10-Q 1 ryder1stquarter201810-q.htm 10-Q Document
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2018
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

ryderlogoeverbetterwtma13.jpg
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, 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.
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 March 31, 2018, was 53,094,898.
 
 
 
 
 




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


i



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(unaudited)
 
 
Three months ended March 31,
 
2018
 
2017
 
(In thousands, except per share amounts)
Lease and rental revenues
$
824,253

 
767,590

Services revenue
928,144

 
840,687

Fuel services revenue
151,070

 
128,706

Total revenues
1,903,467

 
1,736,983

 
 
 
 
Cost of lease and rental
619,207

 
578,762

Cost of services
787,238

 
702,900

Cost of fuel services
146,903

 
125,850

Other operating expenses
33,470

 
31,271

Selling, general and administrative expenses
208,624

 
201,095

Non-operating pension costs
1,222

 
7,330

Used vehicle sales, net
7,409

 
(780
)
Interest expense
37,781

 
34,886

Miscellaneous income, net
(2,510
)
 
(4,953
)
Restructuring and other charges, net
16,023

 

 
1,855,367

 
1,676,361

Earnings from continuing operations before income taxes
48,100

 
60,622

Provision for income taxes
14,168


22,086

Earnings from continuing operations
33,932


38,536

Loss from discontinued operations, net of tax
(427
)
 
(130
)
Net earnings
$
33,505

 
38,406

 
 
 
 
Earnings (loss) per common share — Basic
 
 
 
Continuing operations
$
0.65

 
0.73

Discontinued operations
(0.01
)
 

Net earnings
$
0.64

 
0.72

 
 
 
 
Earnings (loss) per common share — Diluted
 
 
 
Continuing operations
$
0.64

 
0.72

Discontinued operations
(0.01
)
 

Net earnings
$
0.63

 
0.72

 
 
 
 
Cash dividends declared per common share
$
0.52

 
0.44

See accompanying notes to consolidated condensed financial statements.
Note: EPS amounts may not be additive due to rounding.

1


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

    
    
 
Three months ended March 31,
 
2018
 
2017
 
(In thousands)
 
 
 
 
Net earnings
$
33,505

 
38,406

 
 
 
 
Other comprehensive income:
 
 
 
 
 
 
 
Changes in currency translation adjustment and other
11,892

 
15,742

 
 
 
 
Amortization of pension and postretirement items
7,215

 
8,109

Income tax expense related to amortization of pension and postretirement items
(1,609
)
 
(3,045
)
   Amortization of pension and postretirement items, net of tax
5,606

 
5,064

 
 
 
 
Other comprehensive income, net of taxes
17,498

 
20,806

 
 
 
 
Comprehensive income
$
51,003

 
59,212

See accompanying notes to consolidated condensed financial statements.




2



RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
 

 
March 31,
2018
 
December 31,
2017
 
(Dollars in thousands, except
share amounts)
Assets:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
73,857


78,348

Receivables, net of allowance of $15,288 and $13,847, respectively
986,102


1,010,908

Inventories
73,704


73,543

Prepaid expenses and other current assets
177,858


160,094

Total current assets
1,311,521

 
1,322,893

Revenue earning equipment, net
8,595,583


8,355,262

Operating property and equipment, net of accumulated depreciation of $1,210,379 and $1,192,377, respectively
790,476


776,704

Goodwill
380,122


395,504

Intangible assets, net of accumulated amortization of $58,760 and $57,420, respectively
41,746


42,930

Direct financing leases and other assets
616,709


570,706

Total assets
$
11,736,157


11,463,999

 
 
 
 
Liabilities and shareholders’ equity:
 
 
 
Current liabilities:
 
 
 
Short-term debt and current portion of long-term debt
$
677,916


826,069

Accounts payable
618,588


599,303

Accrued expenses and other current liabilities
512,776


589,603

Total current liabilities
1,809,280

 
2,014,975

Long-term debt
4,999,770


4,583,582

Other non-current liabilities
824,257


812,642

Deferred income taxes
1,244,035


1,211,129

Total liabilities
8,877,342

 
8,622,328

 
 
 
 
Shareholders’ equity:
 
 
 
Preferred stock, no par value per share — authorized, 3,800,917; none outstanding,
March 31, 2018 or December 31, 2017

 

Common stock, $0.50 par value per share — authorized, 400,000,000; outstanding,
March 31, 2018 — 53,094,898 December 31, 2017 — 52,955,314
26,547

 
26,478

Additional paid-in capital
1,054,266

 
1,051,017

Retained earnings
2,468,005

 
2,471,677

Accumulated other comprehensive loss
(690,003
)
 
(707,501
)
Total shareholders’ equity
2,858,815


2,841,671

Total liabilities and shareholders’ equity
$
11,736,157


11,463,999

See accompanying notes to consolidated condensed financial statements.

3



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


 
Three months ended March 31,
 
2018
 
2017
 
(In thousands)
Cash flows from operating activities from continuing operations:
 
 
 
Net earnings
$
33,505

 
38,406

Less: Loss from discontinued operations, net of tax
(427
)
 
(130
)
Earnings from continuing operations
33,932

 
38,536

Depreciation expense
336,745

 
311,207

Goodwill impairment
15,513

 

Used vehicle sales, net
7,409

 
(780
)
Amortization expense and other non-cash charges, net
13,636

 
8,841

Non-operating pension costs and share-based compensation expense
6,563

 
12,285

Deferred income tax expense
31,858

 
19,296

Changes in operating assets and liabilities:
 
 
 
Receivables
22,265

 
(27,348
)
Inventories
(253
)
 
1,876

Prepaid expenses and other assets
(26,040
)
 
(7,577
)
Accounts payable
(30,851
)
 
13,966

Accrued expenses and other non-current liabilities
(95,890
)
 
(38,953
)
Net cash provided by operating activities from continuing operations
314,887

 
331,349

 
 
 
 
Cash flows from financing activities from continuing operations:
 
 
 
Net change in commercial paper borrowings and revolving credit facilities
237,960


9,513

Debt proceeds
446,500


477,550

Debt repaid
(412,080
)

(555,671
)
Dividends on common stock
(27,795
)
 
(23,907
)
Common stock issued
1,417

 
3,992

Common stock repurchased
(12,921
)
 
(16,846
)
Debt issuance costs and other items
(1,259
)
 
(846
)
Net cash provided by (used in) financing activities
231,822

 
(106,215
)
 
 
 
 
Cash flows from investing activities from continuing operations:
 
 
 
Purchases of property and revenue earning equipment
(662,744
)
 
(361,339
)
Sales of revenue earning equipment
89,023

 
95,617

Sales of operating property and equipment
933

 
892

Collections on direct finance leases and other items
19,744

 
16,265

Net cash used in investing activities
(553,044
)
 
(248,565
)
 
 
 
 
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
3,519

 
1,501

Decrease in cash, cash equivalents, and restricted cash from continuing operations
(2,816
)
 
(21,930
)
 
 
 
 
 
 
 
 
Decrease in cash, cash equivalents, and restricted cash from discontinued operations
(348
)
 
(355
)
 
 
 
 
Decrease in cash, cash equivalents, and restricted cash
(3,164
)
 
(22,285
)
Cash, cash equivalents, and restricted cash at January 1
83,022

 
62,639

Cash, cash equivalents, and restricted cash at March 31
$
79,858

 
40,354

See accompanying notes to consolidated condensed financial statements.

4

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 2017 Annual Report on Form 10-K and should be read in conjunction with the Consolidated Financial Statements and notes thereto except for the update to our revenue recognition significant accounting policies discussed below. 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.

