Document
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, 2017
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, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer þ | Accelerated filer ¨ |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company ¨ |
Emerging growth company ¨ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) ¨ YES þ NO
The number of shares of Ryder System, Inc. Common Stock ($0.50 par value per share) outstanding at September 30, 2017 was 52,947,715.
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)
|
| | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In thousands, except per share amounts) |
Lease and rental revenues | $ | 823,197 |
| | 803,006 |
| | $ | 2,387,801 |
| | 2,369,147 |
|
Services revenue | 896,245 |
| | 801,004 |
| | 2,619,139 |
| | 2,345,922 |
|
Fuel services revenue | 129,087 |
| | 120,408 |
| | 382,966 |
| | 342,765 |
|
Total revenues | 1,848,529 |
| | 1,724,418 |
| | 5,389,906 |
| | 5,057,834 |
|
| | | | | | | |
Cost of lease and rental | 588,626 |
| | 557,901 |
| | 1,745,777 |
| | 1,665,693 |
|
Cost of services | 761,470 |
| | 658,793 |
| | 2,210,314 |
| | 1,936,636 |
|
Cost of fuel services | 124,562 |
| | 116,904 |
| | 372,016 |
| | 331,283 |
|
Other operating expenses | 28,445 |
| | 27,997 |
| | 87,122 |
| | 85,944 |
|
Selling, general and administrative expenses | 216,653 |
| | 191,337 |
| | 620,041 |
| | 602,768 |
|
Non-operating pension costs | 6,958 |
| | 7,468 |
| | 20,875 |
| | 29,698 |
|
Used vehicle sales, net | (2,727 | ) | | (1,873 | ) | | 11,815 |
| | (33,002 | ) |
Interest expense | 34,854 |
| | 37,440 |
| | 104,591 |
| | 112,597 |
|
Miscellaneous income, net | (4,655 | ) | | (3,247 | ) | | (17,636 | ) | | (10,968 | ) |
| 1,754,186 |
| | 1,592,720 |
| | 5,154,915 |
| | 4,720,649 |
|
Earnings from continuing operations before income taxes | 94,343 |
| | 131,698 |
| | 234,991 |
| | 337,185 |
|
Provision for income taxes | 35,430 |
|
| 46,560 |
| | 86,456 |
| | 121,820 |
|
Earnings from continuing operations | 58,913 |
|
| 85,138 |
| | 148,535 |
| | 215,365 |
|
Loss from discontinued operations, net of tax | (290 | ) | | (386 | ) | | (947 | ) | | (1,069 | ) |
Net earnings | $ | 58,623 |
| | 84,752 |
| | $ | 147,588 |
| | 214,296 |
|
| | | | | | | |
Earnings (loss) per common share — Basic | | | | | | | |
Continuing operations | $ | 1.12 |
| | 1.60 |
| | $ | 2.81 |
| | 4.05 |
|
Discontinued operations | (0.01 | ) | | (0.01 | ) | | (0.02 | ) | | (0.02 | ) |
Net earnings | $ | 1.11 |
| | 1.60 |
| | $ | 2.79 |
| | 4.03 |
|
| | | | | | | |
Earnings (loss) per common share — Diluted | | | | | | | |
Continuing operations | $ | 1.11 |
| | 1.59 |
| | $ | 2.79 |
| | 4.02 |
|
Discontinued operations | (0.01 | ) | | (0.01 | ) | | (0.02 | ) | | (0.02 | ) |
Net earnings | $ | 1.11 |
| | 1.59 |
| | $ | 2.77 |
| | 4.00 |
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| | | | | | | |
Cash dividends declared per common share | $ | 0.46 |
| | 0.44 |
| | $ | 1.34 |
| | 1.26 |
|
See accompanying notes to Consolidated Condensed Financial Statements.
Note: EPS amounts may not be additive due to rounding.
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, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In thousands) |
| | | | | | | |
Net earnings | $ | 58,623 |
| | 84,752 |
| | $ | 147,588 |
| | 214,296 |
|
| | | | | | | |
Other comprehensive income (loss): | | | | | | | |
| | | | | | | |
Changes in currency translation adjustment and other | 27,648 |
| | (19,296 | ) | | 70,991 |
| | (37,874 | ) |
| | | | | | | |
Amortization of pension and postretirement items | 7,960 |
| | 7,171 |
| | 23,741 |
| | 22,040 |
|
Income tax expense related to amortization of pension and postretirement items | (2,812 | ) | | (2,667 | ) | | (8,324 | ) | | (7,854 | ) |
Amortization of pension and postretirement items, net of taxes | 5,148 |
| | 4,504 |
| | 15,417 |
| | 14,186 |
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| | | | | | | |
Change in net actuarial loss and prior service cost | 870 |
| | — |
| | 890 |
| | (17,367 | ) |
Income tax benefit related to change in net actuarial loss and prior service cost | (260 | ) | | — |
| | (80 | ) | | 6,345 |
|
Change in net actuarial loss and prior service cost, net of taxes | 610 |
| | — |
| | 810 |
| | (11,022 | ) |
| | | | | | | |
Other comprehensive income (loss), net of taxes | 33,406 |
| | (14,792 | ) | | 87,218 |
| | (34,710 | ) |
| | | | | | | |
Comprehensive income | $ | 92,029 |
| | 69,960 |
| | $ | 234,806 |
| | 179,586 |
|
See accompanying notes to Consolidated Condensed Financial Statements.
RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
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| | | | | | |
| September 30, 2017 | | December 31, 2016 |
| (Dollars in thousands, except per share amount) |
Assets: | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 65,256 |
|
| 58,801 |
|
Receivables, net of allowance of $13,192 and $14,915, respectively | 981,702 |
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| 831,947 |
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Inventories | 71,328 |
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| 69,529 |
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Prepaid expenses and other current assets | 134,294 |
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| 141,280 |
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Total current assets | 1,252,580 |
| | 1,101,557 |
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Revenue earning equipment, net | 8,249,317 |
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| 8,147,722 |
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Operating property and equipment, net of accumulated depreciation of $1,187,188 and $1,128,040, respectively | 778,879 |
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| 745,870 |
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Goodwill | 395,120 |
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| 386,772 |
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Intangible assets, net of accumulated amortization of $55,934 and $51,578, respectively | 44,381 |
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| 48,249 |
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Direct financing leases and other assets | 538,697 |
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| 472,284 |
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Total assets | $ | 11,258,974 |
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| 10,902,454 |
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| | | |
Liabilities and shareholders’ equity: | | | |
Current liabilities: | | | |
Short-term debt and current portion of long-term debt | $ | 143,942 |
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| 791,410 |
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Accounts payable | 557,216 |
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| 445,470 |
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Accrued expenses and other current liabilities | 529,171 |
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| 507,189 |
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Total current liabilities | 1,230,329 |
| | 1,744,069 |
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Long-term debt | 5,205,284 |
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| 4,599,864 |
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Other non-current liabilities | 872,071 |
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| 817,565 |
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Deferred income taxes | 1,776,226 |
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| 1,688,681 |
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Total liabilities | 9,083,910 |
| | 8,850,179 |
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| | | |
Shareholders’ equity: | | | |
Preferred stock, no par value per share — authorized, 3,800,917; none outstanding, September 30, 2017 or December 31, 2016 | — |
| | — |
|
Common stock, $0.50 par value per share — authorized, 400,000,000; outstanding, September 30, 2017 — 52,947,715; December 31, 2016 — 53,463,118 | 26,474 |
| | 26,732 |
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Additional paid-in capital | 1,039,598 |
| | 1,032,549 |
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Retained earnings | 1,855,806 |
| | 1,827,026 |
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Accumulated other comprehensive loss | (746,814 | ) | | (834,032 | ) |
Total shareholders’ equity | 2,175,064 |
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| 2,052,275 |
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Total liabilities and shareholders’ equity | $ | 11,258,974 |
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| 10,902,454 |
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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, |
| 2017 | | 2016 |
| (In thousands) |
Cash flows from operating activities from continuing operations: | | | |
Net earnings | $ | 147,588 |
| | 214,296 |
|
Less: Loss from discontinued operations, net of tax | (947 | ) | | (1,069 | ) |
Earnings from continuing operations | 148,535 |
| | 215,365 |
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Depreciation expense | 932,772 |
| | 878,173 |
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Used vehicle sales, net | 11,815 |
| | (33,002 | ) |
Amortization expense and other non-cash charges, net | 27,933 |
| | 20,196 |
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Non-operating pension costs and share-based compensation expense | 35,509 |
| | 43,568 |
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Deferred income tax expense | 75,279 |
| | 109,191 |
|
Changes in operating assets and liabilities: | | | |
Receivables | (145,090 | ) | | (69,169 | ) |
Inventories | (985 | ) | | (3,524 | ) |
Prepaid expenses and other assets | 255 |
| | (24,241 | ) |
Accounts payable | 40,734 |
| | 68,599 |
|
Accrued expenses and other non-current liabilities | 39,434 |
| | (20,094 | ) |
Net cash provided by operating activities from continuing operations | 1,166,191 |
| | 1,185,062 |
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| | | |
Cash flows from financing activities: | | | |
Net change in commercial paper borrowings and revolving credit facilities | 2,153 |
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| 73,597 |
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Debt proceeds | 873,302 |
|
| 298,254 |
|
Debt repaid | (938,160 | ) |
| (340,707 | ) |
Dividends on common stock | (71,564 | ) | | (67,651 | ) |
Common stock issued | 10,387 |
| | 9,626 |
|
Common stock repurchased | (65,856 | ) | | (25,658 | ) |
Debt issuance costs | (1,517 | ) | | (3,015 | ) |
Net cash used in financing activities | (191,255 | ) | | (55,554 | ) |
| | | |
Cash flows from investing activities: | | | |
Purchases of property and revenue earning equipment | (1,312,845 | ) | | (1,511,359 | ) |
Sales of revenue earning equipment | 289,432 |
| | 331,720 |
|
Sales of operating property and equipment | 12,541 |
| | 6,623 |
|
Acquisitions | (7,240 | ) | | — |
|
Collections on direct finance leases and other items | 54,227 |
| | 60,229 |
|
Changes in restricted cash | 1,694 |
| | 4,203 |
|
Net cash used in investing activities | (962,191 | ) | | (1,108,584 | ) |
| | | |
Effect of exchange rate changes on cash | (5,226 | ) | | (5,567 | ) |
Increase in cash and cash equivalents from continuing operations | 7,519 |
| | 15,357 |
|
| | | |
Decrease in cash and cash equivalents from discontinued operations | (1,064 | ) | | (1,308 | ) |
| | | |
Increase in cash and cash equivalents | 6,455 |
| | 14,049 |
|
Cash and cash equivalents at January 1 | 58,801 |
| | 60,945 |
|
Cash and cash equivalents at September 30 | $ | 65,256 |
| | 74,994 |
|
See accompanying notes to Consolidated Condensed Financial Statements.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. GENERAL
Interim Financial Statements
The accompanying unaudited Consolidated Condensed Financial Statements include the accounts of Ryder System, Inc. (Ryder) and all entities in which Ryder has a controlling voting interest (subsidiaries) and variable interest entities (VIEs) required to be consolidated in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The accompanying unaudited Consolidated Condensed Financial Statements have been prepared in accordance with the accounting policies described in our 2016 Annual Report on Form 10-K and should be read in conjunction with the Consolidated Financial Statements and notes thereto. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included and the disclosures herein are adequate. The operating results for interim periods are unaudited and are not necessarily indicative of the results that can be expected for a full year.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Derivatives and Hedging
In August 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-12, Derivatives and Hedging (Topic 815), which simplifies and clarifies the accounting and disclosure for hedging activities by more closely aligning the results of cash flow and fair value hedge accounting with the risk management activities of an entity. The amendments in this update are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. We do not expect this standard to have an impact on our consolidated financial position, results of operations or cash flows.
Share-Based Compensation
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The amendments in this update are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. We will adopt the standard as of January 1, 2018, on a prospective basis. We do not expect this standard to have an impact on our consolidated financial position, results of operations or cash flows.
Employee Benefits Plans
In March 2017, the FASB issued ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires an employer to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The standard is effective January 1, 2018, with early adoption as of January 1, 2017 permitted. We adopted the standard during the first quarter of 2017 and recorded the other components of net benefit cost within "Non-operating pension costs" in the Consolidated Condensed Statements of Earnings for both the current and prior year periods.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
Intangibles - Goodwill and Other
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350), which requires an entity to perform a one-step quantitative impairment test, whereby a goodwill impairment loss will be measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). It eliminates the current two-step goodwill impairment test, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The standard is effective January 1, 2020, with early adoption as of January 1, 2017 permitted. We adopted the standard during the first quarter of 2017 and it did not have an impact on our consolidated financial position, results of operations or cash flows.
Statement of Cash Flows
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. In November 2016, the FASB issued additional guidance related to the statement of cash flows, which requires companies to explain the change during the period in the total of cash, cash equivalents, and restricted cash or restricted cash equivalents. The standard is effective January 1, 2018, with early adoption permitted. We will adopt the standard as of January 1, 2018, on a retrospective basis. We do not expect this standard to have a material impact on the presentation of our consolidated cash flows.
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases. The standard requires lessees to classify leases as either finance or operating leases. This classification will determine whether the related expense will be recognized based on asset amortization and interest on the obligation or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. We do not expect the lessee requirements to have a material impact on our consolidated financial position, results of operations or cash flows.
The new standard continues to require lessors to separate the lease component from the non-lease component; however, it provides clarification on the scope of non-lease components (e.g., maintenance services). The new standard also provides more guidance on how to identify and separate the components. The lease component will be accounted for using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The non-lease component will be accounted for in accordance with the revenue recognition guidance in ASU No. 2014-09. The adoption of the new lease standard will primarily impact our ChoiceLease product line, which includes a vehicle lease as well as maintenance and other services related to the vehicle. We will generally continue to recognize revenue for the lease portion of the product line on a straight-line basis. Revenue from maintenance services will be recognized at the time the maintenance services are performed, which will generally require the deferral of some portion of the customer's lease payments when received, as maintenance services are not performed evenly over the life of a ChoiceLease contract. We will adopt the standard effective January 1, 2019, using the modified retrospective transition method. Upon adoption, we will record a cumulative-effect adjustment to recognize deferred revenue related to the maintenance services on the opening balance sheet for 2017 and restate all prior periods presented (2017 and 2018). We expect the cumulative-effect adjustment will have a significant impact on our consolidated financial position. We continue to evaluate the impact of adoption of this standard on our results of operations. We do not expect the adoption of this standard to have an impact on our cash flows.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which together with related, subsequently issued guidance, requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. In June 2017, the FASB provided further clarification on the interaction of the transition provisions of the new revenue standard and the new lease standard. We will adopt the revenue standard on January 1, 2018, using the full retrospective transition method.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
This standard will primarily impact lease revenue from our ChoiceLease product line, specifically the non-lease component (primarily maintenance services). However, based on the FASB's clarification guidance issued in June 2017, on the interaction of the transition provisions of the new revenue standard and the new lease standard, we will continue to apply the existing lease accounting guidance to our lease revenue upon adoption of the revenue standard on January 1, 2018 and will adopt the new revenue standard for the maintenance and other services components of our ChoiceLease product line effective January 1, 2019.
