Ryder 2nd Quarter 2014 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 JUNE 30, 2014
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 June 30, 2014 was 53,067,722.
 
 
 
 
 



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


i


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

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

 
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands, except per share amounts)
Lease and rental revenues
$
733,763

 
688,048

 
$
1,423,445

 
1,347,756

Services revenue
741,427

 
707,666

 
1,451,126

 
1,397,127

Fuel services revenue
209,381

 
208,285

 
420,737

 
422,133

Total revenues
1,684,571

 
1,603,999

 
3,295,308

 
3,167,016

 
 
 
 
 
 
 
 
Cost of lease and rental
508,091

 
476,662

 
1,001,134

 
949,739

Cost of services
625,276

 
590,311

 
1,231,505

 
1,173,900

Cost of fuel services
203,613

 
204,626

 
410,818

 
414,919

Other operating expenses
31,007

 
32,876

 
67,652

 
70,475

Selling, general and administrative expenses
200,430

 
195,033

 
392,132

 
384,106

Gains on vehicle sales, net
(34,365
)
 
(23,197
)
 
(63,183
)
 
(46,203
)
Interest expense
35,302

 
33,901

 
70,411

 
68,355

Miscellaneous income, net
(4,828
)
 
(3,575
)
 
(10,210
)
 
(8,145
)
 
1,564,526

 
1,506,637

 
3,100,259

 
3,007,146

Earnings from continuing operations before income taxes
120,045

 
97,362

 
195,049

 
159,870

Provision for income taxes
44,351


34,787

 
70,257


56,493

Earnings from continuing operations
75,694


62,575

 
124,792


103,377

Loss from discontinued operations, net of tax
(336
)
 
(381
)
 
(1,202
)
 
(1,259
)
Net earnings
$
75,358

 
62,194

 
$
123,590

 
102,118

 
 
 
 
 
 
 
 
Earnings (loss) per common share — Basic
 
 
 
 
 
 
 
Continuing operations
$
1.43

 
1.21

 
$
2.36

 
2.00

Discontinued operations
—

 
(0.01
)
 
(0.02
)
 
(0.02
)
Net earnings
$
1.43

 
1.20

 
$
2.34

 
1.98

 
 
 
 
 
 
 
 
Earnings (loss) per common share — Diluted
 
 
 
 
 
 
 
Continuing operations
$
1.42

 
1.19

 
$
2.34

 
1.98

Discontinued operations
(0.01
)
 
—

 
(0.02
)
 
(0.02
)
Net earnings
$
1.41

 
1.19

 
$
2.32

 
1.96

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.34

 
0.31

 
$
0.68

 
0.62


See accompanying notes to consolidated condensed financial statements.

1

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

    
    
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
 
 
 
 
 
 
 
 
Net earnings
$
75,358

 
62,194

 
$
123,590

 
102,118

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Changes in cumulative translation adjustment and other, before and after tax
26,273

 
(16,239
)
 
11,681

 
(49,943
)
 
 
 
 
 
 
 
 
Amortization of pension and postretirement items
4,295

 
8,180

 
9,328

 
16,534

Income tax expense related to amortization of pension and postretirement items
(1,302
)
 
(2,782
)
 
(3,208
)
 
(5,717
)
Amortization of pension and postretirement items, net of taxes
2,993

 
5,398

 
6,120

 
10,817

 
 
 
 
 
 
 
 
Change in net actuarial loss
(3,144
)
 
(5,762
)
 
(3,144
)
 
(5,762
)
Income tax benefit related to change in net actuarial loss
1,096

 
2,048

 
1,096

 
2,048

Change in net actuarial loss, net of taxes
(2,048
)
 
(3,714
)
 
(2,048
)
 
(3,714
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of taxes
27,218

 
(14,555
)
 
15,753

 
(42,840
)
 
 
 
 
 
 
 
 
Comprehensive income
$
102,576

 
47,639

 
$
139,343

 
59,278

See accompanying notes to consolidated condensed financial statements.




2


RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
 
 
June 30,
2014
 
December 31,
2013
 
(Dollars in thousands, except per
share amount)
Assets:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
86,888


61,562

Receivables, net of allowance of $17,322 and $16,955, respectively
827,274


777,370

Inventories
65,490


64,298

Prepaid expenses and other current assets
157,818


159,263

Total current assets
1,137,470

 
1,062,493

Revenue earning equipment, net of accumulated depreciation of $3,606,141 and $3,596,102, respectively
6,930,465


6,490,837

Operating property and equipment, net of accumulated depreciation of $1,015,764 and $991,117, respectively
687,714


633,826

Goodwill
383,879


383,719

Intangible assets
69,224


72,406

Direct financing leases and other assets
478,915


460,501

Total assets
$
9,687,667


9,103,782

 
 
 
 
Liabilities and shareholders’ equity:
 
 
 
Current liabilities:
 
 
 