Update to Significant Accounting Policies

Our significant accounting policies are detailed in "Note 1: Summary of Significant Accounting Policies" within Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2017. Significant changes to our accounting policies as a result of adopting ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) are discussed below:

Revenue Recognition
We recognize revenue upon the transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and amounts collected from customers for taxes, such as sales tax, and remitted to the applicable taxing authorities. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectibility of consideration is probable. We generally recognize revenue over time as we perform because of continuous transfer of control to our customers.

We generate revenue primarily through the lease, rental and maintenance of revenue earning equipment and by providing logistics management and dedicated services. We classify our revenues in the categories of lease and rental, services and fuel. Our lease and rental revenues are accounted for in accordance with existing lease guidance in Leases (Topic 840) and our services and fuel revenues are accounted for in accordance with revenue recognition guidance in Topic 606.

Lease and rental
Lease and rental includes ChoiceLease and commercial rental revenues from our Fleet Management Solutions (FMS) business segment. We offer a full service lease as well as a lease with more flexible maintenance options under our ChoiceLease product line, which are marketed, priced and managed as bundled lease arrangements, and include equipment, service and financing components. We do not offer a stand-alone unbundled lease of new vehicles. For these reasons, both the lease and service components of our leases are included within lease and rental revenues.

ChoiceLease revenue is recognized in accordance with existing lease accounting guidance in Topic 840. Our ChoiceLease arrangements include lease deliverables such as the lease of a vehicle and the executory agreement for the maintenance, insurance, taxes and other services related to the leased vehicles during the lease term. Arrangement consideration is allocated between the lease deliverables and non-lease deliverables based on management's best estimate of the relative fair value of each deliverable. The arrangement consideration is accounted for pursuant to accounting guidance on leases. Our ChoiceLease arrangements provide for a fixed charge billing and a variable charge billing based on mileage or time usage. Fixed charges are typically billed at the beginning of the month for the services to be provided that month. Variable charges are typically billed a month in arrears.



5

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



Revenue from ChoiceLease and rental agreements is recognized based on the classification of the arrangement, typically as either an operating or direct financing lease (DFL).

The majority of our leases and all of our rental arrangements are classified as operating leases and, therefore, we recognize lease and commercial rental revenue on a straight-line basis as it becomes receivable over the term of the lease or rental arrangement. Lease and rental agreements do not usually provide for scheduled rent increases or escalations. However, most lease agreements allow for rate changes based upon changes in the Consumer Price Index (CPI). ChoiceLease and rental agreements also provide for vehicle usage charges based on a time charge and/or a fixed per-mile charge. The fixed time charge, the fixed per-mile charge and the changes in rates attributed to changes in the CPI are considered contingent rentals and are not considered fixed or determinable until the effect of CPI changes is implemented or the equipment usage occurs.

The non-lease components of our ChoiceLease arrangements include access to substitute vehicles, emergency road service, and safety services. These services are available to our customers throughout the lease term. Accordingly, revenue is recognized on a straight-line basis over the lease term.

Leases not classified as operating leases are generally considered direct financing leases. We recognize revenue for direct financing leases using the effective interest method, which provides a constant periodic rate of return on the outstanding investment on the lease. Cash receipts on impaired direct financing lease receivables are first applied to the direct financing lease receivable and then to any unrecognized income. A direct financing lease receivable is considered impaired, based on current information and events, if it is probable that we will be unable to collect all amounts due according to the contractual terms of the lease.

Services
Services include SelectCare and other revenues from our FMS business segment and all Dedicated Transportation Solutions (DTS) and Supply Chain Solutions (SCS) revenues.

Under our SelectCare arrangements, we provide maintenance and repairs required to keep a vehicle in good operating condition, schedule preventive maintenance inspections and provide access to emergency road service and substitute vehicles. The vast majority of our services are routine services performed on a recurring basis throughout the term of the arrangement. From time to time, we provide non-routine major repair services in order to place a vehicle back in service.

Through our SelectCare product line, we provide maintenance services to customers who do not choose to lease vehicles from us. Our maintenance service arrangement provides for a monthly fixed charge and a monthly variable charge based on mileage or time usage. Fixed charges are typically billed at the beginning of the month for the services to be provided that month. Variable charges are typically billed a month in arrears. Most maintenance agreements allow for rate changes based upon changes in the CPI. The fixed per-mile charge and the changes in rates attributed to changes in the CPI are recognized as earned. Costs associated with the activities performed under our maintenance arrangements are primarily comprised of labor, parts and outside work. These costs are expensed as incurred. Non-chargeable maintenance costs have been allocated and reflected within “Cost of services” based on the proportionate maintenance-related labor costs relative to all product lines.

The maintenance service is the only performance obligation in SelectCare contracts. This single performance obligation is satisfied at a point in time for transactional maintenance services or over time for contract maintenance agreements. For contract maintenance agreements, the maintenance performance obligation represents a series of distinct maintenance services performed during the contract period as the services provided are substantially the same and have the same pattern of transfer to our customers. Revenue from SelectCare contracts is recognized as maintenance services are rendered over the terms of the related arrangements. We generally account for long-term maintenance contracts as one-year contracts since our maintenance arrangements are generally cancelable, without penalty, after one year. As a practical expedient, we do not disclose information about remaining performance obligations that have original expected durations of one year or less. For maintenance contracts that are longer than one year (e.g., not cancelable after one year, without penalty), the revenue we recognize corresponds directly with the value of service transferred to date. We measure the progress of transfer based on the costs incurred to provide the service to the customer. The amount that we have the right to invoice for services performed aligns with this measure. As a practical expedient, we do not disclose information about remaining performance obligations for these contracts since the revenue recognized corresponds to the amount we have the right to invoice for services performed.


6

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



In our DTS business segment, we combine equipment, maintenance, drivers, administrative services and additional services to provide customers with a dedicated transportation solution. DTS transportation solutions are customized for our customers based on a transportation analysis to create a logistics design that includes the routing and scheduling of vehicles, the efficient use of vehicle capacity and overall asset utilization. In our SCS business, we offer a broad range of logistics management services designed to optimize the supply chain and address the key business requirements of our customers. SCS operates by industry verticals (Automotive, Technology and Healthcare, Consumer Packaged Goods and Retail, and Industrial) to enable our teams to focus on the specific needs of their customers. Our SCS services are supported by a variety of information technology and engineering solutions.

Revenues from DTS and SCS service contracts are recognized as services are rendered in accordance with contract terms, which typically include (1) fixed and variable billing rates, (2) cost-plus billing rates (based on actual costs incurred to perform services and a contracted mark-up), or (3) variable only or fixed only billing rates for the services. Our billing structure aligns with the value provided to our customers. As a practical expedient, we do not disclose information about remaining performance obligations for these contracts since the revenue recognized corresponds to the amount we have the right to invoice for services performed.

Our customers contract with us to provide a significant service of integrating a set of transportation or supply chain logistical components into a single transportation or supply chain solution. Therefore, we typically account for DTS and SCS service contracts as one performance obligation satisfied over time. Less commonly, however, we may promise to provide distinct goods or services within a contract, in which case we separate the contract into more than one performance obligation. If a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. We infrequently sell standard products with observable standalone sales. More frequently, we sell a customized customer specific solution, and in these cases we use the expected cost plus a margin approach to estimate the standalone selling price of each performance obligation.

