
$
—

 
53,335,386

 
$
26,667

 
917,539

 
1,390,756

 
(438,248
)
 
1,896,714

Net earnings
—

 
—

 
—

 
—

 
48,232

 
—

 
48,232

Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
(11,465
)
 
(11,465
)
Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
36,767

Common stock dividends declared — $0.34 per share
—

 
—

 
—

 
—

 
(18,124
)
 
—

 
(18,124
)
Common stock issued under employee stock option and stock purchase plans (1)
—

 
409,203

 
204

 
18,125

 
—

 
—

 
18,329

Benefit plan stock sales (2)
—

 
2,590

 
1

 
196

 
—

 
—

 
197

Common stock repurchases
—

 
(562,683
)
 
(281
)
 
(9,602
)
 
(30,554
)
 
—

 
(40,437
)
Share-based compensation
—

 
—

 
—

 
4,858

 
—

 
—

 
4,858

Tax benefits from share-based compensation
—

 
—

 
—

 
237

 
—

 
—

 
237

Balance at March 31, 2014
$
—

 
53,184,496

 
$
26,591

 
931,353

 
1,390,310

 
(449,713
)
 
1,898,541

————————————
(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 2013 Annual Report on Form 10-K and should be read in conjunction with the Consolidated Financial Statements and notes thereto. These financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. 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. Prior year amounts have been reclassified to conform to the current period presentation. These reclassifications were immaterial to the financial statements taken as a whole.

Prior year amounts related to intercompany profit allocations between Fleet Management Solutions (FMS) and Supply Chain Solutions (SCS) have been reclassified to conform to the current period presentation. These reclassifications were immaterial to the financial statements taken as a whole.

(B) ACCOUNTING CHANGES

In July 2013, the Financial Accounting Standards Board issued accounting guidance on the balance sheet presentation of an unrecognized tax benefit when a net operating loss carryforward exists. Under this guidance, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward. This guidance became effective for us on January 1, 2014 and resulted in a reclassification of $38.8 million from other non-current liabilities to deferred income taxes in our December 31, 2013 balance sheet. Prior year amounts have been reclassified to conform to the current period presentation. Other than the change in presentation within the Consolidated Condensed Balance Sheets, this accounting guidance did not have an impact on our consolidated financial position, results of operations or cash flows.

(C) DISCONTINUED OPERATIONS

In 2009, we ceased SCS service operations in Brazil, Argentina, Chile and European markets. Accordingly, results of these operations, financial position and cash flows are separately reported as discontinued operations for all periods presented either in the Consolidated Condensed Financial Statements or notes thereto.

Summarized results of discontinued operations were as follows:
 
Three months ended March 31,
 
2014
 
2013
 
(In thousands)
Pre-tax loss from discontinued operations
$
(955
)
 
(901
)
Income tax benefit
89

 
23

Loss from discontinued operations, net of tax
$
(866
)
 
(878
)

Results of discontinued operations in 2014 and 2013 reflected losses related to adverse legal developments and professional and administrative fees associated with our discontinued South American operations.

The following is a summary of assets and liabilities of discontinued operations:
 
March 31,
2014
 
December 31,
2013
 
(In thousands)
Total assets, primarily deposits
$
3,541

 
3,627

Total liabilities, primarily contingent accruals
$
4,477

 
4,501



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

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. 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 $5.0 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 have 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.

(D) 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 stock options and nonvested stock awards. We have historically paid dividends on nonvested stock awards but not on our stock option awards. Dividends on nonvested stock granted after 2011 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,
 
2014
 
2013
 
(In thousands)
Stock option and stock purchase plans
$
2,237

 
2,110

Nonvested stock
2,621

 
2,499

Share-based compensation expense
4,858

 
4,609

Income tax benefit
(1,676
)
 
(1,687
)
Share-based compensation expense, net of tax
$
3,182

 
2,922


During the three months ended March 31, 2014 and 2013, approximately 405,000 and 377,000 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, 2014 and 2013 was $14.99 and $13.99, respectively.

During each of the three months ended March 31, 2014 and 2013, approximately 22,000 market-based restricted stock rights were granted under the Plans. The awards are segmented into three performance periods of one, two and three years. At the end of each performance period, 25%-125% of the award may be earned based on Ryder's total shareholder return (TSR) compared to the TSR of a custom 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, 2014 and 2013 was $61.07 and $53.32, respectively.


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

During the three months ended March 31, 2014 and 2013, approximately 42,000 and 45,000 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, 25%-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, 2014 and 2013, approximately 30,000 and 15,000 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, 2014 and 2013 was $71.43 and $58.21, respectively.

During the three months ended March 31, 2014 and 2013, approximately 87,000 and 127,000 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, 2014 and 2013 was $71.40 and $58.00, respectively.