Short-term debt and current portion of long-term debt
$
557,681


259,438

Accounts payable
479,952


475,364

Accrued expenses and other current liabilities
479,047


496,337

Total current liabilities
1,516,680

 
1,231,139

Long-term debt
4,159,472


3,929,987

Other non-current liabilities
566,242


616,305

Deferred income taxes
1,480,313


1,429,637

Total liabilities
7,722,707

 
7,207,068

 
 
 
 
Shareholders’ equity:
 
 
 
Preferred stock of no par value per share — authorized, 3,800,917; none outstanding,
   June 30, 2014 or December 31, 2013
—

 
—

Common stock of $0.50 par value per share — authorized, 400,000,000; outstanding,
   June 30, 2014 — 53,067,722; December 31, 2013 — 53,335,386
26,533

 
26,667

Additional paid-in capital
944,064

 
917,539

Retained earnings
1,416,858

 
1,390,756

Accumulated other comprehensive loss
(422,495
)
 
(438,248
)
Total shareholders’ equity
1,964,960


1,896,714

Total liabilities and shareholders’ equity
$
9,687,667


9,103,782

See accompanying notes to consolidated condensed financial statements.

3


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

 
Six months ended June 30,
 
2014
 
2013
 
(In thousands)
Cash flows from operating activities from continuing operations:
 
 
 
Net earnings
$
123,590

 
102,118

Less: Loss from discontinued operations, net of tax
(1,202
)
 
(1,259
)
Earnings from continuing operations
124,792

 
103,377

Depreciation expense
505,997

 
465,979

Gains on vehicle sales, net
(63,183
)
 
(46,203
)
Share-based compensation expense
9,989

 
9,602

Amortization expense and other non-cash charges, net
25,727

 
27,289

Deferred income tax expense
59,956

 
48,176

Changes in operating assets and liabilities:
 
 
 
Receivables
(40,579
)
 
(16,591
)
Inventories
(1,178
)
 
2,089

Prepaid expenses and other assets
(19,163
)
 
(17,392
)
Accounts payable
1,771

 
23,708

Accrued expenses and other non-current liabilities
(67,629
)
 
(36,257
)
Net cash provided by operating activities from continuing operations
536,500

 
563,777

 
 
 
 
Cash flows from financing activities from continuing operations:
 
 
 
Net change in commercial paper borrowings
21,377


180,777

Debt proceeds
765,713


254,371

Debt repaid, including capital lease obligations
(271,248
)

(320,862
)
Dividends on common stock
(35,915
)
 
(32,055
)
Common stock issued
34,129

 
41,428

Common stock repurchased
(79,488
)
 
—

Excess tax benefits from share-based compensation
411

 
3,289

Debt issuance costs
(5,026
)
 
(2,008
)
Net cash provided by financing activities from continuing operations
429,953

 
124,940

 
 
 
 
Cash flows from investing activities from continuing operations:
 
 
 
Purchases of property and revenue earning equipment
(1,255,222
)
 
(948,114
)
Sales of revenue earning equipment
274,394

 
225,749

Sales of operating property and equipment
2,780

 
3,296

Acquisitions
(1,649
)
 
(1,420
)
Collections on direct finance leases
32,355

 
39,854

Changes in restricted cash
8,774

 
(15,142
)
Insurance recoveries and other
(1,250
)
 
8,173

Net cash used in investing activities from continuing operations
(939,818
)
 
(687,604
)
 
 
 
 
Effect of exchange rate changes on cash
48

 
6,966

Increase in cash and cash equivalents from continuing operations
26,683

 
8,079

 
 
 
 
Cash flows from discontinued operations:
 
 
 
Operating cash flows
(1,329
)
 
(1,031
)
Effect of exchange rate changes on cash
(28
)
 
(11
)
Decrease in cash and cash equivalents from discontinued operations
(1,357
)
 
(1,042
)
 
 
 
 
Increase in cash and cash equivalents
25,326

 
7,037

Cash and cash equivalents at January 1
61,562

 
66,392

Cash and cash equivalents at June 30
$
86,888

 
73,429

See accompanying notes to consolidated condensed financial statements.

4


RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS’ EQUITY
(unaudited)
 
 
Preferred
Stock
 
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
 
Amount
 
Shares
 
Par
 
 
(Dollars in thousands, except per share amount)
Balance at December 31, 2013
$
—

 
53,335,386

 
$
26,667

 
917,539

 
1,390,756

 
(438,248
)
 
1,896,714

Net earnings
—

 
—

 
—

 
—

 
123,590

 
—

 
123,590

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
15,753

 
15,753

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
139,343

Common stock dividends declared — $0.68 per share
—

 
—

 
—

 
—

 
(36,158
)
 
—

 
(36,158
)
Common stock issued under employee stock option and stock purchase plans (1)
—

 
753,684

 
377

 
33,301

 
—

 
—

 
33,678

Benefit plan stock sales (2)
—

 
5,724

 
3

 
448

 
—

 
—

 
451

Common stock repurchases
—

 
(1,027,072
)
 
(514
)
 
(17,644
)
 
(61,330
)
 
—

 
(79,488
)
Share-based compensation
—

 
—

 
—

 
9,989

 
—

 
—

 
9,989

Tax benefits from share-based compensation
—

 
—

 
—

 
431

 
—

 
—

 
431

Balance at June 30, 2014
$
—

 
53,067,722

 
$
26,533

 
944,064

 
1,416,858

 
(422,495
)
 
1,964,960

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

5
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)


(A) INTERIM FINANCIAL STATEMENTS

The accompanying unaudited Consolidated Condensed Financial Statements include the accounts of Ryder System, Inc. (Ryder) and all entities in which Ryder has a controlling voting interest (“subsidiaries”) and variable interest entities (VIEs) required to be consolidated in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The accompanying unaudited Consolidated Condensed Financial Statements have been prepared in accordance with the accounting policies described in our 2013 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.