Although not material to our financial statements, in certain contracts, a portion of the contract consideration may be contingent upon the satisfaction of performance criteria, attainment of pain/gain share thresholds or volume thresholds. The amount of contingent consideration included in the determination of the transaction price at the commencement of a contract is only included to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from the initial estimates, we will adjust these estimates, which would affect revenue and earnings in the period such variances become known. In transportation management arrangements where we act as principal, revenue is reported on a gross basis, without deducting third-party purchased transportation costs. To the extent that we are acting as an agent in the arrangement, revenue is reported on a net basis, after deducting purchased transportation costs.

Fuel
Fuel services include fuel services revenue from our FMS business segment. We provide our FMS customers with access to fuel at our maintenance facilities across the United States and Canada. Fuel services revenue is invoiced to customers at contracted rates, separate from other services being provided in other contracts, or at retail prices. Revenue from fuel services is recognized when fuel is delivered to customers. As a practical expedient, we do not disclose information about remaining performance obligations for these contracts since the revenue recognized corresponds to the amount we have the right to invoice for services performed. Fuel is largely a pass-through to our customers, for which we realize minimal changes in profitability during periods of steady market fuel prices. However, profitability may be positively or negatively impacted by sudden increases or decreases in market fuel prices during a short period of time as customer pricing for fuel services is established based on trailing market fuel costs.

Significant Judgments and Estimates
Our contracts with customers often include promises to transfer multiple services to a customer. Determining whether these services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Our DTS and SCS services depend on a significant level of integration and interdependency between the services provided within a contract. Judgment is required to determine whether each service is considered distinct and accounted for separately, or not distinct and accounted for together as a significant integrated service and recognized over time. In making this judgment, we consider whether the services provided, within the context of the contract, represent the transfer of individual services or a combined bundle of services to the customer. This involves evaluating the promises to a customer

7

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



within a contract to identify the services that need to be performed in order for the transfer of control to occur. Since multiple services that occur at different points in time during a contract may be accounted for as an integrated service, judgment is required to assess the pattern of delivery to our customers.

Our judgments on collectibility are initially established when a business relationship with a customer is initiated and is continuously monitored as services are provided. We have a credit rating system based on internally developed standards and ratings provided by third parties. Our credit rating system, along with monitoring for delinquent payments, allows us to make decisions as to whether collectibility may not be reasonably assured. Factors considered during this process include historical payment trends, industry risks, liquidity of the customer, years in business, and judgments, liens or bankruptcies. When collectibility is not considered reasonably assured (typically when a customer is 120 days past due), revenue is not recognized until it is determined that the customer has the ability and intention to pay.

Contract Balances
We do not have material contract assets as we generally invoice customers as we perform services. Contract receivables are recorded in “Receivables, net” in the Consolidated Condensed Balance Sheets. Payment terms vary by contract type, although terms generally include a requirement of payment within 90 days. As a practical expedient, we do not assess whether a contract has a significant financing component as the period between the receipt of customer payment and the transfer of service to the customer is less than a year. Our contract liabilities consist of deferred revenue. We record deferred revenues when cash payments are received or due in advance of our performance, including amounts that are refundable. We classify deferred revenue as current as we expect to recognize this revenue within 12 months. Revenue is recognized upon satisfaction of the performance obligation.

Costs to Obtain and Fulfill a Contract
Our incremental direct costs of obtaining a contract, which primarily consist of sales commissions and start-up costs, are deferred and amortized over the period of contract performance or a longer period, generally the estimated life of the customer relationship if renewals are expected and the renewal commission is not commensurate with the initial commission. We capitalize incremental direct costs of obtaining a contract that i) relate directly to the contract and ii) are expected to be recovered through revenue generated under the contract. This requires an evaluation of whether the costs are incremental and would not have occurred absent the customer contract. The current and noncurrent portions of incremental costs to obtain and fulfill a contract are included in “Prepaid expenses and other current assets” and “Direct financing leases and other assets” respectively, in the Consolidated Condensed Balance Sheets. Costs are amortized in “Selling, general and administrative expenses” in the Consolidated Condensed Statements of Earnings on a straight-line basis over the expected period of benefit.


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 adopted the standard during the first quarter of 2018 and it did not have an impact on our consolidated financial position, results of operations, or cash flows.




8

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



Statement of Cash Flows

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows, 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 adopted the standard during the first quarter of 2018. As a result of this update, restricted cash is included within cash and cash equivalents on our statements of consolidated cash flows. As of March 31, 2018 and December 31, 2017, we had $6 million and $5 million respectively, in prepaid expenses and other current assets associated with our like-kind exchange program for certain of our U.S. based revenue earning equipment.

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, see below section "Revenue Recognition." 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 addition, Topic 606 requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. We adopted Topic 606 in the first quarter of 2018 using the full retrospective method, which required us to restate each prior reporting period presented.

Upon adoption of Topic 606, we applied the standard’s practical expedient that permits the omission of disclosures of the prior period allocation of the transaction price to remaining performance obligations and an explanation of when the entity expects to recognize that amount as revenue.

9

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



Adoption of the new revenue recognition standard impacted our previously reported Consolidated Condensed Statement of Operations results as follows (in thousands, except per share amounts):
 
Three months ended March 31, 2017
 
 
 
New Revenue
 
 
 
As Previously
 
Standard
 
 
 
Reported
 
Adjustment
 
As Revised
Services revenue (1)
$
851,867

 
(11,180
)
 
840,687

Total revenues

1,748,163

 
(11,180
)
 
1,736,983

Cost of services (1)
714,080

 
(11,180
)
 
702,900

Selling, general and administrative expenses
201,761

 
(666
)
 
201,095

Earnings from continuing operations before income taxes

59,956

 
666

 
60,622

Provision for income taxes
21,677

 
409

 
22,086

Earnings from continuing operations

38,279

 
257

 
38,536

Net earnings
38,149

 
257

 
38,406

 
 
 
 
 
 
Earnings per common share - Basic
 
 
 
 
 
        Continuing operations

0.72

 
0.01

 
0.73

 
 
 
 
 
 
Earnings per common share - Diluted
 
 
 
 
 
        Continuing operations
0.71

 
0.01

 
0.72

        Net earnings
0.71

 
0.01

 
0.72

————————————
(1)
Amount includes $11 million correction of a prior period error. We historically accounted for certain freight brokerage agreements as a principal and presented revenue and costs related to subcontracted transportation on a gross basis in our financial statements. In adopting Topic 606, we reviewed and evaluated our existing revenue contracts and determined that certain of our freight brokerage agreements should have historically been presented on a net basis as an agent. We evaluated the materiality of this revision, quantitatively and qualitatively. We concluded it was not material to any of our previously issued consolidated financial statements and correction as an out of period adjustment in the current period was not material.

Adoption of the new revenue recognition standard impacted our previously reported Consolidated Condensed Statement of Comprehensive Income as follows (in thousands):
 
Three months ended March 31, 2017
 
 
 
New Revenue
 
 
 
As Previously
 
Standard
 
As
 
Reported
 
Adjustment
 
Revised
Net earnings
$
38,149

 
257

 
38,406

Comprehensive income
58,955

 
257

 
59,212



10

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



Adoption of the new revenue recognition standard impacted our previously reported Consolidated Condensed Balance Sheet as follows (in thousands):
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
New Revenue
 
 
 
 
 
 
 
As Previously
 
Standard
 
 
 
 
 
 
 
Reported
 
Adjustment
 
As Revised
Prepaid expenses and other current assets
 
$
159,483

 
611

 
160,094

Total current assets
 
1,322,282

 
611

 
1,322,893

Direct financing leases and other assets
 
559,549

 
11,157

 
570,706

Total assets
 
11,452,231

 
11,768

 
11,463,999

Accrued expenses and other current liabilities
 
587,406

 
2,197

 
589,603

Total current liabilities
 
2,012,778

 
2,197

 
2,014,975

Other non-current liabilities
 
812,089

 
553

 
812,642

Deferred income taxes
 
1,208,766

 
2,363

 
1,211,129

Total liabilities
 
8,617,215

 
5,113

 
8,622,328

Retained earnings
 
2,465,022

 
6,655

 
2,471,677

Total shareholders' equity
 
2,835,016

 
6,655

 
2,841,671

Total liabilities and shareholders' equity
 
11,452,231

 
11,768

 
11,463,999

        
Income Taxes

In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits - but does not require - companies to reclassify stranded tax effects caused by 2017 tax reform from accumulated other comprehensive income to retained earnings. Additionally, the ASU requires new disclosures by all companies, whether they opt to do the reclassification or not. The standard is effective fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact of the adoption of this standard on our consolidated financial position, results of operations and cash flows.