During the three months ended March 31, 2014 and 2013, employees who received market-based restricted stock rights also 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,
 
2014
 
2013
 
(In thousands)
Cash awards
$523
 
1,274

Total unrecognized pre-tax compensation expense related to all share-based compensation arrangements at March 31, 2014 was $34.4 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)

(E) EARNINGS PER SHARE

We compute earnings per share using the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. Our nonvested stock granted prior to 2012 and restricted stock units granted to our Board of Directors are considered participating securities since the share-based awards contain a non-forfeitable right to dividend cash payments prior to vesting. Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities based on the weighted average shares outstanding during the period.

The following table presents the calculation of basic and diluted earnings per common share from continuing operations:
 
Three months ended March 31,
 
2014
 
2013
 
(In thousands, except per share amounts)
Earnings per share — Basic:
 
 
 
Earnings from continuing operations
$
49,098

 
40,802

Less: Distributed and undistributed earnings allocated to nonvested stock
(255
)
 
(403
)
Earnings from continuing operations available to common shareholders — Basic
$
48,843

 
40,399

 
 
 
 
Weighted average common shares outstanding — Basic
52,660

 
50,958

 
 
 
 
Earnings from continuing operations per common share — Basic
$
0.93

 
0.79

 
 
 
 
Earnings per share — Diluted:
 
 
 
Earnings from continuing operations
$
49,098

 
40,802

Less: Distributed and undistributed earnings allocated to nonvested stock
(255
)
 
(403
)
Earnings from continuing operations available to common shareholders — Diluted
$
48,843

 
40,399

 
 
 
 
Weighted average common shares outstanding — Basic
52,660

 
50,958

Effect of dilutive equity awards
463

 
435

Weighted average common shares outstanding — Diluted
53,123

 
51,393

 
 
 
 
Earnings from continuing operations per common share — Diluted
$
0.92

 
0.79

 
 
 
 
Anti-dilutive equity awards not included above
215

 
1,413


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

(F) REVENUE EARNING EQUIPMENT

 
March 31, 2014
 
December 31, 2013
 
Cost
 
Accumulated
Depreciation
 
Net  Book
Value(1)
 
Cost
 
Accumulated
Depreciation
 
Net  Book
Value(1)
 
(In thousands)
Held for use:
 
Full service lease
$
7,579,461

 
(2,531,559
)
 
5,047,902

 
$
7,436,093

 
(2,537,077
)
 
4,899,016

Commercial rental
2,309,828

 
(781,005
)
 
1,528,823

 
2,210,863

 
(747,283
)
 
1,463,580

Held for sale
385,718

 
(274,467
)
 
111,251

 
439,983

 
(311,742
)
 
128,241

Total
$
10,275,007

 
(3,587,031
)
 
6,687,976

 
$
10,086,939

 
(3,596,102
)
 
6,490,837

 ————————————
(1)
Revenue earning equipment, net includes vehicles acquired under capital leases of $53.9 million, less accumulated depreciation of $22.7 million, at March 31, 2014, and $54.2 million, less accumulated depreciation of $22.0 million, at December 31, 2013.

At the end of 2013, 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, 2014. The change in estimated residual values and useful lives increased pre-tax earnings for the three months ended March 31, 2014 by approximately $6.3 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, 2014 and December 31, 2013, the net investment in direct financing and sales-type leases was $407.8 million and $400.1 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 vehicle’s fair value, which further mitigates our credit risk.

As of March 31, 2014 and December 31, 2013, the amount of direct financing lease receivables which were 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 $0.4 million and $0.5 million as of March 31, 2014 and December 31, 2013, respectively.


(G) GOODWILL

The carrying amount of goodwill attributable to each reportable business segment with changes therein was as follows:
 
Fleet
Management
Solutions
 
Supply
Chain
Solutions
 
Total
 
(In thousands)
Balance at January 1, 2014:
 
 
 
 
 
Goodwill
$
223,204

 
189,736

 
412,940

Accumulated impairment losses
(10,322
)
 
(18,899
)
 
(29,221
)
 
212,882

 
170,837

 
383,719

Foreign currency translation adjustments
(202
)
 
(317
)
 
(519
)
Balance at March 31, 2014:
 
 
 
 
 
Goodwill
223,002

 
189,419

 
412,421

Accumulated impairment losses
(10,322
)
 
(18,899
)
 
(29,221
)
 
$
212,680

 
170,520

 
383,200

 


