Ryder 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, 2012
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, 2012 was 51,273,569.
 
 
 
 
 

1



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 COMPREHENSIVE INCOME
(unaudited)
 
 
Three months ended March 31,
 
2012
 
2011
 
(In thousands, except per share amounts)
Lease and rental revenues
$
637,858

 
579,415

Services revenue
678,352

 
632,738

Fuel services revenue
220,066

 
213,223

Total revenues
1,536,276

 
1,425,376

 
 
 
 
Cost of lease and rental
455,630

 
408,515

Cost of services
577,948

 
537,857

Cost of fuel services
215,573

 
208,960

Other operating expenses
34,249

 
34,629

Selling, general and administrative expenses
196,019

 
173,109

Gains on vehicle sales, net
(21,991
)
 
(12,349
)
Interest expense
34,765

 
34,419

Miscellaneous income, net
(4,480
)
 
(4,142
)
Restructuring and other charges, net
865

 
768

 
1,488,578

 
1,381,766

Earnings from continuing operations before income taxes
47,698

 
43,610

Provision for income taxes
12,822

 
17,753

Earnings from continuing operations
34,876

 
25,857

Loss from discontinued operations, net of tax
(555
)
 
(732
)
Net earnings
$
34,321

 
25,125

 
 
 
 
Earnings (loss) per common share — Basic
 
 
 
Continuing operations
$
0.68

 
0.50

Discontinued operations
(0.01
)
 
(0.01
)
Net earnings
$
0.67

 
0.49

 
 
 
 
Earnings (loss) per common share — Diluted
 
 
 
Continuing operations
$
0.68

 
0.50

Discontinued operations
(0.01
)
 
(0.02
)
Net earnings
$
0.67

 
0.48

 
 
 
 
Comprehensive income
$
61,812

 
52,424

 
 
 
 
Cash dividends declared per common share
$
0.29

 
0.27




See accompanying notes to consolidated condensed financial statements.

1



RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
 
 
March 31,
2012
 
December 31,
2011
 
(Dollars in thousands, except per
share amount)
Assets:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
113,621

 
104,572

Receivables, net
789,256

 
754,644

Inventories
67,283

 
65,912

Prepaid expenses and other current assets
152,181

 
163,045

Total current assets
1,122,341

 
1,088,173

Revenue earning equipment, net of accumulated depreciation of $3,523,771 and
   $3,462,359, respectively
5,529,793

 
5,049,671

Operating property and equipment, net of accumulated depreciation of $929,173 and
   $911,717, respectively
625,504

 
624,180

Goodwill
377,829

 
377,306

Intangible assets
83,126

 
84,820

Direct financing leases and other assets
410,049

 
393,685

Total assets
$
8,148,642

 
7,617,835

 
 
 
 
Liabilities and shareholders’ equity:
 
 
 
Current liabilities:
 
 
 
Short-term debt and current portion of long-term debt
$
586,872

 
274,366

Accounts payable
720,599

 
391,827

Accrued expenses and other current liabilities
454,277

 
507,630

Total current liabilities
1,761,748

 
1,173,823

Long-term debt
3,006,302

 
3,107,779

Other non-current liabilities
891,283

 
896,587

Deferred income taxes
1,117,929

 
1,121,493

Total liabilities
6,777,262

 
6,299,682

 
 
 
 
Shareholders’ equity:
 
 
 
Preferred stock of no par value per share — authorized, 3,800,917; none outstanding,
   March 31, 2012 or December 31, 2011

 

Common stock of $0.50 par value per share — authorized, 400,000,000; outstanding,
  March 31, 2012 — 51,273,569; December 31, 2011 — 51,143,946
25,637

 
25,572

Additional paid-in capital
784,108

 
769,383

Retained earnings
1,101,309

 
1,090,363

Accumulated other comprehensive loss
(539,674
)
 
(567,165
)
Total shareholders’ equity
1,371,380

 
1,318,153

Total liabilities and shareholders’ equity
$
8,148,642

 
7,617,835

See accompanying notes to consolidated condensed financial statements.

2



RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
 
Three months ended March 31,
 
2012
 
2011
 
(In thousands)
Cash flows from operating activities from continuing operations:
 
 
 
Net earnings
$
34,321

 
25,125

Less: Loss from discontinued operations, net of tax
(555
)
 
(732
)
Earnings from continuing operations
34,876

 
25,857

Depreciation expense
226,608

 
205,937

Gains on vehicle sales, net
(21,991
)
 
(12,349
)
Share-based compensation expense
4,437

 
4,105

Amortization expense and other non-cash charges, net
9,101

 
7,724

Deferred income tax expense
14,356

 
12,781

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Receivables
(26,520
)
 
(51,090
)
Inventories
(1,166
)
 
(3,750
)
Prepaid expenses and other assets
(5,644
)
 
(8,174
)
Accounts payable
9,448

 
31,408

Accrued expenses and other non-current liabilities
(57,229
)
 
5,115

Net cash provided by operating activities from continuing operations
186,276

 
217,564

 
 
 
 
Cash flows from financing activities from continuing operations:
 
 
 
Net change in commercial paper borrowings
(164,298
)

(290,132
)
Debt proceeds
369,920


349,867

Debt repaid, including capital lease obligations
(2,784
)

(820
)
Dividends on common stock
(14,853
)
 
(13,945
)
Common stock issued
13,156

 
5,222

Common stock repurchased
(11,920
)
 
(12,036
)
Excess tax benefits from share-based compensation
789

 
548

Debt issuance costs
(2,211
)
 
(1,732
)
Net cash provided by financing activities from continuing operations
187,799

 
36,972

 
 
 
 
Cash flows from investing activities from continuing operations:
 
 
 
Purchases of property and revenue earning equipment
(470,969
)
 
(313,218
)
Sales of revenue earning equipment
91,341

 
66,150

Sales of operating property and equipment
2,898

 
5,030

Acquisitions
(2,076
)
 
(83,776
)
Collections on direct finance leases
15,475

 
14,828

Changes in restricted cash
(2,438
)
 
(281
)
Net cash used in investing activities from continuing operations
(365,769
)
 
(311,267
)
 
 
 
 
Effect of exchange rate changes on cash
1,660

 
341

Increase (decrease) in cash and cash equivalents from continuing operations
9,966

 
(56,390
)
 
 
 
 
Cash flows from discontinued operations:
 
 
 
Operating cash flows
(933
)
 
(1,048
)
Financing cash flows


11

Investing cash flows

 

Effect of exchange rate changes on cash
16

 
14

Decrease in cash and cash equivalents from discontinued operations
(917
)
 
(1,023
)
 
 
 
 
Increase (decrease) in cash and cash equivalents
9,049

 
(57,413
)
Cash and cash equivalents at January 1
104,572

 
213,053

Cash and cash equivalents at March 31
$
113,621

 
155,640

See accompanying notes to consolidated condensed financial statements.