11

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



3. REVENUE

Disaggregation of Revenue

The following tables disaggregate our revenue by primary geographical market, major product/service lines, and industry:

Primary Geographical Markets
 
Three months ended March 31, 2018
 
FMS
 
DTS
 
SCS
 
Eliminations
 
Total
 
(In thousands)
United States
$
1,080,455

 
298,970

 
391,653

 
(127,717
)
 
1,643,361

Canada
74,468

 

 
43,093

 
(5,072
)
 
112,489

Europe
87,656

 

 

 

 
87,656

Mexico

 

 
54,262

 

 
54,262

Singapore

 

 
5,699

 

 
5,699

Total revenue
$
1,242,579

 
298,970

 
494,707

 
(132,789
)
 
1,903,467


 
Three months ended March 31, 2017
 
FMS
 
DTS
 
SCS
 
Eliminations
 
Total
 
(In thousands)
United States
$
990,261

 
266,630

 
358,347

 
(109,582
)
 
1,505,656

Canada
65,822

 

 
40,845

 
(4,148
)
 
102,519

Europe
76,387

 

 

 

 
76,387

Mexico

 

 
45,041

 

 
45,041

Singapore

 

 
7,380

 

 
7,380

Total revenue
$
1,132,470

 
266,630

 
451,613

 
(113,730
)
 
1,736,983



Major Products/Service Lines
 
Three months ended March 31, 2018
 
FMS
 
DTS
 
SCS
 
Eliminations
 
Total
 
(In thousands)
ChoiceLease
$
690,431

 

 

 
(60,644
)
 
629,787

SelectCare
121,873

 

 

 
(9,345
)
 
112,528

Commercial rental
204,530

 

 

 
(10,064
)
 
194,466

Fuel
203,807

 

 

 
(52,736
)
 
151,071

Other
21,938

 

 

 

 
21,938

DTS

 
298,970

 

 

 
298,970

SCS

 

 
494,707

 

 
494,707

Total revenue
$
1,242,579

 
298,970

 
494,707

 
(132,789
)
 
1,903,467










12

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



 
Three months ended March 31, 2017
 
FMS
 
DTS
 
SCS
 
Eliminations
 
Total
 
(In thousands)
ChoiceLease
$
656,312

 

 

 
(54,217
)
 
602,095

SelectCare
113,609

 

 

 
(9,452
)
 
104,157

Commercial rental
174,006

 

 

 
(8,511
)
 
165,495

Fuel
170,254

 

 

 
(41,550
)
 
128,704

Other
18,289

 

 

 

 
18,289

DTS

 
266,630

 

 

 
266,630

SCS

 

 
451,613

 

 
451,613

Total revenue
$
1,132,470

 
266,630

 
451,613

 
(113,730
)
 
1,736,983


Industry

Our SCS business segment includes revenue from the below industries:
 
Three months ended March 31,
 
2018
 
2017
 
(In thousands)
Automotive
$
207,792

 
196,441

Technology and healthcare
103,097

 
82,658

CPG and retail
135,358

 
118,949

Industrial and other
48,460

 
53,565

Total revenue
$
494,707

 
451,613


Contract Balances

We record a receivable related to revenue recognized when we have an unconditional right to invoice. There were no material contract assets as of March 31, 2018 or December 31, 2017. Trade receivables were $882 million and $899 million at March 31, 2018 and December 31, 2017, respectively. Impairment losses on receivables were not material during the first quarters of 2018 and 2017.

Contract liabilities relate to payments received in advance of performance under the contract. Changes in contract liabilities are due to our performance under the contract. The following table presents changes in contract liabilities for the three months ended March 31, 2018:
 
2018
 
(In thousands)
Balance at January 1
$
14,004

Deferral of revenue
67,401

Recognition of deferred revenue
(64,005
)
Balance at March 31
$
17,400


13

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

4. REVENUE EARNING EQUIPMENT

 
March 31, 2018
 
December 31, 2017
 
Cost
 
Accumulated
Depreciation
 
Net  Book
Value (1)
 
Cost
 
Accumulated
Depreciation
 
Net  Book
Value (1)
 
(In thousands)
Held for use:
 
ChoiceLease
$
10,182,353

 
(3,486,416
)
 
6,695,937

 
$
10,002,981

 
(3,367,431
)
 
6,635,550

Commercial rental
2,790,551

 
(999,632
)
 
1,790,919

 
2,616,706

 
(1,001,965
)
 
1,614,741

Held for sale
401,555

 
(292,828
)
 
108,727

 
403,229

 
(298,258
)
 
104,971

Total
$
13,374,459

 
(4,778,876
)
 
8,595,583

 
$
13,022,916

 
(4,667,654
)
 
8,355,262

 ————————————
(1)
Revenue earning equipment, net includes vehicles under capital leases of $24 million, less accumulated depreciation of $12 million, at March 31, 2018, and $29 million, less accumulated depreciation of $14 million, at December 31, 2017.

We lease revenue earning equipment to customers for periods typically ranging from three to seven years for trucks and tractors and up to ten years for trailers. The majority of our leases are classified as operating leases. However, some of our revenue earning equipment leases are classified as direct financing leases and, to a lesser extent, sales-type leases. As of March 31, 2018 and December 31, 2017, the net investment in direct financing and sales-type leases was $454 million and $447 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 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 March 31, 2018 and December 31, 2017, 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.

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. Expected declines in market prices were also considered when valuing the vehicles held for sale. These vehicles held for sale were classified within Level 3 of the fair value hierarchy.
















14

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

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)
 
 
 
 
 
Three months ended March 31,
 
March 31, 2018
 
December 31, 2017
 
2018
 
2017
 
(In thousands)
Assets held for sale:
 
 
 
 
 
 
 
Revenue earning equipment (1):
 
 
 
 
 
 
 
Trucks
$
35,636

 
33,208

 
$
8,601

 
5,800

Tractors
26,547

 
27,976

 
3,377

 
5,183

Trailers
2,041

 
2,100

 
1,593

 
568

Total assets at fair value
$
64,224

 
63,284

 
$
13,571

 
11,551

 ————————————
(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 that were less than fair value was $45 million and $42 million as of March 31, 2018 and December 31, 2017, 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 months ended March 31, 2018 and 2017, the components of used vehicle sales, net were as follows:
 
Three months ended March 31,
 
2018
 
2017

(In thousands)
Gains on vehicle sales, net
$
(6,162
)
 
(12,331
)
Losses from fair value adjustments
13,571

 
11,551

Used vehicle sales, net
$
7,409

 
(780
)



15

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



5. GOODWILL

The carrying amount of goodwill attributable to each reportable business segment was as follows:
 
Fleet
Management
Solutions
 
Dedicated Transportation Solutions
 
Supply Chain Solutions
 
Total
 
(In thousands)
Balance at December 31, 2017
 
 
 
