Edgar Filing: RYDER SYSTEM INC

March 31,
2013

December 31,
2012

(In thousands)

Total assets, primarily deposits

Total liabilities, primarily contingent accruals

Ryder Ist Quarter 2013 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2013



¨	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 March 31, 2013 was 51,922,227.

RYDER SYSTEM, INC.

FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS




		Page No.

PART I FINANCIAL INFORMATION

ITEM 1 Financial Statements (unaudited)

	Consolidated Condensed Statements of Earnings — Three months ended March 31, 2013 and 2012	1

	Consolidated Condensed Statements of Comprehensive Income - Three months ended March 31, 2013 and 2012	2

	Consolidated Condensed Balance Sheets — March 31, 2013 and December 31, 2012	3

	Consolidated Condensed Statements of Cash Flows — Three months ended March 31, 2013 and 2012	4

	Consolidated Condensed Statement of Shareholders’ Equity — Three months ended March 31, 2013	5

	Notes to Consolidated Condensed Financial Statements	6

ITEM 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		22

ITEM 3 Quantitative and Qualitative Disclosures About Market Risk		41

ITEM 4 Controls and Procedures		41

PART II OTHER INFORMATION

ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds		41

ITEM 6 Exhibits		42

	SIGNATURES	43

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RYDER SYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS

(unaudited)



	Three months ended March 31,
	2013			2012
	(In thousands, except per share amounts)
Lease and rental revenues	$	659,708		637,858
Services revenue	689,461			678,352
Fuel services revenue	213,848			220,066
Total revenues	1,563,017			1,536,276

Cost of lease and rental	470,120			458,944
Cost of services	585,437			575,669
Cost of fuel services	210,293			215,573
Other operating expenses	37,968			34,249
Selling, general and administrative expenses	189,813			194,984
Gains on vehicle sales, net	(23,006		)	(21,991	)
Interest expense	34,454			34,765
Miscellaneous income, net	(4,570		)	(4,480	)
Restructuring and other charges, net	—			865
	1,500,509			1,488,578
Earnings from continuing operations before income taxes	62,508			47,698
Provision for income taxes	21,706			12,822
Earnings from continuing operations	40,802			34,876
Loss from discontinued operations, net of tax	(878		)	(555	)
Net earnings	$	39,924		34,321

Earnings (loss) per common share — Basic
Continuing operations	$	0.79		0.68
Discontinued operations	(0.02		)	(0.01	)
Net earnings	$	0.77		0.67

Earnings (loss) per common share — Diluted
Continuing operations	$	0.79		0.68
Discontinued operations	(0.02		)	(0.01	)
Net earnings	$	0.77		0.67

Cash dividends declared per common share	$	0.31		0.29

See accompanying notes to consolidated condensed financial statements.

RYDER SYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)



	Three months ended March 31,
	2013			2012
	(In thousands)

Net earnings	$	39,924		34,321

Other comprehensive (loss) income before taxes:
Amortization of pension and postretirement items	8,354			7,231
Change in cumulative translation adjustment and other	(33,704		)	22,803
Other comprehensive (loss) income before taxes	(25,350		)	30,034
Income tax expense related to components of other comprehensive income	(2,935		)	(2,543	)
Other comprehensive (loss) income, net of taxes	(28,285		)	27,491
Comprehensive income	$	11,639		61,812

See accompanying notes to consolidated condensed financial statements.

RYDER SYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(unaudited)



	March 31, 2013			December 31, 2012
	(Dollars in thousands, except per share amount)
Assets:
Current assets:
Cash and cash equivalents	$	76,489		66,392
Receivables, net	774,441			775,765
Inventories	63,028			64,146
Prepaid expenses and other current assets	156,897			133,934
Total current assets	1,070,855			1,040,237
Revenue earning equipment, net of accumulated depreciation of $3,496,545 and $3,514,910, respectively	5,808,983			5,754,608
Operating property and equipment, net of accumulated depreciation of $978,101 and $966,220, respectively	625,727			624,853
Goodwill	383,515			384,216
Intangible assets	77,711			80,475
Direct financing leases and other assets	425,311			434,590
Total assets	$	8,392,102		8,318,979

Liabilities and shareholders’ equity:
Current liabilities:
Short-term debt and current portion of long-term debt	$	259,733		367,975
Accounts payable	462,192			398,983
Accrued expenses and other current liabilities	456,945			505,707
Total current liabilities	1,178,870			1,272,665
Long-term debt	3,585,890			3,452,821
Other non-current liabilities	948,513			948,932
Deferred income taxes	1,187,684			1,177,074
Total liabilities	6,900,957			6,851,492

Shareholders’ equity:
Preferred stock of no par value per share — authorized, 3,800,917; none outstanding, March 31, 2013 or December 31, 2012	—			—
Common stock of $0.50 par value per share — authorized, 400,000,000; outstanding, March 31, 2013 — 51,922,227; December 31, 2012 — 51,371,696	25,961			25,686
Additional paid-in capital	836,132			808,230
Retained earnings	1,244,956			1,221,190
Accumulated other comprehensive loss	(615,904		)	(587,619	)
Total shareholders’ equity	1,491,145			1,467,487
Total liabilities and shareholders’ equity	$	8,392,102		8,318,979

See accompanying notes to consolidated condensed financial statements.

