Ryder 3rd Quarter 2013 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2013
OR
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¨ | 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)
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Florida | 59-0739250 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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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.
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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 September 30, 2013 was 52,593,266.
RYDER SYSTEM, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(unaudited)
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| | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
| (In thousands, except per share amounts) |
Lease and rental revenues | $ | 709,039 |
| | 693,912 |
| | $ | 2,056,795 |
| | 2,007,393 |
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Services revenue | 718,292 |
| | 667,399 |
| | 2,115,419 |
| | 2,021,284 |
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Fuel services revenue | 207,209 |
| | 211,984 |
| | 629,342 |
| | 644,754 |
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Total revenues | 1,634,540 |
| | 1,573,295 |
| | 4,801,556 |
| | 4,673,431 |
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| | | | | | | |
Cost of lease and rental | 486,197 |
| | 481,240 |
| | 1,429,845 |
| | 1,414,456 |
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Cost of services | 597,896 |
| | 557,495 |
| | 1,775,554 |
| | 1,697,773 |
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Cost of fuel services | 203,369 |
| | 207,689 |
| | 618,288 |
| | 632,599 |
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Other operating expenses | 32,728 |
| | 32,966 |
| | 103,987 |
| | 100,881 |
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Selling, general and administrative expenses | 195,218 |
| | 183,713 |
| | 580,873 |
| | 568,027 |
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Gains on vehicle sales, net | (22,488 | ) | | (23,147 | ) | | (68,691 | ) | | (67,684 | ) |
Interest expense | 33,967 |
| | 34,879 |
| | 102,322 |
| | 105,266 |
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Miscellaneous income, net | (3,447 | ) | | (1,424 | ) | | (11,592 | ) | | (7,245 | ) |
Restructuring and other (recoveries) charges, net | (298 | ) | | 74 |
| | (298 | ) | | 8,081 |
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| 1,523,142 |
| | 1,473,485 |
| | 4,530,288 |
| | 4,452,154 |
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Earnings from continuing operations before income taxes | 111,398 |
| | 99,810 |
| | 271,268 |
| | 221,277 |
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Provision for income taxes | 37,523 |
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| 35,499 |
| | 94,016 |
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| 75,323 |
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Earnings from continuing operations | 73,875 |
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| 64,311 |
| | 177,252 |
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| 145,954 |
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(Loss) earnings from discontinued operations, net of tax | (2,808 | ) | | 10,780 |
| | (4,067 | ) | | 10,181 |
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Net earnings | $ | 71,067 |
| | 75,091 |
| | $ | 173,185 |
| | 156,135 |
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| | | | | | | |
Earnings (loss) per common share — Basic | | | | | | | |
Continuing operations | $ | 1.41 |
| | 1.26 |
| | $ | 3.42 |
| | 2.86 |
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Discontinued operations | (0.05 | ) | | 0.21 |
| | (0.08 | ) | | 0.20 |
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Net earnings | $ | 1.36 |
| | 1.47 |
| | $ | 3.34 |
| | 3.06 |
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Earnings (loss) per common share — Diluted | | | | | | | |
Continuing operations | $ | 1.40 |
| | 1.26 |
| | $ | 3.39 |
| | 2.84 |
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Discontinued operations | (0.05 | ) | | 0.21 |
| | (0.08 | ) | | 0.20 |
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Net earnings | $ | 1.35 |
| | 1.47 |
| | $ | 3.31 |
| | 3.04 |
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| | | | | | | |
Cash dividends declared per common share | $ | 0.34 |
| | 0.31 |
| | $ | 0.96 |
| | 0.89 |
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See accompanying notes to consolidated condensed financial statements.
RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
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| Three months ended September 30, | | Nine months ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
| (In thousands) |
| | | | | | | |
Net earnings | $ | 71,067 |
| | 75,091 |
| | $ | 173,185 |
| | 156,135 |
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| | | | | | | |
Other comprehensive income (loss): | | | | | | | |
| | | | | | | |
Change in cumulative translation adjustment and other, before and after tax | 31,564 |
| | 25,310 |
| | (18,379 | ) | | 31,173 |
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Amortization of pension and postretirement items | 8,266 |
| | 7,170 |
| | 24,800 |
| | 21,496 |
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Income tax expense related to amortization of pension and postretirement items | (2,927 | ) | | (2,512 | ) | | (8,644 | ) | | (7,545 | ) |
Amortization of pension and postretirement items, net of taxes | 5,339 |
| | 4,658 |
| | 16,156 |
| | 13,951 |
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| | | | | | | |
Change in net actuarial loss | — |
| | — |
| | (5,762 | ) | | (4,081 | ) |
Income tax benefit related to change in net actuarial loss | — |
| | — |
| | 2,048 |
| | 1,534 |
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Change in net actuarial loss, net of taxes | — |
| | — |
| | (3,714 | ) | | (2,547 | ) |
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Other comprehensive income (loss), net of taxes | 36,903 |
| | 29,968 |
| | (5,937 | ) | | 42,577 |
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Comprehensive income | $ | 107,970 |
| | 105,059 |
| | $ | 167,248 |
| | 198,712 |
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See accompanying notes to consolidated condensed financial statements.
RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
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| September 30, 2013 | | December 31, 2012 |
| (Dollars in thousands, except per share amount) |
Assets: | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 74,936 |
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| 66,392 |
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Receivables, net | 798,066 |
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| 775,765 |
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Inventories | 64,035 |
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| 64,146 |
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Prepaid expenses and other current assets | 162,454 |
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| 133,934 |
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Total current assets | 1,099,491 |
| | 1,040,237 |
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Revenue earning equipment, net of accumulated depreciation of $3,533,169 and $3,514,910, respectively | 6,172,778 |
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| 5,754,608 |
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Operating property and equipment, net of accumulated depreciation of $992,002 and $966,220, respectively | 626,229 |
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| 624,853 |
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Goodwill | 384,010 |
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| 384,216 |
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Intangible assets | 74,335 |
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| 80,475 |
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Direct financing leases and other assets | 450,959 |
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| 434,590 |
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Total assets | $ | 8,807,802 |
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| 8,318,979 |
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Liabilities and shareholders’ equity: | | | |
Current liabilities: | | | |
Short-term debt and current portion of long-term debt | $ | 350,954 |
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| 367,975 |
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Accounts payable | 442,076 |
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| 398,983 |
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Accrued expenses and other current liabilities | 481,237 |
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| 505,707 |
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Total current liabilities | 1,274,267 |
| | 1,272,665 |
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Long-term debt | 3,686,038 |
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| 3,452,821 |
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Other non-current liabilities | 931,544 |
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| 948,932 |
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Deferred income taxes | 1,260,497 |
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| 1,177,074 |
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Total liabilities | 7,152,346 |
| | 6,851,492 |
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Shareholders’ equity: | | | |
Preferred stock of no par value per share — authorized, 3,800,917; none outstanding, September 30, 2013 or December 31, 2012 | — |
| | — |
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Common stock of $0.50 par value per share — authorized, 400,000,000; outstanding, September 30, 2013 — 52,593,266; December 31, 2012 — 51,371,696 | 26,297 |
| | 25,686 |
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Additional paid-in capital | 878,540 |
| | 808,230 |
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Retained earnings | 1,344,175 |
| | 1,221,190 |
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Accumulated other comprehensive loss | (593,556 | ) | | (587,619 | ) |
Total shareholders’ equity | 1,655,456 |
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| 1,467,487 |
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Total liabilities and shareholders’ equity | $ | 8,807,802 |
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| 8,318,979 |
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See accompanying notes to consolidated condensed financial statements.
RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
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| | | | | | |
| Nine months ended September 30, |
| 2013 | | 2012 |
| (In thousands) |
Cash flows from operating activities from continuing operations: | | | |
Net earnings | $ | 173,185 |
| | 156,135 |
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Less: (Loss) earnings from discontinued operations, net of tax | (4,067 | ) | | 10,181 |
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Earnings from continuing operations | 177,252 |
| | 145,954 |
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Depreciation expense | 707,783 |
| | 698,516 |
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Gains on vehicle sales, net | (68,691 | ) | | (67,684 | ) |
Share-based compensation expense | 14,264 |
| | 14,186 |
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Amortization expense and other non-cash charges, net | 43,088 |
| | 37,025 |
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Deferred income tax expense | 81,949 |
| | 67,191 |
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Changes in operating assets and liabilities, net of acquisitions: | | | |
Receivables | (34,867 | ) | | (12,311 | ) |
Inventories | (461 | ) | | (836 | ) |
Prepaid expenses and other assets | (23,737 | ) | | 2,457 |
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Accounts payable | 42,664 |
| | (1,827 | ) |
Accrued expenses and other non-current liabilities | (49,209 | ) | | (115,146 | ) |
Net cash provided by operating activities from continuing operations | 890,035 |
| | 767,525 |
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| | | |
Cash flows from financing activities from continuing operations: | | | |
Net change in commercial paper borrowings | 284,481 |
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| (46,485 | ) |
Debt proceeds | 257,677 |
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| 745,755 |
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Debt repaid, including capital lease obligations | (323,300 | ) |
| (229,042 | ) |
Dividends on common stock | (49,855 | ) | | (45,458 | ) |
Common stock issued | 54,617 |
| | 18,503 |
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Common stock repurchased | — |
| | (26,920 | ) |
Excess tax benefits from share-based compensation | 4,915 |
| | 986 |
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Debt issuance costs | (2,144 | ) | | (4,513 | ) |
Net cash provided by financing activities from continuing operations | 226,391 |
| | 412,826 |
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| | | |
Cash flows from investing activities from continuing operations: | | | |
Purchases of property and revenue earning equipment | (1,495,824 | ) | | (1,694,822 | ) |
Sales of revenue earning equipment | 330,766 |
| | 304,857 |
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Sale and leaseback of revenue earning equipment | — |
| | 130,184 |
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Sales of operating property and equipment | 5,847 |
| | 5,088 |
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Acquisitions | (1,858 | ) | | (3,780 | ) |
Collections on direct finance leases | 54,841 |
| | 51,091 |
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Changes in restricted cash | (14,756 | ) | | 19,306 |
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Insurance recoveries | 8,173 |
| | — |
|
Net cash used in investing activities from continuing operations | (1,112,811 | ) | | (1,188,076 | ) |
| | | |
Effect of exchange rate changes on cash | 9,187 |
| | 1,508 |
|
Increase (decrease) in cash and cash equivalents from continuing operations | 12,802 |
| | (6,217 | ) |
| | | |
Cash flows from discontinued operations: | | | |
Operating cash flows | (4,363 | ) | | (2,692 | ) |
Effect of exchange rate changes on cash | 105 |
| | 24 |
|
Decrease in cash and cash equivalents from discontinued operations | (4,258 | ) | | (2,668 | ) |
| | | |
Increase (decrease) in cash and cash equivalents | 8,544 |
| | (8,885 | ) |
Cash and cash equivalents at January 1 | 66,392 |
| | 104,572 |
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Cash and cash equivalents at September 30 | $ | 74,936 |
| | 95,687 |
|
See accompanying notes to consolidated condensed financial statements.
RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS’ EQUITY
(unaudited)
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| | | | | | | | | | | | | | | | | | | | | | |
| 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, 2012 | $ | — |
| | 51,371,696 |
| | $ | 25,686 |
| | 808,230 |
| | 1,221,190 |
| | (587,619 | ) | | 1,467,487 |
|
Net earnings | — |
| | — |
| | — |
| | — |
| | 173,185 |
| | — |
| | 173,185 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | (5,937 | ) | | (5,937 | ) |
Comprehensive income | | | | | | | | | | | | | 167,248 |
|
Common stock dividends declared — $0.96 per share | — |
| | — |
| | — |
| | — |
| | (50,200 | ) | | — |
| | (50,200 | ) |
Common stock issued under employee stock option and stock purchase plans (1) | — |
| | 1,216,330 |
| | 608 |
| | 53,607 |
| | — |
| | — |
| | 54,215 |
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Benefit plan stock sales (2) | — |
| | 5,240 |
| | 3 |
| | 399 |
| | — |
| | — |
| | 402 |
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Share-based compensation | — |
| | — |
| | — |
| | 14,264 |
| | — |
| | — |
| | 14,264 |
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Tax benefits from share-based compensation | — |
| | — |
| | — |
| | 2,040 |
| | — |
| | — |
| | 2,040 |
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Balance at September 30, 2013 | $ | — |
| | 52,593,266 |
| | $ | 26,297 |
| | 878,540 |
| | 1,344,175 |
| | (593,556 | ) | | 1,655,456 |
|
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(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.
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 2012 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.
(B) RECENT ACCOUNTING PRONOUNCEMENTS
In July 2013, the Financial Accounting Standards Board (FASB) 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 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Other than the change in presentation within the Consolidated Balance Sheet, this accounting guidance will not have an impact on our consolidated financial position, results of operations or cash flows.
(C) ACQUISITIONS
Euroway Ltd. — On August 1, 2012, we acquired all of the common stock of Euroway Ltd., a U.K.-based, full service leasing, rental and maintenance company for a purchase price of $2.4 million and assumed capital lease obligations and debt of $20.3 million. Approximately $1.6 million of the stock purchase price has been paid, and the majority of the capital lease obligations have been repaid as of September 30, 2013. The purchase price includes $0.5 million in contingent consideration to be paid to the seller provided certain conditions are met. As of September 30, 2013, the fair value of the contingent consideration has been reflected in “Accrued expenses and other current liabilities” in our Consolidated Condensed Balance Sheet. See Note (N), “Fair Value Measurements,” for additional information. The acquisition included Euroway's fleet of approximately 560 full service lease vehicles as well as 800 contract maintenance vehicles. As of September 30, 2013, goodwill and customer relationship intangibles related to the Euroway acquisition were $6.4 million and $2.8 million, respectively. The combined network operates under the Ryder name, complementing our FMS business segment coverage in the U.K.
During the nine months ended September 30, 2013 and September 30, 2012, we paid $1.9 million and $3.8 million, respectively, related to acquisitions.
(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.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
Summarized results of discontinued operations were as follows:
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| | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
| (In thousands) |
Pre-tax loss from discontinued operations | $ | (2,809 | ) | | (460 | ) | | $ | (4,008 | ) | | (969 | ) |
Income tax benefit (expense) | 1 |
| | 11,240 |
| | (59 | ) | | 11,150 |
|
(Loss) earnings from discontinued operations, net of tax | $ | (2,808 | ) | | 10,780 |
| | $ | (4,067 | ) | | 10,181 |
|
Results of discontinued operations in 2013 and 2012 reflected losses related to adverse legal developments and professional and administrative fees associated with our discontinued South American operations. As previously disclosed, we were assessed $4.7 million (before and after tax) in prior years for certain state operating tax credits utilized between 2001 and 2003. During the three months ended September 30, 2013, we received an adverse tax ruling related to this matter. We incurred and paid $2.3 million to the Brazilian tax authority to settle all of these state operating tax credit assessments. Results of discontinued operations in the three and nine months ended September 30, 2012 also included a tax benefit of $11.3 million resulting from the expiration of a statute of limitations.
The following is a summary of assets and liabilities of discontinued operations:
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| | | | | | |
| September 30, 2013 | | December 31, 2012 |
| (In thousands) |
Total assets, primarily deposits | $ | 4,096 |
| | 4,460 |
|
Total liabilities, primarily contingent accruals | $ | 4,870 |
| | 5,329 |
|
Although we discontinued our South American operations in 2009, we continue to be party to various federal, state and local legal proceedings involving labor matters, tort claims and tax assessments. We have established loss provisions for any matters where we believe a loss is probable and can be reasonably estimated. Other than with respect to the matters discussed below, for matters where a reserve has not been established and for which we believe a loss is reasonably possible, as well as for matters where a reserve has been recorded but for which an exposure to loss in excess of the amount accrued is reasonably possible, we believe that such losses will not have a material effect on our consolidated financial statements.
In Brazil, we were assessed $4.8 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.
(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. 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.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
The following table provides information on share-based compensation expense and income tax benefits recognized during the periods:
|
| | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
| (In thousands) |
Stock option and stock purchase plans | $ | 1,753 |
| | 2,554 |
| | $ | 6,056 |
| | 7,192 |
|
Nonvested stock | 2,909 |
| | 2,547 |
| | 8,208 |
| | 6,994 |
|
Share-based compensation expense | 4,662 |
| | 5,101 |
| | 14,264 |
| | 14,186 |
|
Income tax benefit | (1,549 | ) | | (1,637 | ) | | (4,876 | ) | | (4,643 | ) |
Share-based compensation expense, net of tax | $ | 3,113 |
| | 3,464 |
| | $ | 9,388 |
| | 9,543 |
|
During the nine months ended September 30, 2013 and 2012, approximately 391,000 and 460,000 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 granted in 2013 have contractual terms of ten years and stock options granted in 2012 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 nine months ended September 30, 2013 and 2012 was $13.97 and $14.07, respectively.
During the nine months ended September 30, 2013 and 2012, approximately 23,000 and 93,000 market-based restricted stock rights, respectively, were granted under the Plans. The awards were 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) as compared to the TSR of a peer group over the applicable performance period. For the 2013 awards, Ryder's TSR will be compared to the TSR of a custom peer group. For the 2012 awards, Ryder's TSR will be compared to the TSR of the S&P 500. 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 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 nine months ended September 30, 2013 and 2012 was $53.47 and $43.39, respectively.
