Ryder 3rd Quarter 2012 10-Q

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                      TO                     
Commission File Number: 1-4364

RYDER SYSTEM, INC.
(Exact name of registrant as specified in its charter)
 
Florida
59-0739250
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
11690 N.W. 105th Street
 
Miami, Florida 33178
(305) 500-3726
(Address of principal executive offices, including zip code)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ        NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ        NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
 
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) ¨ YES   þ NO

The number of shares of Ryder System, Inc. Common Stock ($0.50 par value per share) outstanding at September 30, 2012 was 51,112,478.
 
 
 
 
 

1


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


i


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

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

 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands, except per share amounts)
Lease and rental revenues
$
693,912

 
675,288

 
$
2,007,393

 
1,889,420

Services revenue
667,399

 
669,925

 
2,021,284

 
1,943,145

Fuel services revenue
211,984

 
225,507

 
644,754

 
676,875

Total revenues
1,573,295

 
1,570,720

 
4,673,431

 
4,509,440

 
 
 
 
 
 
 
 
Cost of lease and rental
481,240

 
461,756

 
1,414,456

 
1,299,467

Cost of services
557,495

 
554,853

 
1,697,773

 
1,626,334

Cost of fuel services
207,689

 
223,339

 
632,599

 
665,750

Other operating expenses
32,966

 
30,268

 
100,881

 
95,071

Selling, general and administrative expenses
183,713

 
200,096

 
568,027

 
568,373

Gains on vehicle sales, net
(23,147
)
 
(18,270
)
 
(67,684
)
 
(46,277
)
Interest expense
34,879

 
32,745

 
105,266

 
100,138

Miscellaneous income, net
(1,424
)
 
(1,722
)
 
(7,245
)
 
(6,459
)
Restructuring and other charges, net
74

 
—

 
8,081

 
768

 
1,473,485

 
1,483,065

 
4,452,154

 
4,303,165

Earnings from continuing operations before income taxes
99,810

 
87,655

 
221,277

 
206,275

Provision for income taxes
35,499


30,722

 
75,323


82,571

Earnings from continuing operations
64,311


56,933

 
145,954


123,704

Earnings (loss) from discontinued operations, net of tax
10,780

 
(409
)
 
10,181

 
(2,022
)
Net earnings
$
75,091

 
56,524

 
$
156,135

 
121,682

 
 
 
 
 
 
 
 
Earnings (loss) per common share — Basic
 
 
 
 
 
 
 
Continuing operations
$
1.26

 
1.11

 
$
2.86

 
2.41

Discontinued operations
0.21

 
(0.01
)
 
0.20

 
(0.04
)
Net earnings
$
1.47

 
1.10

 
$
3.06

 
2.37

 
 
 
 
 
 
 
 
Earnings (loss) per common share — Diluted
 
 
 
 
 
 
 
Continuing operations
$
1.26

 
1.10

 
$
2.84

 
2.39

Discontinued operations
0.21

 
—

 
0.20

 
(0.04
)
Net earnings
$
1.47

 
1.10

 
$
3.04

 
2.35

 
 
 
 
 
 
 
 
Comprehensive income
$
105,059

 
6,106

 
$
198,712

 
101,384

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.31

 
0.29

 
$
0.89

 
0.83




See accompanying notes to consolidated condensed financial statements.

1


RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
 
 
September 30,
2012
 
December 31,
2011
 
(Dollars in thousands, except per
share amount)
Assets:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
95,687


104,572

Receivables, net
784,121


754,644

Inventories
67,113


65,912

Prepaid expenses and other current assets
132,085


163,045

Total current assets
1,079,006

 
1,088,173

Revenue earning equipment, net of accumulated depreciation of $3,499,462 and
   $3,462,359, respectively
5,669,409


5,049,671

Operating property and equipment, net of accumulated depreciation of $952,543 and
   $911,717, respectively
620,957


624,180

Goodwill
384,477


377,306

Intangible assets
82,432


84,820

Direct financing leases and other assets
423,339


393,685

Total assets
$
8,259,620


7,617,835

 
 
 
 
Liabilities and shareholders’ equity:
 
 
 
Current liabilities:
 
 
 
Short-term debt and current portion of long-term debt
$
443,629


274,366

Accounts payable
422,791


391,827

Accrued expenses and other current liabilities
467,413


507,630

Total current liabilities
1,333,833

 
1,173,823

Long-term debt
3,444,461


3,107,779

Other non-current liabilities
822,002


896,587

Deferred income taxes
1,181,425


1,121,493

Total liabilities
6,781,721

 
6,299,682

 
 
 
 
Shareholders’ equity:
 
 
 
Preferred stock of no par value per share — authorized, 3,800,917; none outstanding,
   September 30, 2012 or December 31, 2011
—

 
—

Common stock of $0.50 par value per share — authorized, 400,000,000; outstanding,
  September 30, 2012 — 51,112,478; December 31, 2011 — 51,143,946
25,556

 
25,572

Additional paid-in capital
793,865

 
769,383

Retained earnings
1,183,066

 
1,090,363

Accumulated other comprehensive loss
(524,588
)
 
(567,165
)
Total shareholders’ equity
1,477,899


1,318,153

Total liabilities and shareholders’ equity
$
8,259,620


7,617,835

See accompanying notes to consolidated condensed financial statements.

2


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

 
Nine months ended September 30,
 
2012
 
2011
 
(In thousands)
Cash flows from operating activities from continuing operations:
 
 
 
Net earnings
$
156,135

 
121,682

Less: Earnings (loss) from discontinued operations, net of tax
10,181

 
(2,022
)
Earnings from continuing operations
145,954

 
123,704

Depreciation expense
698,516

 
645,261

Gains on vehicle sales, net
(67,684
)
 
(46,277
)
Share-based compensation expense
14,186

 
12,637

Amortization expense and other non-cash charges, net
37,025

 
27,971

Deferred income tax expense
67,191

 
68,154

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Receivables
(12,311
)
 
(104,520
)
Inventories
(836
)
 
(4,869
)
Prepaid expenses and other assets
2,457

 
(18,725
)
Accounts payable
(1,827
)
 
20,287

Accrued expenses and other non-current liabilities
(115,146
)
 
58,680

Net cash provided by operating activities from continuing operations
767,525

 
782,303

 
 
 
 
Cash flows from financing activities from continuing operations:
 
 
 
Net change in commercial paper borrowings
(46,485
)

(101,964
)
Debt proceeds
745,755


966,399

Debt repaid, including capital lease obligations
(229,042
)

(417,955
)
Dividends on common stock
(45,458
)
 
(42,689
)
Common stock issued
18,503

 
26,213

Common stock repurchased
(26,920
)
 
(51,425
)
Excess tax benefits from share-based compensation
986

 
1,575

Debt issuance costs
(4,513
)
 
(8,016
)
Net cash provided by financing activities from continuing operations
412,826

 
372,138

 
 