Certain amounts have been reclassified to conform to the current period presentation, including intercompany profit allocations between Fleet Management Solutions (FMS) and Supply Chain Solutions (SCS). These reclassifications were immaterial to the financial statements taken as a whole.

(B) ACCOUNTING CHANGES

Revenue Recognition

In May 2014, the Financial Accounting Standards Board (FASB) issued accounting guidance on the recognition of revenue from contracts with customers. Under the new standard, revenue will be measured and recognized using a performance obligation approach. The guidance will be effective on January 1, 2017. We are currently evaluating the impact of this guidance on our consolidated financial position and results of operations.

Unrecognized Tax Benefits

In July 2013, the FASB issued accounting guidance on the balance sheet presentation of an unrecognized tax benefit when a net operating loss carryforward exists. Under this guidance, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward. This guidance became effective on January 1, 2014 and resulted in a reclassification of $38.8 million from other non-current liabilities to deferred income taxes in our December 31, 2013 balance sheet. Other than the change in presentation within the Consolidated Condensed Balance Sheets, this accounting guidance did not have an impact on our consolidated financial position, results of operations or cash flows.

(C) 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 June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Pre-tax loss from discontinued operations
$
(323
)
 
(298
)
 
$
(1,278
)
 
(1,199
)
Income tax (expense) benefit
(13
)
 
(83
)
 
76

 
(60
)
Loss from discontinued operations, net of tax
$
(336
)
 
(381
)
 
$
(1,202
)
 
(1,259
)

6
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)



Results of discontinued operations in 2014 and 2013 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:
 
June 30,
2014
 
December 31,
2013
 
(In thousands)
Total assets, primarily deposits
$
3,452

 
3,627

Total liabilities, primarily contingent accruals
$
4,476

 
4,501


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. 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 $5.3 million (before and after tax) in prior years for various federal income taxes and social contribution taxes for the 1997 and 1998 tax years. We have successfully overturned these federal tax assessments in the lower courts; however, there is a reasonable possibility that these rulings could be reversed and we would be required to pay the assessments. We believe it is more likely than not that our position will ultimately be sustained if appealed and no amounts have been reserved for these matters. We are entitled to indemnification for a portion of any resulting liability on these federal tax claims which, if honored, would reduce the estimated loss.

(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. Nonvested stock awards include grants of market-based, performance-based, and time-vested restricted stock rights. Under the terms of our Plans, dividends may be paid on our nonvested stock awards. Dividends on nonvested stock granted after 2011 are not paid unless the award vests. Upon vesting, the amount of the dividends paid is equal to the aggregate dividends declared on common shares during the period from the date of grant of the award until the date the shares underlying the award are delivered.

The following table provides information on share-based compensation expense and income tax benefits recognized during the periods:
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Stock option and stock purchase plans
$
2,241

 
2,193

 
$
4,478

 
4,303

Nonvested stock
2,890

 
2,799

 
5,511

 
5,299

Share-based compensation expense
5,131

 
4,992

 
9,989

 
9,602

Income tax benefit
(1,713
)
 
(1,640
)
 
(3,389
)
 
(3,327
)
Share-based compensation expense, net of tax
$
3,418

 
3,352

 
$
6,600

 
6,275



7
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)


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 June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Cash awards
$
743

 
889
 
$
1,266

 
2,163


Total unrecognized pre-tax compensation expense related to all share-based compensation arrangements at June 30, 2014 was $33.4 million and is expected to be recognized over a weighted-average period of 2.0 years.

The following table is a summary of the awards granted under the Plans during the periods presented:
 
 
June 30,
2014
 
June 30,
2013
 
 
(In thousands)
 
 
Stock options
 
405

 
381

Market-based restricted stock rights
 
22

 
22

Performance-based restricted stock rights
 
30

 
15

Time-vested restricted stock rights
 
158

 
146

Total
 
615

 
564




8
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)


(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 and restricted stock units granted to our Board of Directors are considered participating securities since these share-based awards contain a non-forfeitable right to dividend cash payments prior to vesting. Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities based on the weighted average shares outstanding during the period.