 
 
 
 
     Goodwill
$
237,176

 
40,808

 
146,741

 
424,725

     Accumulated impairment losses
(10,322
)
 

 
(18,899
)
 
(29,221
)
 
226,854

 
40,808

 
127,842

 
395,504

     Foreign currency translation adjustments
284

 

 
(153
)
 
131

Balance at March 31, 2018
 
 
 
 
 
 
 
     Goodwill
237,460

 
40,808

 
146,588

 
424,856

     Accumulated impairment losses
(25,835
)
 

 
(18,899
)
 
(44,734
)
 
$
211,625

 
40,808

 
127,689

 
380,122


On October 1, 2017, we completed our annual goodwill impairment test and determined there was no impairment. However, based on market conditions impacting our FMS Europe reporting unit's financial performance in the first quarter of 2018, we performed an interim impairment test as of March 31, 2018. Based on our analysis, we determined that all goodwill associated with our FMS Europe reporting unit was impaired and recorded an impairment charge of $16 million. The impairment charge was recorded within “Restructuring and other charges, net” in our Consolidated Condensed Statements of Earnings.



6. ACCRUED EXPENSES AND OTHER LIABILITIES

 
March 31, 2018
 
December 31, 2017
 
Accrued
Expenses
 
Non-Current
Liabilities
 
Total
 
Accrued
Expenses
 
Non-Current
Liabilities
 
Total
 
(In thousands)
Salaries and wages
$
82,196

 

 
82,196

 
$
135,930

 

 
135,930

Deferred compensation
4,639

 
56,682

 
61,321

 
4,269

 
58,411

 
62,680

Pension benefits
3,858

 
412,797

 
416,655

 
3,863

 
412,417

 
416,280

Other postretirement benefits
1,476

 
19,243

 
20,719

 
1,481

 
19,760

 
21,241

Other employee benefits
11,571

 

 
11,571

 
28,636

 
3,279

 
31,915

Insurance obligations (1)
129,803

 
252,739

 
382,542

 
130,848

 
242,473

 
373,321

Operating taxes
99,039

 

 
99,039

 
95,848

 

 
95,848

Income taxes
3,630

 
24,911

 
28,541

 
8,550

 
23,888

 
32,438

Interest
25,987

 

 
25,987

 
30,003

 

 
30,003

Deposits, mainly from customers
72,736

 
3,533

 
76,269

 
69,903

 
3,638

 
73,541

Deferred revenue
17,400

 

 
17,400

 
14,004

 

 
14,004

Restructuring liabilities (2)
9,245

 

 
9,245

 
13,074

 

 
13,074

Other
51,196

 
54,352

 
105,548

 
53,194

 
48,776

 
101,970

Total
$
512,776

 
824,257

 
1,337,033

 
$
589,603

 
812,642

 
1,402,245

 ————————————
(1)
Insurance obligations are primarily comprised of self-insured claim liabilities.
(2)
The reduction in restructuring liabilities from December 31, 2017, principally represents cash payments for employee termination costs. The majority of the balance remaining in restructuring liabilities is expected to be paid by the end of 2018.


16

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



7. INCOME TAXES

Tax Law Changes

On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act made broad and complex changes to the U.S. tax code and it will take time to fully interpret the changes. The Act significantly impacted our first quarter 2018 earnings, and will impact earnings in future periods; however, we have not fully completed the accounting under Income Taxes (Topic 740) for certain of the Act’s new provisions. In accordance with Topic 740, to the extent the accounting for certain income tax effects of the Act was incomplete, but we were able to determine a reasonable estimate of those effects, a provisional amount (“provisional amount”) has been included in our financial statements. Conversely, where a reasonable estimate of the tax effects of the Act cannot be determined, no related provisional amounts have been included in the financial statements. We intend to adjust the tax effects for the relevant items during the allowed 2018 measurement period.

The Act also requires companies to pay a one-time transition tax on unremitted earnings of certain foreign subsidiaries that had not been subject to U.S. income tax and creates new taxes on certain foreign earnings. We included a $33 million provisional estimate for the transition tax in the December 31, 2017, financial statements. On April 2, 2018, the Internal Revenue Service issued Notice 2018-26, which will require us to increase the provisional estimate related to the one-time transition tax. We currently estimate the additional tax provision to be approximately $30 million in the second quarter. The estimate will be further adjusted during the measurement period as we refine our determination of historical earnings and profits and the amount of cash and cash equivalents held in foreign entities.

As of March 31, 2018, we have alternative minimum tax (AMT) credit carryforwards of $23 million, which do not expire and can be used to offset regular income taxes in future years. Under the Act, the AMT was repealed and taxpayers may claim a refund of 50% of their remaining AMT credit carryforwards (to the extent the credits exceed regular tax for the year) in 2018, 2019 and 2020. Any AMT credits remaining after 2020 will be refunded in 2021. Pursuant to the requirements of the Balanced Budget and Emergency Deficit Control Act of 1985, refundable AMT credits may be subject to sequestration, which is currently 6.2% for refunds after 2019, and during the first quarter of 2018, the Internal Revenue Service clarified sequestration would apply to refundable AMT credits under the Act. We reclassified our credits to a receivable and recorded a charge of $1 million to account for the sequestration reduction. The reclassification and provision for sequestration are adjustments to provisional estimates of the tax effects of the Act.

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 2011.
Foreign — we are no longer subject to foreign tax examinations by tax authorities for tax years before 2010 in Canada, 2012 in Brazil, 2012 in Mexico and 2013 in the U.K., which are our major foreign tax jurisdictions.

At March 31, 2018 and December 31, 2017, the total amount of gross unrecognized tax benefits (including interest and penalties, excluding the federal benefit on state issues) was $65 million and $68 million, respectively. During the first quarter of 2018, we determined that reserves for certain uncertain tax positions should have been reversed in prior periods when the


17

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



statutes of limitations expired. As the amounts were not material to our consolidated financial statements in any individual period, and the cumulative amount is not material to 2018 results, we recognized a one-time $3 million benefit in our provision for income taxes related to this reversal.

Effective Tax Rate

Our effective income tax rate from continuing operations for the first quarter of 2018 was 29.5% compared with 36.4% in the same period of the prior year reflecting lower taxable earnings, the $3 million reversal of reserves for certain uncertain tax positions and a net benefit to the effective income tax rate from the Act. The decrease in the effective income tax rate was offset by the impact of the $16 million non-deductible goodwill impairment charge related to our FMS Europe reporting unit and the $1 million sequestration reduction for expected refundable AMT credits resulting from the Act.