 
 
Cash flows from investing activities from continuing operations:
 
 
 
Purchases of property and revenue earning equipment
(1,694,822
)
 
(1,165,135
)
Sales of revenue earning equipment
304,857

 
216,055

Sale and leaseback of revenue earning equipment
130,184

 
—

Sales of operating property and equipment
5,088

 
7,869

Acquisitions
(3,780
)
 
(362,184
)
Collections on direct finance leases
51,091

 
46,136

Changes in restricted cash
19,306

 
2,821

Net cash used in investing activities from continuing operations
(1,188,076
)
 
(1,254,438
)
 
 
 
 
Effect of exchange rate changes on cash
1,508

 
3,848

Decrease in cash and cash equivalents from continuing operations
(6,217
)
 
(96,149
)
 
 
 
 
Cash flows from discontinued operations:
 
 
 
Operating cash flows
(2,692
)
 
(910
)
Financing cash flows
—


(143
)
Investing cash flows
—

 
—

Effect of exchange rate changes on cash
24

 
(65
)
Decrease in cash and cash equivalents from discontinued operations
(2,668
)
 
(1,118
)
 
 
 
 
Decrease in cash and cash equivalents
(8,885
)
 
(97,267
)
Cash and cash equivalents at January 1
104,572

 
213,053

Cash and cash equivalents at September 30
$
95,687

 
115,786

See accompanying notes to consolidated condensed financial statements.

3


RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS’ EQUITY
(unaudited)
 
 
Preferred
Stock
 
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
 
Amount
 
Shares
 
Par
 
 
(Dollars in thousands, except per share amount)
Balance at December 31, 2011
$
—

 
51,143,946

 
$
25,572

 
769,383

 
1,090,363

 
(567,165
)
 
1,318,153

Components of comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings
—

 
—

 
—

 
—

 
156,135

 
—

 
156,135

Foreign currency translation adjustments
—

 
—

 
—

 
—

 
—

 
31,180

 
31,180

Unrealized loss related to derivatives
—

 
—

 
—

 
—

 
—

 
(7
)
 
(7
)
Amortization of pension and postretirement items, net of tax
—

 
—

 
—

 
—

 
—

 
13,949

 
13,949

Change in net actuarial loss, net of tax
—

 
—

 
—

 
—

 
—

 
(2,545
)
 
(2,545
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
198,712

Common stock dividends declared — $0.89 per share
—

 
—

 
—

 
—

 
(45,546
)
 
—

 
(45,546
)
Common stock issued under employee stock option and stock purchase plans (1)
—

 
524,505

 
262

 
18,241

 
—

 
—

 
18,503

Benefit plan stock purchases (2)
—

 
(12,050)

 
(6
)
 
(571
)
 
—

 
—

 
(577
)
Common stock repurchases
—

 
(543,923
)
 
(272
)
 
(8,185
)
 
(17,886
)
 
—

 
(26,343
)
Share-based compensation
—

 
—

 
—

 
14,186

 
—

 
—

 
14,186

Tax benefits from share-based compensation
—

 
—

 
—

 
811

 
—

 
—

 
811

Balance at September 30, 2012
$
—

 
51,112,478

 
$
25,556

 
793,865

 
1,183,066

 
(524,588
)
 
1,477,899

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

4

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


(A) INTERIM FINANCIAL STATEMENTS

The accompanying unaudited Consolidated Condensed Financial Statements include the accounts of Ryder System, Inc. (Ryder) and all entities in which Ryder has a controlling voting interest (“subsidiaries”) and variable interest entities (VIEs) required to be consolidated in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The accompanying unaudited Consolidated Condensed Financial Statements have been prepared in accordance with the accounting policies described in our 2011 Annual Report on Form 10-K and should be read in conjunction with the Consolidated Financial Statements and notes thereto. These financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included and the disclosures herein are adequate. The operating results for interim periods are unaudited and are not necessarily indicative of the results that can be expected for a full year.

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


(B) ACCOUNTING CHANGES

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


(C) ACQUISITIONS

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

Pro Forma Information — The operating results of Hill Hire have been included in the consolidated condensed financial statements from the date of acquisition. The following table provides the unaudited pro forma revenues, net earnings and earnings per common share for the nine months ended September 30, 2011 as if the results of the Hill Hire acquisition had been included in operations commencing January 1, 2010. This pro forma information is not necessarily indicative either of the combined results of operations that actually would have been realized had the acquisition been consummated during the period for which the pro forma information is presented, or of future results.
 

5

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


 
Nine months ended September 30, 2011
 
(In thousands, except per share amounts)
Revenue — As reported
$
4,509,440

Revenue — Pro forma
$
4,577,010

 
 
Net earnings — As reported
$
121,682

Net earnings — Pro forma
$
136,754

 
 
Net earnings per common share:
 
Basic — As reported
$
2.37

Basic — Pro forma
$
2.66

 
 
Diluted — As reported
$
2.35

Diluted — Pro forma
$
2.64


Other Acquisitions— On August 1, 2012, we acquired all of the common stock of Euroway Ltd., a U.K.-based, full service leasing, rental and maintenance company for a purchase price of $2.4 million and assumed capital lease obligations and debt of $20.3 million. Approximately $1.2 million of the stock purchase price has been paid, and the majority of the capital lease obligations have been repaid as of September 30, 2012. The purchase price includes $0.5 million in contingent consideration to be paid to the seller provided certain conditions are met. As of September 30, 2012, the fair value of the contingent consideration has been reflected in "Other non-currrent liabilities" in our Consolidated Condensed Balance Sheet. See Note (N), "Fair Value Measurements," for additional information. The acquisition included Euroway's fleet of approximately 560 full service lease vehicles as well as 800 contract maintenance vehicles. As of September 30, 2012, goodwill and customer relationship intangibles related to the Euroway acquisition were $6.2 million and $2.8 million, respectively. The combined network operates under the Ryder name, complementing our FMS business segment coverage in the U.K.

During 2011, we completed three other acquisitions of full service leasing and fleet service companies, one of which included the assets of the seller’s dedicated contract carriage business. The combined networks operate under the Ryder name, complementing our FMS and SCS business segment market coverage, primarily in the western part of the United States. The purchase price of these acquisitions totaled $113.8 million, of which $1.6 million and $106.6 million was paid during the nine months ended September 30, 2012 and September 30, 2011, respectively. Goodwill and customer relationship intangibles related to these acquisitions totaled $28.4 million and $11.9 million, respectively. The following table provides further information regarding each of these acquisitions:
Company Acquired
 
Date Acquired
 
Segment
 
Purchase Price
 
Vehicles
 
Contractual Customers
Carmenita Leasing, Inc.
 