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

(H) ACCRUED EXPENSES AND OTHER LIABILITIES
 
March 31, 2014
 
December 31, 2013
 
Accrued
Expenses
 
Non-Current
Liabilities
 
Total
 
Accrued
Expenses
 
Non-Current
Liabilities
 
Total
 
(In thousands)
Salaries and wages
$
69,064

 
—

 
69,064

 
106,281

 
—

 
106,281

Deferred compensation
2,790

 
32,097

 
34,887

 
2,505

 
31,896

 
34,401

Other employee benefits
4,646

 
4,200

 
8,846

 
3,809

 
6,712

 
10,521

Pension benefits
3,582

 
293,074

 
296,656

 
3,660

 
292,155

 
295,815

Other postretirement benefits
2,405

 
28,200

 
30,605

 
2,414

 
28,374

 
30,788

Insurance obligations (1)
130,734

 
187,307

 
318,041

 
125,835

 
186,700

 
312,535

Accrued rent
7,198

 
2,721

 
9,919

 
4,373

 
3,372

 
7,745

Environmental liabilities
4,416

 
8,853

 
13,269

 
4,515

 
8,548

 
13,063

Asset retirement obligations
5,851

 
19,834

 
25,685

 
6,144

 
19,403

 
25,547

Operating taxes
100,519

 
—

 
100,519

 
94,188

 
—

 
94,188

Income taxes
2,566

 
24,682

 
27,248

 
2,623

 
23,813

 
26,436

Interest
25,600

 
—

 
25,600

 
33,654

 
—

 
33,654

Deposits, mainly from customers
56,156

 
6,240

 
62,396

 
55,854

 
6,239

 
62,093

Deferred revenue
15,013

 
—

 
15,013

 
15,123

 
—

 
15,123

Other
35,457

 
10,073

 
45,530

 
35,359

 
9,093

 
44,452

Total
$
465,997

 
617,281

 
1,083,278

 
496,337

 
616,305

 
1,112,642

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


(I) INCOME TAXES

Uncertain Tax Positions

We are subject to tax audits in numerous jurisdictions in the U.S. and foreign countries. Tax audits by their very nature are often complex and can require several years to complete. In the normal course of business, we are subject to challenges from the Internal Revenue Service (IRS) and other tax authorities regarding amounts of taxes due. These challenges may alter the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions. As part of our calculation of the provision for income taxes on earnings, we recognize the tax benefit from uncertain tax positions that are at least more likely than not of being sustained upon audit, based on the technical merits of the tax position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Such calculations require management to make estimates and judgments with respect to the ultimate outcome of a tax audit. Actual results could vary materially from these estimates. We reevaluate uncertain tax positions each quarter based on factors including, but not limited to, changes in facts or circumstances, expiration of statutes of limitations, changes in tax law, effectively settled issues under audit, and new audit activity. Depending on the jurisdiction, such a change in recognition or measurement may result in the recognition of a tax benefit or an additional charge to the tax provision in the period.

The following is a summary of tax years that are no longer subject to examination:
Federal — audits of our U.S. federal income tax returns are closed through fiscal year 2008.
State — for the majority of states, tax returns are closed through fiscal year 2008.
Foreign — we are no longer subject to foreign tax examinations by tax authorities for tax years before 2006 in Canada, 2009 in Brazil, 2008 in Mexico and 2011 in the U.K., which are our major foreign tax jurisdictions. Refer to Note (C), “Discontinued Operations,” for further discussion on various assessments related to our former South American operations.

At March 31, 2014 and December 31, 2013, the total amount of gross unrecognized tax benefits (excluding the federal benefit received from state positions) was $57.8 million and $56.8 million, respectively. Unrecognized tax benefits related to federal, state and foreign tax positions may decrease by $2.7 million by March 31, 2015, if audits are completed or tax years close.


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

Like-Kind Exchange Program

We have a like-kind exchange program for certain of our U.S.-based revenue earning equipment. Pursuant to the program, we dispose of vehicles and acquire replacement vehicles in a form whereby tax gains on disposal of eligible vehicles are deferred. To qualify for like-kind exchange treatment, we exchange through a qualified intermediary eligible vehicles being disposed of with vehicles being acquired, allowing us to generally carryover the tax basis of the vehicles sold (“like-kind exchanges”). The program results in a material deferral of federal and state income taxes, and a decrease in cash taxes in periods when we are not in a net operating loss (NOL) position. As part of the program, the proceeds from the sale of eligible vehicles are restricted for the acquisition of replacement vehicles and other specified applications. These proceeds are classified as restricted cash, which is included within “Prepaid expenses and other current assets” if the restriction is expected to expire in the twelve months following the balance sheet date or within “Direct financing leases and other assets” if the restriction is expected to expire more than twelve months after the balance sheet date. Due to the structure utilized to facilitate the like-kind exchanges, the qualified intermediary that holds the proceeds from the sales of eligible vehicles and the entity that holds the vehicles to be acquired under the program are required to be consolidated in the accompanying Consolidated Condensed Financial Statements in accordance with U.S. GAAP. The total assets, primarily revenue earning equipment, and the total liabilities, primarily vehicle accounts payable, held by these consolidated entities are equal in value as these entities are solely structured to facilitate the like-kind exchanges. At March 31, 2014 and December 31, 2013, these consolidated entities had total assets, primarily revenue earning equipment, and total liabilities, primarily accounts payable of $249.2 million and $246.3 million, respectively.

In the first quarter of 2013, once we had completed a restructuring of the administrative processes for purchasing and selling vehicles, we reinstated our like-kind exchange program. The reinstated program operates, and will provide cash tax benefits, in the same manner as it did prior to suspension once we are no longer in a NOL position. Our cash flow declined $19.0 million in the first quarter of 2013 as a result of the program's restricted cash. There were no other impacts to cash flow as a result of the program's reinstatement.