RYDER SYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)



	Three months ended March 31,
	2013			2012
	(In thousands)
Cash flows from operating activities from continuing operations:
Net earnings	$	39,924		34,321
Less: Loss from discontinued operations, net of tax	(878		)	(555	)
Earnings from continuing operations	40,802			34,876
Depreciation expense	231,541			226,608
Gains on vehicle sales, net	(23,006		)	(21,991	)
Share-based compensation expense	4,609			4,437
Amortization expense and other non-cash charges, net	13,432			9,101
Deferred income tax expense	18,593			14,356
Changes in operating assets and liabilities, net of acquisitions:
Receivables	(8,677		)	(26,520	)
Inventories	902			(1,166	)
Prepaid expenses and other assets	(17,353		)	(5,644	)
Accounts payable	36,405			9,448
Accrued expenses and other non-current liabilities	(48,320		)	(57,229	)
Net cash provided by operating activities from continuing operations	248,928			186,276

Cash flows from financing activities from continuing operations:
Net change in commercial paper borrowings	112,938			(164,298	)
Debt proceeds	249,723			369,920
Debt repaid, including capital lease obligations	(317,344		)	(2,784	)
Dividends on common stock	(15,980		)	(14,853	)
Common stock issued	22,529			13,156
Common stock repurchased	(104		)	(11,920	)
Excess tax benefits from share-based compensation	1,575			789
Debt issuance costs	(1,767		)	(2,211	)
Net cash provided by financing activities from continuing operations	51,570			187,799

Cash flows from investing activities from continuing operations:
Purchases of property and revenue earning equipment	(420,054		)	(470,969	)
Sales of revenue earning equipment	112,425			91,341
Sales of operating property and equipment	916			2,898
Acquisitions	(1,420		)	(2,076	)
Collections on direct finance leases	27,411			15,475
Changes in restricted cash	(18,979		)	(2,438	)
Other, net	3,767			—
Net cash used in investing activities from continuing operations	(295,934		)	(365,769	)

Effect of exchange rate changes on cash	6,257			1,660
Increase in cash and cash equivalents from continuing operations	10,821			9,966

Cash flows from discontinued operations:
Operating cash flows	(726		)	(933	)
Effect of exchange rate changes on cash	2			16
Decrease in cash and cash equivalents from discontinued operations	(724		)	(917	)

Increase in cash and cash equivalents	10,097			9,049
Cash and cash equivalents at January 1	66,392			104,572
Cash and cash equivalents at March 31	$	76,489		113,621

See accompanying notes to consolidated condensed financial statements.

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		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total
	(Dollars in thousands, except per share amount)
Balance at December 31, 2012	$	—	51,371,696	$	25,686	808,230		1,221,190		(587,619	)	1,467,487
Net earnings	—		—	—		—		39,924		—		39,924
Other comprehensive loss	—		—	—		—		—		(28,285	)	(28,285	)
Comprehensive income												11,639
Common stock dividends declared — $0.31 per share	—		—	—		—		(16,158	)	—		(16,158	)
Common stock issued under employee stock option and stock purchase plans ⁽¹⁾	—		551,091	275		22,254		—		—		22,529
Benefit plan stock purchases ⁽²⁾	—		(560)	—		(104	)	—		—		(104	)
Share-based compensation	—		—	—		4,609		—		—		4,609
Tax benefits from share-based compensation	—		—	—		1,143		—		—		1,143
Balance at March 31, 2013	$	—	51,922,227	$	25,961	836,132		1,244,956		(615,904	)	1,491,145

————————————

(1)Net of common shares delivered as payment for the exercise price or to satisfy the option holders’ withholding tax liability upon exercise of options.

(2)Represents open-market transactions of common shares by the trustee of Ryder’s deferred compensation plans.

See accompanying notes to consolidated condensed financial statements.

RYDER SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

(A) INTERIM FINANCIAL STATEMENTS

The accompanying unaudited Consolidated Condensed Financial Statements include the accounts of Ryder System, Inc. (Ryder) and all entities in which Ryder has a controlling voting interest (“subsidiaries”) and variable interest entities (VIEs) required to be consolidated in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The accompanying unaudited Consolidated Condensed Financial Statements have been prepared in accordance with the accounting policies described in our 2012 Annual Report on Form 10-K and should be read in conjunction with the Consolidated Financial Statements and notes thereto. These financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included and the disclosures herein are adequate. The operating results for interim periods are unaudited and are not necessarily indicative of the results that can be expected for a full year. Prior year amounts have been reclassified to conform to the current period presentation. These reclassifications were immaterial to the financial statements taken as a whole.

(B) ACQUISITIONS

Euroway Ltd. — On August 1, 2012, we acquired all of the common stock of Euroway Ltd., a U.K.-based, full service leasing, rental and maintenance company for a purchase price of $2.4 million and assumed capital lease obligations and debt of $20.3 million. Approximately $1.2 million of the stock purchase price has been paid, and the majority of the capital lease obligations have been repaid as of March 31, 2013. The purchase price includes $0.5 million in contingent consideration to be paid to the seller provided certain conditions are met. As of March 31, 2013, the fair value of the contingent consideration has been reflected in “Accrued expenses and other current liabilities” in our Consolidated Condensed Balance Sheet. See Note (M), “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 March 31, 2013, goodwill and customer relationship intangibles related to the Euroway acquisition were $6.1 million and $2.8 million, respectively. The combined network operates under the Ryder name, complementing our FMS business segment coverage in the U.K.

During the three months ended March 31, 2013 and March 31, 2012, we paid $1.4 million and $2.1 million, respectively, related to acquisitions completed in years prior to 2012.

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 March 31,
	2013			2012
	(In thousands)
Pre-tax loss from discontinued operations	$	(901	)	(575	)
Income tax benefit	23			20
Loss from discontinued operations, net of tax	$	(878	)	(555	)

Results of discontinued operations in 2013 and 2012 reflected losses related to adverse legal developments and professional and administrative fees associated with our discontinued South American operations.

The following is a summary of assets and liabilities of discontinued operations:

RYDER SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(unaudited)

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 $4.7 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 $5.1 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.

(D) 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 March 31,
	2013			2012
	(In thousands)
Stock option and stock purchase plans	$	2,110		2,364
Nonvested stock	2,499			2,073
Share-based compensation expense	4,609			4,437
Income tax benefit	(1,687		)	(1,484	)
Share-based compensation expense, net of tax	$	2,922		2,953

During the three months ended March 31, 2013 and 2012, approximately 377,000 and 460,000 stock options, respectively, were granted under the Plans. These awards generally vest evenly over a three years period beginning on the date of grant. The stock options granted in 2013 have contractual terms of ten years, and stock options granted in 2012 have contractual terms of seven years. The fair value of each option award at the date of grant was estimated using a Black-Scholes-Merton option-pricing valuation model. The weighted-average fair value per option granted during the three months ended March 31, 2013 and 2012 was $13.99 and $14.07, respectively.