8. DEBT
 
Weighted-Average
Interest Rate
 
 
 
 
 
 
 
March 31,
2018
 
December 31,
2017
 
Maturities
 
March 31,
2018
 
December 31,
2017
 
 
 
 
 
 
 
(In thousands)
Short-term debt and current portion of long-term debt:
 
 
 
 
 
 
 
 
 
Short-term debt
1.54%
 
1.79%
 

 
$
36,498

 
35,509

Current portion of long-term debt
 
 
 
 
 
 
641,418

 
790,560

Total short-term debt and current portion of long-term debt
 
 
 
 
 
677,916

 
826,069

Long-term debt:
 
 
 
 
 
 
 
 
 
U.S. commercial paper (1)
2.08%
 
1.56%
 
2020
 
780,975

 
570,218

Canadian commercial paper (1)
1.54%
 
—%
 
2020
 
41,000

 

Global revolving credit facility
2.70%
 
2.80%
 
2020
 
800

 
17,328

Unsecured U.S. notes — Medium-term notes (1)
2.83%
 
2.73%
 
2018-2025
 
4,113,377

 
4,014,091

Unsecured U.S. obligations
—%
 
2.79%
 
2018
 

 
50,000

Unsecured foreign obligations
1.60%
 
1.50%
 
2018-2020
 
236,733

 
230,380

Asset-backed U.S. obligations (2)
1.85%
 
1.85%
 
2018-2022
 
479,871

 
491,899

Capital lease obligations
3.58%
 
3.53%
 
2018-2024
 
18,351

 
20,871

Total before fair market value adjustment
 
 
 
 
 
 
5,671,107

 
5,394,787

Fair market value adjustment on notes subject to hedging (3)
 
 
 
 
 
(14,555
)
 
(7,192
)
Debt issuance costs
 
 
 
 
 
 
(15,364
)
 
(13,453
)
 
 
 
 
 
 
 
5,641,188

 
5,374,142

Current portion of long-term debt
 
 
 
 
 
 
(641,418
)
 
(790,560
)
Long-term debt
 
 
 
 
 
 
4,999,770

 
4,583,582

Total debt
 
 
 
 
 
 
$
5,677,686

 
5,409,651

 ————————————
(1)
Amounts are net of unamortized original issue discounts of $8 million and $6 million at March 31, 2018 and December 31, 2017.
(2)
Asset-backed U.S. obligations are related to financing transactions involving revenue earning equipment.
(3)
The notional amount of the executed interest rate swaps designated as fair value hedges was $825 million at March 31, 2018 and December 31, 2017.

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 matures in January 2020. The agreement provides for annual facility fees that 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.


18

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

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 March 31, 2018). 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 March 31, 2018 was 167%. At March 31, 2018, there was $341 million available under the credit facility.

Our global revolving credit facility enables us to refinance short-term obligations on a long-term basis. Short-term commercial paper obligations not required for working capital needs are classified as long-term 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 March 31, 2018, we classified $822 million of short-term commercial paper as long-term debt. At December 31, 2017, we classified $570 million of short-term commercial paper and $16 million of the current portion of long-term debt as long-term debt.

In February 2018, we issued $450 million of unsecured medium-term notes maturing in March 2023. 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, and 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.

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 March 31, 2018 or December 31, 2017.

At March 31, 2018 and December 31, 2017, we had letters of credit and surety bonds outstanding totaling $350 million, which primarily guarantee the payment of insurance claims.

The fair value of total debt (excluding capital lease and asset-backed U.S. obligations) at March 31, 2018 and December 31, 2017 was approximately $5.19 billion and $4.95 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.


19

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

9. DERIVATIVES

From time to time, we enter into interest rate derivatives to manage our fixed and variable interest rate exposure and to better match 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 or 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 March 31, 2018, we had interest rate swaps outstanding that are designated as fair value hedges for certain debt obligations, with a total notional value of $825 million and maturities through 2020. Interest rate swaps are measured at fair value on a recurring basis using Level 2 fair value inputs. The fair value of these interest rate swaps was a liability of $15 million and $7 million as of March 31, 2018 and December 31, 2017, respectively. The amounts are presented in "Accrued expenses and other current liabilities" and "Other non-current liabilities" in our Consolidated Condensed Balance Sheets. 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.

As of March 31, 2018, we had an interest rate swap outstanding that was designated as a cash flow hedge for a certain debt obligation, with a total notional value of $16 million and maturity through 2021. The interest rate swap is measured at fair value on a recurring basis using Level 2 fair value inputs. The fair value of this interest rate swap was not material as of March 31, 2018. The amounts are presented in "Other non-current liabilities" in our Consolidated Condensed Balance Sheets. The effective portion of the change in the fair value of the hedging instrument is reported in other comprehensive income. The amounts accumulated in other comprehensive income are reclassified to earnings when the related interest payments affect earnings. There was no ineffectiveness related to the interest rate swap.



10. SHARE REPURCHASE PROGRAMS

In December 2017, 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 up to 1.5 million shares of common stock, the sum of which will not exceed the number of shares issued to employees under the Company’s employee stock plans from December 31, 2017 to December 13, 2019. Share repurchases of common stock are made periodically in open-market transactions and are subject to market conditions, legal requirements and other factors. Management may establish prearranged written plans for the Company under Rule 10b5-1 of the Securities Exchange Act of 1934 as part of the program, which allow for share repurchases during Ryder’s quarterly blackout periods as set forth in the trading plan.

During the three months ended March 31, 2018 and March 31, 2017, we repurchased approximately 171,000 shares for $13 million and 221,000 shares for $17 million, respectively.



20

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



11. 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, 2017
 
$
(140,438
)
 
(560,153
)
 
(6,910
)
 
(707,501
)
Amortization
 

 
5,517

 
89

 
5,606

Other current period change
 
11,892

 

 

 
11,892

March 31, 2018
 
$
(128,546
)
 
(554,636
)
 
(6,821
)
 
(690,003
)

 
 
Currency
Translation
Adjustments and Other
 
Net Actuarial
Loss (1)
 
Prior Service
Credit (1)
 
Accumulated
Other
Comprehensive
Loss
 
 
(In thousands)
December 31, 2016
 
$
(206,610
)
 
(620,292
)
 
(7,130
)
 
(834,032
)
Amortization
 

 
5,011

 
53

 
5,064

Other current period change
 
15,742

 

 

 
15,742

March 31, 2017
 
$
(190,868
)
 
(615,281
)
 
(7,077
)
 
(813,226
)
_______________________ 
(1)
These amounts are included in the computation of net pension expense. See Note 14, "Employee Benefit Plans," for further information.

The gain from currency translation adjustments in the three months ended March 31, 2018 of $12 million was primarily due to the strengthening of the British Pound against the U.S. Dollar, partially offset by the weakening of the Canadian Dollar against the U.S. Dollar. The gain from currency translation adjustments in the three months ended March 31, 2017 of $16 million was due to the strengthening of the British Pound and the Canadian Dollar against the U.S. Dollar.



21

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

12. EARNINGS PER SHARE

The following table presents the calculation of basic and diluted earnings per common share from continuing operations:
 
Three months ended March 31,
 
2018
 
2017
 
(In thousands, except per share amounts)
Earnings per share — Basic:
 
 
 
Earnings from continuing operations
$
33,932

 
38,536

Less: Earnings allocated to unvested stock
(118
)
 
(132
)
Earnings from continuing operations available to common shareholders — Basic
$
33,814

 
38,404

 
 
 
 
Weighted average common shares outstanding — Basic
52,405

 
52,945

 
 
 
 
Earnings from continuing operations per common share — Basic
$
0.65

 
0.73

 
 
 
 
Earnings per share — Diluted:
 
 
 
Earnings from continuing operations
$
33,932

 
38,536

Less: Earnings allocated to unvested stock
(118
)
 
(132
)
Earnings from continuing operations available to common shareholders — Diluted
$
33,814

 
38,404

 
 
 
 
Weighted average common shares outstanding — Basic
52,405

 
52,945

Effect of dilutive equity awards
608

 
451

Weighted average common shares outstanding — Diluted
53,013

 
53,396

 
 
 
 
Earnings from continuing operations per common share — Diluted
$
0.64

 
0.72

 
 
 
 
Anti-dilutive equity awards not included above
1,046

 
591



22

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



13. 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 March 31,
 
2018
 
2017
 
(In thousands)
Stock option and stock purchase plans
$
1,875

 
1,905

Unvested stock
3,466

 
3,050

Share-based compensation expense
5,341

 
4,955

Income tax benefit
(1,161
)
 
(1,734
)
Share-based compensation expense, net of tax
$
4,180

 
3,221


During the three months ended March 31, 2018 and 2017, approximately 347,000 and 462,000 stock options, respectively, were granted under the Plans. These awards generally vest in equal annual installments over a three year period beginning on the date of grant. The stock options have contractual terms of ten years. The fair value of each option award at the date of grant was estimated using a Black-Scholes-Merton option-pricing valuation model. Share-based compensation expense is recognized on a straight-line basis over the vesting period. The weighted-average fair value per option granted during the three months ended March 31, 2018 and 2017 was $15.89 and $15.71, respectively.