Effective Tax Rate

Our effective income tax rate from continuing operations for the first quarter of 2014 was 34.5% compared with 34.7% in the same period of the prior year. The decrease in our effective tax rate in the first quarter of 2014 reflects a benefit from a tax law change in the state of New York partially offset by a higher proportionate amount of 2014 earnings in higher tax rate jurisdictions.

On March 31, 2014, the State of New York enacted changes to its tax system, which impacted net operating loss provisions and reduced the corporate income tax rate from 7.1% to 6.5%. The impact of these changes resulted in a non-cash benefit to deferred income taxes of $1.8 million.


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

(J) DEBT
 
Weighted-Average
Interest Rate
 
 
 
 
 
 
 
March 31,
2014
 
December 31,
2013
 
Maturities
 
March 31,
2014
 
December 31,
2013
 
 
 
 
 
 
 
(In thousands)
Short-term debt and current portion of long-term debt:
 
 
 
 
 
 
 
 
 
Short-term debt
1.02%
 
1.70%
 
2014
 
$
1,590

 
1,315

Current portion of long-term debt, including capital leases
 
 
 
 
 
 
399,256

 
258,123

Total short-term debt and current portion of long-term debt
 
 
 
 
 
 
400,846

 
259,438

Long-term debt:
 
 
 
 
 
 
 
 
 
U.S. commercial paper (1)
0.26%
 
0.28%
 
2018
 
640,940

 
486,939

Canadian commercial paper (1)
—%
 
1.13%
 
2018
 
—

 
11,297

Global revolving credit facility
3.00%
 
—%
 
2018
 
16,290

 
—

Unsecured U.S. notes — Medium-term notes (1)
3.44%
 
3.76%
 
2015-2025
 
3,371,707

 
3,271,734

Unsecured U.S. obligations, principally bank term loans
1.45%
 
1.45%
 
2015-2018
 
55,500

 
55,500

Unsecured foreign obligations
1.99%
 
1.99%
 
2015-2016
 
315,681

 
315,558

Capital lease obligations
3.78%
 
3.81%
 
2014-2019
 
38,701

 
38,911

Total before fair market value adjustment
 
 
 
 
 
 
4,438,819

 
4,179,939

Fair market value adjustment on notes subject to hedging (2)
 
 
 
 
 
6,188

 
8,171

 
 
 
 
 
 
 
4,445,007

 
4,188,110

Current portion of long-term debt, including capital leases
 
 
 
 
 
 
(399,256
)
 
(258,123
)
Long-term debt
 
 
 
 
 
 
4,045,751

 
3,929,987

Total debt
 
 
 
 
 
 
$
4,446,597

 
4,189,425

 ————————————
(1)
We had unamortized original issue discounts of $8.4 million and $8.3 million at March 31, 2014 and December 31, 2013, respectively.
(2)
The notional amount of executed interest rate swaps designated as fair value hedges was $500 million and $400 million at March 31, 2014 and December 31, 2013, respectively.

We maintain a $900 million 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 global credit facility matures in October 2018. The global 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, 2014). At our option, the interest rate on borrowings under the credit facility is based on LIBOR, prime, federal funds or local equivalent rates. The agreement provides for annual facility fees which range from 8.0 basis points to 27.5 basis points and are based on Ryder’s long-term credit ratings. This annual facility fee is 12.5 basis points, which applies to the total facility size of $900 million. 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, 2014 was 188%. At March 31, 2014, $242.7 million was available under the credit facility.

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. At March 31, 2014 and December 31, 2013, we classified $640.9 million and $498.2 million, respectively, of short-term commercial paper as long-term debt.


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

In February 2014, we issued $350 million of unsecured medium-term notes maturing in June 2019. The proceeds from the notes were used to pay down commercial paper and for general corporate purposes. If the notes are downgraded 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 which causes early termination, the 364-day program will expire on October 24, 2014. 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. At March 31, 2014 and December 31, 2013, no amounts were outstanding under the program. Sales of receivables under this program will be accounted for as secured borrowings based on our continuing involvement in the transferred assets.

At March 31, 2014 and December 31, 2013, we had letters of credit and surety bonds outstanding totaling $308.9 million and $310.5 million, respectively, which primarily guarantee the payment of insurance claims.


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

(K) FAIR VALUE MEASUREMENTS

The following tables present our assets and liabilities that are measured at fair value on a recurring basis and the levels of inputs used to measure fair value:
 
Balance Sheet Location
 
Fair Value Measurements
At March 31, 2014 Using
 
Total
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
(In thousands)
Assets:
 
 
 
Interest rate swaps
Prepaid expenses and other current assets
 
$
—

 
2,509

 
—

 
2,509

Interest rate swaps
DFL and other assets
 
—

 
5,625

 
—

 
5,625

Investments held in Rabbi Trusts:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
3,719

