Ryder 3rd Quarter 2013 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 SEPTEMBER 30, 2013
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 September 30, 2013 was 52,593,266.
 
 
 
 
 




RYDER SYSTEM, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
 
 
 
 
 
 
Page No.  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


i



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

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

 
 
Three months ended 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

Services revenue
718,292

 
667,399

 
2,115,419

 
2,021,284

Fuel services revenue
207,209

 
211,984

 
629,342

 
644,754

Total revenues
1,634,540

 
1,573,295

 
4,801,556

 
4,673,431

 
 
 
 
 
 
 
 
Cost of lease and rental
486,197

 
481,240

 
1,429,845

 
1,414,456

Cost of services
597,896

 
557,495

 
1,775,554

 
1,697,773

Cost of fuel services
203,369

 
207,689

 
618,288

 
632,599

Other operating expenses
32,728

 
32,966

 
103,987

 
100,881

Selling, general and administrative expenses
195,218

 
183,713

 
580,873

 
568,027

Gains on vehicle sales, net
(22,488
)
 
(23,147
)
 
(68,691
)
 
(67,684
)
Interest expense
33,967

 
34,879

 
102,322

 
105,266

Miscellaneous income, net
(3,447
)
 
(1,424
)
 
(11,592
)
 
(7,245
)
Restructuring and other (recoveries) charges, net
(298
)
 
74

 
(298
)
 
8,081

 
1,523,142

 
1,473,485

 
4,530,288

 
4,452,154

Earnings from continuing operations before income taxes
111,398

 
99,810

 
271,268

 
221,277

Provision for income taxes
37,523


35,499

 
94,016


75,323

Earnings from continuing operations
73,875


64,311

 
177,252


145,954

(Loss) earnings from discontinued operations, net of tax
(2,808
)
 
10,780

 
(4,067
)
 
10,181

Net earnings
$
71,067

 
75,091

 
$
173,185

 
156,135

 
 
 
 
 
 
 
 
Earnings (loss) per common share — Basic
 
 
 
 
 
 
 
Continuing operations
$
1.41

 
1.26

 
$
3.42

 
2.86

Discontinued operations
(0.05
)
 
0.21

 
(0.08
)
 
0.20

Net earnings
$
1.36

 
1.47

 
$
3.34

 
3.06

 
 
 
 
 
 
 
 
Earnings (loss) per common share — Diluted
 
 
 
 
 
 
 
Continuing operations
$
1.40

 
1.26

 
$
3.39

 
2.84

Discontinued operations
(0.05
)
 
0.21

 
(0.08
)
 
0.20

Net earnings
$
1.35

 
1.47

 
$
3.31

 
3.04

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.34

 
0.31

 
$
0.96

 
0.89

See accompanying notes to consolidated condensed financial statements.

1


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

    
    
 
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

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in cumulative translation adjustment and other, before and after tax
31,564

 
25,310

 
(18,379
)
 
31,173

 
 
 
 
 
 
 
 
Amortization of pension and postretirement items
8,266

 
7,170

 
24,800

 
21,496

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

 
 
 
 
 
 
 
 
Change in net actuarial loss

 

 
(5,762
)
 
(4,081
)
Income tax benefit related to change in net actuarial loss

 

 
2,048

 
1,534

Change in net actuarial loss, net of taxes

 

 
(3,714
)
 
(2,547
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of taxes
36,903

 
29,968

 
(5,937
)
 
42,577

 
 
 
 
 
 
 
 
Comprehensive income
$
107,970

 
105,059

 
$
167,248

 
198,712


See accompanying notes to consolidated condensed financial statements.