During the nine months ended September 30, 2013, approximately 16,000 performance-based restricted stock rights were granted under the Plans. For these awards, 25%-125% of the awards may be earned based on Ryder's 2013 adjusted return on capital (ROC) measured against a 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. 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. During the nine months ended September 30, 2013, approximately 31,000 performance-based restricted stock rights were also awarded under the Plans for which the annual ROC target will be determined in future years. These awards will be considered granted under accounting guidance for stock compensation once the Compensation Committee approves the annual ROC target and communicates the terms of the awards to the recipients.
During the nine months ended September 30, 2013 and 2012, approximately 153,000 and 124,000 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. The weighted-average fair value per time-vested restricted stock right granted during the nine months ended September 30, 2013 and 2012 was $58.17 and $52.44, respectively.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
During the nine months ended September 30, 2013 and 2012, employees who received market-based restricted stock rights also received market-based cash awards. In addition, in 2012, the majority of the employees who received time-vested 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.
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 September 30, | | Nine months ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
| (In thousands) |
Cash awards | $ | 934 |
| | 737 |
| | $ | 3,101 |
| | 2,122 |
|
Total unrecognized pre-tax compensation expense related to all share-based compensation arrangements at September 30, 2013 was $28.0 million and is expected to be recognized over a weighted-average period of 1.7 years.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
(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 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 September 30, | | Nine months ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
| (In thousands, except per share amounts) |
Earnings per share — Basic: | | | | | | | |
Earnings from continuing operations | $ | 73,875 |
| | 64,311 |
| | $ | 177,252 |
| | 145,954 |
|
Less: Distributed and undistributed earnings allocated to nonvested stock | (643 | ) | | (814 | ) | | (1,636 | ) | | (1,891 | ) |
Earnings from continuing operations available to common shareholders — Basic | $ | 73,232 |
| | 63,497 |
| | $ | 175,616 |
| | 144,063 |
|
| | | | | | | |
Weighted average common shares outstanding — Basic | 51,788 |
| | 50,381 |
| | 51,397 |
| | 50,433 |
|
| | | | | | | |
Earnings from continuing operations per common share — Basic | $ | 1.41 |
| | 1.26 |
| | $ | 3.42 |
| | 2.86 |
|
| | | | | | | |
Earnings per share — Diluted: | | | | | | | |
Earnings from continuing operations | $ | 73,875 |
| | 64,311 |
| | $ | 177,252 |
| | 145,954 |
|
Less: Distributed and undistributed earnings allocated to nonvested stock | (639 | ) | | (812 | ) | | (1,625 | ) | | (1,883 | ) |
Earnings from continuing operations available to common shareholders — Diluted | $ | 73,236 |
| | 63,499 |
| | $ | 175,627 |
| | 144,071 |
|
| | | | | | | |
Weighted average common shares outstanding — Basic | 51,788 |
| | 50,381 |
| | 51,397 |
| | 50,433 |
|
Effect of dilutive equity awards | 440 |
| | 172 |
| | 451 |
| | 292 |
|
Weighted average common shares outstanding — Diluted | 52,228 |
| | 50,553 |
| | 51,848 |
| | 50,725 |
|
| | | | | | | |
Earnings from continuing operations per common share — Diluted | $ | 1.40 |
| | 1.26 |
| | $ | 3.39 |
| | 2.84 |
|
| | | | | | | |
Anti-dilutive equity awards not included above | 584 |
| | 2,613 |
| | 863 |
| | 2,234 |
|
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
(G) RESTRUCTURING AND OTHER (RECOVERIES) CHARGES
The components of restructuring and other (recoveries) charges, net in the three and nine months ended September 30, 2013 and 2012, respectively, were as follows:
|
| | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
| (In thousands) |
Restructuring (recoveries) charges, net: | | | | | | | |
Severance and employee-related (recoveries) costs | $ | (298 | ) | | 74 |
| | $ | (298 | ) | | 7,216 |
|
Contract termination costs | — |
| | — |
| | — |
| | 865 |
|
Total | $ | (298 | ) | | 74 |
| | $ | (298 | ) | | 8,081 |
|
During the third quarter of 2013, we refined previous estimates of employee severance and benefit costs which resulted in a benefit of $0.3 million.
During the second quarter of 2012, we approved a plan to eliminate approximately 350 employees, primarily in the U.S., as a result of cost containment actions. These actions resulted in the payment of severance and other termination benefits, which have been completed. During the nine months ended September 30, 2012, we also recorded exit costs of $0.9 million associated with non-essential leased facilities assumed in the Hill Hire acquisition.
Activity related to restructuring reserves including discontinued operations was as follows:
|
| | | | | | | | | | | | | | | | | | |
| | | | | Deductions | | | | |
| December 31, 2012 | | Additions | | Cash Payments | | Non-Cash Reductions (1) | | Foreign Translation Adjustments | | September 30, 2013 |
| Balance | | | | | | Balance |
| (In thousands) |
Employee severance and benefits | $ | 3,147 |
| | 84 |
| | 2,267 |
| | 382 |
| | (119 | ) | | 463 |
|
Contract termination costs | 1,728 |
| | — |
| | 1,261 |
| | — |
| | (66 | ) | | 401 |
|
Total | $ | 4,875 |
| | 84 |
| | 3,528 |
| | 382 |
| | (185 | ) | | 864 |
|
_________________________
| |
(1) | Non-cash reductions represent adjustments to the restructuring reserve as actual costs were less than originally estimated. |
At September 30, 2013, the majority of outstanding restructuring obligations are required to be paid by the end of the year.