3



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, 2011
$

 
51,143,946

 
$
25,572

 
769,383

 
1,090,363

 
(567,165
)
 
1,318,153

Components of comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings

 

 

 

 
34,321

 

 
34,321

Foreign currency translation adjustments

 

 

 

 

 
22,803

 
22,803

Amortization of pension and postretirement items, net of tax

 

 

 

 

 
4,688

 
4,688

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
61,812

Common stock dividends declared — $0.29 per share

 

 

 

 
(14,908
)
 

 
(14,908
)
Common stock issued under employee stock option and stock purchase plans (1)

 
352,533

 
177

 
12,957

 

 

 
13,134

Benefit plan stock sales (2)

 
290

 

 
22

 

 

 
22

Common stock repurchases

 
(223,200
)
 
(112
)
 
(3,341
)
 
(8,467
)
 

 
(11,920
)
Share-based compensation

 

 

 
4,437

 

 

 
4,437

Tax benefits from share-based compensation

 

 

 
650

 

 

 
650

Balance at March 31, 2012
$

 
51,273,569

 
$
25,637

 
784,108

 
1,101,309

 
(539,674
)
 
1,371,380

————————————
(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.

4


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 2011 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. In the fourth quarter of 2011, we revised our Consolidated Condensed Statements of Comprehensive Income presentation to disaggregate our revenues and direct costs into three categories: full service lease and rental, services and fuel. In addition, we changed our business segments and our primary measure of segment operating performance. Prior to 2012, our business was divided into three business segments: Fleet Management Solutions (FMS), Supply Chain Solutions (SCS), and Dedicated Contract Carriage (DCC). In 2012, the SCS and DCC reportable business segments were combined as a result of aligning our internal reporting with how we operate our business. Our primary measurement of segment operating performance, “Earnings Before Taxes” (EBT) from continuing operations, was changed in 2012 to exclude the non-service components of pension costs in order to more accurately reflect the operating performance of the business segments.


(B) ACCOUNTING CHANGES

In June 2011, the Financial Accounting Standards Board (FASB) issued accounting guidance on the presentation of comprehensive income. Under this guidance, entities have the option to present the components of net income and other comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance was amended in December 2011 to defer the requirement to present the effects of reclassification adjustments out of accumulated other comprehensive income on the components of net income. We adopted this guidance in the first quarter of 2012 and have presented total comprehensive income in a single continuous statement which contains two sections, net earnings and comprehensive income. This accounting guidance only impacted presentation and did not have an impact on our consolidated financial position, results of operations or cash flows.


(C) ACQUISITIONS

Hill Hire plc — On June 8, 2011, we acquired all of the common stock of Hill Hire plc (Hill Hire), a U.K. based full service leasing, rental and maintenance company for a purchase price of $251.5 million, net of cash acquired, all of which was paid in 2011. The acquisition included Hill Hire’s fleet of approximately 8,000 full service lease vehicles and 5,700 rental vehicles, and approximately 400 contractual customers. The acquired fleet included 9,700 trailers. The combined network operates under the Ryder name, complementing our FMS business segment market coverage in the U.K. During the three months ended March 31, 2012, purchase price adjustments totaled $1.8 million and related to adjustments to the fair value of liabilities assumed and revenue earning equipment.

Pro Forma Information — The operating results of Hill Hire have been included in the consolidated condensed financial statements from the date of acquisition. The following table provides the unaudited pro forma revenues, net earnings and earnings per common share for the three months ended March 31, 2011 as if the results of the Hill Hire acquisition had been included in operations commencing January 1, 2010. This pro forma information is not necessarily indicative either of the combined results of operations that actually would have been realized had the acquisition been consummated during the period for which the pro forma information is presented, or of future results.
 

5


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


 
Three months ended
March 31, 2011
 
(In thousands, except
per share amounts)
Revenue — As reported
$
1,425,376

Revenue — Pro forma
$
1,463,205

 
 
Net earnings — As reported
$
25,125

Net earnings — Pro forma
$
32,213

 
 
Net earnings per common share:
 
Basic — As reported
$
0.49

Basic — Pro forma
$
0.63

 
 
Diluted — As reported
$
0.48

Diluted — Proforma
$
0.62


Other Acquisitions—During 2011, we completed three other acquisitions of full service leasing and fleet service companies, one of which included the assets of the seller’s dedicated contract carriage business. The combined networks operate under the Ryder name, complementing our FMS and SCS business segment market coverage throughout the United States. The purchase price of these acquisitions totaled $113.8 million, of which $1.2 million and $79.6 million was paid during the three months ended March 31, 2012 and March 31, 2011, respectively. Goodwill and customer relationship intangibles related to these acquisitions totaled $28.4 million and $11.9 million, respectively. The following table provides further information regarding each of these acquisitions:

Company Acquired
 
Date Acquired
 
Segment
 
Purchase Price
 
Vehicles
 
Contractual Customers
Carmenita Leasing, Inc.
 
January 10, 2011
 
FMS
 
$9.0 million
 
190
 
60
The Scully Companies
 
January 28, 2011
 
FMS/SCS
 
$91.0 million
 
2,100
 
200
B.I.T Leasing
 
April 1, 2011
 
FMS
 
$13.8 million
 
490
 
130

During the three months ended March 31, 2012 and March 31, 2011, we paid $0.9 million and $4.2 million, respectively, related to acquisitions completed in years prior to 2011.

(D) 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,
 
2012
 
2011
 
(In thousands)
Pre-tax loss from discontinued operations
$
(575
)
 
(747
)
Income tax benefit
20

 
15

Loss from discontinued operations, net of tax
$
(555
)
 
(732
)

Results of discontinued operations in 2012 and 2011 included losses related to adverse legal developments and professional and administrative fees associated with our discontinued South American operations.