During the three months ended March 31, 2013 and 2012, approximately 22,000 and 93,000 market-based restricted stock rights, respectively, were granted under the Plans. The awards were segmented into three performance periods of one, two and three years. At the end of each performance period, 25%-125% of the award may be earned based on Ryder's total shareholder return (TSR) as compared to the TSR of a peer group over the applicable performance period. For the 2013 awards, Ryder's TSR will be compared to the TSR of a custom peer group. For the 2012 awards, Ryder's TSR will be compared to the TSR of the S&P 500. If earned, employees will receive the grant of stock at the end of the three year performance period from the grant date provided they continue to be employed with Ryder, subject to Compensation Committee approval. The fair value of the market-based restricted stock rights was estimated using a lattice-based option-pricing valuation model that incorporates a Monte-Carlo simulation. The fair value of the market-based awards was determined and fixed on the grant date and considers the likelihood of Ryder achieving the market-based condition. The weighted-average fair value per market-based restricted stock right granted during the three months ended March 31, 2013 and 2012 was $53.32 and $43.39, respectively.

RYDER SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(unaudited)

During the three months ended March 31, 2013, approximately 15,000 performance-based restricted stock rights were granted under the Plans. For these awards, 25%-125% of the awards may be earned based on Ryder's 2013 return on capital (ROC) measured against a ROC target. If earned, employees will receive the grant of stock at the end of the three year period from the grant date provided they continue to be employed with Ryder, subject to Compensation Committee approval. Share-based compensation expense is recognized on a straight-line basis over the vesting period, based upon the probability that the performance target will be met. The fair value of the performance-based restricted stock rights was 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 performance-based restricted stock right granted was $58.21. During the three months ended March 31, 2013, approximately 30,000 performance-based restricted stock rights were also awarded under the Plans for which the annual ROC target will be determined in future years. These awards will be considered granted under accounting guidance for stock compensation once the Compensation Committee approves the annual ROC target and communicates the terms of the awards to the recipients.

During the three months ended March 31, 2013 and 2012, approximately 127,000 and 104,000 time-vested restricted stock rights, respectively, were granted under the Plans. The time-vested restricted stock rights entitle the holder to shares of common stock when the awards generally vest at the end of the three-year period after the grant date. The fair value of the time-vested awards is determined and fixed on the date of grant based on Ryder’s stock price on the date of grant. The weighted-average fair value per time-vested restricted stock right granted during the three months ended March 31, 2013 and 2012 was $58.00 and $53.62, respectively.

During the three months ended March 31, 2013 and 2012, employees who received market-based restricted stock rights also received market-based cash awards. In addition, in 2012, the majority of the employees who received time-vested restricted stock also received market-based cash awards. The cash awards have the same vesting provisions as the market-based restricted stock rights. The cash awards are accounted for as liability awards under the share-based compensation accounting guidance as the awards are based upon the performance of our common stock and are settled in cash. As a result, the liability is adjusted to reflect fair value at the end of each reporting period. The fair value of the cash awards was estimated using a lattice-based option-pricing valuation model that incorporates a Monte-Carlo simulation.

The following table is a summary of compensation expense recognized for market-based cash awards in addition to the share-based compensation expense reported in the previous table:



	Three months ended March 31,
	2013	2012
	(In thousands)
Cash awards	$1,274	597

Total unrecognized pre-tax compensation expense related to all share-based compensation arrangements at March 31, 2013 was $39.3 million and is expected to be recognized over a weighted-average period of 1.6 years.

(E) EARNINGS PER SHARE

We compute earnings per share using the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. Our nonvested stock granted prior to 2012 are considered participating securities since the share-based awards contain a non-forfeitable right to dividend cash payments prior to vesting. Dividends on nonvested stock granted after 2011 are not paid unless the award vests. 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.

RYDER SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(unaudited)

The following table presents the calculation of basic and diluted earnings per common share from continuing operations:



	Three months ended March 31,
	2013			2012
	(In thousands, except per share amounts)
Earnings per share — Basic:
Earnings from continuing operations	$	40,802		34,876
Less: Distributed and undistributed earnings allocated to nonvested stock	(403		)	(462	)
Earnings from continuing operations available to common shareholders — Basic	$	40,399		34,414

Weighted average common shares outstanding — Basic	50,958			50,485

Earnings from continuing operations per common share — Basic	$	0.79		0.68

Earnings per share — Diluted:
Earnings from continuing operations	$	40,802		34,876
Less: Distributed and undistributed earnings allocated to nonvested stock	(403		)	(460	)
Earnings from continuing operations available to common shareholders — Diluted	$	40,399		34,416

Weighted average common shares outstanding — Basic	50,958			50,485
Effect of dilutive equity awards	435			436
Weighted average common shares outstanding — Diluted	51,393			50,921

Earnings from continuing operations per common share — Diluted	$	0.79		0.68

Anti-dilutive equity awards not included above	1,413			1,453

(F) RESTRUCTURING AND OTHER CHARGES

Restructuring charges, net of $0.9 million for the three months ended March 31, 2012 represented exit costs associated with non-essential leased facilities assumed in the Hill Hire acquisition.

Activity related to restructuring reserves including discontinued operations were as follows:



				Deductions
	December 31, 2012		Additions	Cash Payments	Non-Cash Reductions ⁽¹⁾	Foreign Translation Adjustments		March 31, 2013
	Balance		Additions	Cash Payments	Non-Cash Reductions ⁽¹⁾	Foreign Translation Adjustments		Balance
	(In thousands)
Employee severance and benefits	$	3,147	—	1,693	25	(95	)	1,334
Contract termination costs	1,728		—	579	—	(103	)	1,046
Total	$	4,875	—	2,272	25	(198	)	2,380

^{_________________________}

^{(1) Non-cash reductions represent adjustments to the restructuring reserve as actual costs were less than originally estimated.}

At March 31, 2013, the majority of outstanding restructuring obligations are required to be paid by the end of the year.