As mentioned in Note (U), "Segment Reporting," our primary measure of segment financial performance excludes, among other items, restructuring and other (recoveries) charges, net. However, the applicable portion of the restructuring and other (recoveries) charges, net that related to each segment for the three and nine months ended September 30, 2013 and 2012, respectively, were as follows:
|
| | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
| (In thousands) |
Fleet Management Solutions | $ | (298 | ) | | 74 |
| | $ | (298 | ) | | 6,421 |
|
Supply Chain Solutions | — |
| | — |
| | — |
| | 1,400 |
|
Central Support Services | — |
| | — |
| | — |
| | 260 |
|
Total | $ | (298 | ) | | 74 |
| | $ | (298 | ) | | 8,081 |
|
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
(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:
|
| | | | | | |
| September 30, 2013 | | December 31, 2012 |
| (In thousands) |
Total minimum lease payments receivable | $ | 633,801 |
| | 629,919 |
|
Less: Executory costs | (197,549 | ) | | (201,777 | ) |
Minimum lease payments receivable | 436,252 |
| | 428,142 |
|
Less: Allowance for uncollectibles | (564 | ) | | (703 | ) |
Net minimum lease payments receivable | 435,688 |
| | 427,439 |
|
Unguaranteed residuals | 57,545 |
| | 60,764 |
|
Less: Unearned income | (93,597 | ) | | (96,280 | ) |
Net investment in direct financing and sales-type leases | 399,636 |
| | 391,923 |
|
Current portion | (77,618 | ) | | (76,395 | ) |
Non-current portion | $ | 322,018 |
| | 315,528 |
|
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. The credit risk assessment is only updated under certain circumstances. Credit risk is assessed using an internally developed model, which is updated monthly, that incorporates credit scores from third party providers and our own custom risk ratings. 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 in which the customer operates, company size, years in business, and other credit-related financial indicators. 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.
The following table presents the credit risk profile by creditworthiness category of our direct financing lease receivables:
|
| | | | | | |
| September 30, 2013 | | December 31, 2012 |
| (In thousands) |
Very low risk to low risk | $ | 185,750 |
| | 193,123 |
|
Moderate risk | 184,671 |
| | 177,400 |
|
Moderately high risk to high risk | 65,831 |
| | 57,619 |
|
| $ | 436,252 |
| | 428,142 |
|
The following table is a rollforward of the allowance for credit losses on direct financing lease receivables for the nine months ended September 30, 2013 and 2012:
|
| | | | | | |
| 2013 | | 2012 |
| (In thousands) |
Balance at January 1 | $ | 703 |
| | 903 |
|
Charged to earnings | 2 |
| | 667 |
|
Deductions | (141 | ) | | (919 | ) |
Balance at September 30 | $ | 564 |
| | 651 |
|
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
(I) REVENUE EARNING EQUIPMENT
|
| | | | | | | | | | | | | | | | | | | |
| September 30, 2013 | | December 31, 2012 |
| Cost | | Accumulated Depreciation | | Net Book Value(1) | | Cost | | Accumulated Depreciation | | Net Book Value(1) |
| (In thousands) |
Held for use: | |
Full service lease | $ | 7,054,605 |
| | (2,484,747 | ) | | 4,569,858 |
| | $ | 6,728,746 |
| | (2,500,786 | ) | | 4,227,960 |
|
Commercial rental | 2,197,633 |
| | (725,722 | ) | | 1,471,911 |
| | 2,041,698 |
| | (660,356 | ) | | 1,381,342 |
|
Held for sale | 453,709 |
| | (322,700 | ) | | 131,009 |
| | 499,074 |
| | (353,768 | ) | | 145,306 |
|
Total | $ | 9,705,947 |
| | (3,533,169 | ) | | 6,172,778 |
| | $ | 9,269,518 |
| | (3,514,910 | ) | | 5,754,608 |
|
————————————
| |
(1) | Revenue earning equipment, net includes vehicles acquired under capital leases of $55.0 million, less accumulated depreciation of $19.8 million, at September 30, 2013, and $56.2 million, less accumulated depreciation of $16.5 million, at December 31, 2012. |
At the end of 2012, 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, 2013. The change in estimated residual values increased pre-tax earnings for the three and nine months ended September 30, 2013 by approximately $7.4 million and $22.3 million, respectively.
(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, 2013: | | | | | |
Goodwill | $ | 223,129 |
| | 190,308 |
| | 413,437 |
|
Accumulated impairment losses | (10,322 | ) | | (18,899 | ) | | (29,221 | ) |
| 212,807 |
| | 171,409 |
| | 384,216 |
|
Purchase accounting adjustments | 371 |
| | — |
| | 371 |
|
Foreign currency translation adjustments | (256 | ) | | (321 | ) | | (577 | ) |
Balance at September 30, 2013: | | | | | |
Goodwill | 223,244 |
| | 189,987 |
| | 413,231 |
|
Accumulated impairment losses | (10,322 | ) | | (18,899 | ) | | (29,221 | ) |
| $ | 212,922 |
| | 171,088 |
| | 384,010 |
|
Purchase accounting adjustments primarily related to changes in the fair value of acquired revenue earning equipment. We did not adjust the December 31, 2012 balance sheet as the amounts are not material.