The following table presents the calculation of basic and diluted earnings per common share from continuing operations:
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands, except per share amounts)
Earnings per share — Basic:
 
 
 
 
 
 
 
Earnings from continuing operations
$
75,694

 
62,575

 
$
124,792

 
103,377

Less: Distributed and undistributed earnings allocated to nonvested stock
(301
)
 
(556
)
 
(582
)
 
(978
)
Earnings from continuing operations available to common shareholders — Basic
$
75,393

 
62,019

 
$
124,210

 
102,399

 
 
 
 
 
 
 
 
Weighted average common shares outstanding — Basic
52,564

 
51,445

 
52,612

 
51,201

 
 
 
 
 
 
 
 
Earnings from continuing operations per common share — Basic
$
1.43

 
1.21

 
$
2.36

 
2.00

 
 
 
 
 
 
 
 
Earnings per share — Diluted:
 
 
 
 
 
 
 
Earnings from continuing operations
$
75,694

 
62,575

 
$
124,792

 
103,377

Less: Distributed and undistributed earnings allocated to nonvested stock
(299
)
 
(552
)
 
(578
)
 
(972
)
Earnings from continuing operations available to common shareholders — Diluted
$
75,395

 
62,023

 
$
124,214

 
102,405

 
 
 
 
 
 
 
 
Weighted average common shares outstanding — Basic
52,564

 
51,445

 
52,612

 
51,201

Effect of dilutive equity awards
482

 
478

 
472

 
457

Weighted average common shares outstanding — Diluted
53,046

 
51,923

 
53,084

 
51,658

 
 
 
 
 
 
 
 
Earnings from continuing operations per common share — Diluted
$
1.42

 
1.19

 
$
2.34

 
1.98

 
 
 
 
 
 
 
 
Anti-dilutive equity awards not included above
412

 
593

 
314

 
1,003


9
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)


(F) REVENUE EARNING EQUIPMENT

 
June 30, 2014
 
December 31, 2013
 
Cost
 
Accumulated
Depreciation
 
Net  Book
Value(1)
 
Cost
 
Accumulated
Depreciation
 
Net  Book
Value(1)
 
(In thousands)
Held for use:
 
Full service lease
$
7,699,750

 
(2,564,790
)
 
5,134,960

 
$
7,436,093

 
(2,537,077
)
 
4,899,016

Commercial rental
2,491,695

 
(791,662
)
 
1,700,033

 
2,210,863

 
(747,283
)
 
1,463,580

Held for sale
345,161

 
(249,689
)
 
95,472

 
439,983

 
(311,742
)
 
128,241

Total
$
10,536,606

 
(3,606,141
)
 
6,930,465

 
$
10,086,939

 
(3,596,102
)
 
6,490,837

 ————————————
(1)
Revenue earning equipment, net includes vehicles acquired under capital leases of $48.1 million, less accumulated depreciation of $20.1 million, at June 30, 2014, and $54.2 million, less accumulated depreciation of $22.0 million, at December 31, 2013.

At the end of 2013, 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, 2014. The change in estimated residual values and useful lives increased pre-tax earnings for the three and six months ended June 30, 2014 by approximately $6.3 million and $12.5 million, respectively.

We lease revenue earning equipment to customers for periods typically ranging from three to seven years for trucks and tractors and up to ten years for trailers. The majority of our leases are classified as operating leases. However, some of our revenue earning equipment leases are classified as direct financing leases and, to a lesser extent, sales-type leases. As of June 30, 2014 and December 31, 2013, the net investment in direct financing and sales-type leases was $417.8 million and $400.1 million, respectively. Our direct financing lease customers operate in a wide variety of industries, and we have no significant customer concentrations in any one industry. We assess credit risk for all of our customers including those who lease equipment under direct financing leases upon signing of a full service lease contract. For those customers who are designated as high risk, we typically require deposits to be paid in advance in order to mitigate our credit risk. Additionally, our receivables are collateralized by the vehicles, based on their estimated fair values, which further mitigates our credit risk.

As of June 30, 2014 and December 31, 2013, the amount of direct financing lease receivables past due was not significant, and there were no impaired receivables. Accordingly, we do not believe there is a material risk of default with respect to the direct financing lease receivables. The allowance for credit losses was $0.4 million and $0.5 million as of June 30, 2014 and December 31, 2013, respectively.


(G) 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, 2014:
 
 
 
 
 
Goodwill
$
223,204

 
189,736

 
412,940

Accumulated impairment losses
(10,322
)
 
(18,899
)
 
(29,221
)
 
212,882

 
170,837

 
383,719

Foreign currency translation adjustments
197

 
(37
)
 
160

Balance at June 30, 2014:
 
 
 
 
 
Goodwill
223,401

 
189,699

 
413,100

Accumulated impairment losses
(10,322
)
 
(18,899
)
 
(29,221
)
 
$
213,079

 
170,800

 
383,879

 

10
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)


We assess goodwill for impairment on April 1st of each year or more often if deemed necessary. In the second quarter of 2014, we completed our annual goodwill impairment test. We performed a quantitative test for one reporting unit in the Supply Chain Solutions business segment and determined there was no impairment. We performed a qualitative test for our other reporting units, which considered individual factors such as macroeconomic conditions, changes in our industry and the markets in which we operate as well as our historical and expected future financial performance. After performing the qualitative assessment, we concluded it is more likely than not that fair values are greater than carrying values and determined there was no impairment.