 
—

 
—

 
3,719

U.S. equity mutual funds
 
 
20,005

 
—

 
—

 
20,005

Foreign equity mutual funds
 
 
4,383

 
—

 
—

 
4,383

Fixed income mutual funds
 
 
5,000

 
—

 
—

 
5,000

Investments held in Rabbi Trusts
DFL and other assets
 
33,107

 
—

 
—

 
33,107

Total assets at fair value
 
 
$
33,107

 
8,134

 
—

 
41,241

 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Interest rate swaps
Other non-current liabilities
 
$
—

 
1,946

 
—

 
1,946

Total liabilities at fair value
 
 
$
—

 
1,946

 
—

 
1,946

 
Balance Sheet Location
 
Fair Value Measurements
At December 31, 2013 Using
 
Total
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
(In thousands)
Assets:
 
 
 
Interest rate swaps
DFL and other assets
 
—

 
9,333

 
—

 
9,333

Investments held in Rabbi Trusts:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
7,101

 
—

 
—

 
7,101

U.S. equity mutual funds
 
 
16,479

 
—

 
—

 
16,479

Foreign equity mutual funds
 
 
4,323

 
—

 
—

 
4,323

Fixed income mutual funds
 
 
4,616

 
—

 
—

 
4,616

Investments held in Rabbi Trusts
DFL and other assets
 
32,519

 
—

 
—

 
32,519

Total assets at fair value
 
 
$
32,519

 
9,333

 
—

 
41,852

 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Interest rate swaps
Other non-current liabilities
 
$
—

 
1,162

 
—

 
1,162

Total liabilities at fair value
 
 
$
—

 
1,162

 
—

 
1,162


The following is a description of the valuation methodologies used for these items, as well as the level of inputs used to measure fair value:

Interest rate swaps — The derivatives are pay-variable, receive-fixed interest rate swaps based on the LIBOR rate and are designated as fair value hedges. 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.

Investments held in Rabbi Trusts — The investments primarily include mutual funds that invest in equity and fixed income securities. Shares of mutual funds were valued based on quoted market prices, which represent the net asset value of the shares and were therefore classified within Level 1 of the fair value hierarchy.



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

The following tables present our assets and liabilities that are measured at fair value on a nonrecurring basis and the levels of inputs used to measure fair value:
 
Fair Value Measurements
At March 31, 2014 Using
 
Total Losses (2)
 
Level 1
 
Level 2
 
Level 3
 
Three months  ended
 
(In thousands)
Assets held for sale:
 
 
 
 
 
 
 
Revenue earning equipment: (1)
 
 
 
 
 
 
 
Trucks
$
—

 
—

 
11,928

 
$
1,882

Tractors
—

 
—

 
7,495

 
1,632

Trailers
—

 
—

 
742

 
161

Total assets at fair value
$
—

 
—

 
20,165

 
$
3,675

 
 
Fair Value Measurements
At March 31, 2013 Using
 
Total Losses (2)
 
Level 1
 
Level 2
 
Level 3
 
Three months
 ended
 
(In thousands)
Assets held for sale:
 
 
 
 
 
 
 
Revenue earning equipment (1)
 
 
 
 
 
 
 
Trucks
$
—

 
—

 
13,229

 
$
3,029

Tractors
—

 
—

 
14,943

 
1,095

Trailers
—

 
—

 
989

 
597

Total assets at fair value
$
—

 
—

 
29,161

 
$
4,721

 ————————————
(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. 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 (tractors, trucks 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, 2014 and December 31, 2013 was approximately $4.45 billion and $4.28 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.


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

(L) 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. The following table provides a detail of the swaps outstanding and the related hedged items as of March 31, 2014:
 
 
 
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
 
 
 
 
 
2014
 
2013
 
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
February 2011
 
March 2015
 
$350,000
 
$150,000
 
3.15%
 
1.28%
 
1.41%
May 2011
 
June 2017
 
$350,000
 
$150,000
 
3.50%
 
1.44%
 
1.62%
November 2013
 
November 2018
 
$300,000
 
$100,000
 
2.45%
 
1.19%
 
—%
February 2014
 
June 2019
 
$350,000
 
$100,000
 
2.55%
 
1.10%
 
—%

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. The location and amount of gains (losses) on interest rate swap agreements designated as fair value hedges and related hedged items reported in the Consolidated Condensed Statements of Earnings were as follows:
Fair Value Hedging Relationship
 
Location of
 Gain (Loss)
Recognized in Income
 
Three months ended March 31,
 
2014
 
2013
 
 
 
 
(In thousands)
Derivatives: Interest rate swaps
 
Interest expense
 
$
(1,983
)
 
(2,781
)
Hedged items: Fixed-rate debt
 
Interest expense
 
1,983

 
2,781

Total
 
 
 
$
—

 
—


Refer to Note (K), “Fair Value Measurements,” for disclosures of the fair value and line item caption of derivative instruments recorded on the Consolidated Condensed Balance Sheets.

(M) 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 may establish 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. For the three months ended March 31, 2014, we repurchased and retired 562,683 shares under the program at an aggregate cost of $40.4 million. We did not repurchase any shares under this program in 2013.