We assess goodwill for impairment on April 1st of each year or more often if deemed necessary. In the second quarter of 2013, we completed our annual goodwill impairment test and determined there was no impairment.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
(K) ACCRUED EXPENSES AND OTHER LIABILITIES
|
| | | | | | | | | | | | | | | | | | | |
| September 30, 2013 | | December 31, 2012 |
| Accrued Expenses | | Non-Current Liabilities | | Total | | Accrued Expenses | | Non-Current Liabilities | | Total |
| (In thousands) |
Salaries and wages | $ | 96,224 |
| | — |
| | 96,224 |
| | $ | 86,776 |
| | — |
| | 86,776 |
|
Deferred compensation | 1,983 |
| | 29,179 |
| | 31,162 |
| | 1,630 |
| | 24,918 |
| | 26,548 |
|
Pension benefits | 3,288 |
| | 569,173 |
| | 572,461 |
| | 3,309 |
| | 597,275 |
| | 600,584 |
|
Other postretirement benefits | 2,675 |
| | 36,701 |
| | 39,376 |
| | 2,683 |
| | 37,916 |
| | 40,599 |
|
Insurance obligations (1) | 129,235 |
| | 187,387 |
| | 316,622 |
| | 133,459 |
| | 178,714 |
| | 312,173 |
|
Residual value guarantees | 531 |
| | 239 |
| | 770 |
| | 1,505 |
| | 130 |
| | 1,635 |
|
Accrued rent | 10,475 |
| | 5,037 |
| | 15,512 |
| | 9,244 |
| | 9,405 |
| | 18,649 |
|
Environmental liabilities | 4,385 |
| | 8,308 |
| | 12,693 |
| | 4,201 |
| | 8,415 |
| | 12,616 |
|
Asset retirement obligations | 5,658 |
| | 15,417 |
| | 21,075 |
| | 3,642 |
| | 17,116 |
| | 20,758 |
|
Operating taxes | 84,432 |
| | — |
| | 84,432 |
| | 91,419 |
| | — |
| | 91,419 |
|
Income taxes | 2,554 |
| | 63,227 |
| | 65,781 |
| | 8,288 |
| | 57,590 |
| | 65,878 |
|
Interest | 22,683 |
| | — |
| | 22,683 |
| | 35,798 |
| | — |
| | 35,798 |
|
Deposits, mainly from customers | 54,780 |
| | 6,238 |
| | 61,018 |
| | 51,671 |
| | 6,236 |
| | 57,907 |
|
Deferred revenue | 18,422 |
| | — |
| | 18,422 |
| | 21,557 |
| | — |
| | 21,557 |
|
Acquisition holdbacks | 2,477 |
| | — |
| | 2,477 |
| | 1,637 |
| | 2,673 |
| | 4,310 |
|
Other | 41,435 |
| | 10,638 |
| | 52,073 |
| | 48,888 |
| | 8,544 |
| | 57,432 |
|
Total | $ | 481,237 |
| | 931,544 |
| | 1,412,781 |
| | $ | 505,707 |
| | 948,932 |
| | 1,454,639 |
|
————————————
(1) Insurance obligations are primarily comprised of self-insured claim liabilities.
(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. 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, 2008 in Brazil, 2008 in Mexico and 2011 in the U.K., which are our major foreign tax jurisdictions. Refer to Note (D), “Discontinued Operations,” for further discussion on various assessments related to our former South American operations.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
At September 30, 2013 and December 31, 2012, the total amount of gross unrecognized tax benefits (excluding the federal benefit received from state positions) was $57.4 million and $52.3 million, respectively. Unrecognized tax benefits related to federal, state and foreign tax positions may decrease by $2.3 million by September 30, 2014, if audits are completed or tax years close.
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. 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 September 30, 2013 and December 31, 2012, these consolidated entities had total assets and total liabilities of $153.6 million and $25.8 million, respectively.
In the second quarter of 2012, we began to restructure and centralize the administration of vehicle purchasing, licensing and sales in order to reduce vehicle acquisition costs as well as realize operational efficiencies. During 2012, we were in a NOL position for tax purposes and were not realizing any benefits from the like-kind exchange program. As a result, effective April 1, 2012, we temporarily suspended the like-kind exchange program. Once we suspended the program, tax gains on vehicles sold during that period were no longer deferred. Those tax gains resulted in an immaterial decrease in the NOL. Although the suspension did not impact our 2012 tax provision or capital spending program, our cash flows increased by $19.2 million from the release of the program's restricted cash.
In the first quarter of 2013, once we had completed our 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 $14.8 million 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 third quarter of 2013 was 33.7% compared with 35.6% in the same period of the prior year. The effective tax rate in the third quarter of 2012 was negatively impacted by a tax law change in the U.K., which increased the provision for income taxes by $0.9 million and our effective tax rate by 0.9%. The decrease in our effective tax rate in the third quarter of 2013 is due to a higher proportionate amount of 2013 earnings in lower tax rate jurisdictions.