(H) ACCRUED EXPENSES AND OTHER LIABILITIES
 
June 30, 2014
 
December 31, 2013
 
Accrued
Expenses
 
Non-Current
Liabilities
 
Total
 
Accrued
Expenses
 
Non-Current
Liabilities
 
Total
 
(In thousands)
Salaries and wages
$
87,951

 
—

 
87,951

 
$
106,281

 
—

 
106,281

Deferred compensation
2,966

 
34,123

 
37,089

 
2,505

 
31,896

 
34,401

Other employee benefits
6,060

 
4,271

 
10,331

 
3,809

 
6,712

 
10,521

Pension benefits
3,606

 
239,904

 
243,510

 
3,660

 
292,155

 
295,815

Other postretirement benefits
2,413

 
27,481

 
29,894

 
2,414

 
28,374

 
30,788

Insurance obligations (1)
131,763

 
189,595

 
321,358

 
125,835

 
186,700

 
312,535

Accrued rent
2,102

 
2,222

 
4,324

 
4,373

 
3,372

 
7,745

Environmental liabilities
4,018

 
8,828

 
12,846

 
4,515

 
8,548

 
13,063

Asset retirement obligations
5,049

 
19,689

 
24,738

 
6,144

 
19,403

 
25,547

Operating taxes
96,657

 
—

 
96,657

 
94,188

 
—

 
94,188

Income taxes
284

 
25,552

 
25,836

 
2,623

 
23,813

 
26,436

Interest
30,968

 
—

 
30,968

 
33,654

 
—

 
33,654

Deposits, mainly from customers
56,411

 
6,175

 
62,586

 
55,854

 
6,239

 
62,093

Deferred revenue
14,652

 
—

 
14,652

 
15,123

 
—

 
15,123

Other
34,147

 
8,402

 
42,549

 
35,359

 
9,093

 
44,452

Total
$
479,047

 
566,242

 
1,045,289

 
$
496,337

 
616,305

 
1,112,642

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


11
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)


(I) DEBT
 
Weighted-Average
Interest Rate
 
 
 
 
 
 
 
June 30,
2014
 
December 31,
2013
 
Maturities
 
June 30,
2014
 
December 31,
2013
 
 
 
 
 
 
 
(In thousands)
Short-term debt and current portion of long-term debt:
 
 
 
 
 
 
 
 
 
Short-term debt
1.28%
 
1.70%
 
2014
 
$
1,604

 
1,315

U.S. commercial paper (1)
0.26%
 
—%
 
2014
 
144,000

 
—

Current portion of long-term debt, including capital leases
 
 
 
 
 
 
412,077

 
258,123

Total short-term debt and current portion of long-term debt
 
 
 
 
 
 
557,681

 
259,438

Long-term debt:
 
 
 
 
 
 
 
 
 
U.S. commercial paper (1)
0.26%
 
0.28%
 
2018
 
375,949

 
486,939

Canadian commercial paper (1)
—%
 
1.13%
 
2018
 
—

 
11,297

Unsecured U.S. notes — Medium-term notes (1)
3.29%
 
3.76%
 
2015-2025
 
3,771,238

 
3,271,734

Unsecured U.S. obligations, principally bank term loans
1.44%
 
1.45%
 
2015-2018
 
55,500

 
55,500

Unsecured foreign obligations
1.99%
 
1.99%
 
2015-2016
 
324,423

 
315,558

Capital lease obligations
3.69%
 
3.81%
 
2014-2019
 
36,584

 
38,911

Total before fair market value adjustment
 
 
 
 
 
 
4,563,694

 
4,179,939

Fair market value adjustment on notes subject to hedging (2)
 
 
 
 
 
7,855

 
8,171

 
 
 
 
 
 
 
4,571,549

 
4,188,110

Current portion of long-term debt, including capital leases
 
 
 
 
 
 
(412,077
)
 
(258,123
)
Long-term debt
 
 
 
 
 
 
4,159,472

 
3,929,987

Total debt
 
 
 
 
 
 
$
4,717,153

 
4,189,425

 ————————————
(1)
We had unamortized original issue discounts of $8.8 million and $8.3 million at June 30, 2014 and December 31, 2013, respectively.
(2)
The notional amount of executed interest rate swaps designated as fair value hedges was $600 million and $400 million at June 30, 2014 and December 31, 2013, respectively.