(G) 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:

RYDER SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(unaudited)



	March 31, 2013			December 31, 2012
	(In thousands)
Total minimum lease payments receivable	$	602,575		629,919
Less: Executory costs	(190,380		)	(201,777	)
Minimum lease payments receivable	412,195			428,142
Less: Allowance for uncollectibles	(643		)	(703	)
Net minimum lease payments receivable	411,552			427,439
Unguaranteed residuals	58,022			60,764
Less: Unearned income	(93,209		)	(96,280	)
Net investment in direct financing and sales-type leases	376,365			391,923
Current portion	(73,951		)	(76,395	)
Non-current portion	$	302,414		315,528

Our direct financing lease customers operate in a wide variety of industries, and we have no significant customer concentrations in any one industry. We assess credit risk for all of our customers including those who lease equipment under direct financing leases upon signing of a full service lease contract. The credit risk assessment is only updated under certain circumstances. Credit risk is assessed using an internally developed model, which is updated monthly, that incorporates credit scores from third party providers and our own custom risk ratings. The external credit scores are developed based on the customer’s historical payment patterns and an overall assessment of the likelihood of delinquent payments. Our internal ratings are weighted based on the industry in which the customer operates, company size, years in business, and other credit-related 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:



	March 31, 2013		December 31, 2012
	(In thousands)
Very low risk to low risk	$	172,034	193,123
Moderate risk	175,056		177,400
Moderately high risk to high risk	65,105		57,619
	$	412,195	428,142

The following table is a rollforward of the allowance for credit losses on direct financing lease receivables for the three months ended March 31, 2013 and 2012:



	2013			2012
	(In thousands)
Balance at December 31	$	703		903
Charged to earnings	(42		)	783
Deductions	(18		)	(879	)
Balance at March 31	$	643		807

As of March 31, 2013, 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 financing lease receivables as of March 31, 2013.

RYDER SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(unaudited)

(H) REVENUE EARNING EQUIPMENT



	March 31, 2013					December 31, 2012
	Cost		Accumulated Depreciation		Net Book Value⁽¹⁾	Cost	Accumulated Depreciation		Net Book Value⁽¹⁾
	(In thousands)
Held for use:
Full service lease	$	6,783,263	(2,463,080	)	4,320,183	6,728,746	(2,500,786	)	4,227,960
Commercial rental	1,979,910		(648,351	)	1,331,559	2,041,698	(660,356	)	1,381,342
Held for sale	542,355		(385,114	)	157,241	499,074	(353,768	)	145,306
Total	$	9,305,528	(3,496,545	)	5,808,983	9,269,518	(3,514,910	)	5,754,608

————————————


(1)	Revenue earning equipment, net includes vehicles acquired under capital leases of $55.1 million, less accumulated depreciation of $17.1 million, at March 31, 2013, and $56.2 million, less accumulated depreciation of $16.5 million, at December 31, 2012.

At the end of 2012, we completed our annual review of residual values and useful lives of revenue earning equipment. Based on the results of our analysis, we adjusted the estimated residual values of certain classes of revenue earning equipment effective January 1, 2013. The change in estimated residual values increased pre-tax earnings for the three months ended March 31, 2013 by approximately $7.4 million.

(I) GOODWILL

The carrying amount of goodwill attributable to each reportable business segment with changes therein was as follows:



	Fleet Management Solutions			Supply Chain Solutions		Total
	(In thousands)
Balance at January 1, 2013:
Goodwill	$	223,129		190,308		413,437
Accumulated impairment losses	(10,322		)	(18,899	)	(29,221	)
	212,807			171,409		384,216
Purchase accounting adjustments	86			—		86
Foreign currency translation adjustments	(573		)	(214	)	(787	)
Balance at March 31, 2013:
Goodwill	222,642			190,094		412,736
Accumulated impairment losses	(10,322		)	(18,899	)	(29,221	)
	$	212,320		171,195		383,515

RYDER SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(unaudited)

(J) ACCRUED EXPENSES AND OTHER LIABILITIES



	March 31, 2013				December 31, 2012
	Accrued Expenses		Non-Current Liabilities	Total	Accrued Expenses	Non-Current Liabilities	Total
	(In thousands)
Salaries and wages	$	61,830	—	61,830	86,776	—	86,776
Deferred compensation	1,718		26,546	28,264	1,630	24,918	26,548
Pension benefits	2,661		597,762	600,423	3,309	597,275	600,584
Other postretirement benefits	2,677		37,601	40,278	2,683	37,916	40,599
Insurance obligations ⁽¹⁾	126,608		182,570	309,178	133,459	178,714	312,173
Residual value guarantees	1,421		184	1,605	1,505	130	1,635
Accrued rent	16,250		6,944	23,194	9,244	9,405	18,649
Environmental liabilities	4,145		7,926	12,071	4,201	8,415	12,616
Asset retirement obligations	5,268		15,347	20,615	3,642	17,116	20,758
Operating taxes	98,677		—	98,677	91,419	—	91,419
Income taxes	3,234		58,745	61,979	8,288	57,590	65,878
Interest	22,950		—	22,950	35,798	—	35,798
Deposits, mainly from customers	50,739		6,237	56,976	51,671	6,236	57,907
Deferred revenue	18,918		6	18,924	21,557	—	21,557
Acquisition holdbacks	2,798		—	2,798	1,637	2,673	4,310
Other	37,051		8,645	45,696	48,888	8,544	57,432
Total	$	456,945	948,513	1,405,458	505,707	948,932	1,454,639

————————————

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

(K) INCOME TAXES

Uncertain Tax Positions

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

The following is a summary of tax years that are no longer subject to examination:

Federal — audits of our U.S. federal income tax returns are closed through fiscal year 2008.

State — for the majority of states, tax returns are closed through fiscal year 2008.

Foreign — we are no longer subject to foreign tax examinations by tax authorities for tax years before 2005 in Canada, 2006 in Brazil, 2008 in Mexico and 2010 in the U.K., which are our major foreign tax jurisdictions. Refer to Note (C), “Discontinued Operations,” for further discussion on various assessments related to our former South American operations.

At March 31, 2013 and December 31, 2012, the total amount of gross unrecognized tax benefits (excluding the federal benefit received from state positions) was $53.2 million and $52.3 million, respectively. Unrecognized tax benefits related to federal, state and foreign tax positions may decrease by $2.3 million by March 31, 2014, if audits are completed or tax years close.