Our effective income tax rate from continuing operations for the nine months ended September 30, 2013 was 34.7% compared with 34.0% in the same period of the prior year. The effective rate from continuing operations in the nine months ended September 30, 2012 was favorably impacted by a tax benefit of $5.0 million (2.2% of earnings before tax) relating to the favorable resolution of a tax item from prior periods partially offset by the previously discussed U.K. tax law change. The increase in the effective tax rate in the nine months ended September 30, 2013 reflects the $5.0 million tax benefit in the prior year partially offset by a higher proportionate amount of 2013 earnings in lower tax rate jurisdictions as well as the impact of tax law changes in the U.K.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
(M) DEBT |
| | | | | | | | | | | | |
| Weighted-Average Interest Rate | | | | | | |
| September 30, 2013 | | December 31, 2012 | | Maturities | | September 30, 2013 | | December 31, 2012 |
| | | | | | | (In thousands) |
Short-term debt and current portion of long-term debt: | | | | | | | | | |
Short-term debt | 2.27% | | 2.27% | | 2013 | | $ | 3,695 |
| | 9,820 |
|
Current portion of long-term debt, including capital leases | | | | | | | 347,259 |
| | 358,155 |
|
Total short-term debt and current portion of long-term debt | | | | | | | 350,954 |
| | 367,975 |
|
Long-term debt: | | | | | | | | | |
U.S. commercial paper (1) | 0.30% | | 0.41% | | 2016 | | 637,912 |
| | 329,925 |
|
Canadian commercial paper (1) | —% | | 1.14% | | 2016 | | — |
| | 23,165 |
|
Global revolving credit facility | 1.58% | | 1.58% | | 2016 | | 5,056 |
| | 8,924 |
|
Unsecured U.S. notes — Medium-term notes (1) | 3.94% | | 4.01% | | 2014-2025 | | 2,972,055 |
| | 2,971,313 |
|
Unsecured U.S. obligations, principally bank term loans | 1.46% | | 1.56% | | 2015-2018 | | 55,500 |
| | 105,500 |
|
Unsecured foreign obligations | 1.89% | | 1.91% | | 2014-2016 | | 310,716 |
| | 313,406 |
|
Capital lease obligations | 3.90% | | 4.08% | | 2013-2019 | | 41,656 |
| | 42,018 |
|
Total before fair market value adjustment | | | | | | | 4,022,895 |
| | 3,794,251 |
|
Fair market value adjustment on notes subject to hedging (2) | | | | | | 10,402 |
| | 16,725 |
|
| | | | | | | 4,033,297 |
| | 3,810,976 |
|
Current portion of long-term debt, including capital leases | | | | | | | (347,259 | ) | | (358,155 | ) |
Long-term debt | | | | | | | 3,686,038 |
| | 3,452,821 |
|
Total debt | | | | | | | $ | 4,036,992 |
| | 3,820,796 |
|
————————————
| |
(1) | We had unamortized original issue discounts of $8.0 million and $8.8 million at September 30, 2013 and December 31, 2012, respectively. |
| |
(2) | The notional amount of executed interest rate swaps designated as fair value hedges was $300 million and $550 million at September 30, 2013 and December 31, 2012, 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. On October 18, 2013, the maturity date of the global credit facility was extended from June 2016 to 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 September 30, 2013). 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 previously provided for annual facility fees ranging from 10.0 basis points to 32.5 basis points. The amended 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. The previous annual facility fee was 15.0 basis points. This fee was amended to 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 September 30, 2013 was 176%. At September 30, 2013, $256.9 million was available under the credit facility, net of outstanding commercial paper borrowings.
Our global revolving credit facility enables us to refinance short-term obligations on a long-term basis. Settlement of short-term commercial paper obligations not expected to require the use of working capital are classified as long-term as we have both the intent and ability to refinance on a long-term basis. At September 30, 2013 and December 31, 2012, we classified $637.9 million and $353.1 million, respectively, of short-term commercial paper as long-term debt.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
In February 2013, we issued $250 million of unsecured medium-term notes maturing in February 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. The program expires on October 25, 2013. We are currently in the process of renewing the program through October 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 September 30, 2013 and December 31, 2012, 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 September 30, 2013 and December 31, 2012, we had letters of credit and surety bonds outstanding totaling $297.5 million and $294.1 million, respectively, which primarily guarantee the payment of insurance claims.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
(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 September 30, 2013 Using | | Total |
| | Level 1 | | Level 2 | | Level 3 | |
| | | (In thousands) |
Assets: | | | |
Interest rate swaps | DFL and other assets | | $ | — |
| | 10,402 |
| | — |
| | 10,402 |
|
Investments held in Rabbi Trusts: | | | | | | | | | |
Cash and cash equivalents | | | 4,816 |
| | — |
| | — |
| | 4,816 |
|
U.S. equity mutual funds | | | 14,003 |
| | — |
| | — |
| | 14,003 |
|
Foreign equity mutual funds | | | 3,882 |
| | — |
| | — |
| | 3,882 |
|
Fixed income mutual funds | | | 4,285 |
| | — |
| | — |
| | 4,285 |
|
Investments held in Rabbi Trusts | DFL and other assets | | 26,986 |
| | — |
| | — |
| | 26,986 |
|
Total assets at fair value | | | $ | 26,986 |
| | 10,402 |
| | — |
| | 37,388 |
|
| | | | | | | | | |
Liabilities: | | | | | | | | | |
Contingent consideration | Accrued expenses and other current liabilities | | $ | — |
| | — |
| | 498 |
| | 498 |
|
Total liabilities at fair value | | | $ | — |
| | — |
| | 498 |
| | 498 |
|
|
| | | | | | | | | | | | | | |
| Balance Sheet Location | | Fair Value Measurements At December 31, 2012 Using | | Total |
| | Level 1 | | Level 2 | | Level 3 | |
| | | (In thousands) |
Assets: | | | |
Interest rate swaps | Prepaid expenses and other current assets | | $ | — |
| | 1,313 |
| | — |
| | 1,313 |
|
Interest rate swaps | DFL and other assets | | — |
| | 15,412 |
| | — |
| | 15,412 |
|
Investments held in Rabbi Trusts: | | | | | | | | | |
Cash and cash equivalents | | | 4,055 |
| | — |
| | — |
| | 4,055 |
|
U.S. equity mutual funds | | | 10,871 |
| | — |
| | — |
| | 10,871 |
|
Foreign equity mutual funds | | | 2,974 |
| | — |
| | — |
| | 2,974 |
|
Fixed income mutual funds | | | 4,526 |
| | — |
| | — |
| | 4,526 |
|
Investments held in Rabbi Trusts | DFL and other assets | | 22,426 |
| | — |
| | — |
| | 22,426 |
|
Total assets at fair value | | | $ | 22,426 |
| | 16,725 |
| | — |
| | 39,151 |
|
| | | | | | | | | |
Liabilities: | | | | | | | | | |
Contingent consideration | Other non-current liabilities | | $ | — |
| | — |
| | 478 |
| | 478 |
|
Total liabilities at fair value | | | $ | — |
| | — |
| | 478 |
| | 478 |
|
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.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
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.