We maintain a $900 million global revolving credit facility with a syndicate of twelve lending institutions led by Bank of America N.A., Bank of Tokyo-Mitsubishi UFJ, Ltd., BNP Paribas, Mizuho Corporate Bank, Ltd., Royal Bank of Canada, Royal Bank of Scotland Plc, U.S. Bank National Association and Wells Fargo Bank, N.A. The global credit facility matures in October 2018. The global facility is used primarily to finance working capital but can also be used to issue up to $75 million in letters of credit (there were no letters of credit outstanding against the facility at June 30, 2014). 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 8.0 basis points to 27.5 basis points and are based on Ryder’s long-term credit ratings. The annual facility fee is 12.5 basis points, which applies to the total facility size of $900 million. The credit facility contains no provisions limiting its availability in the event of a material adverse change to Ryder’s business operations; however, the credit facility does contain standard representations and warranties, events of default, cross-default provisions and certain affirmative and negative covenants. In order to maintain availability of funding, we must maintain a ratio of debt to consolidated net worth of less than or equal to 300%. Net worth, as defined in the credit facility, represents shareholders' equity excluding any accumulated other comprehensive income or loss associated with our pension and other postretirement plans. The ratio at June 30, 2014 was 194%. At June 30, 2014, $380.0 million was available under the credit facility.

Our global revolving credit facility enables us to refinance short-term obligations on a long-term basis. Settlement of short-term commercial paper obligations not expected to require the use of working capital are classified as long-term as we have both the intent and ability to refinance on a long-term basis. At June 30, 2014 and December 31, 2013, we classified $375.9 million and $498.2 million, respectively, of short-term commercial paper as long-term debt. At June 30, 2014, we reclassified $144.0 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.


12
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)


In May 2014, we issued $400 million of unsecured medium-term notes maturing in September 2019 and in February 2014, we issued $350 million of unsecured medium-term notes maturing in June 2019. The proceeds from the notes were used to reduce commercial paper balances and for general corporate purposes. If the notes are downgraded below investment grade 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 that causes early termination, the 364-day program will expire on October 24, 2014. The program contains provisions restricting its availability in the event of a material adverse change to our business operations or the collectibility of the collateralized receivables. At June 30, 2014 and December 31, 2013, 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 June 30, 2014 and December 31, 2013, we had letters of credit and surety bonds outstanding totaling $310.7 million and $310.5 million, respectively, which primarily guarantee the payment of insurance claims.


13
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)


(J) FAIR VALUE MEASUREMENTS

The assets and liabilities measured at fair value on a recurring basis consist primarily of interest rate swaps and investments held in Rabbi Trusts.  These amounts as of June 30, 2014 are not material to our consolidated financial position and operations and have not changed significantly from the amounts reported as of December 31, 2013.  

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 June 30, 2014 Using
 
Total Losses (2)
 
 
Level 3
 
Three months  ended
 
Six months ended
 
(In thousands)
Assets held for sale:
 
 
 
 
 
 
Revenue earning equipment: (1)
 
 
 
 
 
 
Trucks
 
10,713

 
$
1,572

 
$
3,454

Tractors
 
6,057

 
662

 
2,294

Trailers
 
497

 
281

 
442

Total assets at fair value
 
17,267

 
$
2,515

 
$
6,190

 
 
Fair Value Measurements
At June 30, 2013 Using
 
Total Losses (2)
 
 
Level 3
 
Three months
 ended
 
Six months ended
 
(In thousands)
Assets held for sale:
 
 
 
 
 
 
Revenue earning equipment (1)
 
 
 
 
 
 
Trucks
 
11,132

 
$
2,447

 
$
5,476

Tractors
 
16,283

 
1,413

 
2,508

Trailers
 
882

 
370

 
967

Total assets at fair value
 
28,297

 
$
4,230

 
$
8,951

 ————————————
(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. Only certain vehicles held for sale have carrying amounts greater than the fair value and losses are recorded at the time they arrive at our used truck centers. We typically record gains on the remaining vehicles with carrying amounts greater than fair value at the time they are sold. 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 (trucks, tractors 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.

14
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)



Fair value of total debt (excluding capital lease obligations) at June 30, 2014 and December 31, 2013 was approximately $4.83 billion and $4.28 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.

(K) DERIVATIVES

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 June 30, 2014:
 
 
 
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 June 30,
Issuance date
 
 
 
 
 
2014
 
2013
 
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
February 2011
 
March 2015
 
$350,000
 
$150,000
 
3.15%
 
1.28%
 
1.41%
May 2011
 
June 2017
 
$350,000
 
$150,000
 
3.50%
 
1.42%
 
1.51%
November 2013
 
November 2018
 
$300,000
 
$100,000
 
2.45%
 
1.18%
 
—%
February 2014
 
June 2019
 
$350,000
 
$100,000
 
2.55%
 
1.10%
 
—%
May 2014
 
September 2019
 
$400,000
 
$100,000
 
2.45%
 
0.85%
 
—%

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 June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
(In thousands)
Derivatives: Interest rate swaps
 
Interest expense
 
$
1,667

 
(3,586
)
 
$
(316
)
 
(6,367
)
Hedged items: Fixed-rate debt
 
Interest expense
 
(1,667
)
 
3,586

 
316

 
6,367

Total
 
 
 
$
—

 
—

 
$
—

 
—


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. The location and fair value amounts of the interest rate swaps reported on the Consolidated Condensed Balance Sheets were as follows:
Balance Sheet Location
 
June 30,
2014
 
December 31,
2013
 
 
(In thousands)
Prepaid expenses and other current assets
 
$
1,834

 
$
—

Direct financing leases and other assets
 
6,162

 
9,333

Other non-current liabilities
 
(141
)
 
(1,162
)


15
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)


(L) SHARE REPURCHASE PROGRAMS

In December 2013, 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 2013 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, 2013 through December 31, 2015. The December 2013 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 2013 program, which allow for share repurchases during Ryder’s quarterly blackout periods as set forth in the trading plan. For the three months ended June 30, 2014, we repurchased and retired 464,389 shares under the program at an aggregate cost of $39.1 million. For the six months ended June 30, 2014, we repurchased and retired 1,027,072 shares under the program at an aggregate cost of $79.5 million. We did not repurchase any shares under this program in 2013.