6


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



The following is a summary of assets and liabilities of discontinued operations:
 
March 31,
2012
 
December 31,
2011
 
(In thousands)
Total assets, primarily deposits
$
5,042

 
4,600

Total liabilities, primarily contingent accruals
$
7,459

 
6,502


(E) 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.

The following table provides information on share-based compensation expense and income tax benefits recognized during the periods:
 
Three months ended March 31,
 
2012
 
2011
 
(In thousands)
Stock option and stock purchase plans
$
2,364

 
2,247

Nonvested stock
2,073

 
1,858

Share-based compensation expense
4,437

 
4,105

Income tax benefit
(1,484
)
 
(1,372
)
Share-based compensation expense, net of tax
$
2,953

 
2,733


During the three months ended March 31, 2012 and 2011, approximately 460,000 and 700,000 stock options, respectively, were granted under the Plans. These awards generally vest evenly over a three year period from the date of grant and have contractual terms of seven years. The fair value of each option award at the date of grant was estimated using a Black-Scholes-Merton option-pricing valuation model. The weighted-average fair value per option granted during the three months ended March 31, 2012 and 2011 was $14.07 and $12.84, respectively.

During the three months ended March 31, 2012 and 2011, approximately 93,000 and 140,000 market-based restricted stock rights, respectively, were granted under the Plans. For the 2012 grant, the awards were segmented into three equal 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 target TSR of the S&P 500 over the applicable performance period. Employees will receive the grant of stock at the end of the three year period provided they continue to be employed with Ryder, subject to Compensation Committee approval. For grants prior to 2012, employees only receive the grant of stock if Ryder’s cumulative average TSR at least meets the S&P 500 cumulative average TSR over an applicable three-year period. 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 and fixed on the grant date and considers the likelihood of Ryder achieving the market-based condition. The weighted-average fair value per market-based restricted stock right granted during the three months ended March 31, 2012 and 2011 was $43.39 and $25.29, respectively.

During the three months ended March 31, 2012 and 2011, approximately 104,000 and 120,000 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 vest at the end of a three-year period. 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. The weighted-average fair value per time-vested restricted stock right granted during the three months ended March 31, 2012 and 2011 was $53.62 and $50.62, respectively.

During the three months ended March 31, 2012 and 2011, employees who received market-based restricted stock rights also received market-based cash awards. In addition, in 2012, employees who received time-vested restricted stock also received market-based cash awards. For the 2012 grant, the cash awards have the same vesting provisions as the market-based restricted stock rights. For grants prior to 2012, the awards have the same vesting provisions as the market-based restricted stock rights except that Ryder’s TSR must at least meet the TSR of the 33rd percentile of the S&P 500. 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

7


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


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.

The following table is a summary of compensation expense recognized for cash awards in addition to the share-based compensation expense reported in the previous table:
 
Three months ended March 31,
 
2012
 
2011
 
(In thousands)
Cash awards
$597
 
460

Total unrecognized pre-tax compensation expense related to all share-based compensation arrangements at March 31, 2012 was $43.8 million and is expected to be recognized over a weighted-average period of 2.3 years.

(F) 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 are considered participating securities since the share-based awards contain a non-forfeitable right to dividend equivalents irrespective of whether the awards ultimately vest. 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,
 
2012
 
2011
 
(In thousands, except per share amounts)
Earnings per share — Basic:
 
 
 
Earnings from continuing operations
$
34,876

 
25,857

Less: Distributed and undistributed earnings allocated to nonvested stock
(462
)
 
(405
)
Earnings from continuing operations available to common shareholders — Basic
$
34,414

 
25,452

 
 
 
 
Weighted average common shares outstanding — Basic
50,485

 
50,626

 
 
 
 
Earnings from continuing operations per common share — Basic
$
0.68

 
0.50

 
 
 
 
Earnings per share — Diluted:
 
 
 
Earnings from continuing operations
$
34,876

 
25,857

Less: Distributed and undistributed earnings allocated to nonvested stock
(460
)
 
(403
)
Earnings from continuing operations available to common shareholders — Diluted
$
34,416

 
25,454

 
 
 
 
Weighted average common shares outstanding — Basic
50,485

 
50,626

Effect of dilutive options
436

 
385

Weighted average common shares outstanding — Diluted
50,921

 
51,011

 
 
 
 
Earnings from continuing operations per common share — Diluted
$
0.68

 
0.50

 
 
 
 
Anti-dilutive equity awards and market-based restricted stock rights not included above
1,453

 
1,442


8


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



(G) RESTRUCTURING AND OTHER CHARGES

Restructuring charges, net of $0.9 million for the three months ended March 31, 2012 primarily represented exit costs associated with non-essential leased facilities assumed in the Hill Hire acquisition. Restructuring charges, net of $0.8 million for the three months ended March 31, 2011 represented employee severance and benefit costs related to workforce reductions and termination costs associated with non-essential equipment contracts assumed in the Scully acquisition.

Activity related to restructuring reserves including discontinued operations were as follows:
 
December 31, 2011
 
Additions
 
Cash
Payments
 
Foreign
Translation
Adjustments
 
March 31, 2012
 
Balance
 
 
 
 
Balance
 
(In thousands)      
Employee severance and benefits
$
2,607

 

 
755

 
74

 
1,926

Contract termination costs
2,639

 
865

 
384

 
(97
)
 
3,023

Total
$
5,246

 
865

 
1,139

 
(23
)
 
4,949


At March 31, 2012, the majority of outstanding restructuring obligations are required to be paid over the next two years.