RYDER SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(unaudited)

Like-Kind Exchange Program

We have a like-kind exchange program for certain of our revenue earning equipment operating in the U.S. Pursuant to the program, we dispose of vehicles and acquire replacement vehicles in a form whereby tax gains on disposal of eligible vehicles are deferred. To qualify for like-kind exchange treatment, we exchange through a qualified intermediary eligible vehicles being disposed of with vehicles being acquired, allowing us to generally carryover the tax basis of the vehicles sold (“like-kind exchanges”). The program results in a material deferral of federal and state income taxes. As part of the program, the proceeds from the sale of eligible vehicles are restricted for the acquisition of replacement vehicles and other specified applications. Due to the structure utilized to facilitate the like-kind exchanges, the qualified intermediary that holds the proceeds from the sales of eligible vehicles and the entity that holds the vehicles to be acquired under the program are required to be consolidated in the accompanying Consolidated Condensed Financial Statements in accordance with U.S. GAAP. At March 31, 2013 and December 31, 2012, these consolidated entities had total assets, primarily revenue earning equipment, and total liabilities, primarily accounts payable, of $174.3 million and $25.8 million, respectively.

During 2012, we were in a net operating loss position for tax purposes and were not realizing any benefits from the like-kind exchange program. We also had restricted cash in the program that could be used for other purposes. As a result, in the second quarter of 2012, we temporarily ceased utilizing the program while we restructured the processes relating to the purchase and sale of our vehicles and evaluated other tax planning alternatives. Although these actions did not impact our 2012 tax provision or capital spending program, our cash flows increased $19 million from the release of the program's restricted cash. In the first quarter of 2013, once we had completed our restructuring and evaluation, we reinstated our like-kind exchange program and expect to realize cash tax benefits in future periods.

Effective Tax Rate

Our effective income tax rate from continuing operations for the first quarter of 2013 was 34.7% compared with 26.9% in the same period of the prior year. The effective tax rate in the first quarter of 2012 was favorably impacted by a tax benefit of $5 million (10.4% of earnings before tax) relating to the favorable resolution of a tax item from prior periods.

RYDER SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(unaudited)

(L) DEBT



	Weighted-Average Interest Rate
	March 31, 2013		December 31, 2012		Maturities	March 31, 2013			December 31, 2012
						(In thousands)
Short-term debt and current portion of long-term debt:
Short-term debt	1.49	%	2.27	%	2013	$	2,015		9,820
Current portion of long-term debt, including capital leases						257,718			358,155
Total short-term debt and current portion of long-term debt						259,733			367,975
Long-term debt:
U.S. commercial paper ⁽¹⁾	0.35	%	0.41	%	2016	457,942			329,925
Canadian commercial paper ⁽¹⁾	1.15	%	1.14	%	2016	7,861			23,165
Global revolving credit facility	1.40	%	1.58	%	2016	500			8,924
Unsecured U.S. notes — Medium-term notes⁽¹⁾	3.95	%	4.01	%	2014-2025	2,971,376			2,971,313
Unsecured U.S. obligations, principally bank term loans	1.49	%	1.56	%	2015-2019	55,500			105,500
Unsecured foreign obligations	1.92	%	1.91	%	2014-2016	295,055			313,406
Capital lease obligations	4.14	%	4.08	%	2013-2019	41,430			42,018
Total before fair market value adjustment						3,829,664			3,794,251
Fair market value adjustment on notes subject to hedging ⁽²⁾						13,944			16,725
						3,843,608			3,810,976
Current portion of long-term debt, including capital leases						(257,718		)	(358,155	)
Long-term debt						3,585,890			3,452,821
Total debt						$	3,845,623		3,820,796

————————————


(1)	We had unamortized original issue discounts of $8.7 million and $8.8 million at March 31, 2013 and December 31, 2012, respectively.


(2)	The notional amount of executed interest rate swaps designated as fair value hedges was $300 million and $550 million at March 31, 2013 and December 31, 2012, respectively.

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 March 31, 2013). At our option, the interest rate on borrowings under the credit facility is based on LIBOR, prime, federal funds or local equivalent rates. The agreement 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, represents shareholders' equity excluding any accumulated other comprehensive income or loss associated with our pension and other postretirement plans. The ratio at March 31, 2013 was 180%. At March 31, 2013, $434 million was available under the credit facility, net of support for commercial paper borrowings.

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 March 31, 2013 and December 31, 2012, we classified $465.8 million and $353.1 million, respectively, of short-term commercial paper as long-term debt.

In February 2013, we issued $250 million of unsecured medium-term notes maturing in February 2019. The proceeds from the notes were used to pay down commercial paper and for general corporate purposes. If the notes are downgraded following,

RYDER SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(unaudited)

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 25, 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 March 31, 2013 and December 31, 2012, no amounts were outstanding under the program. Sales of receivables under this program will be accounted for as secured borrowings based on our continuing involvement in the transferred assets.

At March 31, 2013 and December 31, 2012, we had letters of credit and surety bonds outstanding totaling $293.9 million and $294.1 million, respectively, which primarily guarantee the payment of insurance claims.

RYDER SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(unaudited)

(M) 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 March 31, 2013 Using				Total
	Balance Sheet Location	Level 1		Level 2	Level 3	Total
		(In thousands)
Assets:
Interest rate swaps	DFL and other assets	$	—	13,944	—	13,944
Investments held in Rabbi Trusts:
Cash and cash equivalents		3,513		—	—	3,513
U.S. equity mutual funds		12,239		—	—	12,239
Foreign equity mutual funds		3,337		—	—	3,337
Fixed income mutual funds		4,534		—	—	4,534
Investments held in Rabbi Trusts	DFL and other assets	23,623		—	—	23,623
Total assets at fair value		$	23,623	13,944	—	37,567

Liabilities:
Contingent consideration	Accrued expenses and other current liabilities	$	—	—	478	478
Total liabilities at fair value		$	—	—	478	478



	Balance Sheet Location	Fair Value Measurements At December 31, 2012 Using				Total
	Balance Sheet Location	Level 1		Level 2	Level 3	Total
		(In thousands)
Assets:
Interest rate swaps	Prepaid expenses and other current assets	$	—	1,313	—	1,313
Interest rate swaps	DFL and other assets	—		15,412	—	15,412
Investments held in Rabbi Trusts:
Cash and cash equivalents		4,055		—	—	4,055
U.S. equity mutual funds		10,871		—	—	10,871
Foreign equity mutual funds		2,974		—	—	2,974
Fixed income mutual funds		4,526		—	—	4,526
Investments held in Rabbi Trusts	DFL and other assets	22,426		—	—	22,426
Total assets at fair value		$	22,426	16,725	—	39,151

Liabilities:
Contingent consideration	Other non-current liabilities	$	—	—	478	478
Total liabilities at fair value		$	—	—	478	478

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

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.