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 was 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 limited aggregate share repurchases to no more than 2 million shares of Ryder common stock. In 2013, we did not repurchase any shares under this program as 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.

(M) ACCUMULATED OTHER COMPREHENSIVE LOSS

The following summaries set forth the components of accumulated other comprehensive loss, net of tax:
 
 
 
Currency
Translation
Adjustments and Other
 
Net Actuarial
Loss (1)
 
Prior Service
Credit (1)
 
Accumulated
Other
Comprehensive
Loss
 
 
(In thousands)
December 31, 2013
 
$
35,875

 
(477,883
)
 
3,760

 
(438,248
)
Amortization
 
—

 
7,455

 
(1,335
)
 
6,120

Other current period change
 
11,681

 
(2,048
)
 
—

 
9,633

June 30, 2014
 
$
47,556

 
(472,476
)
 
2,425

 
(422,495
)

December 31, 2012
 
$
57,860

 
(648,113
)
 
2,634

 
(587,619
)
Amortization
 
—

 
11,514

 
(697
)
 
10,817

Other current period change
 
(49,943
)
 
(3,714
)
 
—

 
(53,657
)
June 30, 2013
 
$
7,917

 
(640,313
)
 
1,937

 
(630,459
)
_______________________ 

(1)
These amounts are included in the computation of net periodic pension cost. See Note (N), "Employee Benefit Plans," for further information.




16
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)


(N) EMPLOYEE BENEFIT PLANS

Components of net periodic benefit cost were as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Pension Benefits
 
 
 
 
 
 
 
Company-administered plans:
 
 
 
 
 
 
 
Service cost
$
3,171

 
3,756

 
$
6,594

 
8,008

Interest cost
25,135

 
22,316

 
50,696

 
44,735

Expected return on plan assets
(29,284
)
 
(26,389
)
 
(58,002
)
 
(52,837
)
Amortization of:
 
 
 
 
 
 
 
Net actuarial loss
5,579

 
8,685

 
11,814

 
17,565

Prior service credit
(435
)
 
(443
)
 
(893
)
 
(909
)
 
4,166

 
7,925

 
10,209

 
16,562

Union-administered plans
2,123

 
2,046

 
4,214

 
4,030

Net periodic benefit cost
$
6,289

 
9,971

 
$
14,423

 
20,592

 
 
 
 
 
 
 
 
Company-administered plans:
 
 
 
 
 
 
 
U.S.
$
4,499

 
8,152

 
$
10,786

 
16,893

Non-U.S.
(333
)
 
(227
)
 
(577
)
 
(331
)
 
4,166

 
7,925

 
10,209

 
16,562

Union-administered plans
2,123

 
2,046

 
4,214

 
4,030

 
$
6,289

 
9,971

 
$
14,423

 
20,592

 
 
 
 
 
 
 
 
Postretirement Benefits
 
 
 
 
 
 
 
Company-administered plans:
 
 
 
 
 
 
 
Service cost
$
89

 
230

 
$
224

 
493

Interest cost
348

 
392

 
713

 
787

Amortization of:
 
 
 
 
 
 
 
Net actuarial credit
(234
)
 
(5
)
 
(363
)
 
(7
)
Prior service credit
(615
)
 
(57
)
 
(1,230
)
 
(115
)
Net periodic benefit cost
$
(412
)
 
560

 
$
(656
)
 
1,158

Company-administered plans:
 
 
 
 
 
 
 
U.S.
$
(524
)
 
402

 
$
(921
)
 
808

Non-U.S.
112

 
158

 
265

 
350

 
$
(412
)
 
560

 
$
(656
)
 
1,158


During the six months ended June 30, 2014, we contributed $65.0 million to our pension plans. All of the contributions to the U.S. plan for 2014 were made as of June 30, 2014. In 2014, we expect total contributions to our pension plans to be approximately $75 million.

17
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)


(O) 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 six months ended June 30, 2013, we recognized a benefit of $1.9 million (before and after tax) from the recognition of the accumulated currency translation adjustment from a FMS foreign operation which has substantially liquidated its net assets. This benefit was recorded within “Miscellaneous income, net” in our Consolidated Condensed Statements of Earnings.

(P) SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information was as follows:
 
Six months ended June 30,
 
2014
 
2013
 
(In thousands)
Interest paid
$
68,974

 
67,545

Income taxes paid
7,332

 
8,447

Changes in accounts payable related to purchases of revenue earning equipment
1,520

 
40,389

Operating and revenue earning equipment acquired under capital leases
2,371

 
4,814


During the six months ended June 30, 2014 and 2013, we paid $1.6 million and $1.4 million, respectively, related to acquisitions completed in prior years.