In December 2011, 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 2011 program, management was 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, 2011 through December 13, 2013. The December 2011 program limited aggregate share repurchases to no more than 2 million shares of Ryder common stock. In 2013, we temporarily paused our anti-dilutive share repurchase program to appropriately manage our leverage and to allow us to maintain near-term balance sheet flexibility.

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


(N) ACCUMULATED OTHER COMPREHENSIVE LOSS

The following summaries set 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, 2013
 
$
35,875

 
(477,883
)
 
3,760

 
(438,248
)
Amortization
 
—

 
3,807

 
(680
)
 
3,127

Current period change
 
(14,592
)
 
—

 
—

 
(14,592
)
March 31, 2014
 
$
21,283

 
(474,076
)
 
3,080

 
(449,713
)

 
 
Currency
Translation
Adjustments and Other
 
Net Actuarial
Loss (1)
 
Prior Service
Credit (1)
 
Accumulated
Other
Comprehensive
Loss
 
 
(In thousands)
December 31, 2012
 
$
57,860

 
(648,113
)
 
2,634

 
(587,619
)
Amortization
 
—

 
5,754

 
(335
)
 
5,419

Current period change
 
(33,704
)
 
—

 
—

 
(33,704
)
March 31, 2013
 
$
24,156

 
(642,359
)
 
2,299

 
(615,904
)
_______________________ 

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

(O) EMPLOYEE BENEFIT PLANS

Components of net periodic benefit cost were as follows:
 
Pension Benefits
 
Postretirement Benefits
 
Three months ended March 31,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Company-administered plans:
 
 
 
 
 
 
 
Service cost
$
3,423

 
4,252

 
$
135

 
263

Interest cost
25,561

 
22,419

 
365

 
395

Expected return on plan assets
(28,718
)
 
(26,448
)
 
—

 
—

Amortization of:
 
 
 
 
 
 
 
Net actuarial loss (credit)
6,235

 
8,880

 
(129
)
 
(2
)
Prior service credit
(458
)
 
(466
)
 
(615
)
 
(58
)
 
6,043

 
8,637

 
(244
)
 
598

Union-administered plans
2,091

 
1,984

 
—

 
—

Net periodic benefit cost
$
8,134

 
10,621

 
$
(244
)
 
598

 
 
 
 
 
 
 
 
Company-administered plans:
 
 
 
 
 
 
 
U.S.
$
6,287

 
8,741

 
$
(397
)
 
406

Non-U.S.
(244
)
 
(104
)
 
153

 
192

 
6,043

 
8,637

 
(244
)
 
598

Union-administered plans
2,091

 
1,984

 
—

 
—

 
$
8,134

 
10,621

 
$
(244
)
 
598

 
 
 
 
 
 
 
 

During the three months ended March 31, 2014, we contributed $4.3 million to our pension plans. In 2014, we expect total contributions to our pension plans to be approximately $75 million.

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


(P) 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, 2013, we recognized a benefit of $1.9 million (before and after tax) from the recognition of the accumulated currency translation adjustment from a FMS foreign operation which has substantially liquidated its net assets. This benefit was recorded within “Miscellaneous income, net” in our Consolidated Condensed Statement of Earnings.

(Q) SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information was as follows:
 
Three months ended March 31,
 
2014
 
2013
 
(In thousands)
Interest paid
$
41,180

 
45,425

Income taxes paid
1,534

 
3,721

Changes in accounts payable related to purchases of revenue earning equipment
16,918

 
29,381

Operating and revenue earning equipment acquired under capital leases
2,245

 
458


During the three months ended March 31, 2014 and 2013, we paid $1.6 million and $1.4 million, respectively, related to acquisitions completed in prior years.


(R) MISCELLANEOUS INCOME, NET
 
Three months ended March 31,
 
2014
 
2013
 
(In thousands)
Contract settlement
$
2,908

 
—

Gains on sales of operating property and equipment
1,304

 
273

Foreign currency translation benefit (1)
—

 
1,904

Rabbi trust investment income
500

 
1,459

Other, net
670

 
934

Total
$
5,382

 
4,570

 ————————————
(1) Refer to Note (P), "Other Items Impacting Comparability," for additional information.


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

(S) SEGMENT REPORTING

Our operating segments are aggregated into reportable business segments based upon similar economic characteristics, products, services, customers and delivery methods. We operate in two reportable business segments: (1) FMS, which provides full service leasing, contract maintenance, contract-related maintenance and commercial rental of trucks, tractors and trailers to customers, principally in the U.S., Canada and the U.K.; and (2) SCS, which provides comprehensive supply chain management solutions including distribution and transportation services in North America and Asia. The SCS segment also provides dedicated services, which includes vehicles and drivers as part of a dedicated transportation solution in the U.S.

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 the items discussed in Note (P), “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 SCS segment. 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 SCS and then eliminated (presented as “Eliminations”). 

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, 2014 and 2013. 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.