January 10, 2011
 
FMS
 
$9.0 million
 
190
 
60
The Scully Companies
 
January 28, 2011
 
FMS/SCS
 
$91.0 million
 
2,100
 
200
B.I.T. Leasing
 
April 1, 2011
 
FMS
 
$13.8 million
 
490
 
130

During the nine months ended September 30, 2012 and September 30, 2011, we paid $1.0 million and $4.1 million, respectively, related to acquisitions completed in years prior to 2011.




6

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



(D) DISCONTINUED OPERATIONS

In 2009, we ceased SCS service operations in Brazil, Argentina, Chile and European markets. Accordingly, results of these operations, financial position and cash flows are separately reported as discontinued operations for all periods presented either in the Consolidated Condensed Financial Statements or notes thereto.

Summarized results of discontinued operations were as follows:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Pre-tax loss from discontinued operations
$
(460
)
 
(371
)
 
$
(969
)
 
(2,087
)
Income tax benefit (expense)
11,240

 
(38
)
 
11,150

 
65

Earnings (loss) from discontinued operations, net of tax
$
10,780

 
(409
)
 
$
10,181

 
(2,022
)

Results of discontinued operations in the three and nine months ended September 30, 2012 included a tax benefit of $11.3 million resulting from the expiration of a statute of limitations. Results of discontinued operations in 2012 and 2011 also included losses related to adverse legal developments and professional and administrative fees associated with our discontinued South American operations. Results of discontinued operations in the first nine months of 2012 also included $0.6 million of pre-tax income related to the sub-lease of a SCS facility in Europe in June 2012.

The following is a summary of assets and liabilities of discontinued operations:
 
September 30,
2012
 
December 31,
2011
 
(In thousands)
Total assets, primarily deposits
$
4,134

 
4,600

Total liabilities, primarily contingent accruals
$
5,401

 
6,502


Although we discontinued our South American operations in 2009, we continue to be party to various federal, state and local legal proceedings involving labor matters, tort claims and tax assessments. We have established loss provisions for any matters where we believe a loss is probable and can be reasonably estimated. Other than with respect to the matters discussed below, for matters where a reserve has not been established and for which we believe a loss is reasonably possible, as well as for matters where a reserve has been recorded but for which an exposure to loss in excess of the amount accrued is reasonably possible, we believe that such losses will not have a material effect on our consolidated financial statements.

In Brazil, we were assessed $4.6 million (before and after tax) for various federal income taxes and social contribution taxes for the 1997 and 1998 tax years. We have successfully overturned these federal tax assessments in the lower courts; however, there is a reasonable possibility that these rulings could be reversed and we would be required to pay the assessments. We believe it is more likely than not that our position will ultimately be sustained if appealed and no amounts have been reserved for these matters. We are entitled to indemnification for a portion of any resulting liability on these federal tax claims which, if honored, would reduce the estimated loss.

In Brazil, we were assessed $5.7 million (before and after tax) for certain state operating tax credits utilized between 2001 and 2003. Although there is a reasonable possibility that we could incur this loss, we believe it is more likely than not that our position will ultimately be sustained and no amounts have been reserved for these matters.

Additionally in Brazil, we were assessed $15.7 million, including penalties and interest, related to tax due on the sale of our outbound auto carriage business in 2001. On November 11, 2010, the Administrative Tax Court dismissed the assessment. The tax authority filed a motion to review the decision before the Administrative Tax Court. On December 6, 2011, the Administrative Tax Court upheld our position. In the first quarter of 2012, the tax authority decided not to file a final special appeal and the case was ultimately dismissed. There was no financial statement impact upon resolution as no amounts were reserved for this matter.




7

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



(E) SHARE-BASED COMPENSATION PLANS

Share-based incentive awards are provided to employees under the terms of various share-based compensation plans (collectively, the “Plans”). The Plans are administered by the Compensation Committee of the Board of Directors. Awards under the Plans principally include at-the-money stock options, nonvested stock and cash awards.

The following table provides information on share-based compensation expense and income tax benefits recognized during the periods:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Stock option and stock purchase plans
$
2,554

 
2,370

 
$
7,192

 
6,974

Nonvested stock
2,547

 
1,927

 
6,994

 
5,663

Share-based compensation expense
5,101

 
4,297

 
14,186

 
12,637

Income tax benefit
(1,637
)
 
(1,425
)
 
(4,643
)
 
(4,212
)
Share-based compensation expense, net of tax
$
3,464

 
2,872

 
$
9,543

 
8,425


During the nine months ended September 30, 2012 and 2011, approximately 460,000 and 710,000 stock options, respectively, were granted under the Plans. These awards generally vest evenly over a three year period from the date of grant and have contractual terms of seven years. The fair value of each option award at the date of grant was estimated using a Black-Scholes-Merton option-pricing valuation model. The weighted-average fair value per option granted during the nine months ended September 30, 2012 and 2011 was $14.07 and $12.88, respectively.

During the nine months ended September 30, 2012 and 2011, approximately 93,000 and 140,000 market-based restricted stock rights, respectively, were granted under the Plans. For the 2012 grant, the awards were segmented into three equal performance periods of one, two and three years. At the end of each performance period, 25%-125% of the award may be earned based on Ryder's total shareholder return (TSR) compared to the target TSR of the S&P 500 over the applicable performance period. Employees will receive the grant of stock at the end of the three year period provided they continue to be employed with Ryder, subject to Compensation Committee approval. For grants prior to 2012, employees only receive the grant of stock if Ryder’s cumulative average TSR at least meets the S&P 500 cumulative average TSR over an applicable three-year period. The fair value of the market-based restricted stock rights was estimated using a lattice-based option-pricing valuation model that incorporates a Monte-Carlo simulation. The fair value of the market-based awards was determined and fixed on the grant date and considers the likelihood of Ryder achieving the market-based condition. The weighted-average fair value per market-based restricted stock right granted during the nine months ended September 30, 2012 and 2011 was $43.39 and $25.37, respectively.

During the nine months ended September 30, 2012 and 2011, approximately 124,000 and 200,000 time-vested restricted stock rights and restricted stock units (RSU), respectively, were granted under the plans. The time-vested restricted stock rights entitle the holder to shares of common stock when the awards vest at the end of a three-year period. The fair value of the time-vested awards is determined and fixed on the date of grant based on Ryder’s stock price on the date of grant. The weighted-average fair value per time-vested restricted stock right and RSU granted during the nine months ended September 30, 2012 and 2011 was $52.44 and $52.78, respectively.

During the nine months ended September 30, 2012 and 2011, employees who received market-based restricted stock rights also received market-based cash awards. In addition, in 2012, the majority of the employees who received time-vested restricted stock also received market-based cash awards. For the 2012 grant, the cash awards have the same vesting provisions as the market-based restricted stock rights. For grants prior to 2012, the awards have the same vesting provisions as the market-based restricted stock rights except that Ryder’s TSR must at least meet the TSR of the 33rd percentile of the S&P 500. The cash awards are accounted for as liability awards under the share-based compensation accounting guidance as the awards are based upon the performance of 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.