(Q) MISCELLANEOUS INCOME, NET
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014

2013
 
(In thousands)
Contract settlement
$
—

 
—

 
$
2,908

 
—

Gains on sales of operating property and equipment
1,286

 
267

 
2,590

 
540

Business interruption insurance recoveries
756

 
1,805

 
756


1,805

Foreign currency translation benefit (1)
—

 
—

 
—

 
1,904

Rabbi trust investment income
1,077

 
172

 
1,577

 
1,631

Other, net
1,709

 
1,331

 
2,379

 
2,265

Total
$
4,828

 
3,575

 
$
10,210

 
8,145

 ————————————
(1) Refer to Note (O), "Other Items Impacting Comparability," for additional information.


18
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)


(R) 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 management solutions 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 and the items discussed in Note (O), “Other Items Impacting Comparability.” CSS represents those costs incurred to support all business segments, including human resources, finance, corporate services, public affairs, information technology, health and safety, legal, marketing and corporate communications. The objective of the EBT measurement is to provide clarity on the profitability of each 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”). 

19
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)



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 and six months ended June 30, 2014 and 2013. 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.
 
FMS
 
SCS
 
Eliminations
 
Total
 
(In thousands)
 
 
For the three months ended June 30, 2014
 
 
 
 
 
 
Revenue from external customers
$
1,056,992

 
627,579

 
—

 
1,684,571

Inter-segment revenue
124,230

 
—

 
(124,230
)
 
—

Total revenue
$
1,181,222

 
627,579

 
(124,230
)
 
1,684,571

 
 
 
 
 
 
 
 
Segment EBT
$
113,509

 
30,728

 
(10,523
)
 
133,714

Unallocated CSS
 
 
 
 
 
 
(12,125
)
     Non-operating pension costs 
 
 
 
 
 
 
(1,544
)
Earnings from continuing operations before income taxes
 
 
 
 
 
 
$
120,045

 
 
 
 
 
 
 
 
Segment capital expenditures paid (1)
$
623,138

 
4,249

 
—

 
627,387

Unallocated CSS
 
 
 
 
 
 
49,113

Capital expenditures paid
 
 
 
 
 
 
$
676,500

 
 
 
 
 
 
 
 
For the three months ended June 30, 2013
 
 
 
 
 
 
Revenue from external customers
$
1,006,822

 
597,177

 
—

 
1,603,999

Inter-segment revenue
114,436

 
—

 
(114,436
)
 
—

Total revenue
$
1,121,258

 
597,177

 
(114,436
)
 
1,603,999

 
 
 
 
 
 
 
 
Segment EBT
$
88,667

 
32,968

 
(8,690
)
 
112,945

Unallocated CSS
 
 
 
 
 
 
(10,584
)
Non-operating pension costs 
 
 
 
 
 
 
(4,999
)
Earnings from continuing operations before income taxes
 
 
 
 
 
 
$
97,362

 
 
 
 
 
 
 
 
Segment capital expenditures paid (1)
$
517,131

 
5,017

 
—

 
522,148

Unallocated CSS
 
 
 
 
 
 
5,912

Capital expenditures paid
 
 
 
 
 
 
$
528,060

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


20
RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)


 
FMS
 
SCS
 
Eliminations
 
Total
 
(In thousands)
 
 
For the six months ended June 30, 2014
 
 
 
 
 
 
Revenue from external customers
$
2,070,388

 
1,224,920

 
—

 
3,295,308

Inter-segment revenue
245,921

 
—

 
(245,921
)
 
—

Total revenue
$
2,316,309

 
1,224,920

 
(245,921
)
 
3,295,308

 
 
 
 
 
 
 
 
Segment EBT
$
190,500

 
52,512

 
(20,151
)
 
222,861

Unallocated CSS
 
 
 
 
 
 
(22,954
)
     Non-operating pension costs 
 
 
 
 
 
 
(4,858
)
Earnings from continuing operations before income taxes
 
 
 
 
 
 
$
195,049

 
 
 
 
 
 
 
 
Segment capital expenditures paid (1), (2)
$
1,191,377

 
8,121

 
—

 
1,199,498

Unallocated CSS
 
 
 
 
 
 
55,724

Capital expenditures paid
 
 
 
 
 
 
$
1,255,222

 
 
 
 
 
 
 
 
For the six months ended June 30, 2013
 
 
 
 
 
 
Revenue from external customers
$
1,993,360

 
1,173,656

 
—

 
3,167,016

Inter-segment revenue
227,630

 
—

 
(227,630
)
 
—

Total revenue
$
2,220,990

 
1,173,656

 
(227,630
)
 
3,167,016

 
 
 
 
 
 
 
 
Segment EBT
$
149,412

 
57,404

 
(16,648
)
 
190,168

Unallocated CSS
 
 
 
 
 
 
(21,959
)
Non-operating pension costs