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

 
FMS
 
SCS
 
Eliminations
 
Total
 
(In thousands)
 
 
For the three months ended March 31, 2014
 
 
 
 
 
 
Revenue from external customers
$
1,013,396

 
597,341

 
—

 
1,610,737

Inter-segment revenue
121,691

 
—

 
(121,691
)
 
—

Total revenue
$
1,135,087

 
597,341

 
(121,691
)
 
1,610,737

 
 
 
 
 
 
 
 
Segment EBT
$
76,991

 
21,784

 
(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 (1), (2)
$
568,239

 
3,872

 
—

 
572,111

Unallocated CSS
 
 
 
 
 
 
6,611

Capital expenditures paid
 
 
 
 
 
 
$
578,722

 
 
 
 
 
 
 
 
For the three months ended March 31, 2013
 
 
 
 
 
 
Revenue from external customers
$
986,538

 
576,479

 
—

 
1,563,017

Inter-segment revenue
113,194

 
—

 
(113,194
)
 
—

Total revenue
$
1,099,732

 
576,479

 
(113,194
)
 
1,563,017

 
 
 
 
 
 
 
 
Segment EBT
$
60,745

 
24,436

 
(7,958
)
 
77,223

Unallocated CSS
 
 
 
 
 
 
(11,375
)
Non-operating pension costs 
 
 
 
 
 
 
(5,244
)
Restructuring and other charges, net and other items
 
 
 
 
 
 
1,904

Earnings from continuing operations before income taxes
 
 
 
 
 
 
$
62,508

 
 
 
 
 
 
 
 
Segment capital expenditures paid (1), (2)
$
406,511

 
5,800

 
—

 
412,311

Unallocated CSS
 
 
 
 
 
 
7,743

Capital expenditures paid
 
 
 
 
 
 
$
420,054

 ————————————
(1)
Excludes revenue earning equipment acquired under capital leases.
(2)
Excludes acquisition payments of $1.6 million and $1.4 million during the three months ended March 31, 2014, and 2013, respectively.

21
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)

(T) 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.

Refer to Note (C), “Discontinued Operations,” for additional matters.

22
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 2013 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. We operate in two reportable business segments: (1) FMS, which provides full service leasing, contract maintenance, contract-related maintenance and commercial rental of trucks, tractors and trailers to customers, principally in the U.S., Canada and the U.K.; and (2) SCS, which provides comprehensive supply chain management solutions including distribution and transportation services in North America and Asia. The SCS segment also provides dedicated services, which includes vehicles and drivers as part of a dedicated transportation solution in the U.S.

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, hi-tech and electronics, retail, housing, business and personal services, and paper and publishing.

Total revenue increased 3% in the first quarter of 2014 to $1.61 billion. Operating revenue (revenue excluding FMS fuel and all subcontracted transportation) increased 4% in the first quarter of 2014 to $1.32 billion. The increase in total and operating revenue for both periods was driven by growth in both the FMS and SCS business segments. See “Consolidated Results” for further discussion of operating revenue, a non-GAAP financial measure.

Earnings from continuing operations before taxes (EBT) increased 20% in the first quarter of 2014 to $75.0 million. The increase in EBT in the first quarter of 2014 reflects improved performance in the FMS business segment.




























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



EBT, earnings and EPS from continuing operations in the first quarter of 2014 and 2013 included certain items we do not consider indicative of our ongoing operations and have been excluded from our comparable EBT, earnings and EPS measures. The following discussion provides a summary of these items, which are discussed in more detail throughout our MD&A and within the Notes to Consolidated Condensed Financial Statements:
 
EBT
 
Earnings
 
Diluted EPS
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Three months ended March 31
(In thousands, except per share amounts)
EBT/Earnings/EPS
$
75,004

 
62,508

 
$
49,098

 
40,802

 
$
0.92

 
0.79

Non-operating pension costs (1)
3,314

 
5,244

 
1,888

 
3,081

 
0.03

 
0.06

Foreign currency translation benefit (2)
—

 
(1,904
)
 
—

 
(1,904
)
 
—

 
(0.04
)
Benefit from tax law change (3)
—

 
—

 
(1,776
)
 
—

 
(0.03
)
 
—

Comparable (4)
$
78,318

 
65,848

 
$
49,210

 
41,979

 
$
0.92


0.81

__________________
(1)
Includes the amortization of actuarial loss, interest cost and expected return on plan assets components of pension and postretirement costs, which are tied to financial market performance. We consider these costs to be outside the operational performance of the business.
(2)
See Note (P), "Other Items Impacting Comparability," for additional information.
(3)
See Note (I), "Income Taxes," for additional information.
(4)
Non-GAAP financial measure. We believe comparable EBT, comparable earnings and comparable earnings per diluted common share all from continuing operations measures 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.

Excluding the special items listed above, comparable earnings and comparable EPS from continuing operations in the first quarter of 2014 increased 17% to $49.2 million and increased 14% to $0.92 per diluted common share, respectively. EBT growth exceeded the EPS growth during the first quarter of 2014 because the average number of shares outstanding has increased 3% over prior year reflecting the impact of stock issuances under employee stock option and stock purchase plans.