With respect to other revenue sources, we continue to assess the impact of the following: (1) timing of recognition of variable consideration; (2) principal versus agent considerations; and (3) accounting for costs to obtain and fulfill contracts. We do not expect the adoption of this standard as it relates to other revenue sources to have a material impact on our consolidated financial position, results of operations or cash flows.
3. ACQUISITIONS
On September 29, 2017, we completed the acquisition of Dallas Service Center, Inc., an independent truck repair facility, for a purchase price of approximately $8.0 million, net of cash acquired, which includes $0.8 million in contingent consideration to be paid to the seller provided certain conditions are met.
4. REVENUE EARNING EQUIPMENT
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| | | | | | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Cost | | Accumulated Depreciation | | Net Book Value(1) | | Cost | | Accumulated Depreciation | | Net Book Value(1) |
| (In thousands) |
Held for use: | |
ChoiceLease | $ | 9,799,028 |
| | (3,284,267 | ) | | 6,514,761 |
| | $ | 9,486,977 |
| | (3,031,937 | ) | | 6,455,040 |
|
Commercial rental | 2,599,043 |
| | (973,126 | ) | | 1,625,917 |
| | 2,499,010 |
| | (935,346 | ) | | 1,563,664 |
|
Held for sale | 417,771 |
| | (309,132 | ) | | 108,639 |
| | 494,355 |
| | (365,337 | ) | | 129,018 |
|
Total | $ | 12,815,842 |
| | (4,566,525 | ) | | 8,249,317 |
| | $ | 12,480,342 |
| | (4,332,620 | ) | | 8,147,722 |
|
————————————
| |
(1) | Revenue earning equipment, net includes vehicles acquired under capital leases of $29 million, less accumulated depreciation of $14 million, at September 30, 2017, and $43 million, less accumulated depreciation of $22 million, at December 31, 2016. |
We lease revenue earning equipment to customers for periods typically ranging from three to seven years for trucks and tractors and up to ten years for trailers. The majority of our leases are classified as operating leases. However, some of our revenue earning equipment leases are classified as direct financing leases and, to a lesser extent, sales-type leases. As of September 30, 2017 and December 31, 2016, the net investment in direct financing and sales-type leases was $439 million and $409 million, respectively. Our direct financing lease customers operate in a wide variety of industries, and we have no significant customer concentrations in any one industry. We assess credit risk for all of our customers including those who lease equipment under direct financing leases prior to signing a ChoiceLease contract. For those customers who are designated as high risk, we typically require security deposits to be paid in advance in order to mitigate our credit risk. Additionally, our receivables are collateralized by the vehicles, which further mitigates our credit risk.
As of September 30, 2017 and December 31, 2016, the amount of direct financing lease receivables past due was not significant, and there were no impaired receivables. Accordingly, we do not believe there is a material risk of default with respect to the direct financing lease receivables.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
Revenue earning equipment held for sale is stated at the lower of carrying amount or fair value less costs to sell. Losses on vehicles held for sale for which carrying values exceeded fair value are recognized at the time they arrive at our used truck sales centers and are presented within “Used vehicle sales, net” in the Consolidated Condensed Statements of Earnings. For revenue earning equipment held for sale, we stratify our fleet by vehicle type (trucks, tractors and trailers), weight class, age and other relevant characteristics and create classes of similar assets for analysis purposes. For a certain population of our revenue earning equipment held for sale, fair value was determined based upon recent market prices obtained from our own sales experience for sales of each class of similar assets and vehicle condition. These vehicles held for sale were classified within Level 3 of the fair value hierarchy.
The following table presents our assets held for sale that are measured at fair value on a nonrecurring basis and considered a Level 3 fair value measurement:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Total Losses (2) |
| September 30, | | Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| (In thousands) |
Assets held for sale: | | | | | | | | | | | |
Revenue earning equipment (1): | | | | | | | | | | | |
Trucks | $ | 14,081 |
| | 17,091 |
| | $ | 6,215 |
| | 2,528 |
| | $ | 22,942 |
| | 6,842 |
|
Tractors | 15,448 |
| | 61,480 |
| | 1,127 |
| | 7,985 |
| | 18,444 |
| | 22,073 |
|
Trailers | 2,279 |
| | 2,563 |
| | 1,871 |
| | 1,152 |
| | 5,044 |
| | 2,589 |
|
| | | | | | | | | | | |
Total assets at fair value | $ | 31,808 |
| | 81,134 |
| | $ | 9,213 |
| | 11,665 |
| | $ | 46,430 |
| | 31,504 |
|
————————————
| |
(1) | Assets held for sale in the above table only include the portion of revenue earning equipment held for sale where net book values exceeded fair values and fair value adjustments were recorded. The net book value of assets held for sale which were less than fair value was $77 million and $76 million as of September 30, 2017 and 2016, respectively. |
| |
(2) | Total losses represent fair value adjustments for all vehicles reclassified to held for sale throughout the period for which fair value was less than net book value. |
For the three and nine months ended September 30, 2017 and 2016, the components of gains on used vehicles, net were as follows:
|
| | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In thousands) |
Gains on vehicle sales, net | $ | (11,940 | ) | | (13,538 | ) | | $ | (34,615 | ) | | (64,506 | ) |
Losses from fair value adjustments | 9,213 |
| | 11,665 |
| | 46,430 |
| | 31,504 |
|
Used vehicle sales, net | $ | (2,727 | ) | | (1,873 | ) | | $ | 11,815 |
| | (33,002 | ) |
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
5. ACCRUED EXPENSES AND OTHER LIABILITIES
|
| | | | | | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Accrued Expenses | | Non-Current Liabilities | | Total | | Accrued Expenses | | Non-Current Liabilities | | Total |
| (In thousands) |
Salaries and wages | $ | 100,273 |
| | — |
| | 100,273 |
| | $ | 90,913 |
| | — |
| | 90,913 |
|
Deferred compensation | 3,990 |
| | 54,595 |
| | 58,585 |
| | 2,992 |
| | 46,541 |
| | 49,533 |
|
Pension benefits | 3,842 |
| | 462,935 |
| | 466,777 |
| | 3,796 |
| | 451,940 |
| | 455,736 |
|
Other postretirement benefits | 1,520 |
| | 19,163 |
| | 20,683 |
| | 1,506 |
| | 19,459 |
| | 20,965 |
|
Other employee benefits | 22,678 |
| | 2,958 |
| | 25,636 |
| | 29,358 |
| | 5,854 |
| | 35,212 |
|
Insurance obligations (1) | 133,855 |
| | 261,244 |
| | 395,099 |
| | 127,470 |
| | 234,336 |
| | 361,806 |
|
Asset retirement obligations | 6,595 |
| | 19,810 |
| | 26,405 |
| | 5,828 |
| | 20,143 |
| | 25,971 |
|
Operating taxes | 99,086 |
| | — |
| | 99,086 |
| | 92,150 |
| | — |
| | 92,150 |
|
Income taxes | 2,570 |
| | 24,623 |
| | 27,193 |
| | 4,197 |
| | 23,174 |
| | 27,371 |
|
Interest | 26,066 |
| | — |
| | 26,066 |
| | 27,277 |
| | — |
| | 27,277 |
|
Customer deposits | 66,302 |
| | 4,089 |
| | 70,391 |
| | 61,225 |
| | 4,569 |
| | 65,794 |
|
Deferred revenue | 14,997 |
| | — |
| | 14,997 |
| | 14,064 |
| | — |
| | 14,064 |
|
Other | 47,397 |
| | 22,654 |
| | 70,051 |
| | 46,413 |
| | 11,549 |