8

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


The following table is a summary of compensation expense recognized for cash awards in addition to the share-based compensation expense reported in the previous table:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Cash awards
$737
 
396
 
$2,122
 
1,216

Total unrecognized pre-tax compensation expense related to all share-based compensation arrangements at September 30, 2012 was $33.6 million and is expected to be recognized over a weighted-average period of 1.9 years.

(F) EARNINGS PER SHARE

We compute earnings per share using the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. Our nonvested stock granted prior to 2012 are considered participating securities since the share-based awards contain a non-forfeitable right to dividend equivalents irrespective of whether the awards ultimately vest. Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities based on the weighted average shares outstanding during the period.

The following table presents the calculation of basic and diluted earnings per common share from continuing operations:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands, except per share amounts)
Earnings per share — Basic:
 
 
 
 
 
 
 
Earnings from continuing operations
$
64,311

 
56,933

 
$
145,954

 
123,704

Less: Distributed and undistributed earnings allocated to nonvested stock
(814
)
 
(933
)
 
(1,891
)
 
(1,981
)
Earnings from continuing operations available to common shareholders — Basic
$
63,497

 
56,000

 
$
144,063

 
121,723

 
 
 
 
 
 
 
 
Weighted average common shares outstanding — Basic
50,381

 
50,426

 
50,433

 
50,533

 
 
 
 
 
 
 
 
Earnings from continuing operations per common share — Basic
$
1.26

 
1.11

 
$
2.86

 
2.41

 
 
 
 
 
 
 
 
Earnings per share — Diluted:
 
 
 
 
 
 
 
Earnings from continuing operations
$
64,311

 
56,933

 
$
145,954

 
123,704

Less: Distributed and undistributed earnings allocated to nonvested stock
(812
)
 
(928
)
 
(1,883
)
 
(1,972
)
Earnings from continuing operations available to common shareholders — Diluted
$
63,499

 
56,005

 
$
144,071

 
121,732

 
 
 
 
 
 
 
 
Weighted average common shares outstanding — Basic
50,381

 
50,426

 
50,433

 
50,533

Effect of dilutive equity awards
172

 
327

 
292

 
389

Weighted average common shares outstanding — Diluted
50,553

 
50,753

 
50,725

 
50,922

 
 
 
 
 
 
 
 
Earnings from continuing operations per common share — Diluted
$
1.26

 
1.10

 
$
2.84

 
2.39

 
 
 
 
 
 
 
 
Anti-dilutive equity awards and market-based restricted stock rights not included above
2,613

 
1,718

 
2,234

 
1,462



9

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


(G) RESTRUCTURING AND OTHER CHARGES

The components of restructuring and other charges, net in the three and nine months ended September 30, 2012 and 2011, respectively, were as follows:

 
Three months ended September 30,
 
Nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Restructuring charges, net:
 
 
 
 
 
 
 
   Severance and employee-related costs
$
74

 
—

 
$
7,216

 
393

   Contract termination costs
—

 
—

 
865

 
375

       Total
$
74

 
—

 
$
8,081

 
768


Restructuring charges, net of $0.1 million for the three months ended September 30, 2012 reflect employee severance and benefit costs associated with the elimination of certain positions assumed in the Euroway acquisition offset by benefits from refinements in estimates from restructuring charges in the prior year. Restructuring charges, net for the nine months ended September 30, 2012 include $7.1 million of employee severance and other termination benefits as a result of cost management actions. During the second quarter of 2012, we approved a plan to eliminate approximately 350 employees, primarily in the U.S. These actions have been substantially completed. During the nine months ended September 30, 2012, we also recorded a charge of $0.9 million associated with non-essential leased facilities assumed in the Hill Hire acquisition.

Restructuring charges, net of $0.8 million for the nine months ended September 30, 2011 represented employee severance and benefit costs for workforce reductions and termination costs associated with non-essential equipment contracts assumed in the Scully acquisition.

Activity related to restructuring reserves including discontinued operations were as follows:
 
 
 
 
 
Deductions
 
 
 
 
 
December 31, 2011
 
Additions
 
Cash
Payments
 
Non-Cash Reductions (1)
 
Foreign
Translation
Adjustments
 
September 30, 2012
 
Balance
 
 
 
 
 
Balance
 
(In thousands)      
Employee severance and benefits
$
2,607

 
8,276

 
4,424

 
1,060

 
79

 
5,478

Contract termination costs
2,639

 
931

 
661

 
612

 
97

 
2,394

Total
$
5,246

 
9,207

 
5,085

 
1,672

 
176

 
7,872

_________________________ 
(1) Non-cash reductions represent adjustments to the restructuring reserve as actual costs were less than originally estimated. 
At September 30, 2012, the majority of outstanding restructuring obligations are required to be paid by January 2014.

As mentioned in Note (T), "Segment Reporting," our primary measure of segment financial performance excludes, among other items, restructuring and other charges, net. However, the applicable portion of the restructuring and other charges, net that related to each segment for the three and nine months ended September 30, 2012 and 2011, respectively, were as follows:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Fleet Management Solutions
$
74

 
—

 
$
6,421

 
768

Supply Chain Solutions
—

 
—

 
1,400

 
—

Central Support Services (CSS)
—

 
—

 
260

 
—

      Total
$
74

 
—

 
$
8,081

 
768



10

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



(H) DIRECT FINANCING LEASE RECEIVABLES

We lease revenue earning equipment to customers for periods typically ranging from three to seven years for trucks and tractors and up to ten years for trailers. The majority of our leases are classified as operating leases. However, some of our revenue earning equipment leases are classified as direct financing leases and, to a lesser extent, sales-type leases. The net investment in direct financing and sales-type leases consisted of:
 
September 30,
2012
 
December 31,
2011
 
(In thousands)
Total minimum lease payments receivable
$
637,870

 
561,772

Less: Executory costs
(208,499
)
 
(181,820
)
Minimum lease payments receivable
429,371

 
379,952

Less: Allowance for uncollectibles
(651
)
 
(903
)
Net minimum lease payments receivable
428,720

 
379,049

Unguaranteed residuals
63,284

 
63,472

Less: Unearned income
(100,523
)
 
(92,637
)
Net investment in direct financing and sales-type leases
391,481

 
349,884

Current portion
(77,360
)
 
(68,896
)
Non-current portion
$
314,121

 
280,988


Our direct financing lease customers operate in a wide variety of industries, and we have no significant customer concentrations in any one industry. We assess credit risk for all of our customers including those who lease equipment under direct financing leases. Credit risk is assessed using an internally developed model which incorporates credit scores from third party providers and our own custom risk ratings and is updated on a monthly basis. The external credit scores are developed based on the customer’s historical payment patterns and an overall assessment of the likelihood of delinquent payments. Our internal ratings are weighted based on the industry in which the customer operates, company size, years in business, and other credit-related indicators (i.e. profitability, cash flow, liquidity, tangible net worth, etc.). Any one of the following factors may result in a customer being classified as high risk: i) the customer has a history of late payments; ii) the customer has open lawsuits, liens or judgments; iii) the customer has been in business less than 3 years; and iv) the customer operates in an industry with low barriers to entry. For those customers who are designated as high risk, we typically require deposits to be paid in advance in order to mitigate our credit risk. Additionally, our receivables are collateralized by the vehicle’s fair value, which further mitigates our credit risk.
 