(H) DIRECT FINANCING LEASE RECEIVABLES

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. The net investment in direct financing and sales-type leases consisted of:
 
March 31,
2012
 
December 31,
2011
 
(In thousands)
Total minimum lease payments receivable
$
615,486

 
561,772

Less: Executory costs
(202,017
)
 
(181,820
)
Minimum lease payments receivable
413,469

 
379,952

Less: Allowance for uncollectibles
(807
)
 
(903
)
Net minimum lease payments receivable
412,662

 
379,049

Unguaranteed residuals
64,499

 
63,472

Less: Unearned income
(101,042
)
 
(92,637
)
Net investment in direct financing and sales-type leases
376,119

 
349,884

Current portion
(72,028
)
 
(68,896
)
Non-current portion
$
304,091

 
280,988


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. Credit risk is assessed using an internally developed model which incorporates credit scores from third party providers and our own custom risk ratings and is updated on a monthly basis. The external credit scores are developed based on the customer’s historical payment patterns and an overall assessment of the likelihood of delinquent payments. Our internal ratings are weighted based on the industry that the customer operates, company size, years in business, and other credit-related indicators (i.e. profitability, cash flow, liquidity, tangible net worth, etc.). Any one of the following factors may result in a customer being classified as high risk: i) the customer has a history of late payments; ii) the customer has open lawsuits, liens or judgments; iii) the customer has been in business less than 3 years; and iv) the customer operates in an industry with low barriers to entry. 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.
 

9


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



The following table presents the credit risk profile by creditworthiness category of our direct financing lease receivables:
 
March 31,
2012
 
December 31,
2011
 
(In thousands)
Very low risk to low risk
$
153,452

 
121,836

Moderate risk
198,689

 
190,070

Moderately high risk to high risk
61,328

 
68,046

 
$
413,469

 
379,952


The following table is a rollforward of the allowance for credit losses on direct financing lease receivables for the three months ended March 31, 2012:
 
 
 
(In thousands)
Balance at December 31, 2011
$
903

Charged to earnings
783

Deductions
(879
)
Balance at March 31, 2012
$
807


As of March 31, 2012, 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 as of March 31, 2012.

(I) REVENUE EARNING EQUIPMENT

 
March 31, 2012
 
December 31, 2011
 
Cost
 
Accumulated
Depreciation
 
Net  Book
Value(1)
 
Cost
 
Accumulated
Depreciation
 
Net  Book
Value(1)
 
(In thousands)
Held for use:
 
Full service lease
$
6,326,070

 
(2,527,246
)
 
3,798,824

 
6,010,335

 
(2,518,830
)
 
3,491,505

Commercial rental
2,268,130

 
(666,758
)
 
1,601,372

 
2,175,003

 
(708,052
)
 
1,466,951

Held for sale
459,364

 
(329,767
)
 
129,597

 
326,692

 
(235,477
)
 
91,215

Total
$
9,053,564

 
(3,523,771
)
 
5,529,793

 
8,512,030

 
(3,462,359
)
 
5,049,671

 ————————————
(1) 
Revenue earning equipment, net includes vehicles acquired under capital leases of $59.4 million, less accumulated depreciation of $15.1 million, at March 31, 2012, and $60.7 million, less accumulated depreciation of $14.4 million, at December 31, 2011.

At the end of 2011, 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, 2012. The change in estimated residual values increased pre-tax earnings for the three months ended March 31, 2012 by approximately $4.5 million.
 

10


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



(J) 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, 2012:
 
 
 
 
 
Goodwill
$
216,559

 
189,968

 
406,527

Accumulated impairment losses
(10,322
)
 
(18,899
)
 
(29,221
)
 
206,237

 
171,069

 
377,306

Purchase accounting adjustments
72

 
97

 
169

Foreign currency translation adjustment
155

 
199

 
354

Balance at March 31, 2012:
 
 
 
 
 
Goodwill
216,786

 
190,264

 
407,050

Accumulated impairment losses
(10,322
)
 
(18,899
)
 
(29,221
)
 
$
206,464

 
171,365

 
377,829


Purchase accounting adjustments primarily related to changes in the fair value of acquired revenue earning equipment. We did not recast the December 31, 2011 balance sheet as the adjustments are not material.

(K) ACCRUED EXPENSES AND OTHER LIABILITIES

 
March 31, 2012
 
December 31, 2011
 
Accrued
Expenses
 
Non-Current
Liabilities
 
Total
 
Accrued
Expenses
 
Non-Current
Liabilities
 
Total
 
(In thousands)
Salaries and wages
$
62,043

 

 
62,043

 
121,087

 

 
121,087

Deferred compensation
1,508

 
22,943

 
24,451

 
1,405

 
21,285

 
22,690

Pension benefits
3,140

 
547,417

 
550,557

 
3,120

 
546,681

 
549,801

Other postretirement benefits
2,842

 
40,143

 
42,985

 
2,838

 
40,154

 
42,992

Insurance obligations,
 primarily self-insurance
119,453

 
163,660

 
283,113

 
120,045

 
157,390

 
277,435

Residual value guarantees
2,872

 
693

 
3,565

 
3,093

 
1,125

 
4,218

Accrued rent
13,952

 
8,138

 
22,090

 
4,088

 
14,686

 
18,774

Environmental liabilities
4,539

 
9,541

 
14,080

 
4,368

 
9,171

 
13,539

Asset retirement obligations
5,847

 
12,546

 
18,393

 
5,702

 
12,364

 
18,066

Operating taxes
87,163

 

 
87,163

 
81,820

 

 
81,820

Income taxes
3,197

 
70,011

 
73,208

 
4,160

 
74,147

 
78,307

Interest
25,973

 

 
25,973

 
30,410

 

 
30,410

Deposits, mainly from customers
54,621

 
7,546

 
62,167

 
50,951

 
7,544

 
58,495

Deferred revenue
17,182

 
138

 
17,320

 
20,698

 
476

 
21,174

Acquisition holdbacks
4,992

 

 
4,992

 
7,422

 

 
7,422

Other
44,953

 
8,507

 
53,460

 
46,423

 
11,564

 
57,987

Total
$
454,277

 
891,283

 
1,345,560

 
507,630

 
896,587

 
1,404,217


11


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



(L) 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.

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 2007.
State — for the majority of states, tax returns are closed through fiscal year 2007.
Foreign — we are no longer subject to foreign tax examinations by tax authorities for tax years before 2004 in Canada, 2006 in Brazil, 2007 in Mexico and 2009 in the U.K., which are our major foreign tax jurisdictions. Refer to Note (T), "Other Matters," for further discussion on the resolution of a Brazil tax assessment in the first quarter of 2012.

At March 31, 2012 and December 31, 2011, the total amount of gross unrecognized tax benefits (excluding the federal benefit received from state positions) was $70.3 million and $69.2 million, respectively. Unrecognized tax benefits related to federal, state and foreign tax positions may decrease by $13.9 million by March 31, 2013, if audits are completed or tax years close.