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 March 31, 2013 Using				Total Losses ⁽²⁾
	Level 1		Level 2	Level 3	Three months ended
	(In thousands)
Assets held for sale:
Revenue earning equipment: ⁽¹⁾
Trucks	$	—	—	13,229	$	3,029
Tractors	—		—	14,943	1,095
Trailers	—		—	989	597
Total assets at fair value	$	—	—	29,161	$	4,721



	Fair Value Measurements At March 31, 2012 Using				Total Losses ⁽²⁾
	Level 1		Level 2	Level 3	Three months ended
	(In thousands)
Assets held for sale:
Revenue earning equipment ⁽¹⁾
Trucks	$	—	—	7,321	$	2,381
Tractors	—		—	3,514	471
Trailers	—		—	624	507
Total assets at fair value	$	—	—	11,459	$	3,359

————————————


(1)	Represents the portion of all revenue earning equipment held for sale that is recorded at fair value, less costs to sell.


(2)	Total losses represent fair value adjustments for all vehicles held for sale throughout the period for which fair value was less than carrying value.

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

Fair value of total debt (excluding capital lease obligations) at March 31, 2013 and December 31, 2012 was approximately $4.02 billion and $3.99 billion, respectively. For publicly-traded debt, estimates of fair value were based on market prices. Since our publicly-traded debt is not actively traded, the fair value measurement was classified within Level 2 of the fair value hierarchy. For other debt, fair value was estimated based on a model-driven approach using rates currently available to us for debt with similar terms and remaining maturities. Therefore, the fair value measurement of our other debt was classified within Level 2 of the fair value hierarchy. The carrying amounts reported in the Consolidated Condensed Balance Sheets for “Cash and cash equivalents,” “Receivables, net” and “Accounts payable” approximate fair value because of the immediate or short-term maturities of these financial instruments.

RYDER SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(unaudited)

(N) DERIVATIVES

As of March 31, 2013, we have interest rate swaps outstanding which are designated as fair value hedges whereby we receive fixed interest rate payments in exchange for making variable interest rate payments. The differential to be paid or received is accrued and recognized as interest expense. The following table provides a detail of the swaps outstanding and the related hedged items as of March 31, 2013:



	Maturity date	Face value of medium-term notes	Aggregate notional amount of interest rate swaps	Fixed interest rate	Weighted-average variable interest rate on hedged debt as of March 31,
Issuance date	Maturity date	Face value of medium-term notes	Aggregate notional amount of interest rate swaps	Fixed interest rate	2013	2012
		(Dollars in thousands)
May 2011	June 2017	$350,000	$150,000	3.50%	1.62%	1.84%
February 2011	March 2015	$350,000	$150,000	3.15%	1.41%	1.70%

Changes in the fair value of our interest rate swaps are offset by changes in the fair value of the debt instrument. Accordingly, there is no ineffectiveness related to the interest rate swaps. The location and amount of gains (losses) on interest rate swap agreements designated as fair value hedges and related hedged items reported in the Consolidated Condensed Statements of Earnings were as follows:



Fair Value Hedging Relationship	Location of Gain (Loss) Recognized in Income	Three months ended March 31,
Fair Value Hedging Relationship	Location of Gain (Loss) Recognized in Income	2013			2012
		(In thousands)
Derivatives: Interest rate swaps	Interest expense	$	(2,781	)	(2,170	)
Hedged items: Fixed-rate debt	Interest expense	2,781			2,170
Total		$	—		—

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

(O) SHARE REPURCHASE PROGRAMS

In December 2011, our Board of Directors authorized a share repurchase program intended to mitigate the dilutive impact of shares issued under our various employee stock, stock option and employee stock purchase plans. Under the December 2011 program, management is authorized to repurchase shares of common stock in an amount not to exceed the number of shares issued to employees under the Company's various employee stock, stock option and employee stock purchase plans from December 1, 2011 through December 13, 2013. The December 2011 program limits aggregate share repurchases to no more than 2 million shares of Ryder common stock. In 2013, we temporarily paused our anti-dilutive share repurchase program to appropriately manage our leverage and to allow us to maintain near-term balance sheet flexibility. For the three months ended March 31, 2012, we repurchased and retired 223,200 shares under this program at an aggregate cost of $11.9 million.

(P) COMPREHENSIVE INCOME

“Other comprehensive loss” for the three months ended March 31, 2013 totaled $28.3 million. For the three months ended March 31, 2012, “Other comprehensive income” was $27.5 million. The 2013 loss primarily consisted of a $33.7 million (before and after tax) change in the cumulative translation adjustment, which related to the weakening of the British Pound and the Canadian Dollar when compared to the U.S. Dollar. The prior year adjustment of $22.8 million (before and after tax) reflected the strengthening of these currencies against the U.S. Dollar.

“Other comprehensive income” for the three months ended March 31, 2013 and 2012 also includes amortization of pension and postretirement items of $8.4 million and $7.2 million ($5.4 million and $4.7 million after-tax) respectively, which are included in the computation of net periodic pension cost. See Note (Q), “Employee Benefit Plans,” for further information.

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:



	Pension Benefits					Postretirement Benefits
	Three months ended March 31,
	2013			2012		2013		2012
	(In thousands)
Company-administered plans:
Service cost	$	4,252		3,907		263		320
Interest cost	22,419			23,689		395		514
Expected return on plan assets	(26,448		)	(24,057	)	—		—
Amortization of:
Net actuarial loss	8,880			7,861		(2	)	(3	)
Prior service credit	(466		)	(569	)	(58	)	(58	)
	8,637			10,831		598		773
Union-administered plans	1,984			1,614		—		—
Net periodic benefit cost	$	10,621		12,445		598		773

Company-administered plans:
U.S.	$	8,741		9,848		406		552
Non-U.S.	(104		)	983		192		221
	8,637			10,831		598		773
Union-administered plans	1,984			1,614		—		—
	$	10,621		12,445		598		773

During the three months ended March 31, 2013, we contributed $4.0 million to our pension plans. In 2013, we expect to contribute approximately $66 million to our pension plans.