The following table presents the credit risk profile by creditworthiness category of our direct financing lease receivables:
 
September 30,
2012
 
December 31,
2011
 
(In thousands)
Very low risk to low risk
$
184,214

 
121,836

Moderate risk
185,102

 
190,070

Moderately high risk to high risk
60,055

 
68,046

 
$
429,371

 
379,952


The following table is a rollforward of the allowance for credit losses on direct financing lease receivables for the nine months ended September 30, 2012:
 
 
 
(In thousands)
Balance at December 31, 2011
$
903

Charged to earnings
667

Deductions
(919
)
Balance at September 30, 2012
$
651


As of September 30, 2012, the amount of direct financing lease receivables which were past due was not significant, and there were no impaired receivables. Accordingly, we do not believe there is a material risk of default with respect to the direct

11

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


financing lease receivables as of September 30, 2012.

(I) REVENUE EARNING EQUIPMENT

 
September 30, 2012
 
December 31, 2011
 
Cost
 
Accumulated
Depreciation
 
Net  Book
Value(1)
 
Cost
 
Accumulated
Depreciation
 
Net  Book
Value(1)
 
(In thousands)
Held for use:
 
Full service lease
$
6,585,343

 
(2,504,588
)
 
4,080,755

 
6,010,335

 
(2,518,830
)
 
3,491,505

Commercial rental
2,079,397

 
(641,735
)
 
1,437,662

 
2,175,003

 
(708,052
)
 
1,466,951

Held for sale
504,131

 
(353,139
)
 
150,992

 
326,692

 
(235,477
)
 
91,215

Total
$
9,168,871

 
(3,499,462
)
 
5,669,409

 
8,512,030

 
(3,462,359
)
 
5,049,671

 ————————————
(1)
Revenue earning equipment, net includes vehicles acquired under capital leases of $56.7 million, less accumulated depreciation of $15.5 million, at September 30, 2012, and $60.7 million, less accumulated depreciation of $14.4 million, at December 31, 2011.

At the end of 2011, we completed our annual review of residual values and useful lives of revenue earning equipment. Based on the results of our analysis, we adjusted the estimated residual values of certain classes of revenue earning equipment effective January 1, 2012. The change in estimated residual values increased pre-tax earnings for the three and nine months ended September 30, 2012 by approximately $4.5 million and $13.5 million, respectively.

In the second quarter of 2012, we completed a sale-leaseback transaction of revenue earning equipment with third parties not deemed to be VIEs and this leaseback is being accounted for as an operating lease. Proceeds from the sale-leaseback transaction totaled $130.2 million. We did not enter into any sale-leaseback transactions during 2011.

(J) GOODWILL

The carrying amount of goodwill attributable to each reportable business segment with changes therein was as follows:
 
Fleet
Management
Solutions
 
Supply
Chain
Solutions
 
Total
 
(In thousands)
Balance at January 1, 2012:
 
 
 
 
 
Goodwill
$
216,559

 
189,968

 
406,527

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

 
171,069

 
377,306

Acquisitions
6,176

 
—

 
6,176

Purchase accounting adjustments
72

 
97

 
169

Foreign currency translation adjustments
502

 
324

 
826

Balance at September 30, 2012:
 
 
 
 
 
Goodwill
223,309

 
190,389

 
413,698

Accumulated impairment losses
(10,322
)
 
(18,899
)
 
(29,221
)
 
$
212,987

 
171,490

 
384,477


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

We assess goodwill for impairment on April 1st of each year or more often if deemed necessary. In the second quarter of 2012, we completed our annual goodwill impairment test and determined there was no impairment. As a result of combining the SCS and DCC reportable segments, all of the goodwill in DCC was included in the SCS reportable segment.


12

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


(K) ACCRUED EXPENSES AND OTHER LIABILITIES

 
September 30, 2012
 
December 31, 2011
 
Accrued
Expenses
 
Non-Current
Liabilities
 
Total
 
Accrued
Expenses
 
Non-Current
Liabilities
 
Total
 
(In thousands)
Salaries and wages
$
77,468

 
—

 
77,468

 
121,087

 
—

 
121,087

Deferred compensation
1,530

 
23,243

 
24,773

 
1,405

 
21,285

 
22,690

Pension benefits
3,147

 
485,794

 
488,941

 
3,120

 
546,681

 
549,801

Other postretirement benefits
2,845

 
38,504

 
41,349

 
2,838

 
40,154

 
42,992

Insurance obligations (1)
123,205

 
169,092

 
292,297

 
120,045

 
157,390

 
277,435

Residual value guarantees
1,694

 
191

 
1,885

 
3,093

 
1,125

 
4,218

Accrued rent
9,847

 
5,933

 
15,780

 
4,088

 
14,686

 
18,774

Environmental liabilities
4,397

 
9,204

 
13,601

 
4,368

 
9,171

 
13,539

Asset retirement obligations
5,579

 
13,207

 
18,786

 
5,702

 
12,364

 
18,066

Operating taxes
78,768

 
—

 
78,768

 
81,820

 
—

 
81,820

Income taxes
4,059

 
59,034

 
63,093

 
4,160

 
74,147

 
78,307

Interest
24,091

 
—

 
24,091

 
30,410

 
—

 
30,410

Deposits, mainly from customers
50,466

 
6,235

 
56,701

 
50,951

 
7,544

 
58,495

Deferred revenue
18,688

 
87

 
18,775

 
20,698

 
476

 
21,174

Acquisition holdbacks
4,353

 
1,333

 
5,686

 
7,422

 
—

 
7,422

Other
57,276

 
10,145

 
67,421

 
46,423

 
11,564

 
57,987

Total
$
467,413

 
822,002

 
1,289,415

 
507,630

 
896,587

 
1,404,217

————————————
(1) Insurance obligations are primarily comprised of self-insured claim liabilities.

(L) INCOME TAXES

Uncertain Tax Positions

We are subject to tax audits in numerous jurisdictions in the U.S. and foreign countries. Tax audits by their very nature are often complex and can require several years to complete. In the normal course of business, we are subject to challenges from the Internal Revenue Service (IRS) and other tax authorities regarding amounts of taxes due. These challenges may alter the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions. As part of our calculation of the provision for income taxes on earnings, we recognize the tax benefit from uncertain tax positions that are at least more likely than not of being sustained upon audit based on the technical merits of the tax position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Such calculations require management to make estimates and judgments with respect to the ultimate outcome of a tax audit. Actual results could vary materially from these estimates. We reevaluate uncertain tax positions each quarter based on factors including, but not limited to, changes in facts or circumstances, expiration of statutes of limitations, changes in tax law, effectively settled issues under audit, and new audit activity. Depending on the jurisdiction, such a change in recognition or measurement may result in the recognition of a tax benefit or an additional charge to the tax provision in the period.