| | 57,962 |
|
Total | $ | 529,171 |
| | 872,071 |
| | 1,401,242 |
| | $ | 507,189 |
| | 817,565 |
| | 1,324,754 |
|
————————————
| |
(1) | Insurance obligations are primarily comprised of self-insured claim liabilities. |
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
6. DEBT
|
| | | | | | | | | | | | |
| Weighted-Average Interest Rate | | | | | | |
| September 30, 2017 | | December 31, 2016 | | Maturities | | September 30, 2017 | | December 31, 2016 |
| | | | | | | (In thousands) |
Short-term debt and current portion of long-term debt: | | | | | | | | | |
Short-term debt | 1.57% | | 1.07% | |
| | $ | 59,410 |
| | 177,629 |
|
Current portion of long-term debt | | | | | | | 84,532 |
| | 613,781 |
|
Total short-term debt and current portion of long-term debt | | | | | | 143,942 |
| | 791,410 |
|
Long-term debt: | | | | | | | | | |
U.S. commercial paper (1) | 1.44% | | 0.87% | | 2020 | | 468,540 |
| | 342,480 |
|
Global revolving credit facility | 3.20% | | 2.06% | | 2020 | | 7,596 |
| | 4,703 |
|
Unsecured U.S. notes — Medium-term notes (1) | 2.69% | | 2.67% | | 2017-2025 | | 4,013,602 |
| | 4,113,421 |
|
Unsecured U.S. obligations | 2.52% | | 2.19% | | 2018 | | 50,000 |
| | 50,000 |
|
Unsecured foreign obligations | 1.50% | | 1.55% | | 2017-2020 | | 229,030 |
| | 232,092 |
|
Asset-backed U.S. obligations (2) | 1.85% | | 1.80% | | 2017-2024 | | 516,009 |
| | 459,876 |
|
Capital lease obligations | 3.45% | | 3.17% | | 2017-2023 | | 21,859 |
| | 24,184 |
|
Total before fair market value adjustment | | | | | | | 5,306,636 |
| | 5,226,756 |
|
Fair market value adjustment on notes subject to hedging (3) | | | | | | (2,058 | ) | | 1,110 |
|
Debt issuance costs | | | | | | | (14,762 | ) | | (14,221 | ) |
| | | | | | | 5,289,816 |
| | 5,213,645 |
|
Current portion of long-term debt | | | | | | | (84,532 | ) | | (613,781 | ) |
Long-term debt | | | | | | | 5,205,284 |
| | 4,599,864 |
|
Total debt | | | | | | | $ | 5,349,226 |
| | 5,391,274 |
|
————————————
| |
(1) | Amounts are net of unamortized original issue discounts of $7 million at September 30, 2017 and December 31, 2016. |
| |
(2) | Asset-backed U.S. obligations are related to financing transactions backed by a portion of our revenue earning equipment. |
| |
(3) | The notional amount of the executed interest rate swaps designated as fair value hedges was $825 million at September 30, 2017 and December 31, 2016, respectively. |
We maintain a $1.2 billion global revolving credit facility with a syndicate of twelve lending institutions led by Bank of America N.A., Bank of Tokyo-Mitsubishi UFJ, Ltd., BNP Paribas, Mizuho Corporate Bank, Ltd., Royal Bank of Canada, Lloyds Bank Plc, U.S. Bank National Association and Wells Fargo Bank, N.A. The facility expires in January 2020. The agreement provides for annual facility fees which range from 7.5 basis points to 25 basis points based on Ryder's long-term credit ratings. The annual facility fee is currently 10 basis points, which applies to the total facility size of $1.2 billion.
The credit facility is used primarily to finance working capital but can also be used to issue up to $75 million in letters of credit (there were no letters of credit outstanding against the facility at September 30, 2017). At our option, the interest rate on borrowings under the credit facility is based on LIBOR, prime, federal funds or local equivalent rates. The credit facility contains no provisions limiting its availability in the event of a material adverse change to Ryder’s business operations; however, the credit facility does contain standard representations and warranties, events of default, cross-default provisions and certain affirmative and negative covenants.
In order to maintain availability of funding, we must maintain a ratio of debt to consolidated net worth of less than or equal to 300%. Net worth, as defined in the credit facility, represents shareholders' equity excluding any accumulated other comprehensive income or loss associated with our pension and other postretirement plans. The ratio at September 30, 2017, was 192%. At September 30, 2017, there was $664 million available under the credit facility.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
Our global revolving credit facility enables us to refinance short-term obligations on a long-term basis. Short-term commercial paper obligations not expected to require the use of working capital are classified as long-term obligations, as we have both the intent and ability to refinance on a long-term basis. In addition, we have the intent and ability to refinance the current portion of certain long-term debt on a long-term basis. At September 30, 2017, we classified $469 million of short-term commercial paper and $50 million of the current portion of long-term debt as long-term debt. At December 31, 2016, we classified $342 million of short-term commercial paper and $350 million of the current portion of long-term debt as long-term debt.
In August 2017, we issued $300 million of unsecured medium-term notes maturing in September 2022. In February 2017, we issued $300 million of unsecured medium-term notes maturing in March 2022. The proceeds from these notes were used to pay off maturing debt and for general corporate purposes. If these notes are downgraded below investment grade following, or as a result of, a change in control, the note holders can require us to repurchase all or a portion of the notes at a purchase price equal to 101% of principal value plus accrued and unpaid interest.
In June 2017, we received $98 million from financing transactions backed by a portion of our revenue earning equipment. The proceeds from these transactions were used for general corporate purposes. We have provided end of term guarantees for the residual value of the revenue earning equipment in these transactions. The transaction proceeds, along with the end of term residual value guarantees, have been included within "asset-backed U.S. obligations" in the preceding table.
We have a trade receivables purchase and sale program, pursuant to which we sell certain of our domestic trade accounts receivable to a bankruptcy remote, consolidated subsidiary of Ryder, that in turn sells, on a revolving basis, an ownership interest in certain of these accounts receivable to a committed purchaser. The subsidiary is considered a VIE and is consolidated based on our control of the entity’s activities. We use this program to provide additional liquidity to fund our operations, particularly when it is cost effective to do so. The costs under the program may vary based on changes in interest rates. The available proceeds that may be received under the program are limited to $175 million. The program was renewed in October 2017. If no event occurs which causes early termination, the 364-day program will expire on October 22, 2018. The program contains provisions restricting its availability in the event of a material adverse change to our business operations or the collectibility of the collateralized receivables. Sales of receivables under this program are accounted for as secured borrowings based on our continuing involvement in the transferred assets. No amounts were outstanding under the program at September 30, 2017 or December 31, 2016.
At September 30, 2017 and December 31, 2016, we had letters of credit and surety bonds outstanding totaling $357 million and $354 million, respectively, which primarily guarantee the payment of insurance claims.