In the first quarter of 2014, net earnings and EPS increased 21% to $48.2 million and 17% to $0.90 per diluted common share, respectively. Net earnings in the first quarter of 2014 and 2013 were negatively impacted by losses from discontinued operations of $0.9 million, or $0.02 per diluted share in both periods.

24
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)



CONSOLIDATED RESULTS
 
Three months ended March 31,
 
Change
 
2014
 
2013
 
2014/2013
 
(In thousands, except per share amounts)
 
Total revenue
$
1,610,737

 
1,563,017

 
   3%
Operating revenue (1)
1,322,478

 
1,267,521

 
   4%
 
 
 
 
 
 
 
 
 
 
 
 
EBT
$
75,004

 
62,508

 
   20%
Earnings from continuing operations
49,098

 
40,802

 
   20%
Net earnings
48,232

 
39,924

 
   21%
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per common share — Diluted
 
 
 
 
 
Continuing operations
$
0.92

 
0.79

 
   16%
Net earnings
0.90

 
0.77

 
   17%
  ————————————
(1)
We use operating revenue, a non-GAAP financial measure, to evaluate the operating performance of our businesses and as a measure of sales activity. FMS fuel services revenue, which is directly impacted by fluctuations in market fuel prices, is excluded from the operating revenue computation as fuel is largely a pass-through to our customers for which we realize minimal changes in 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 market fuel costs. Subcontracted transportation is deducted from total revenue to arrive at operating revenue as subcontracted transportation is typically a pass-through to our customers. We realize minimal changes in profitability as a result of fluctuations in subcontracted transportation. Refer to the section titled “Non-GAAP Financial Measures” for a reconciliation of total revenue to operating revenue.
 
Revenue and Cost of Revenue by Source

Total revenue increased 3% in the first quarter of 2014 to $1.61 billion. Operating revenue increased 4% in the first quarter of 2014 to $1.32 billion. The increase in total and operating revenue reflects growth in both FMS and SCS. The FMS growth was primarily driven by higher lease and commercial rental revenue and the SCS growth was driven by new business and higher volumes.

Lease and Rental
 
Three months ended March 31,
 
Change
 
2014
 
2013
 
2014/2013
 
(Dollars in thousands)
 
Lease and rental revenues
$
689,682

 
659,708

 
   5%
Cost of lease and rental
493,043

 
473,077

 
   4%
Gross margin
196,639

 
186,631

 
   5%
Gross margin %
29
%
 
28
%
 
 

Lease and rental revenues represent full service lease and commercial rental product offerings within our FMS business segment. Revenues increased 5% in the first quarter of 2014 to $689.7 million driven by full service lease fleet growth, higher prices on full service lease vehicles and increased commercial rental revenue. Commercial rental revenue increased due to higher rental pricing (up 5% in the first quarter of 2014) and North American demand.

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 4% to $493.0 million in the first quarter of 2014 due to depreciation from increased lease vehicle investments and higher maintenance costs on a larger average lease fleet. Cost of lease and rental benefited by $6.3 million in the first quarter of 2014 from changes in the residual value policy effective January 1, 2014.

25
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)



Lease and rental gross margin increased 5% in the first quarter of 2014 to $196.6 million and lease and rental gross margin as a percentage of revenue increased to 29% in the first quarter of 2014. The increase was due to higher rental pricing and demand as well as benefits from depreciation policy changes.

Services
 
Three months ended March 31,
 
Change
 
2014
 
2013
 
2014/2013
 
(Dollars in thousands)
 
 
Services revenue
$
709,699

 
689,461

 
   3%
Cost of services
606,229

 
583,589

 
   4%
Gross margin
103,470

 
105,872

 
   (2)%
Gross margin %
15
%
 
15
%
 
 

Services revenue represents all the revenues associated with our SCS business segment as well as contract maintenance, contract-related maintenance and fleet support services associated with our FMS business segment. Services revenue increased 3% in the first quarter of 2014 to $709.7 million primarily due to higher volumes and new business in our SCS business segment, especially in our dedicated services.

Cost of services represents the direct costs related to services revenue and is primarily comprised of salaries and employee-related costs, SCS subcontracted transportation (purchased transportation from third parties) and maintenance costs. Cost of services increased 4% in the first quarter of 2014 to $606.2 million primarily due to higher revenue and, to a lesser extent, downtime and other costs related to severe winter weather in our SCS business segment.

Services gross margin decreased 2% to $103.5 million in the first quarter of 2014 primarily due to the impact of severe winter weather-related downtime and associated costs in SCS. Services gross margin as a percentage of revenue remained at 15% in the first quarter of 2014.

Fuel
 
Three months ended March 31,
 
Change
 
2014
 
2013
 
2014/2013
 
(Dollars in thousands)
 
 
Fuel services revenue
$
211,356

 
213,848

 
   (1)%
Cost of fuel services
207,205

 
210,293

 
   (1)%
Gross margin
4,151

 
3,555

 
   17%
Gross margin %
2
%
 
2
%