The following is a summary of tax years that are no longer subject to examination:
Federal — audits of our U.S. federal income tax returns are closed through fiscal year 2008.
State — for the majority of states, tax returns are closed through fiscal year 2007.
Foreign — we are no longer subject to foreign tax examinations by tax authorities for tax years before 2004 in Canada, 2006 in Brazil, 2007 in Mexico and 2009 in the U.K., which are our major foreign tax jurisdictions. Refer to Note (D), "Discontinued Operations," for further discussion on various assessments related to our former South American operations.

At September 30, 2012 and December 31, 2011, the total amount of gross unrecognized tax benefits (excluding the federal benefit received from state positions) was $59.0 million and $69.2 million, respectively. Unrecognized tax benefits related to federal, state and foreign tax positions may decrease by $2.5 million by September 30, 2013, if audits are completed or tax years close.

13

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



Tax Law Changes

On July 17, 2012, the U.K. enacted legislation which lowered the statutory rate from 25% to 24%, effective April 1, 2012 and from 24% to 23%, effective April 1, 2013. The impact of this change resulted in a non-cash charge to deferred income taxes and a decrease to earnings for the nine months ended September 30, 2012 of $0.9 million. The charge resulted from a reduction in the U.K.'s net deferred tax asset balance due to this legislation.
  
On June 20, 2012, Ontario, Canada enacted legislation which sets the income tax rate at 11.5% starting in 2012. Previously enacted legislation would have lowered the income tax rate to 10.0% starting in 2013. The impact of this change resulted in a non-cash charge to deferred income taxes and a decrease to earnings for the nine months ended September 30, 2012 of $0.7 million.

On May 25, 2011, the State of Michigan enacted changes to its tax system, which included a repeal of the Michigan Business Tax and replaced it with a corporate income tax. The impact of this change resulted in a non-cash charge to deferred income taxes and a decrease to earnings for the nine months ended September 30, 2011 of $5.4 million.

On January 13, 2011, the State of Illinois enacted changes to its tax system, which included an increase to the corporate income tax rate from 4.8% to 7.0%. The impact of this change resulted in a non-cash charge to deferred income taxes and a decrease to earnings for the nine months ended September 30, 2011 of $1.2 million.

Effective Tax Rate

Our effective income tax rate from continuing operations for the third quarter of 2012 was 35.6% compared with 35.0% in the same period of the prior year. The effective tax rate in the third quarter of 2012 was negatively impacted by the tax law change in the U.K., which increased the provision for income taxes by $0.9 million and our effective rate by 0.9%. The effective tax rate in the third quarter of 2011 was favorably impacted by tax benefits from acquisition-related transaction costs incurred in a prior year. The increase in the effective income tax rate from continuing operations was partially offset by a higher proportionate amount of earnings in lower rate jurisdictions.

Our effective income tax rate from continuing operations for the nine months ended September 30, 2012 was 34.0% compared with 40.0% in the same period of the prior year. The effective rate from continuing operations in the nine months ended September 30, 2012 was favorably impacted by a tax benefit of $5.0 million, or 2.2% of earnings before tax, relating to the favorable resolution of a tax item from prior periods and a higher proportionate amount of earnings in lower rate jurisdictions. These benefits were partially offset by tax law changes in the U.K. and Canada, which increased our provision for income taxes by $1.6 million and our effective tax rate by 0.7%. The effective rate from continuing operations in the nine months ended September 30, 2011 was negatively impacted by tax law changes in the States of Michigan and Illinois. For the nine months ended September 30, 2011, these tax law changes increased our provision for income taxes by $6.6 million and our effective rate by 3.2%.


14

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



(M) DEBT
 
Weighted-Average
Interest Rate
 
 
 
 
 
 
 
September 30,
2012
 
December 31,
2011
 
Maturities
 
September 30,
2012
 
December 31,
2011
 
 
 
 
 
 
 
(In thousands)
Short-term debt and current portion of long-term debt:
 
 
 
 
 
 
 
 
 
U.S. commercial paper
0.45
%
 
—
%
 
2012
 
$
65,000

 
—

Short-term debt
1.42
%
 
1.45
%
 
2012-2013
 
4,274

 
5,091

Current portion of long-term debt, including capital leases
 
 
 
 
 
 
374,355

 
269,275

Total short-term debt and current portion of long-term debt
 
 
 
 
 
 
443,629

 
274,366

Long-term debt:
 
 
 
 
 
 
 
 
 
U.S. commercial paper (1)
0.45
%
 
0.40
%
 
2016
 
283,921

 
415,936

Canadian commercial paper (1)
1.15
%
 
—
%
 
2016
 
22,363

 
—

Global revolving credit facility
1.62
%
 
1.52
%
 
2016
 
46,056

 
1,000

Unsecured U.S. notes — Medium-term notes (1)
4.02
%
 
4.49
%
 
2012-2025
 
2,984,845

 
2,484,712

Unsecured U.S. obligations, principally bank term loans
1.62
%
 
1.78
%
 
2013-2017
 
105,500

 
105,000

Unsecured foreign obligations
2.05
%
 
2.71
%
 
2014-2016
 
312,441

 
300,516

Capital lease obligations
4.14
%
 
4.24
%
 
2012-2018
 
43,863

 
48,047

Total before fair market value adjustment
 
 
 
 
 
 
3,798,989

 
3,355,211

Fair market value adjustment on notes subject to hedging (2)
 
 
 
 
 
19,827

 
21,843

 
 
 
 
 
 
 
3,818,816

 
3,377,054

Current portion of long-term debt, including capital leases
 
 
 
 
 
 
(374,355
)
 
(269,275
)
Long-term debt
 
 
 
 
 
 
3,444,461

 
3,107,779

Total debt
 
 
 
 
 
 
$
3,888,090

 
3,382,145

 ————————————
(1)
We had unamortized original issue discounts of $9.2 million and $8.7 million at September 30, 2012 and December 31, 2011, respectively.
(2)
The notional amount of executed interest rate swaps designated as fair value hedges was $550 million at September 30, 2012 and December 31, 2011.