The fair value of total debt (excluding capital lease and asset-backed U.S. obligations) at September 30, 2017 and December 31, 2016 was approximately $4.89 billion and $4.97 billion, respectively. For publicly-traded debt, estimates of fair value were based on market prices. For other debt, fair value was estimated based on a model-driven approach using rates currently available to us for debt with similar terms and remaining maturities. The fair value measurements of our publicly-traded debt and other debt were classified within Level 2 of the fair value hierarchy. The carrying amounts reported in the Consolidated Condensed Balance Sheets for “Cash and cash equivalents,” “Receivables, net” and “Accounts payable” approximate fair value because of the immediate or short-term maturities of these financial instruments.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
7. DERIVATIVES
From time to time, we enter into interest rate derivative contracts to manage our fixed and variable interest rate exposure and to better align the repricing of debt instruments to that of our portfolio of assets. We assess the risk that changes in interest rates will have either on the fair value of debt obligations or on the amount of future interest payments by monitoring changes in interest rate exposures and by evaluating hedging opportunities. We regularly monitor interest rate risk attributable to both our outstanding and forecasted debt obligations as well as any offsetting hedge positions. This risk management process involves the use of analytical techniques, including cash flow sensitivity analyses, to estimate the expected impact of changes in interest rates on our future cash flows.
As of September 30, 2017, we had interest rate swaps outstanding, which are designated as fair value hedges for certain debt obligations, with a total notional value of $825 million and maturities through 2022. Interest rate swaps are measured at fair value on a recurring basis using Level 2 fair value inputs. The fair value amounts of the interest rate swaps are recorded in "Direct financing leases and other assets" and "Other non-current liabilities" in our Consolidated Condensed Balance Sheets. As of September 30, 2017, these amounts are not material to our consolidated financial position or results of operations and have not changed significantly from the amounts reported at December 31, 2016. Changes in the fair value of our interest rate swaps were offset by changes in the fair value of the hedged debt instruments. Accordingly, there was no ineffectiveness related to the interest rate swaps.
8. SHARE REPURCHASE PROGRAMS
In December 2015, our Board of Directors authorized a share repurchase program intended to mitigate the dilutive impact of shares issued under our employee stock plans (the program). Under the program, management is authorized to repurchase (i) up to 1.5 million shares of common stock, the sum of which will not exceed the number of shares issued to employees under Ryder's employee stock plans from December 1, 2015 to December 9, 2017, plus (ii) 0.5 million shares issued to employees that were not repurchased under Ryder's previous share repurchase program. The program limits aggregate share repurchases to no more than 2 million shares of Ryder common stock. Share repurchases of common stock are made periodically in open-market transactions and are subject to market conditions, legal requirements and other factors. Management may establish prearranged written plans for Ryder under Rule 10b5-1 of the Securities Exchange Act of 1934 as part of the program, which allow for share repurchases during Ryder’s quarterly blackout periods as set forth in the trading plan.
During the nine months ended September 30, 2017 and September 30, 2016, we repurchased approximately 933,000 shares for $65.9 million and 380,000 shares for $25.7 million, respectively.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
9. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following summary sets forth the components of accumulated other comprehensive loss, net of tax:
|
| | | | | | | | | | | | | |
| | Currency Translation Adjustments and Other | | Net Actuarial Loss (1) | | Prior Service (Cost)/ Credit (1) | | Accumulated Other Comprehensive Loss |
| | (In thousands) |
December 31, 2016 | | $ | (206,610 | ) | | (620,292 | ) | | (7,130 | ) | | (834,032 | ) |
Amortization | | — |
| | 15,252 |
| | 165 |
| | 15,417 |
|
Other current period change | | 70,991 |
| | 810 |
| | — |
| | 71,801 |
|
September 30, 2017 | | $ | (135,619 | ) | | (604,230 | ) | | (6,965 | ) | | (746,814 | ) |
|
| | | | | | | | | | | | | |
| | Currency Translation Adjustments and Other | | Net Actuarial Loss (1) | | Prior Service Credit (1) | | Accumulated Other Comprehensive Loss |
| | (In thousands) |
December 31, 2015 | | $ | (136,020 | ) | | (576,993 | ) | | 278 |
| | (712,735 | ) |
Amortization | | — |
| | 14,052 |
| | 134 |
| | 14,186 |
|
Other current period change | | (37,874 | ) | | (5,495 | ) | | (5,527 | ) | | (48,896 | ) |
September 30, 2016 | | $ | (173,894 | ) | | (568,436 | ) | | (5,115 | ) | | (747,445 | ) |
_______________________
| |
(1) | These amounts are included in the computation of net pension expense. See Note 12, "Employee Benefit Plans," for further information. |
The gain from currency translation adjustments in the nine months ended September 30, 2017 of $71.0 million was primarily due to the strengthening of the British Pound and the Canadian Dollar against the U.S. Dollar. The loss from currency translation adjustments in the nine months ended September 30, 2016 of $37.9 million was due to the weakening of the British Pound against the U.S. Dollar, partially offset by the strengthening of the Canadian Dollar against the U.S. Dollar.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
10. EARNINGS PER SHARE
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, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In thousands, except per share amounts) |
Earnings per share — Basic: | | | | | | | |
Earnings from continuing operations | $ | 58,913 |
| | 85,138 |
| | $ | 148,535 |
| | 215,365 |
|
Less: Earnings allocated to unvested stock | (222 | ) | | (261 | ) | | (536 | ) | | (674 | ) |
Earnings from continuing operations available to common shareholders — Basic | $ | 58,691 |
| | 84,877 |
| | $ | 147,999 |
| | 214,691 |
|
| | | | | | | |
Weighted average common shares outstanding — Basic | 52,405 |
| | 52,953 |
| | 52,671 |
| | 53,029 |
|
| | | | | | | |
Earnings from continuing operations per common share — Basic | $ | 1.12 |
| | 1.60 |
| | $ | 2.81 |
| | 4.05 |
|
| | | | | | | |
Earnings per share — Diluted: | | | | | | | |
Earnings from continuing operations | $ | 58,913 |
| | 85,138 |
| | $ | 148,535 |
| | 215,365 |
|
Less: Earnings allocated to unvested stock | (222 | ) | | (260 | ) | | (536 | ) | | (672 | ) |
Earnings from continuing operations available to common shareholders — Diluted | $ | 58,691 |
| | 84,878 |
| | $ | 147,999 |
| | 214,693 |
|
| | | | | | | |
Weighted average common shares outstanding — Basic | 52,405 |
| | 52,953 |
| | 52,671 |
| | 53,029 |
|
Effect of dilutive equity awards | 371 |
| | 338 |
| | 356 |
| | 315 |
|
Weighted average common shares outstanding — Diluted | 52,776 |
| | 53,291 |
| | 53,027 |
| | 53,344 |
|
| | | | | | | |
Earnings from continuing operations per common share — Diluted | $ | 1.11 |
| | 1.59 |
| | $ | 2.79 |
| | 4.02 |
|
| | | | | | | |
Anti-dilutive equity awards not included above | 843 |
| | 653 |
| | 889 |
| | 836 |
|
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
11. SHARE-BASED COMPENSATION PLANS
Share-based incentive awards are provided to employees under the terms of various share-based compensation plans (collectively, the “Plans”). The Plans are administered by the Compensation Committee of the Board of Directors and principally include at-the-money stock options, unvested stock and cash awards. Unvested stock awards include grants of market-based, performance-based and time-vested restricted stock rights. Under the terms of our Plans, dividends are not paid unless the stock award vests. Upon vesting, the amount of the dividends paid is equal to the aggregate dividends declared on common shares during the period from the grant date of the award until the date the shares underlying the award are delivered.