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 September 30, 2013 Using | | Total Losses (2) |
| Level 1 | | Level 2 | | Level 3 | | Three months ended | | Nine months ended |
| (In thousands) |
Assets held for sale: | | | | | | | | | |
Revenue earning equipment: (1) | | | | | | | | | |
Trucks | $ | — |
| | — |
| | 10,546 |
| | $ | 2,042 |
| | $ | 7,518 |
|
Tractors | — |
| | — |
| | 15,332 |
| | 1,677 |
| | 4,185 |
|
Trailers | — |
| | — |
| | 671 |
| | 275 |
| | 1,242 |
|
Total assets at fair value | $ | — |
| | — |
| | 26,549 |
| | $ | 3,994 |
| | $ | 12,945 |
|
|
| | | | | | | | | | | | | | | | | |
| Fair Value Measurements At September 30, 2012 Using | | Total Losses (2) |
| Level 1 | | Level 2 | | Level 3 | | Three months ended | | Nine months ended |
| (In thousands) |
Assets held for sale: | | | | | | | | | |
Revenue earning equipment (1) | | | | | | | | | |
Trucks | $ | — |
| | — |
| | 11,994 |
| | $ | 3,664 |
| | $ | 9,153 |
|
Tractors | — |
| | — |
| | 8,616 |
| | 1,097 |
| | 2,639 |
|
Trailers | — |
| | — |
| | 407 |
| | 400 |
| | 1,183 |
|
Total assets at fair value | $ | — |
| | — |
| | 21,017 |
| | $ | 5,161 |
| | $ | 12,975 |
|
————————————
| |
(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 September 30, 2013 and December 31, 2012 was approximately $4.14 billion and $3.99 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.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
(O) DERIVATIVES
As of September 30, 2013, 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 September 30, 2013:
|
| | | | | | | | | | | | |
| | 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 September 30, |
Issuance date | | | | | | 2013 | | 2012 |
| | | | (Dollars in thousands) | | | | | | |
May 2011 | | June 2017 | | $350,000 | | $150,000 | | 3.50% | | 1.51% | | 1.83% |
February 2011 | | March 2015 | | $350,000 | | $150,000 | | 3.15% | | 1.34% | | 1.66% |
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 September 30, | | Nine months ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
| | | | (In thousands) |
Derivatives: Interest rate swaps | | Interest expense | | $ | 44 |
| | (64 | ) | | $ | (6,323 | ) | | (2,016 | ) |
Hedged items: Fixed-rate debt | | Interest expense | | (44 | ) | | 64 |
| | 6,323 |
| | 2,016 |
|
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. 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. For the three months ended September 30, 2012, we repurchased and retired 87,223 shares under the program at an aggregate cost of $3.5 million. For the nine months ended September 30, 2012, we repurchased and retired 543,923 shares under the program at an aggregate cost of $26.3 million.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
(Q) ACCUMULATED OTHER COMPREHENSIVE LOSS
The following summaries set forth the components of accumulated other comprehensive loss, net of tax:
|
| | | | | | | | | | | | | | | | | | | |
| | Currency Translation Adjustments | | Net Actuarial Loss (1) | | Prior Service Credit (1) | | Transition Obligation (1) | | Unrealized Gain (Loss) on Derivatives | | Accumulated Other Comprehensive Loss |
| | (In thousands) |
December 31, 2012 | | $ | 57,848 |
| | (648,125 | ) | | 2,634 |
| | 12 |
| | 12 |
| | (587,619 | ) |
Amortization | | — |
| | 17,176 |
| | (1,020 | ) | | — |
| | — |
| | 16,156 |
|
Current period change | | (18,316 | ) | | (3,714 | ) | | — |
| | — |
| | (63 | ) | | (22,093 | ) |
September 30, 2013 | | $ | 39,532 |
| | (634,663 | ) | | 1,614 |
| | 12 |
| | (51 | ) | | (593,556 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | Currency Translation Adjustments | | Net Actuarial Loss (1) | | Prior Service Credit (1) | | Transition Obligation (1) | | Unrealized Loss on Derivatives | | Accumulated Other Comprehensive Loss |
| | (In thousands) |
December 31, 2011 | | $ | 28,219 |
| | (599,687 | ) | | 4,291 |
| | 12 |
| | — |
| | (567,165 | ) |
Amortization | | — |
| | 15,173 |
| | (1,222 | ) | | — |
| | — |
| | 13,951 |
|
Current period change | | 31,180 |
| | (2,547 | ) | | — |
| | — |
| | (7 | ) | | 28,626 |
|
September 30, 2012 | | $ | 59,399 |
| | (587,061 | ) | | 3,069 |
| | 12 |
| | (7 | ) | | (524,588 | ) |
_______________________
| |
(1) | These amounts are included in the computation of net periodic pension cost. See Note (R), "Employee Benefit Plans", for further information. |
The loss from currency translation adjustments in 2013 of $18.3 million was due to the weakening of the British Pound and the Canadian Dollar compared to the U.S. Dollar. The currency translation adjustment in 2012 of $31.2 million reflects the strengthening of the British Pound against the U.S. Dollar.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
(R) EMPLOYEE BENEFIT PLANS
Components of net periodic benefit cost were as follows: |
| | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
| (In thousands) |
Pension Benefits | | | | | | | |
Company-administered plans: | | | | | | | |
Service cost | $ | 3,994 |
| | 3,861 |
| | $ | 12,002 |
| | 11,594 |
|
Interest cost | 22,418 |
| | 23,651 |
| | 67,153 |
| | 70,903 |
|
Expected return on plan assets | (26,498 | ) | | (24,091 | ) | | (79,335 | ) | | (72,203 | ) |
Amortization of: | | | | | | | |
Net actuarial loss | 8,782 |
| | 7,803 |
| | 26,347 |
| | 23,390 |
|
Prior service credit | (454 | ) | | (570 | ) | | (1,363 | ) | | (1,706 | ) |
| 8,242 |
| | 10,654 |
| | 24,804 |
| | 31,978 |
|
Union-administered plans | 3,388 |
| | 1,754 |
| | 7,418 |
| |