Like-Kind Exchange Program

We have a like-kind exchange program for certain of our revenue earning equipment operating in the U.S. 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. 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. 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. At March 31, 2012 and December 31, 2011, these consolidated entities had total assets, primarily revenue earning equipment, and total liabilities, primarily accounts payable, of $190.9 million and $142.0 million, respectively.

Tax Law Changes

On January 13, 2011, the State of Illinois enacted changes to its tax system, which included an increase to the corporate income tax rate from 4.8% to 7.0%. The impact of this change resulted in a non-cash charge to deferred income taxes and a decrease to earnings for the three months ended March 31, 2011 of $1.2 million.

Effective Tax Rate

Our effective income tax rate from continuing operations for the first quarter of 2012 was 26.9% compared with 40.7% in the same period of the prior year. The decrease in the effective tax rate from continuing operations was mainly due to a tax benefit of $5.0 million (10.4% of earnings before tax) relating to the favorable resolution of a tax item from prior periods and a higher proportionate amount of earnings in lower rate jurisdictions. The 2011 tax rate included an unfavorable impact related to a tax law change in Illinois of $1.2 million (2.8% of earnings before tax).

12


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



(M) DEBT

 
Weighted-Average
Interest Rate
 
 
 
 
 
 
 
March 31,
2012
 
December 31,
2011
 
Maturities
 
March 31,
2012
 
December 31,
2011
 
 
 
 
 
 
 
(In thousands)
Short-term debt and current portion of long-term debt:
 
 
 
 
 
 
 
 
 
Short-term debt
1.44
%
 
1.45
%
 
2012
 
$
4,451

 
5,091

Current portion of long-term debt, including capital leases
 
 
 
 
 
 
582,421

 
269,275

Total short-term debt and current portion of long-term debt
 
 
 
 
 
 
586,872

 
274,366

Long-term debt:
 
 
 
 
 
 
 
 
 
U.S. commercial paper (1)
0.44
%
 
0.40
%
 
2016
 
239,968

 
415,936

Canadian commercial paper (1)
1.12
%
 
%
 
2016
 
12,026

 

Global revolving credit facility
1.71
%
 
1.52
%
 
2016
 
21,114

 
1,000

Unsecured U.S. notes — Medium-term notes (1)
4.28
%
 
4.49
%
 
2012-2025
 
2,834,647

 
2,484,712

Unsecured U.S. obligations, principally bank term loans
1.66
%
 
1.78
%
 
2012-2015
 
105,500

 
105,000

Unsecured foreign obligations
2.36
%
 
2.71
%
 
2014-2016
 
309,302

 
300,516

Capital lease obligations
4.23
%
 
4.24
%
 
2012-2018
 
46,493

 
48,047

Total before fair market value adjustment
 
 
 
 
 
 
3,569,050

 
3,355,211

Fair market value adjustment on notes subject to hedging (2)
 
 
 
 
 
19,673

 
21,843

 
 
 
 
 
 
 
3,588,723

 
3,377,054

Current portion of long-term debt, including capital leases
 
 
 
 
 
 
(582,421
)
 
(269,275
)
Long-term debt
 
 
 
 
 
 
3,006,302

 
3,107,779

Total debt
 
 
 
 
 
 
$
3,593,174

 
3,382,145

 ————————————
(1)
We had unamortized original issue discounts of $8.9 million and $8.7 million at March 31, 2012 and December 31, 2011, respectively.
(2)
The notional amount of executed interest rate swaps designated as fair value hedges was $550 million at March 31, 2012 and December 31, 2011.

We can borrow up to $900 million under a global revolving credit facility with a syndicate of twelve lending institutions led by Bank of America N.A., Bank of Tokyo-Mitsubishi UFJ, Ltd., BNP Paribas, Mizuho Corporate Bank, Ltd., Royal Bank of Canada, Royal Bank of Scotland Plc, U.S. Bank National Association and Wells Fargo Bank, N.A. This facility matures in June 2016 and is used primarily to finance working capital and provide support for the issuance of unsecured commercial paper in the U.S. and Canada. This facility 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, 2012). 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 10.0 basis points to 32.5 basis points, and are based on Ryder’s long-term credit ratings. The current annual facility fee is 15.0 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 tangible net worth, of less than or equal to 300%. Tangible net worth, as defined in the credit facility, includes 50% of our deferred federal income tax liability and excludes the book value of our intangibles. The ratio at March 31, 2012 was 259%. On April 20, 2012, we amended our debt to net worth covenant. As amended, our net worth is defined as shareholders’ equity excluding any accumulated other comprehensive income or loss associated with pension and other post-retirement plans. Had this amendment been in place as of March 31, 2012, the ratio would have been 183%. At March 31, 2012, $626.9 million was available under the credit facility, net of the support for commercial paper borrowings.

Our global revolving credit facility permits us to refinance short-term commercial paper 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, 2012 and December 31, 2011, we

13


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


classified $252.0 million and $415.9 million, respectively, of short-term commercial paper as long-term debt.

In February 2012, we issued $350 million of unsecured medium-term notes maturing in March 2017. 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 26, 2012. The program contains provisions restricting its availability in the event of a material adverse change to our business operations or the collectability of the collateralized receivables. At March 31, 2012 and December 31, 2011, 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, 2012 and December 31, 2011, we had letters of credit and surety bonds outstanding totaling $271.3 million and $271.0 million, respectively, which primarily guarantee the payment of insurance claims.