The following table provides information on share-based compensation expense and income tax benefits recognized during the periods:
|
| | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In thousands) |
Stock option and stock purchase plans | $ | 1,953 |
| | 1,633 |
| | $ | 5,811 |
| | 5,410 |
|
Unvested stock | 2,618 |
| | 2,237 |
| | 8,823 |
| | 8,460 |
|
Share-based compensation expense | 4,571 |
| | 3,870 |
|
| 14,634 |
|
| 13,870 |
|
Income tax benefit | (1,608 | ) | | (1,321 | ) | | (5,090 | ) | | (4,691 | ) |
Share-based compensation expense, net of tax | $ | 2,963 |
| | 2,549 |
|
| $ | 9,544 |
|
| 9,179 |
|
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, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In thousands) |
Cash awards | $ | 124 |
| | 119 |
| | $ | 245 |
| | 447 |
|
Total unrecognized pre-tax compensation expense related to all share-based compensation arrangements at September 30, 2017 was $23.3 million and is expected to be recognized over a weighted-average period of 1.9 years.
The following table is a summary of the awards granted under the Plans during the periods presented:
|
| | | | | |
| Nine months ended September 30, |
| 2017 | | 2016 |
| (Shares in thousands) |
Stock options | 465 |
| | 513 |
|
Market-based restricted stock rights | 46 |
| | 34 |
|
Performance-based restricted stock rights | 79 |
| | 45 |
|
Time-vested restricted stock rights | 110 |
| | 129 |
|
Total | 700 |
|
| 721 |
|
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
12. EMPLOYEE BENEFIT PLANS
Components of net pension expense were as follows: |
| | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In thousands) |
Pension Benefits | | | | | | | |
Company-administered plans: | | | | | | | |
Service cost | $ | 3,165 |
| | 2,660 |
| | $ | 9,431 |
| | 9,065 |
|
Interest cost | 21,609 |
| | 22,754 |
| | 64,524 |
| | 72,086 |
|
Expected return on plan assets | (22,822 | ) | | (22,601 | ) | | (68,012 | ) | | (68,353 | ) |
Amortization of: | | | | | | | |
Net actuarial loss | 8,336 |
| | 7,324 |
| | 24,863 |
| | 23,889 |
|
Prior service cost | 133 |
| | 320 |
| | 399 |
| | 3,060 |
|
| 10,421 |
| | 10,457 |
| | 31,205 |
| | 39,747 |
|
Union-administered plans | 7,873 |
| | 2,493 |
| | 12,996 |
| | 7,221 |
|
Net pension expense | $ | 18,294 |
| | 12,950 |
| | $ | 44,201 |
| | 46,968 |
|
| | | | | | | |
Company-administered plans: | | | | | | | |
U.S. | $ | 10,929 |
| | 10,952 |
| | $ | 32,787 |
| | 41,389 |
|
Non-U.S. | (508 | ) | | (495 | ) | | (1,582 | ) | | (1,642 | ) |
| 10,421 |
| | 10,457 |
| | 31,205 |
| | 39,747 |
|
Union-administered plans | 7,873 |
| | 2,493 |
| | 12,996 |
| | 7,221 |
|
Net pension expense | $ | 18,294 |
| | 12,950 |
| | $ | 44,201 |
| | 46,968 |
|
| | | | | | | |
During the nine months ended September 30, 2017, we contributed $10.6 million to our pension plans. In 2017, the expected total contributions to our pension plans are approximately $22 million. We also maintain other postretirement benefit plans that are not reflected in the above table. The amount of postretirement benefit expense was not material for the three or nine months ended September 30, 2017.
During the third quarter of 2017, we recorded an estimated pension settlement charge of $5.5 million for the exit from a U.S. multi-employer pension plan. This charge was recorded within “Selling, general, and administrative expenses” in our Consolidated Condensed Statement of Earnings and is included in the Union-administered plans expense.
During the second quarter of 2016, we determined that certain pension benefit improvements made in 2009 had not been fully reflected in our projected benefit obligation. Because the amounts were not material to our consolidated financial statements in any individual period, and the cumulative amount was not material to 2016 results, we recognized a one-time, non-cash charge of $7.7 million in "Selling, general and administrative expenses" and a $12.8 million pre-tax increase to “Accumulated other comprehensive loss” in our second quarter 2016 consolidated condensed financial statements to correctly state the pension benefit obligation and account for these 2009 benefit improvements.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
13. OTHER ITEMS IMPACTING COMPARABILITY
Our primary measure of segment performance as shown in Note 16, "Segment Reporting," excludes certain items we do not believe are representative of the ongoing operations of the segment. Excluding these items from our segment measure of performance allows for better year over year comparison:
|
| | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (In thousands) |
Pension settlement charge (1) | $ | 5,454 |
| | — |
| | $ | 5,454 |
| | — |
|
Fees related to cost-savings program | 4,255 |
| | — |
| | 4,255 |
| | — |
|
Operating tax adjustment | — |
| | — |
| | 2,205 |
| | — |
|
Restructuring | — |
| | — |
| | (2,574 | ) | | — |
|
Pension-related adjustments (1)
| — |
| | — |
| | — |
| | 7,650 |
|
Restructuring and other items, net | $ | 9,709 |
| | — |
| | $ | 9,340 |
| | 7,650 |
|
_______________
| |
(1) | Refer to Note 12, Employee Benefit Plans for additional information. |
During the third quarter of 2017, we incurred charges of $4.3 million related to consulting fees associated with a cost-savings program. These items were reflected within “Selling, general and administrative expenses” in our Consolidated Condensed Statement of Earnings.
During the first quarter of 2017, we determined that certain operating tax expenses related to prior periods had not been recognized in prior period earnings. We recorded a one-time charge of $2.2 million within “Selling, general and administrative expenses” in our Consolidated Condensed Statement of Earnings as the impact of the adjustment was not material to our consolidated condensed financial statements in any individual prior period, and the cumulative amount was not material to the first quarter 2017 results.
During the second quarter of 2017, we realized restructuring credits of $2.6 million related to the gains on sale of certain UK facilities that were closed as part of prior year restructuring activities. These items were reflected within "Miscellaneous income, net" in our Consolidated Condensed Statement of Earnings.
14. OTHER MATTERS
We are a party to various claims, complaints and proceedings arising in the ordinary course of our continuing business operations including, but not limited to, those relating to commercial and employment claims, environmental matters, risk management matters (e.g., vehicle liability, workers’ compensation, etc.) and administrative assessments primarily associated with operating taxes. We have established loss provisions for matters in which losses are probable and can be reasonably estimated. We believe that the resolution of these claims, complaints and legal proceedings will not have a material effect on our consolidated condensed financial statements.
Our estimates regarding potential losses and materiality are based on our judgment and assessment of the claims utilizing currently available information. Although we will continue to reassess our reserves and estimates based on future developments, our objective assessment of the legal merits of such claims may not always be predictive of the outcome and actual results may vary from our current estimates.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
15. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information was as follows:
|
| | | | | | |
| Nine months ended September 30, |
| 2017 | | 2016 |
| (In thousands) |
Interest paid | $ | 99,889 |
| | 100,903 |
|
Income taxes paid | 10,596 |
| | 12,250 |
|
Changes in accounts payable related to purchases of revenue earning equipment | (63,184 | ) | | (107,177 | ) |
Operating and revenue earning equipment acquired under capital leases | 6,209 |
| | 947 |
|
16. SEGMENT REPORTING
Our operating segments are aggregated into reportable business segments based upon similar economic characteristics, products, services, customers and delivery methods. We report our financial performance in three business segments: (1) Fleet Management Solutions (FMS), which provides leasing, commercial rental and maintenance of trucks, tractors and trailers to customers principally in the U.S., Canada and the U.K.; (2) Dedicated Transportation Solutions (DTS), which provides vehicles and drivers as part of a dedicated transportation solution in the U.S.; and (3) Supply Chain Solutions (SCS), which provides comprehensive supply chain solutions including distribution and transportation services in North America and Asia. Dedicated transportation services provided as part of an integrated, multi-service, supply chain solution to SCS customers are reported in the SCS business segment.