During the three months ended March 31, 2018, there were no market-based restricted stock rights granted under the Plans. There were approximately 45,000 market-based restricted stock rights granted during the first quarter of 2017. The awards are segmented into three performance periods of one, two and three years. At the end of each performance period, up to 150% of the award in 2017 may be earned based on Ryder's total shareholder return (TSR) compared to the target TSR of a peer group over the applicable performance period. If earned, employees will receive the grant of stock at the end of the relevant three-year performance period provided they continue to be employed with Ryder, subject to Compensation Committee approval. The fair value of the market-based restricted stock rights was estimated using a lattice-based option-pricing valuation model that incorporates a Monte-Carlo simulation. The fair value of the market-based awards was determined on the grant date and considers the likelihood of Ryder achieving the market-based condition. Share-based compensation expense is recognized on a straight-line basis over the vesting period. The weighted-average fair value per market-based restricted stock right granted during the three months ended March 31, 2017 was $73.43.

During the three months ended March 31, 2018 and 2017, approximately 95,000 and 142,000 performance-based restricted stock rights (PBRSRs), respectively, were awarded under the Plans. The awards are segmented into three one-year performance periods. For these awards, up to 150% of the awards in 2018 and in 2017 may be earned based on Ryder's one-year adjusted return on capital (ROC) measured against an annual ROC target. If earned, employees will receive the grant of stock three years after the grant date, provided they continue to be employed with Ryder, subject to Compensation Committee approval. For accounting purposes, these awards are not considered granted until the Compensation Committee approves the annual ROC target. During the three months ended March 31, 2018 and 2017, approximately 98,000 and 79,000 PBRSRs, respectively, were considered granted for accounting purposes. The fair value of the PBRSRs is determined and fixed on the grant date based on Ryder's stock price on the date of grant. Share-based compensation expense is recognized on a straight-line basis over the vesting period, based upon the probability that the performance target will be met. The weighted-average fair value per PBRSR granted during the three months ended March 31, 2018 and 2017 was $74.72 and $76.49, respectively.





23

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



During the three months ended March 31, 2018, approximately 51,000 performance-based restricted stock rights (PBRSRs) were awarded under the Plans. For these awards, up to 200% of the awards may be earned based on the spread between Ryder's adjusted return on capital and the cost of capital (ROC/COC) measured against a three-year ROC/COC target. The majority of these awards include a TSR modifier. The Company’s TSR will be compared against the TSR of each of the companies in a custom peer group to determine the Company’s TSR percentile rank versus this custom peer group. The number of ROC/COC PBRSRs will then be adjusted based on the Company’s relative TSR percentile rank. The fair value of these PBRSRs is estimated using a lattice-based option-pricing valuation model that incorporates a Monte-Carlo simulation. Share-based compensation expense is recognized on a straight-line basis over the vesting period, based upon the probability that the performance target will be met. The weighted-average fair value per PBRSR granted during the three months ended March 31, 2018 was $72.93.

During the three months ended March 31, 2018, approximately 51,000 performance-based restricted stock rights (PBRSRs) were awarded under the Plans. For these awards, up to 200% of the awards may be earned based on Ryder's strategic revenue growth (SRG) measured against a three-year SRG target. The majority of these awards include a TSR modifier. The Company’s TSR will be compared against the TSR of each of the companies in a custom peer group to determine the Company’s TSR percentile rank versus this custom peer group. The number of SRG PBRSRs will then be adjusted based on the Company’s relative TSR percentile rank. The fair value of these PBRSRs is estimated using a lattice-based option-pricing valuation model that incorporates a Monte-Carlo simulation. Share-based compensation expense is recognized on a straight-line basis over the vesting period, based upon the probability that the performance target will be met. The weighted-average fair value per PBRSR granted during the three months ended March 31, 2018 was $72.93.

During the three months ended March 31, 2018 and 2017, approximately 132,000 and 85,000 time-vested restricted stock rights, respectively, were granted under the Plans. The time-vested restricted stock rights entitle the holder to shares of common stock when the awards vest. In 2018, 104,000 of the new awards vest in equal annual installments over a three-year period beginning on the date of grant. The remaining awards granted in 2018 and the 2017 awards primarily vest at the end of the three-year period. The fair value of the time-vested awards is determined and fixed based on Ryder’s stock price on the date of grant. Share-based compensation expense is recognized on a straight-line basis over the vesting period. The weighted-average fair value per time-vested restricted stock right granted during the three months ended March 31, 2018 and 2017 was $76.69 and $76.57, respectively.

Certain employees also received cash awards prior to 2017 as part of our long-term incentive compensation program. The cash awards have the same vesting provisions as the market-based restricted stock rights. The cash awards are accounted for as liability awards under the share-based compensation accounting guidance as the awards are based upon the performance of our common stock and are settled in cash. As a result, the liability is adjusted to reflect fair value at the end of each reporting period. The fair value of the cash awards was estimated using a lattice-based option-pricing valuation model that incorporates a Monte-Carlo simulation. Share-based compensation expense is recognized on a straight-line basis over the vesting period. The compensation expense associated with cash awards was not material for the three months ended March 31, 2018 and 2017.

Total unrecognized pre-tax compensation expense related to all share-based compensation arrangements at March 31, 2018 was $44 million and is expected to be recognized over a weighted-average period of 3.0 years.



















24

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

14. EMPLOYEE BENEFIT PLANS

Components of net pension expense were as follows:
 
Three months ended March 31,
 
2018
 
2017
 
(In thousands)
Pension Benefits
 
 
 
Company-administered plans:
 
 
 
Service cost
$
3,201

 
3,249

Interest cost
19,752

 
21,489

Expected return on plan assets
(25,834
)
 
(22,478
)
Amortization of:
 
 
 
Net actuarial loss
7,372

 
8,450

Prior service cost
145

 
145

 
4,636

 
10,855

Union-administered plans
2,346

 
2,502

Net pension expense
$
6,982

 
13,357

 
 
 
 
Company-administered plans:
 
 
 
U.S.
$
7,357

 
11,311

Non-U.S.
(2,721
)
 
(456
)
 
4,636

 
10,855

Union-administered plans
2,346

 
2,502

Net pension expense
$
6,982

 
13,357


During the three months ended March 31, 2018, we contributed $3 million to our pension plans. In 2018, the expected total contributions to our pension plans are approximately $36 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 months ended March 31, 2018.



25

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



15. OTHER ITEMS IMPACTING COMPARABILITY

Our primary measure of segment performance as shown in Note 18, "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 March 31,
 
2018
 
2017
 
(In thousands)
Goodwill impairment (1)
$
15,513

 

Acquisition transaction costs (2)
575

 

Tax Reform-related adjustments, net
(804
)
 

Restructuring and other, net
510

 

Operating tax adjustment

 
2,205

Restructuring and other items, net
$
15,794

 
2,205

————————————
(1)
Refer to Note 5, "Goodwill ," for additional information.
(2)
Refer to Note 19, "Subsequent Events," for additional information.