2



RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
 
 
September 30,
2013
 
December 31,
2012
 
(Dollars in thousands, except per
share amount)
Assets:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
74,936


66,392

Receivables, net
798,066


775,765

Inventories
64,035


64,146

Prepaid expenses and other current assets
162,454


133,934

Total current assets
1,099,491

 
1,040,237

Revenue earning equipment, net of accumulated depreciation of $3,533,169 and
   $3,514,910, respectively
6,172,778


5,754,608

Operating property and equipment, net of accumulated depreciation of $992,002 and
   $966,220, respectively
626,229


624,853

Goodwill
384,010


384,216

Intangible assets
74,335


80,475

Direct financing leases and other assets
450,959


434,590

Total assets
$
8,807,802


8,318,979

 
 
 
 
Liabilities and shareholders’ equity:
 
 
 
Current liabilities:
 
 
 
Short-term debt and current portion of long-term debt
$
350,954


367,975

Accounts payable
442,076


398,983

Accrued expenses and other current liabilities
481,237


505,707

Total current liabilities
1,274,267

 
1,272,665

Long-term debt
3,686,038


3,452,821

Other non-current liabilities
931,544


948,932

Deferred income taxes
1,260,497


1,177,074

Total liabilities
7,152,346

 
6,851,492

 
 
 
 
Shareholders’ equity:
 
 
 
Preferred stock of no par value per share — authorized, 3,800,917; none outstanding,
   September 30, 2013 or December 31, 2012

 

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

Additional paid-in capital
878,540

 
808,230

Retained earnings
1,344,175

 
1,221,190

Accumulated other comprehensive loss
(593,556
)
 
(587,619
)
Total shareholders’ equity
1,655,456


1,467,487

Total liabilities and shareholders’ equity
$
8,807,802


8,318,979

See accompanying notes to consolidated condensed financial statements.

3



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

 
Nine months ended September 30,
 
2013
 
2012
 
(In thousands)
Cash flows from operating activities from continuing operations:
 
 
 
Net earnings
$
173,185

 
156,135

Less: (Loss) earnings from discontinued operations, net of tax
(4,067
)
 
10,181

Earnings from continuing operations
177,252

 
145,954

Depreciation expense
707,783

 
698,516

Gains on vehicle sales, net
(68,691
)
 
(67,684
)
Share-based compensation expense
14,264

 
14,186

Amortization expense and other non-cash charges, net
43,088

 
37,025

Deferred income tax expense
81,949

 
67,191

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

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

 
 
 
 
Cash flows from financing activities from continuing operations:
 
 
 
Net change in commercial paper borrowings
284,481


(46,485
)
Debt proceeds
257,677


745,755

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

Common stock repurchased

 
(26,920
)
Excess tax benefits from share-based compensation
4,915

 
986

Debt issuance costs
(2,144
)
 
(4,513
)
Net cash provided by financing activities from continuing operations
226,391

 
412,826

 
 
 
 
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

Sale and leaseback of revenue earning equipment

 
130,184

Sales of operating property and equipment
5,847

 
5,088

Acquisitions
(1,858
)
 
(3,780
)
Collections on direct finance leases
54,841

 
51,091

Changes in restricted cash
(14,756
)
 
19,306

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

Cash and cash equivalents at September 30
$
74,936

 
95,687

See accompanying notes to consolidated condensed financial statements.

4




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

Benefit plan stock sales (2)

 
5,240

 
3

 
399

 

 

 
402

Share-based compensation

 

 

 
14,264

 

 

 
14,264

Tax benefits from share-based compensation

 

 

 
2,040

 

 

 
2,040

Balance at September 30, 2013
$

 
52,593,266

 
$
26,297

 
878,540

 
1,344,175

 
(593,556
)
 
1,655,456

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

5


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


(A) INTERIM FINANCIAL STATEMENTS

The accompanying unaudited Consolidated Condensed Financial Statements include the accounts of Ryder System, Inc. (Ryder) and all entities in which Ryder has a controlling voting interest (“subsidiaries”) and variable interest entities (VIEs) required to be consolidated in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The accompanying unaudited Consolidated Condensed Financial Statements have been prepared in accordance with the accounting policies described in our 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.

6

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


Summarized results of discontinued operations were as follows:
 
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:
 
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.

7

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.

8

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.

9

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


10

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



11

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



12

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.

13

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.

14

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.


15

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.



16

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.


17

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.




18

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.


19

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.

20

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.


21

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