Our primary measurement of segment financial performance, defined as segment “Earnings Before Tax” (EBT) from continuing operations, includes an allocation of Central Support Services (CSS) and excludes non-operating pension costs and restructuring and other items, net, as discussed in Note 13, "Other Items Impacting Comparability." CSS represents those costs incurred to support all business segments, including human resources, finance, corporate services, public affairs, information technology, health and safety, legal, marketing and corporate communications. The objective of the EBT measurement is to provide clarity on the profitability of each segment and, ultimately, to hold leadership of each segment accountable for their allocated share of CSS costs. Certain costs are considered to be overhead not attributable to any segment and remain unallocated in CSS. Included among the unallocated overhead remaining within CSS are the costs for investor relations, public affairs and certain executive compensation. CSS costs attributable to the business segments are predominantly allocated to FMS, DTS and SCS as follows:
•Finance, corporate services, and health and safety — allocated to each segment based upon estimated and planned resource utilization for each segment;
•Human resources — individual costs within this category are allocated under various methods, including allocation based on estimated utilization and number of personnel supported for each segment;
•Information technology — principally allocated based upon utilization-related metrics such as number of users or minutes of CPU time. Customer-related project costs and expenses are allocated to the business segment responsible for the project; and
•Other — represents legal and other centralized costs and expenses including certain share-based incentive compensation costs. Such expenses, if allocated to a segment, are based primarily on the number of personnel supported in each segment.
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
Our FMS segment leases revenue earning equipment and provides fuel, maintenance and other ancillary services to the DTS and SCS segments. Inter-segment revenue and EBT are accounted for at rates similar to those executed with third parties. EBT related to inter-segment equipment and services billed to DTS and SCS customers (equipment contribution) are included in both FMS and the segment that served the customer and then eliminated (presented as “Eliminations" in the table below).
The following tables set forth financial information for each of our segments and provide a reconciliation between segment EBT and earnings from continuing operations before income taxes for the three and nine months ended September 30, 2017 and 2016. Segment results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented. Prior period Segment EBT amounts and non-operating pension costs have been reclassified to conform to the current period presentation. These reclassifications were immaterial to the financial statements taken as a whole.
|
| | | | | | | | | | | | | | | | |
| FMS | | DTS | | SCS | | Eliminations | | Total |
| (In thousands) |
For the three months ended September 30, 2017 | | | | | | | | |
Revenue from external customers | $ | 1,080,191 |
| | 272,334 |
| | 496,004 |
| | — |
| | 1,848,529 |
|
Inter-segment revenue | 115,607 |
| | — |
| | — |
| | (115,607 | ) | | — |
|
Total revenue | $ | 1,195,798 |
| | 272,334 |
| | 496,004 |
| | (115,607 | ) | | 1,848,529 |
|
| | | | | | | | | |
Segment EBT | $ | 100,693 |
| | 13,770 |
| | 22,052 |
| | (14,464 | ) | | 122,051 |
|
Unallocated CSS | | | | | | | | | (11,041 | ) |
Non-operating pension costs | | | | | | | | | (6,958 | ) |
Restructuring and other items, net (1) | | | | | | | | | (9,709 | ) |
Earnings from continuing operations before income taxes | | | | | | | | | $ | 94,343 |
|
| | | | | | | | | |
Segment capital expenditures paid | $ | 431,093 |
| | 1,878 |
| | 16,705 |
| | — |
| | 449,676 |
|
Unallocated CSS capital expenditures paid | | | | | | | | | 7,917 |
|
Capital expenditures paid | | | | | | | | | $ | 457,593 |
|
| | | | | | | | | |
| | | | | | | | | |
For the three months ended September 30, 2016 | | | | | | | | |
Revenue from external customers | $ | 1,046,599 |
| | 260,921 |
| | 416,898 |
| | — |
| | 1,724,418 |
|
Inter-segment revenue | 108,412 |
| | — |
| | — |
| | (108,412 | ) | | — |
|
Total revenue | $ | 1,155,011 |
| | 260,921 |
| | 416,898 |
| | (108,412 | ) | | 1,724,418 |
|
| | | | | | | | | |
Segment EBT | $ | 112,507 |
| | 17,584 |
| | 30,956 |
| | (12,606 | ) | | 148,441 |
|
Unallocated CSS | | | | | | | | | (9,275 | ) |
Non-operating pension costs | | | | | | | | | (7,468 | ) |
Earnings from continuing operations before income taxes | | | | | | | | | $ | 131,698 |
|
| | | | | | | | | |
Segment capital expenditures paid | $ | 375,779 |
| | 1,060 |
| | 8,181 |
| | — |
| | 385,020 |
|
Unallocated CSS capital expenditures paid | | | | | | | | | 6,157 |
|
Capital expenditures paid | | | | | | | | | $ | 391,177 |
|
————————————
| |
(1) | Refer to Note 13, Other Items Impacting Comparability for additional information. |
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
|
| | | | | | | | | | | | | | | | |
| FMS | | DTS | | SCS | | Eliminations | | Total |
| (In thousands) |
For the nine months ended September 30, 2017 | | | | | | | | |
Revenue from external customers | $ | 3,148,809 |
| | 811,620 |
| | 1,429,477 |
| | — |
| | 5,389,906 |
|
Inter-segment revenue | 343,038 |
| | — |
| | — |
| | (343,038 | ) | | — |
|
Total revenue | $ | 3,491,847 |
| | 811,620 |
| | 1,429,477 |
| | (343,038 | ) | | 5,389,906 |
|
| | | | | | | | | |
Segment EBT | $ | 220,973 |
| | 39,892 |
| | 75,359 |
| | (38,053 | ) | | 298,171 |
|
Unallocated CSS | | | | | | | | | (32,965 | ) |
Non-operating pension costs | | | | | | | | | (20,875 | ) |
Restructuring and other items, net (1) | | | | | | | | | (9,340 | ) |
Earnings from continuing operations before income taxes | | | | | | | | | $ | 234,991 |
|
| | | | | | | | | |
Segment capital expenditures paid | $ | 1,255,789 |
| | 2,989 |
| | 34,839 |
| | — |
| | 1,293,617 |
|
Unallocated CSS capital expenditures paid | | | | | | | | | 19,228 |
|
Capital expenditures paid | | | | | | | | | $ | 1,312,845 |
|
| | | | | | | | | |
| | | | | | | | | |
For the nine months ended September 30, 2016 | | | | | | | | |
Revenue from external customers | $ | 3,086,144 |
| | 764,025 |
| | 1,207,665 |
| | — |
| | 5,057,834 |
|
Inter-segment revenue | 318,308 |
| | — |
| | — |
| | (318,308 | ) | | — |
|
Total revenue | $ | 3,404,452 |
| | 764,025 |
| | 1,207,665 |
| | (318,308 | ) | | 5,057,834 |
|
| | | | | | | | | |
Segment EBT | $ | 306,554 |
| | 48,300 |
| | 79,105 |
| | (37,116 | ) | | 396,843 |
|
Unallocated CSS | | | | | | | | | (29,960 | ) |
Non-operating pension costs | | | | | | | | | (22,048 | ) |
Pension-related charge (2)
| | | | | | | | | (7,650 | ) |
Earnings from continuing operations before income taxes | | | | | | | | | $ | 337,185 |
|
| | | | | | | | | |
Segment capital expenditures paid | $ | 1,438,104 |
| | 1,940 |
| | 52,643 |
| | — |
| | 1,492,687 |
|
Unallocated CSS capital expenditures paid | | | | | | | | | 18,672 |
|
Capital expenditures paid | | | | | | | | | $ | 1,511,359 |
|
————————————
| |
(1) | Refer to Note 13, Other Items Impacting Comparability for additional information. |
| |
(2) | During the second quarter of 2016, we determined that certain pension benefit improvements made in 2009 were not fully reflected in our projected benefit obligation. We recognized a charge of $7.7 million related to these benefit improvements. |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the unaudited Consolidated Condensed Financial Statements and notes thereto included under Item 1. In addition, reference should be made to our audited Consolidated Financial Statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2016 Annual Report on Form 10-K.