(N) 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, 2012 Using
 
Total
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
(In thousands)
Assets:
 
 
 
 
 
 
 
 
 
Interest rate swap
Prepaid expenses and other current assets
 
$

 
7,080

 

 
7,080

Interest rate swaps
DFL and other assets
 

 
12,593

 

 
12,593

Investments held in Rabbi Trusts:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
3,192

 

 

 
3,192

U.S. equity mutual funds
 
 
10,640

 

 

 
10,640

Foreign equity mutual funds
 
 
2,973

 

 

 
2,973

Fixed income mutual funds
 
 
4,161

 

 

 
4,161

Investments held in Rabbi Trusts
DFL and other assets
 
20,966

 

 

 
20,966

Total assets at fair value
 
 
$
20,966

 
19,673

 

 
40,639


14


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


 
Balance Sheet Location
 
Fair Value Measurements
At December 31, 2011 Using
 
Total
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
(In thousands)
Assets:
 
 
 
Interest rate swaps
DFL and other assets
 
$

 
21,843

 

 
21,843

Investments held in Rabbi Trusts:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
3,783

 

 

 
3,783

U.S. equity mutual funds
 
 
8,850

 

 

 
8,850

Foreign equity mutual funds
 
 
2,526

 

 

 
2,526

Fixed income mutual funds
 
 
3,537

 

 

 
3,537

Investments held in Rabbi Trusts
DFL and other assets
 
18,696

 

 

 
18,696

Total assets at fair value
 
 
$
18,696

 
21,843

 

 
40,539

 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Contingent consideration
Accrued expenses
 
$

 

 
1,000

 
1,000

Total liabilities at fair value
 
 
$

 

 
1,000

 
1,000


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:

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 represents the net asset value of the shares and were therefore classified within Level 1 of the fair value hierarchy.

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.

Contingent consideration — Fair value was based on the income approach and uses significant inputs that are not observable in the market. These inputs are based on our expectations as to what amount we will pay based on contractual provisions. Therefore, the liability was classified within Level 3 of the fair value hierarchy.

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, 2012 Using
 
Total Losses (2)
 
Level 1
 
Level 2
 
Level 3
 
Three months  ended
 
(In thousands)
Assets held for sale:
 
 
 
 
 
 
 
Revenue earning equipment: (1)
 
 
 
 
 
 
 
Trucks
$

 

 
7,321

 
$
2,381

Tractors

 

 
3,514

 
471

Trailers

 

 
624

 
507

Total assets at fair value
$

 

 
11,459

 
$
3,359

 

15


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


 
Fair Value Measurements
At March 31, 2011 Using
 
Total Losses (2)
 
Level 1
 
Level 2
 
Level 3
 
Three months
 ended
 
(In thousands)
Assets held for sale:
 
 
 
 
 
 
 
Revenue earning equipment (1)
 
 
 
 
 
 
 
Trucks
$

 

 
10,155

 
$
1,689

Tractors

 

 
4,274

 
689

Trailers

 

 
646

 
661

Total assets at fair value
$

 

 
15,075

 
$
3,039

 ————————————
(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 Comprehensive Income. 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, 2012 and December 31, 2011 was approximately $3.70 billion and $3.51 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, accounts receivable and accounts payable approximate fair value because of the immediate or short-term maturities of these financial instruments.

(O) DERIVATIVES

Interest Rate Swaps

As of March 31, 2012, 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, 2012:
 
 
 
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
 
 
 
 
 
2012
 
2011
 
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
May 2011
 
June 2017
 
$350,000
 
$150,000
 
3.50%
 
1.84%
 
NA
February 2011
 
March 2015
 
$350,000
 
$150,000
 
3.15%
 
1.70%
 
1.42%
February 2008
 
March 2013
 
$250,000
 
$250,000
 
6.00%
 
2.88%
 
2.59%

16


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



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 Comprehensive Income were as follows:
Fair Value Hedging Relationship
 
Location of
 Gain (Loss)
Recognized in Income
 
Three months ended March 31,
 
2012
 
2011
 
 
 
 
(In thousands)
Derivatives: Interest rate swaps
 
Interest expense
 
$
(2,170
)
 
(1,149
)
Hedged items: Fixed-rate debt
 
Interest expense
 
2,170

 
1,149

Total
 
 
 
$

 


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

(P) SHARE REPURCHASE PROGRAMS

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 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, 2011 through December 13, 2013. The December 2011 program limits aggregate share repurchases to no more than 2 million shares of Ryder common stock. Share repurchases of common stock are made periodically in open-market transactions and are subject to market conditions, legal requirements and other factors. Management established prearranged written plans for the Company under Rule 10b5-1 of the Securities Exchange Act of 1934 as part of the December 2011 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, 2012, we repurchased and retired 223,200 shares under this program at an aggregate cost of $11.9 million.

In December 2009, our Board of Directors authorized a two-year anti-dilutive share repurchase program. The December 2009 program limited aggregate share repurchases to no more than 2 million shares of Ryder common stock. For the three months ended March 31, 2011, we repurchased and retired 250,000 shares under this program at an aggregate cost of $12.0 million.

17


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



(Q) EMPLOYEE BENEFIT PLANS

Components of net periodic benefit cost were as follows:

 
Pension Benefits
 
Postretirement Benefits
 
Three months ended March 31,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Pension Benefits
 
 
 
 
 
 
 
Company-administered plans:
 
 
 
 
 
 
 
Service cost
$
3,907

 
3,767

 
$
320

 
347

Interest cost
23,689

 
24,490

 
514

 
669

Expected return on plan assets
(24,057
)
 
(25,859
)
 

 

Amortization of:
 
 
 
 
 
 
 
Transition obligation

 
(8
)
 

 

Net actuarial loss (gain)
7,861

 
5,129

 
(3
)
 
106

Prior service credit
(569
)
 
(570
)
 
(58
)
 
(58
)
 
10,831

 
6,949

 
773

 
1,064

Union-administered plans
1,614

 
1,341

 

 

Net periodic benefit cost
$
12,445

 
8,290

 
$
773

 
1,064

 
 
 
 
 
 
 
 
Company-administered plans:
 
 
 
 
 
 
 
U.S.
$
9,848

 
7,100

 
$
552

 
883

Non-U.S.
983

 
(151
)
 
221

 
181

 
10,831

 
6,949

 
773

 
1,064

Union-administered plans
1,614

 
1,341

 

 

 
$
12,445

 
8,290

 
$
773

 
1,064


Pension Contributions

During the three months ended March 31, 2012, we contributed $3.6 million to our pension plans. In 2012, we expect to contribute approximately $81 million to our pension plans.

Savings Plans

Employees who do not actively participate in pension plans and are not covered by union-administered plans are generally eligible to participate in enhanced savings plans. Plans provide for (i) a company contribution even if employees do not make contributions, (ii) a company match of employee contributions of eligible pay, subject to tax limits and (iii) a discretionary company match. During the three months ended March 31, 2012 and 2011, we recognized total savings plan costs of $8.4 million and $8.2 million, respectively.