During the first quarter of 2018, we recorded a $0.8 million adjustment related to the one-time Tax Reform-related employee bonus accrued as of December 31, 2017. This item was reflected within "Selling, general and administrative expenses" in our Consolidated Statements of Earnings. We also recorded restructuring and other charges of $0.5 million, primarily related to professional fees and adjustments to the restructuring accrual recorded as of December 31, 2017. These items were reflected within "Restructuring and other charges, net" in our Consolidated Statements 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 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.


16OTHER 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.


26

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



17. SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information was as follows:
 
Three months ended March 31,
 
2018
 
2017
 
(In thousands)
Interest paid
$
40,165

 
31,441

Income taxes paid
8,187

 
3,107

Changes in accounts payable related to purchases of revenue earning equipment
48,176

 
74,766

Operating and revenue earning equipment acquired under capital leases
257

 
1,607

Changes in restricted cash
1,327

 
(1,435
)

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Condensed Balance Sheets that sum to the total of the same such amounts shown in the Consolidated Condensed Statements of Cash Flows.

 
 
March 31, 2018
 
December 31, 2017
 
 
(In thousands)
Cash and cash equivalents
 
$
73,857

 
$
78,348

Restricted cash included in prepaid expenses and other current assets
 
6,001

 
4,674

Total cash, cash equivalents, and restricted cash shown in the statement of cash flows
 
$
79,858

 
$
83,022


Amounts included in restricted cash represent the proceeds from the sale of eligible vehicles under our like-kind exchange program for certain of our U.S. - based revenue earning equipment. The proceeds are restricted for the acquisition of replacement vehicles and other specified applications. The Act repealed like-kind exchange treatment for revenue earning equipment after December 31, 2017.

27

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

18. 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) 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) DTS, which provides vehicles and drivers as part of a dedicated transportation solution in the U.S.; and (3) SCS, which provides comprehensive supply chain solutions including distribution and transportation services in North America and Singapore. 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 the restructuring and other items, net discussed in Note 15, "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 based upon estimated and planned resource utilization;

Human resources — individual costs within this category are allocated under various methods, including allocation based on estimated utilization and number of personnel supported;

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. Expenses, where allocated, are based primarily on the number of personnel supported.

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”). 

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 months ended March 31, 2018 and 2017. 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 have been reclassified to conform to the current period presentation. These reclassifications were immaterial to the financial statements taken as a whole.

28

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

 
FMS
 
DTS
 
SCS
 
Eliminations
 
Total
 
(In thousands)
For the three months ended March 31, 2018
 
 
 
 
 
 
 
 
Revenue from external customers
$
1,109,790

 
298,970

 
494,707

 

 
1,903,467

Inter-segment revenue
132,789

 

 

 
(132,789
)
 

Total revenue
$
1,242,579

 
298,970

 
494,707

 
(132,789
)
 
1,903,467

 
 
 
 
 
 
 
 
 
 
Segment EBT
$
49,822

 
13,052

 
26,203

 
(13,272
)
 
75,805

Unallocated CSS
 
 
 
 
 
 
 
 
(10,689
)
     Non-operating pension costs (1)
 
 
 
 
 
 
 
 
(1,222
)
Other items (2)
 
 
 
 
 
 
 
 
(15,794
)
Earnings from continuing operations before income taxes
 
 
 
 
 
 
 
 
$
48,100

 
 
 
 
 
 
 
 
 
 
   Segment capital expenditures paid (3)
$
645,369

 
249

 
12,293

 

 
657,911

Unallocated CSS capital expenditures paid
 
 
 
 
 
 
 
 
4,833

Capital expenditures paid
 
 
 
 
 
 
 
 
$
662,744

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the three months ended March 31, 2017
 
 
 
 
 
 
 
 
Revenue from external customers
$
1,018,740

 
266,630

 
451,613

 

 
1,736,983

Inter-segment revenue
113,730

 

 

 
(113,730
)
 

Total revenue
$
1,132,470

 
266,630

 
451,613

 
(113,730
)
 
1,736,983

 
 
 
 
 
 
 
 
 
 
Segment EBT
$
52,277

 
11,283

 
28,036

 
(11,216
)
 
80,380

Unallocated CSS
 
 
 
 
 
 
 
 
(10,223
)
Non-operating pension costs (1)
 
 
 
 
 
 
 
 
(7,330
)
Other items (2)
 
 
 
 
 
 
 
 
(2,205
)
Earnings from continuing operations before income taxes
 
 
 
 
 
 
 
 
$
60,622

 
 
 
 
 
 
 
 
 
 
  Segment capital expenditures paid (3)
$
344,355

 
768

 
10,998

 

 
356,121

Unallocated CSS capital expenditures paid
 
 
 
 
 
 
 
 
5,218

Capital expenditures paid
 
 
 
 
 
 
 
 
$
361,339

————————————
(1)
Non-operating pension costs include the amortization of net actuarial loss and prior service costs, interest costs and expected return on plan assets.
(2)
See Note 15, Other Items Impacting Comparability," for additional information.
(3)
Excludes revenue earning equipment acquired under capital leases.




29

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



19. SUBSEQUENT EVENTS
On April 2, 2018, we completed the acquisition of MXD Group (MXD), an e-commerce fulfillment provider with a national network of facilities, including last mile capabilities. We purchased all outstanding equity of MXD for a purchase price of approximately $120 million. During the first quarter of 2018, we incurred acquisition transaction costs of $0.6 million related to the purchase. As the acquisition of MXD occurred in April 2018, the allocation of the purchase price is not yet available.
On April 2, 2018, the Internal Revenue Service issued Notice 2018-26, which will require us to increase the provisional estimate related to the one-time transition tax. We currently estimate the additional tax provision to be approximately $30 million in the second quarter.


30

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 2017 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) 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) DTS, which provides vehicles and drivers as part of a dedicated transportation solution in the U.S.; and (3) SCS, which provides comprehensive supply chain solutions including distribution and transportation services in North America and Singapore. 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 food and beverage service, transportation and warehousing, automotive, retail and consumer goods, industrial, housing, technology, and business and personal services.

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.


31

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



Operating results were as follows:
 
Three months ended March 31,
 
Change
 
2018
 
2017
 
2018/2017
 
(In thousands, except per share amounts)
 
 
Total revenue
$
1,903,467

 
1,736,983

 
   10
 %
Operating revenue (1)
1,542,929

 
1,445,126

 
   7
 %



 


 
 



 


 
 
EBT
$
48,100

 
60,622

 
   (21
)%
Comparable EBT (2)
65,116

 
70,157

 
   (7
)%
Earnings from continuing operations
33,932

 
38,536

 
   (12
)%
Comparable earnings from continuing operations (2)
48,415

 
44,421

 
   9
 %
Net earnings
33,505

 
38,406

 
   (13
)%


 

 
 


 

 
 
Earnings per common share (EPS) — Diluted

 

 
 
Continuing operations
$
0.64

 
0.72

 
   (11
)%
Comparable (2)
0.91

 
0.83

 
   10
 %
Net earnings
0.63

 
0.72

 
   (13
)%
  ————————————
(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 10% and 7%, respectively, in the first quarter of 2018. Total revenue 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 increased across all three business segments, reflecting new business and higher volumes. EBT decreased 21% in the first quarter of 2018, primarily reflecting a $16 million impairment of goodwill in our FMS Europe reporting unit, which predominantly operates in the U.K.

32

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




CONSOLIDATED RESULTS

Lease and Rental
 
Three months ended March 31,
 
Change
 
2018
 
2017
 
2018/2017
 
(Dollars in thousands)
 
 
Lease and rental revenues
$
824,253

 
767,590