(R) OTHER ITEMS IMPACTING COMPARABILITY

Our primary measure of segment performance excludes certain items we do not believe are representative of the ongoing operations of the segment. We believe that excluding these items from our segment measure of performance allows for better comparison of results.

During the three months ended March 31, 2013, we recognized a benefit of $1.9 million (before and after tax) from the recognition of the accumulated currency translation adjustment from a foreign operation which has substantially liquidated its net assets. This benefit was recorded within “Miscellaneous income, net” in our Consolidated Condensed Statement of Earnings.

RYDER SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(unaudited)

(S) SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information was as follows:



	Three months ended March 31,
	2013		2012
	(In thousands)
Interest paid	$	45,425	37,325
Income taxes paid	$	3,721	4,183
Changes in accounts payable related to purchases of revenue earning equipment	$	29,381	316,457
Operating and revenue earning equipment acquired under capital leases	$	458	59

(T) SEGMENT REPORTING

Our operating segments are aggregated into reportable business segments based upon similar economic characteristics, products, services, customers and delivery methods. We operate in two reportable business segments: (1) FMS, which provides full service leasing, contract maintenance, contract-related maintenance and commercial rental of trucks, tractors and trailers to customers, principally in the U.S., Canada and the U.K.; and (2) SCS, which provides comprehensive supply chain consulting including distribution and transportation services in North America and Asia. The SCS segment also provides dedicated services, which includes vehicles and drivers as part of a dedicated transportation solution in the U.S.

Our primary measurement of segment financial performance, defined as “Earnings Before Tax” (EBT) from continuing operations, includes an allocation of Central Support Services (CSS) and excludes non-operating pension costs, restructuring and other charges, net as described in Note (F), “Restructuring and Other Charges” and the items discussed in Note (R), “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 and corporate communications. The objective of the EBT measurement is to provide clarity on the profitability of each business segment and, ultimately, to hold leadership of each business segment and each operating segment within each business 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.

Our FMS segment leases revenue earning equipment and provides fuel, maintenance and other ancillary services to the SCS segment. 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 customers (equipment contribution) are included in both FMS and SCS and then eliminated (presented as “Eliminations”).

The following tables set forth financial information for each of our business segments and provides a reconciliation between segment EBT and earnings from continuing operations before income taxes for the three months ended March 31, 2013 and 2012. 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.

RYDER SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(unaudited)



	FMS		SCS	Eliminations		Total

For the three months ended March 31, 2013
Revenue from external customers	$	986,538	576,479	—		1,563,017
Inter-segment revenue	113,194		—	(113,194	)	—
Total revenue	$	1,099,732	576,479	(113,194	)	1,563,017

Segment EBT	$	60,745	23,811	(7,333	)	77,223
Unallocated CSS						(11,375		)
Non-operating pension costs						(5,244		)
Restructuring and other charges, net and other items						1,904
Earnings from continuing operations before income taxes						$	62,508

Segment capital expenditures ^{(1), (2)}	$	406,511	5,800	—		412,311
Unallocated CSS						7,743
Capital expenditures paid						$	420,054

For the three months ended March 31, 2012
Revenue from external customers	$	964,363	571,913	—		1,536,276
Inter-segment revenue	107,028		—	(107,028	)	—
Total revenue	$	1,071,391	571,913	(107,028	)	1,536,276

Segment EBT	$	50,683	21,871	(6,481	)	66,073
Unallocated CSS						(9,506		)
Non-operating pension costs						(8,004		)
Restructuring and other charges, net and other items						(865		)
Earnings from continuing operations before income taxes						$	47,698

Segment capital expenditures ^{(1), (2)}	$	463,606	2,837	—		466,443
Unallocated CSS						4,526
Capital expenditures paid						$	470,969

————————————


(1)	Excludes revenue earning equipment acquired under capital leases.


(2)	Excludes acquisition payments of $1.4 million and $2.1 million during the three months ended March 31, 2013 and 2012, respectively.

(U) OTHER MATTERS

We are a party to various claims, complaints and proceedings arising in the ordinary course of our continuing business operations including but not limited to those relating to commercial and employment claims, environmental matters, risk management matters (e.g. vehicle liability, workers’ compensation, etc.) and administrative assessments primarily associated with operating taxes. We have established loss provisions for matters in which losses are probable and can be reasonably estimated. For matters from continuing operations 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.

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.

Refer to Note (C), “Discontinued Operations,” for additional matters.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

OVERVIEW

The following discussion 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 2012 Annual Report on Form 10-K.

Ryder System, Inc. (Ryder) is a global leader in transportation and supply chain management solutions. Our operating segments are aggregated into reportable business segments based upon similar economic characteristics, products, services, customers and delivery methods. We operate in two reportable business segments: (1) FMS, which provides full service leasing, contract maintenance, contract-related maintenance and commercial rental of trucks, tractors and trailers to customers, principally in the U.S., Canada and the U.K.; and (2) SCS, which provides comprehensive supply chain consulting including distribution and transportation services in North America and Asia. The SCS segment also provides dedicated services, which includes vehicles and drivers as part of a dedicated transportation solution in the U.S.

We operate in highly competitive markets. Our customers select us based on numerous factors including service quality, price, technology and service offerings. As an alternative to using our services, customers may choose to provide these services for themselves, or may choose to obtain similar or alternative services from other third-party vendors. Our customer base includes enterprises operating in a variety of industries including automotive, transportation, food service, electronics, consumer packaged goods, grocery, lumber and wood products and home furnishing.

Total revenue increased 2% in the first quarter of 2013 to $1.56 billion. Operating revenue (revenue excluding FMS fuel and all subcontracted transportation) increased 3% in the first quarter of 2013 to $1.27 billion. The increase in total and operating revenue was driven by growth in both the FMS and SCS business segments. See “Consolidated Results” for further discussion of operating revenue, a non-GAAP financial measure.