(R) SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information was as follows:
 
Three months ended March 31,
 
2012
 
2011
 
(In thousands)
Interest paid
$
37,325

 
31,429

Income taxes paid
$
4,183

 
5,110

Changes in accounts payable related to purchases of revenue earning equipment
$
316,457

 
134,806

Operating and revenue earning equipment acquired under capital leases
$
59

 
1,153


18


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. Prior to 2012, we operated in three 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.; (2) SCS, which provides comprehensive supply chain consulting including distribution and transportation services in North America and Asia; and (3) DCC, which provides vehicles and drivers as part of a dedicated transportation solution in the U.S. In 2012, the SCS and DCC reportable business segments were combined as a result of aligning our internal reporting with how we operate our business. As a result of this alignment, DCC is not considered an operating segment under the authoritative guidance as discrete financial information is no longer available.

Our primary measurement of segment financial performance, defined as EBT from continuing operations, includes an allocation of Central Support Services (CSS) and excludes non-service pension costs and restructuring and other charges, net as described in Note (G), “Restructuring and Other Charges.” CSS represents those costs incurred to support all business segments, including human resources, finance, corporate services, public affairs, information technology, health and safety, legal and corporate communications. Beginning in 2012, we adjusted our segment financial performance measurement to also exclude the non-service components of pension costs in order to more accurately reflect the operating performance of the business segments. Prior year segment EBT has been recast to conform to the current year presentation. 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, 2012 and 2011. 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.

19


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


 
FMS
 
SCS
 
Eliminations
 
Total
 
 
 
 
 
 
 
 
For the three months ended March 31, 2012
 
 
 
 
 
 
 
Revenue from external customers
$
964,363

 
571,913

 

 
1,536,276

Inter-segment revenue
107,028

 

 
(107,028
)
 

Total revenue
$
1,071,391

 
571,913

 
(107,028
)
 
1,536,276

 
 
 
 
 
 
 
 
Segment EBT
$
50,683

 
21,871

 
(6,481
)
 
66,073

Unallocated CSS
 
 
 
 
 
 
(9,506
)
Non-service pension costs 
 
 
 
 
 
 
(8,004
)
Restructuring and other charges, net
 
 
 
 
 
 
(865
)
Earnings from continuing operations before income taxes
 
 
 
 
 
 
$
47,698

 
 
 
 
 
 
 
 
Segment capital expenditures (1), (2)
$
463,606

 
$
2,837

 

 
466,443

Unallocated CSS
 
 
 
 
 
 
4,526

Capital expenditures paid
 
 
 
 
 
 
$
470,969

 
 
 
 
 
 
 
 
For the three months ended March 31, 2011
 
 
 
 
 
 
 
Revenue from external customers
$
889,616

 
535,760

 

 
1,425,376

Inter-segment revenue
90,500

 

 
(90,500
)
 

Total revenue
$
980,116

 
535,760

 
(90,500
)
 
1,425,376

 
 
 
 
 
 
 
 
Segment EBT
$
42,376

 
20,175

 
(4,904
)
 
57,647

Unallocated CSS
 
 
 
 
 
 
(8,742
)
Non-service pension costs 
 
 
 
 
 
 
(4,527
)
Restructuring and other charges, net
 
 
 
 
 
 
(768
)
Earnings from continuing operations before income taxes
 
 
 
 
 
 
$
43,610

 
 
 
 
 
 
 
 
Segment capital expenditures (1), (2)
$
301,972

 
7,099

 

 
309,071

Unallocated CSS
 
 
 
 
 
 
4,147

Capital expenditures paid
 
 
 
 
 
 
$
313,218

 ————————————
(1)
Excludes revenue earning equipment acquired under capital leases.
(2)
Excludes acquisition payments of $2.1 million and $83.8 million during the three months ended March 31, 2012 and 2011, respectively.


20


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 business including but not limited to those relating to litigation matters, environmental matters, risk management matters (e.g. vehicle liability, workers’ compensation, etc.) and administrative assessments primarily associated with operating taxes. We are also subject to various claims, tax assessments and administrative proceedings associated with our discontinued operations. We have established loss provisions for matters in which losses are probable and can be reasonably estimated. It is not possible at this time for us to determine fully the effect of all unasserted claims and assessments on our consolidated financial condition, results of operations or liquidity; however, to the extent possible, where unasserted claims can be estimated and where such claims are considered probable we have recorded a liability. Litigation is subject to many uncertainties, and the outcome of any individual litigated matter is not predictable with assurance. It is possible that certain of the actions, claims, inquiries or proceedings could be decided unfavorably to Ryder. To the extent that these matters pertain to our discontinued operations, additional adjustments and expenses may be recorded through discontinued operations in future periods as further relevant information becomes available. Although the final resolution of any such matters could have a material effect on our consolidated operating results for the particular reporting period in which an adjustment of the estimated liability is recorded, we believe that any resulting liability should not materially affect our consolidated financial position.

In Brazil, we were assessed $15.7 million, including penalties and interest, related to tax due on the sale of our outbound auto carriage business in 2001. On November 11, 2010, the Administrative Tax Court dismissed the assessment. The tax authority filed a motion to review the decision before the Administrative Tax Court. On December 6, 2011, the Administrative Tax Court upheld our position. In the first quarter of 2012, the tax authority decided not to file a final special appeal. The case was dismissed.

21

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



OVERVIEW

The following discussion should be read in conjunction with the unaudited Consolidated Condensed Financial Statements and notes thereto included under Item 1. In addition, reference should be made to our audited Consolidated Financial Statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2011 Annual Report on Form 10-K.

Ryder System, Inc. (Ryder) is a global leader in transportation and supply chain management solutions. Prior to 2012, our business was divided into three business segments: Fleet Management Solutions (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.; Supply Chain Solutions (SCS), which provides comprehensive supply chain consulting including distribution and transportation services in North America and Asia; and Dedicated Contract Carriage (DCC), which provides vehicles and drivers as part of a dedicated transportation solution in the U.S. In 2012, the SCS and DCC reportable business segments were combined as a result of aligning our internal reporting with how we operate our business. While this change did not impact our consolidated results, segment data for prior periods have been recast to be consistent with the current year presentation.

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, electronics, transportation, grocery, lumber and wood products, food service and home furnishing.

Total revenue increased 8% in the first quarter of 2012 to $1.54 billion. The increase in total revenue was driven by organic growth, the benefit of acquisitions, and fuel services. Operating revenue increased 9% in the first quarter of 2012 to $1.23 billion primarily due to organic growth and acquisitions.