We can borrow up to $900 million under a global revolving credit facility with a syndicate of twelve lending institutions led by Bank of America N.A., Bank of Tokyo-Mitsubishi UFJ, Ltd., BNP Paribas, Mizuho Corporate Bank, Ltd., Royal Bank of Canada, Royal Bank of Scotland Plc, U.S. Bank National Association and Wells Fargo Bank, N.A. This facility matures in June 2016 and is used primarily to finance working capital and provide support for the issuance of unsecured commercial paper in the U.S. and Canada. This facility can also be used to issue up to $75 million in letters of credit (there were no letters of credit outstanding against the facility at September 30, 2012). At our option, the interest rate on borrowings under the credit facility is based on LIBOR, prime, federal funds or local equivalent rates. The agreement provides for annual facility fees, which range from 10.0 basis points to 32.5 basis points, and are based on Ryder’s long-term credit ratings. The current annual facility fee is 15.0 basis points, which applies to the total facility size of $900 million. The credit facility contains no provisions limiting its availability in the event of a material adverse change to Ryder’s business operations; however, the credit facility does contain standard representations and warranties, events of default, cross-default provisions and certain affirmative and negative covenants. In order to maintain availability of funding, we must maintain a ratio of debt to consolidated net worth, of less than or equal to 300%. Net worth, as defined in the credit facility and amended in April 2012, represents shareholders' equity excluding any accumulated other comprehensive income or loss associated with our pension and other postretirement plans. The ratio at September 30, 2012 was 188%.

Our global revolving credit facility permits us to refinance short-term commercial paper obligations on a long-term basis. Settlement of short-term commercial paper obligations not expected to require the use of working capital are classified as long-term as we have both the intent and ability to refinance on a long-term basis. At September 30, 2012 and December 31, 2011, we classified $306.3 million and $415.9 million, respectively, of short-term commercial paper as long-term debt. At September 30, 2012, we classified $65.0 million of commercial paper as short-term debt as we do not expect to refinance these borrowings for at least one year from the balance sheet date.

15

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



In August 2012, we issued $350 million of unsecured medium-term notes maturing in March 2018. In February 2012, we issued $350 million of unsecured medium-term notes maturing in March 2017. The proceeds from the notes were used to pay down commercial paper and for general corporate purposes. If the notes are downgraded following, and as a result of, a change in control, the note holder can require us to repurchase all or a portion of the notes at a purchase price equal to 101% of principal plus accrued and unpaid interest.

We have a trade receivables purchase and sale program, pursuant to which we sell certain of our domestic trade accounts receivable to a bankruptcy remote, consolidated subsidiary of Ryder, that in turn sells, on a revolving basis, an ownership interest in certain of these accounts receivable to a receivables conduit or committed purchasers. The subsidiary is considered a VIE and is consolidated based on our control of the entity’s activities. We use this program to provide additional liquidity to fund our operations, particularly when it is cost effective to do so. The costs under the program may vary based on changes in interest rates. The available proceeds that may be received under the program are limited to $175 million. If no event occurs which causes early termination, the 364-day program will expire on October 26, 2012. We are currently in the process of renewing the program through October 2013. The program contains provisions restricting its availability in the event of a material adverse change to our business operations or the collectability of the collateralized receivables. At September 30, 2012 and December 31, 2011, no amounts were outstanding under the program. Sales of receivables under this program will be accounted for as secured borrowings based on our continuing involvement in the transferred assets.

At September 30, 2012 and December 31, 2011, we had letters of credit and surety bonds outstanding totaling $271.8 million and $271.0 million, respectively, which primarily guarantee the payment of insurance claims.


16

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



(N) FAIR VALUE MEASUREMENTS

The following tables present our assets and liabilities that are measured at fair value on a recurring basis and the levels of inputs used to measure fair value:
 
Balance Sheet Location
 
Fair Value Measurements
At September 30, 2012 Using
 
Total
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
(In thousands)
Assets:
 
 
 
Interest rate swap
Prepaid expenses and other current assets
 
$
—

 
3,269

 
—

 
3,269

Interest rate swaps
DFL and other assets
 
—

 
16,558

 
—

 
16,558

Investments held in Rabbi Trusts:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
3,120

 
—

 
—

 
3,120

U.S. equity mutual funds
 
 
11,305

 
—

 
—

 
11,305

Foreign equity mutual funds
 
 
2,716

 
—

 
—

 
2,716

Fixed income mutual funds
 
 
4,391

 
—

 
—

 
4,391

Investments held in Rabbi Trusts
DFL and other assets
 
$
21,532

 
—

 
—

 
21,532

Total assets at fair value
 
 
$
21,532

 
19,827

 
—

 
41,359

 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Contingent consideration
Other non-current liabilities
 
$
—

 
—

 
478

 
478

Total liabilities at fair value
 
 
$
—

 
—

 
478

 
478

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

 
21,843

 
—

 
21,843

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

 
—

 
—

 
3,783

U.S. equity mutual funds
 
 
8,850

 
—

 
—

 
8,850

Foreign equity mutual funds
 
 
2,526

 
—

 
—

 
2,526

Fixed income mutual funds
 
 
3,537

 
—

 
—

 
3,537

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

 
—

 
—

 
18,696

Total assets at fair value
 
 
$
18,696

 
21,843

 
—

 
40,539

 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Contingent consideration
Accrued expenses
 
$
—

 
—

 
1,000

 
1,000

Total liabilities at fair value
 
 
$
—

 
—

 
1,000

 
1,000


The following is a description of the valuation methodologies used for these items, as well as the level of inputs used to measure fair value:

Investments held in Rabbi Trusts — The investments primarily include mutual funds that invest in equity and fixed income securities. Shares of mutual funds were valued based on quoted market prices, which represent the net asset value of the shares and were therefore classified within Level 1 of the fair value hierarchy.

Interest rate swaps — The derivatives are pay-variable, receive-fixed interest rate swaps based on the LIBOR rate and are designated as fair value hedges. Fair value was based on a model-driven income approach using the LIBOR rate at each interest payment date, which was observable at commonly quoted intervals for the full term of the swaps. Therefore, our interest rate swaps were classified within Level 2 of the fair value hierarchy.


17

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


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

The following tables present our assets and liabilities that are measured at fair value on a nonrecurring basis and the levels of inputs used to measure fair value:
 
Fair Value Measurements
At September 30, 2012 Using
 
Total Losses (2)
 
Level 1
 
Level 2
 
Level 3
 
Three months  ended
 
Nine months ended
 
(In thousands)
Assets held for sale:
 
 
 
 
 
 
 
 
 
Revenue earning equipment: (1)
 
 
 
 
 
 
 
 
 
Trucks
$
—

 
—

 
11,994

 
$
3,664

 
$
9,153

Tractors
—

 
—

 
8,616

 
1,097

 
2,639

Trailers
—

 
—

 
407

 
400

 
1,183

Total assets at fair value
$
—

 
—

 
21,017

 
$
5,161

 
$
12,975

 
 
Fair Value Measurements
At September 30, 2011 Using
 
Total Losses (2)
 
Level 1
 
Level 2
 
Level 3
 
Three months
 ended
 
Nine months ended
 
(In thousands)
Assets held for sale:
 
 
 
 
 
 
 
 
 
Revenue earning equipment (1)
 
 
 
 
 
 
 
 
 
Trucks
$
—

 
—

 
6,401

 
$
1,275

 
$
3,875

Tractors
—

 
—

 
1,972

 
425

 
1,377

Trailers
—

 
—

 
357

 
305

 
815

Total assets at fair value
$
—

 
—

 
8,730

 
$
2,005

 
$
6,067

 ————————————
(1)
Represents the portion of all revenue earning equipment held for sale that is recorded at fair value, less costs to sell.
(2)
Total losses represent fair value adjustments for all vehicles held for sale throughout the period for which fair value was less than carrying value.