Earnings from continuing operations before taxes (EBT) increased 31% in the first quarter of 2013 to $62.5 million. The increase in EBT in the first quarter of 2013 reflects improved performance in the FMS and SCS business segments.

EBT, earnings and EPS from continuing operations in the first quarter of 2013 and 2012 included certain items we do not consider indicative of our ongoing operations and have been excluded from our comparable earnings measure. The following discussion provides a summary of these items which are discussed in more detail throughout our MD&A and within the Notes to Consolidated Condensed Financial Statements:



	EBT				Earnings					EPS-Diluted
	2013			2012	2013			2012		2013			2012
Three months ended March 31,	(In thousands, except per share amounts)
EBT/Earnings/EPS	$	62,508		47,698	$	40,802		34,876		$	0.79		0.68
Non-operating pension costs ⁽¹⁾	5,244			8,004	3,081			4,939		0.06			0.10
Foreign currency translation benefit ⁽²⁾	(1,904		)	—	(1,904		)	—		(0.04		)	—
Restructuring and other charges ⁽³⁾	—			865	—			645		—			0.01
Tax benefit ⁽⁴⁾	—			—	—			(4,967	)	—			(0.10	)
Comparable	$	65,848		56,567	$	41,979		35,493		$	0.81		0.69

_______________


(1)	Includes the amortization of actuarial loss, interest cost and expected return on plan assets components of pension and post-retirement costs.


(2)	See Note (R), “Other items Impacting Comparability,” for additional information.


(3)	See Note (F), “Restructuring and Other Charges,” for further discussion.


(4)	Tax benefit associated with the resolution of a prior year tax item. See Note (K),“Income Taxes.”

Excluding the special items listed above, comparable earnings and EPS from continuing operations in the first quarter of 2013 increased 18% to $42.0 million and increased 17% to $0.81 per diluted common share, respectively. We believe that comparable earnings from continuing operations before taxes, comparable earnings from continuing operations, and comparable earnings per diluted common share from continuing operations, all non-GAAP financial measures, provide useful information to investors and allow for better year over year comparison of operating performance because they exclude non-

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS - (Continued)

operating pension costs, which is a non-operational expense that can significantly change from year to year. These non-GAAP financial measures also exclude other significant items that are not representative of our ongoing business operations and allow for better year over year comparison.

Net earnings and EPS increased 16% in the first quarter of 2013 to $39.9 million and 15% to $0.77 per diluted common share, respectively. Net earnings in the first quarter of 2013 and 2012 were negatively impacted by losses from discontinued operations of $0.9 million, or $0.02 per diluted common share and $0.6 million, or $0.01 per diluted common share, respectively.

CONSOLIDATED RESULTS



	Three months ended March 31,			Change
	2013		2012	2013/2012
	(In thousands, except per share amounts)
Total revenue	$	1,563,017	1,536,276	2%
Operating revenue ⁽¹⁾	1,267,521		1,228,924	3%


Pre-tax earnings from continuing operations	$	62,508	47,698	31%
Earnings from continuing operations	40,802		34,876	17%
Net earnings	39,924		34,321	16%


Earnings per common share — Diluted
Continuing operations	$	0.79	0.68	16%
Net earnings	0.77		0.67	15%

————————————

(1)

We use operating revenue, a non-GAAP financial measure, to evaluate the operating performance of our businesses and as a measure of sales activity. FMS fuel services revenue, which is directly impacted by fluctuations in market fuel prices, is excluded from the operating revenue computation as 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 rapid changes in market fuel prices during a short period of time as customer pricing for fuel services is established based on market fuel costs. Subcontracted transportation is deducted from total revenue to arrive at operating revenue as subcontracted transportation is typically a pass-through to our customers. We realize minimal changes in profitability as a result of fluctuations in subcontracted transportation. Refer to the section titled “Non-GAAP Financial Measures” for a reconciliation of total revenue to operating revenue.

Revenue and Cost of Revenue by Source

Total revenue increased 2% in the first quarter of 2013 to $1.56 billion. Operating revenue increased 3% in the first quarter of 2013 to $1.27 billion. The increase in total and operating revenue was primarily driven by organic growth in both FMS and SCS.

Lease and Rental



	Three months ended March 31,					Change
	2013			2012		2013/2012
	(Dollars in thousands)
Lease and rental revenues	$	659,708		637,858		3%
Cost of lease and rental	470,120			458,944		2%
Gross margin	189,588			178,914		6%
Gross margin %	29		%	28	%

Lease and rental revenues represent full service lease and commercial rental product offerings within our FMS business segment. Revenues increased 3% in the first quarter of 2013 to $659.7 million primarily driven by higher prices on full service lease vehicles and increased miles driven. Improved full service lease pricing was driven by higher costs on new engine technology. Year over year comparisons also benefited from improved rental pricing on a smaller fleet. Pricing on commercial rental power vehicles increased 2% in the first quarter of 2013 compared to the same period in 2012.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS - (Continued)

Cost of lease and rental represents the direct costs related to lease and rental revenues. These costs are comprised of depreciation of revenue earning equipment, maintenance costs (primarily repair parts and labor), and other fixed costs such as licenses, insurance and operating taxes. Cost of lease and rental excludes interest costs from vehicle financing. Cost of lease and rental grew 2% in the first quarter of 2013 to $470.1 million due to increased depreciation from higher net vehicle investments as well as equipment rental costs. The growth in equipment rental reflects a higher number of leased vehicles resulting from the sale lease-back transaction completed in June 2012. Maintenance costs declined due to a younger fleet, partially offset by increased costs to prepare vehicles for sale and upfront investments in initiatives for which benefits have not yet been realized.

Lease and rental gross margin increased 6% in the first quarter of 2013 to $189.6 million and lease and rental gross margin as a percentage of revenue increased in the first quarter of 2013 due to improved full service lease performance from increased miles driven and higher per vehicle pricing reflecting new engine technology.

Services



	Three months ended March 31,			Change
	2013		2012	2013/2012
	(Dollars in thousands)
Services revenue	$	689,461	678,352	2%
Cost of services	585,437		575,669	2%
Gros