Ryder System, Inc. (Ryder) is a global leader in transportation and supply chain management solutions. We report our financial performance based on three segments: (1) Fleet Management Solutions (FMS), which provides leasing, commercial rental, and maintenance of trucks, tractors and trailers to customers principally in the U.S., Canada and the U.K.; (2) Dedicated Transportation Solutions (DTS), which provides vehicles and drivers as part of a dedicated transportation solution in the U.S.; and (3) Supply Chain Solutions (SCS), which provides comprehensive supply chain solutions including distribution and transportation services in North America and Asia. Dedicated transportation services provided as part of an integrated, multi-service, supply chain solution to SCS customers are reported in the SCS business segment.
We operate in highly competitive markets. Our customers select us based on numerous factors including service quality, price, technology and service offerings. As an alternative to using our services, customers may choose to provide these services for themselves, or may choose to obtain similar or alternative services from other third-party vendors. Our customer base includes enterprises operating in a variety of industries including automotive, industrial, food and beverage service, consumer packaged goods (CPG), transportation and warehousing, technology and healthcare, retail, housing, business and personal services, and paper and publishing.
In 2016, we expanded our full service lease product line to provide lease customers additional flexibility, choice and
control in fleet management, and we renamed this lease product line "ChoiceLease." Our ChoiceLease product line allows customers to select the level of maintenance they prefer in their leases, from full service or total bumper-to-bumper coverage to on demand or pay-as-you-go maintenance. We also combined our historical contract maintenance and our contract-related maintenance product offerings into a new product line "SelectCare." Our SelectCare product line allows customers to select the level of maintenance to keep their fleet running properly, as well as the option to choose where they want their service delivered. Beginning in 2017, FMS is using these new product names in its reporting.
This MD&A includes certain non-GAAP financial measures. Please refer to the “Non-GAAP Financial Measures” section of this MD&A for information on the non-GAAP measures included in the MD&A, reconciliations to the most comparable GAAP financial measure and the reasons why we believe each measure is useful to investors.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Operating results were as follows:
|
| | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | Change 2017/2016 |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | Nine Months |
| (In thousands, except per share amounts) | | | |
Total revenue | $ | 1,848,529 |
| | 1,724,418 |
| | $ | 5,389,906 |
| | 5,057,834 |
| | 7 | % | 7 | % |
Operating revenue (1) | 1,525,453 |
| | 1,468,293 |
| | 4,453,768 |
| | 4,324,019 |
| | 4 | % | 3 | % |
|
|
| |
|
| | | | | |
|
| |
|
|
| |
|
| | | | | |
|
| |
EBT | $ | 94,343 |
| | 131,698 |
| | $ | 234,991 |
| | 337,185 |
| | (28 | )% | (30 | )% |
Comparable EBT (2) | 111,010 |
| | 139,141 |
| | 265,206 |
| | 366,858 |
| | (20 | )% | (28 | )% |
Earnings from continuing operations | 58,913 |
| | 85,138 |
| | 148,535 |
| | 215,365 |
| | (31 | )% | (31 | )% |
Comparable earnings from continuing operations (2) | 70,820 |
| | 89,558 |
| | 168,079 |
| | 233,039 |
| | (21 | )% | (28 | )% |
Net earnings | 58,623 |
| | 84,752 |
| | 147,588 |
| | 214,296 |
| | (31 | )% | (31 | )% |
|
| |
| | | | | |
|
| |
|
| |
| | | | | |
|
| |
Earnings per common share (EPS) — Diluted |
| |
| | | | | |
|
| |
Continuing operations | $ | 1.11 |
| | 1.59 |
| | $ | 2.79 |
| | 4.02 |
| | (30 | )% | (31 | )% |
Comparable (2) | 1.33 |
| | 1.67 |
| | 3.16 |
| | 4.35 |
| | (20 | )% | (27 | )% |
Net earnings | 1.11 |
| | 1.59 |
| | 2.77 |
| | 4.00 |
| | (30 | )% | (31 | )% |
————————————
| |
(1) | Non-GAAP financial measure. Refer to the“Non-GAAP Financial Measures” section of this MD&A for a reconciliation of total revenue to operating revenue and the reasons why management believes this measure is important to investors. |
| |
(2) | Non-GAAP financial measures. Refer to the “Non-GAAP Financial Measures” section for a reconciliation of EBT, net earnings and earnings per diluted common share to the comparable measures and the reasons why management believes these measures are important to investors. |
Total revenue and operating revenue (a non-GAAP measure excluding fuel and subcontracted transportation) increased 7% and 4%, respectively, in the third quarter of 2017. For the nine months ended September 30, 2017, total revenue and operating revenue increased 7% and 3%, respectively. Total revenue in both periods increased due to higher operating revenue and increased subcontracted transportation passed through to customers, reflecting new business and higher volumes, as well as higher fuel costs passed through to customers. Operating revenue in both periods increased due to higher revenue in the SCS business segment and higher contractual ChoiceLease revenue. Operating revenue growth was partially offset by lower commercial rental revenue in the nine months ended September 30, 2017.
EBT decreased 28% in the third quarter of 2017, reflecting lower year over year operating results in all segments, a $5.5 million estimated pension settlement charge for the exit from a U.S. multi-employer pension plan and $4.3 million related to consulting fees associated with a cost-savings program. In FMS, EBT decreased in the third quarter due to accelerated depreciation of $4 million on vehicles expected to be made available for sale through June 2018 and more normalized maintenance spending associated with vehicles being prepared for sale, as well as increased overhead spending, primarily due to the timing of incentive compensation and higher sales and marketing expense. DTS EBT decreased in the third quarter due to higher insurance premiums, higher maintenance costs on certain older model year vehicles and the impact of one less work day. SCS EBT decreased in the third quarter primarily due to the operating performance of two customer accounts, including a particularly challenging start-up, and higher overhead spending, primarily for planned investments in information technology and sales. The net impact of hurricanes was neutral in the third quarter of 2017, as hurricane-related increases in commercial rental demand were offset by property losses.
EBT decreased 30% in the nine months ended September 30, 2017, primarily reflecting lower used vehicle sales and commercial rental results, as well as accelerated depreciation of $21 million, a $5.5 million estimated pension settlement charge, $4.3 million related to consulting fees associated with a cost-savings program and a particularly challenging start-up during the third quarter in the SCS segment.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
CONSOLIDATED RESULTS
Lease and Rental
|
| | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | Change 2017/2016 |
| 2017 | | 2016 | | 2017 | | 2016 | | Three Months | | Nine Months |
| (Dollars in thousands) | | | | |
Lease and rental revenues | $ | 823,197 |
| | 803,006 |
| | $ | 2,387,801 |
| | 2,369,147 |
| | 3 | % | | 1 | % |
Cost of lease and rental | 588,626 |
| | 557,901 |
| | 1,745,777 |
| | 1,665,693 |
| | 6 | % | | 5 | % |
Gross margin | 234,571 |
| | 245,105 |
| | 642,024 |
| | 703,454 |
| | (4 | )% | | (9 | )% |
Gross margin % | 28 | % | | 31 | % | | 27 | % | | 30 | % | | | | |