Earnings from continuing operations before taxes (EBT) increased 9% in the first quarter of 2012 to $47.7 million. The increase in EBT was primarily driven by the Hill Hire acquisition, improved used vehicle sales results and organic growth in commercial rental as well as in the SCS business segment. Acquisitions accounted for 17% of year-over-year EBT growth in the first quarter of 2012.

Earnings from continuing operations and earnings per diluted common share (EPS) from continuing operations in the first quarter of 2012 increased 35% to $34.9 million and 36% to $0.68 per diluted common share, respectively. Earnings from continuing operations in 2012 included an income tax benefit of $5.0 million, or $0.10 per diluted common share, relating to the favorable resolution of a tax item from prior periods. Earnings from continuing operations in 2012 and 2011 also included acquisition-related restructuring charges of $0.6 million, or $0.01 per diluted common share and $0.5 million, or $0.01 per diluted common share, respectively. Excluding these items, comparable earnings and EPS from continuing operations both increased 16% to $30.6 million and $0.59 per diluted common share, respectively. We believe that comparable earnings from continuing operations and comparable earnings per diluted common share from continuing operations measures provide useful information to investors because they exclude significant items that are unrelated to our ongoing business operations.

Net earnings and EPS increased 37% in the first quarter of 2012 to $34.3 million and 40% to $0.67 per diluted common share, respectively. Net earnings in the first quarter of 2012 and 2011 were negatively impacted by losses from discontinued operations of $0.6 million, or $0.01 per diluted common share, and $0.7 million, or $0.02 per diluted common share, respectively. EPS growth in the first quarter of 2012 exceeded the earnings growth reflecting the impact of the share repurchase program.

22

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




ACQUISITIONS

We completed the following acquisitions in 2011, under which we acquired companies' fleets and contractual customers. The acquisitions operate under Ryder's name and complement our existing market coverage and service network. The results of these acquisitions have been included in our consolidated results since the dates of acquisition. See Note (C), "Acquisitions," for further discussion.
Company Acquired
 
Date Acquired
 
Segment
 
Vehicles
 
Contractual Customers
 
Market
Hill Hire plc
 
June 8, 2011
 
FMS
 
13,700
 
400
 
U.K.
B.I.T Leasing
 
April 1, 2011
 
FMS
 
490
 
130
 
California
The Scully Companies
 
January 28, 2011
 
FMS/SCS
 
2,100
 
200
 
Western U.S.
Carmenita Leasing Inc.
 
January 10, 2011
 
FMS
 
190
 
60
 
California



CONSOLIDATED RESULTS

 
Three months ended March 31,
 
Change
 
2012
 
2011
 
2012/2011
 
(In thousands, except per share amounts)
 
Total revenue
$
1,536,276

 
1,425,376

 
      8%
Operating revenue (1)
1,228,924

 
1,129,070

 
   9
 
 
 
 
 
 
 
 
 
 
 
 
Pre-tax earnings from continuing operations
$
47,698

 
43,610

 
      9%
Earnings from continuing operations
34,876

 
25,857

 
   35
Net earnings
34,321

 
25,125

 
   37
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per common share — Diluted
 
 
 
 
 
Continuing operations
$
0.68

 
0.50

 
      36%
Net earnings
0.67

 
0.48

 
   40
  ————————————
(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 8% in the first quarter of 2012 to $1.54 billion. Operating revenue (revenue excluding FMS fuel and all subcontracted transportation) increased 9% in the first quarter of 2012 to $1.23 billion. The following table summarizes the components of the change in revenue on a percentage basis versus the prior year:
 
Three months ended March 31, 2012
 
Total
 
Operating
Organic including price and volume
   4%
 
   5%
Acquisitions
3
 
4
FMS fuel
1
 
Total increase
   8%
 
  9%

See “Operating Results by Business Segment” for a further discussion of the revenue impact from acquisitions and organic

23

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


growth.

The changes in the individual revenue and expense components of net earnings are discussed in more detail below.

Lease and Rental
 
Three months ended March 31,
 
Change
 
2012
 
2011
 
2012/2011
 
(Dollars in thousands)
 
 
Lease and rental revenues
$
637,858

 
$
579,415

 
      10%
Cost of lease and rental
455,630

 
408,515

 
   12
Gross margin
182,228

 
170,900

 
   7
Gross margin %
29
%
 
29
%
 
 

Lease and rental revenues represent full service lease and commercial rental product offerings within our FMS business segment. Revenues increased 10% in the first quarter of 2012 to $637.9 million primarily driven by acquisitions, higher prices on lease replacement vehicles and organic full service lease and rental fleet growth. The increase in full service lease pricing on new and replacement vehicles was driven by higher costs on new engine technology. The increase in organic rental revenue was driven by higher pricing (up 5%) and improved rental 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 increased 12% in the first quarter of 2012 to $455.6 million due to the growth in the fleet and higher maintenance costs to service a slightly older lease fleet, including higher vehicle outservicing activity.

Lease and rental gross margin increased 7% to $182.2 million in the first quarter of 2012 due to acquisitions and improved rental performance as a result of a 5% increase in rental power pricing and higher rental demand. The benefit of the lease fleet growth and increased lease pricing was offset by higher maintenance costs to service a slightly older lease fleet, including higher vehicle outservicing activity. Lease and rental gross margin as a percentage of revenue remained at 29% in the first quarter of 2012.

Services
 
Three months ended March 31,
 
Change
 
2012
 
2011
 
2012/2011
 
(Dollars in thousands)
 
 
Services revenue
$
678,352

 
$
632,738

 
      7%
Cost of services
577,948

 
537,857

 
   7
Gross margin
100,404

 
94,881

 
   6
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 7% in the first quarter of 2012 to $678.4 million primarily driven by higher freight volumes and new business in our SCS business segment.

Cost of services represent 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 7% in the first quarter of 2012 to $577.9 million due to an increase in revenue. Subcontracted transportation costs, which are passed through to customers, increased $4.2 million in the first quarter of 2012.

Services gross margin increased 6% to $100.4 million in the first quarter of 2012. Services gross margin as a percentage of revenue remained at 15% in the first quarter of 2012.

24

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



Fuel