Revenue earning equipment held for sale is stated at the lower of carrying amount or fair value less costs to sell. Losses to reflect changes in fair value are presented within “Other operating expenses” in the Consolidated Condensed Statements of Comprehensive Income. For revenue earning equipment held for sale, we stratify our fleet by vehicle type (tractors, trucks and trailers), weight class, age and other relevant characteristics and create classes of similar assets for analysis purposes. Fair value was determined based upon recent market prices obtained from our own sales experience for sales of each class of similar assets and vehicle condition. Therefore, our revenue earning equipment held for sale was classified within Level 3 of the fair value hierarchy.

Fair value of total debt (excluding capital lease obligations) at September 30, 2012 and December 31, 2011 was approximately $4.06 billion and $3.51 billion, respectively. For publicly-traded debt, estimates of fair value were based on market prices. Since our publicly-traded debt is not actively traded, the fair value measurement was classified within Level 2 of the fair value hierarchy. For other debt, fair value was estimated based on a model-driven approach using rates currently available to us for debt with similar terms and remaining maturities. Therefore, the fair value measurement of our other debt was classified within Level 2 of the fair value hierarchy. The carrying amounts reported in the Consolidated Condensed Balance Sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the immediate or short-term maturities of these financial instruments.


18

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



(O) DERIVATIVES

Interest Rate Swaps

As of September 30, 2012, we have interest rate swaps outstanding which are designated as fair value hedges whereby we receive fixed interest rate payments in exchange for making variable interest rate payments. The differential to be paid or received is accrued and recognized as interest expense. The following table provides a detail of the swaps outstanding and the related hedged items as of September 30, 2012:
 
 
 
Maturity date
 
Face value of medium-term notes
 
Aggregate 
notional
amount of interest rate swaps
 
Fixed interest 
rate
 
Weighted-average variable
interest rate on hedged debt
as of September 30,
Issuance date
 
 
 
 
 
2012
 
2011
 
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
May 2011
 
June 2017
 
$350,000
 
$150,000
 
3.50%
 
1.83%
 
1.50%
February 2011
 
March 2015
 
$350,000
 
$150,000
 
3.15%
 
1.66%
 
1.43%
February 2008
 
March 2013
 
$250,000
 
$250,000
 
6.00%
 
2.84%
 
2.61%

Changes in the fair value of our interest rate swaps are offset by changes in the fair value of the debt instrument. Accordingly, there is no ineffectiveness related to the interest rate swaps. The location and amount of gains (losses) on interest rate swap agreements designated as fair value hedges and related hedged items reported in the Consolidated Condensed Statements of Comprehensive Income were as follows:
Fair Value Hedging Relationship
 
Location of
 Gain (Loss)
Recognized in Income
 
Three months ended September 30,
 
Nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
 
 
 
 
(In thousands)
Derivatives: Interest rate swaps
 
Interest expense
 
$
(64
)
 
8,251

 
$
(2,016
)
 
9,263

Hedged items: Fixed-rate debt
 
Interest expense
 
64

 
(8,251
)
 
2,016

 
(9,263
)
Total
 
 
 
$
—

 
—

 
$
—

 
—


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

(P) SHARE REPURCHASE PROGRAMS

In December 2011, our Board of Directors authorized a share repurchase program intended to mitigate the dilutive impact of shares issued under our various employee stock, stock option and employee stock purchase plans. Under the December 2011 program, management is authorized to repurchase shares of common stock in an amount not to exceed the number of shares issued to employees under the Company's various employee stock, stock option and employee stock purchase plans from December 1, 2011 through December 13, 2013. The December 2011 program limits aggregate share repurchases to no more than 2 million shares of Ryder common stock. Share repurchases of common stock are made periodically in open-market transactions and are subject to market conditions, legal requirements and other factors. Management established prearranged written plans for the Company under Rule 10b5-1 of the Securities Exchange Act of 1934 as part of the December 2011 program, which allow for share repurchases during Ryder's quarterly blackout periods as set forth in the trading plan. For the three months ended September 30, 2012, we repurchased and retired 87,223 shares under this program at an aggregate cost of $3.5 million. For the nine months ended September 30, 2012, we repurchased and retired 543,923 shares under this program at an aggregate cost of $26.3 million.

In December 2009, our Board of Directors authorized a two-year anti-dilutive share repurchase program. The December 2009 program limited aggregate share repurchases to no more than 2 million shares of Ryder common stock. For the three months ended September 30, 2011, we repurchased and retired 202,971 shares under this program at an aggregate cost of $9.5 million. For the nine months ended September 30, 2011, we repurchased and retired 1,022,971 shares under this program at an aggregate cost of $51.4 million. We completed the December 2009 share repurchase program in December 2011.

19

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



(Q) EMPLOYEE BENEFIT PLANS

Components of net periodic benefit cost were as follows:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Pension Benefits
 
 
 
 
 
 
 
Company-administered plans:
 
 
 
 
 
 
 
Service cost
$
3,861

 
3,676

 
$
11,594

 
11,059

Interest cost
23,651

 
24,374

 
70,903

 
73,248

Expected return on plan assets
(24,091
)
 
(25,441
)
 
(72,203
)
 
(76,477
)
Amortization of:
 
 
 
 
 
 
 
Transition obligation
—

 
(8
)
 
—

 
(23
)
Net actuarial loss
7,803

 
5,054

 
23,390

 
15,185

Prior service credit
(570
)
 
(568
)
 
(1,706
)
 
(1,710
)
 
10,654

 
7,087

 
31,978

 
21,282

Union-administered plans
1,754

 
1,627

 
4,998

 
4,423

Net periodic benefit cost
$
12,408

 
8,714

 
$
36,976

 
25,705

 
 
 
 
 
 
 
 
Company-administered plans:
 
 
 
 
 
 
 
U.S.
$
9,749

 
7,243

 
$
29,240

 
21,730

Non-U.S.
905

 
(156
)
 
2,738

 
(448
)
 
10,654

 
7,087

 
31,978

 
21,282

Union-administered plans
1,754

 
1,627

 
4,998

 
4,423

 
$
12,408

 
8,714

 
$
36,976

 
25,705

 
 
 
 
 
 
 
 
Postretirement Benefits
 
 
 
 
 
 
 
Company-administered plans:
 
 
 
 
 
 
 
  Service cost
$
274

 
323

 
$
821

 
973

  Interest cost
501

 
625