Edgar Filing: RYDER SYSTEM INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2016



¨	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, 2016 was 53,478,452.

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 and six months ended June 30, 2016 and 2015	1

	Consolidated Condensed Statements of Comprehensive Income — Three and six months ended June 30, 2016 and 2015	2

	Consolidated Condensed Balance Sheets — June 30, 2016 and December 31, 2015	3

	Consolidated Condensed Statements of Cash Flows — Six months ended June 30, 2016 and 2015	4

	Notes to Consolidated Condensed Financial Statements	5

ITEM 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		20

ITEM 3 Quantitative and Qualitative Disclosures About Market Risk		46

ITEM 4 Controls and Procedures		46

PART II OTHER INFORMATION

ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds		46

ITEM 6 Exhibits		47

SIGNATURES		48

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,
	2016			2015		2016			2015
	(In thousands, except per share amounts)
Lease and rental revenues	$	798,387		779,046		$	1,566,141		1,508,070
Services revenue	785,791			737,170		1,544,918			1,430,874
Fuel services revenue	119,566			146,715		222,357			291,140
Total revenues	1,703,744			1,662,931		3,333,416			3,230,084

Cost of lease and rental	555,302			531,308		1,107,792			1,049,730
Cost of services	646,129			603,488		1,277,843			1,185,818
Cost of fuel services	115,478			142,176		214,379			278,465
Other operating expenses	27,796			29,582		57,947			61,955
Selling, general and administrative expenses	222,448			214,868		433,661			421,473
Gains on used vehicles, net	(12,000		)	(29,985	)	(31,129		)	(57,193	)
Interest expense	37,268			39,075		75,157			75,877
Miscellaneous income, net	(5,456		)	(1,028	)	(7,721		)	(3,665	)
	1,586,965			1,529,484		3,127,929			3,012,460
Earnings from continuing operations before income taxes	116,779			133,447		205,487			217,624
Provision for income taxes	42,737			47,530		75,260			78,381
Earnings from continuing operations	74,042			85,917		130,227			139,243
Loss from discontinued operations, net of tax	(292		)	(758	)	(683		)	(1,295	)
Net earnings	$	73,750		85,159		$	129,544		137,948

Earnings (loss) per common share — Basic
Continuing operations	$	1.39		1.62		$	2.45		2.63
Discontinued operations	(0.01		)	(0.01	)	(0.01		)	(0.02	)
Net earnings	$	1.39		1.61		$	2.43		2.61

Earnings (loss) per common share — Diluted
Continuing operations	$	1.38		1.61		$	2.43		2.61
Discontinued operations	(0.01		)	(0.01	)	(0.01		)	(0.03	)
Net earnings	$	1.38		1.59		$	2.42		2.59

Cash dividends declared per common share	$	0.41		0.37		$	0.82		0.74

See accompanying notes to consolidated condensed financial statements.

Note: EPS amounts may not be additive due to rounding

RYDER SYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)



	Three months ended June 30,					Six months ended June 30,
	2016			2015		2016			2015
	(In thousands)

Net earnings	$	73,750		85,159		$	129,544		137,948

Other comprehensive income (loss):

Currency translation adjustment and other	(32,264		)	27,027		(18,578		)	(30,345	)

Amortization of pension and postretirement items	7,446			6,834		14,869			13,892
Income tax expense related to amortization of pension and postretirement items	(2,479		)	(2,366	)	(5,187		)	(4,814	)
Amortization of pension and postretirement items, net of tax	4,967			4,468		9,682			9,078

Change in net actuarial loss and prior service cost	(17,367		)	(8,526	)	(17,367		)	(8,526	)
Income tax benefit related to change in net actuarial loss and prior service cost	6,345			3,205		6,345			3,205
Change in net actuarial loss and prior service cost, net of taxes	(11,022		)	(5,321	)	(11,022		)	(5,321	)

Other comprehensive income (loss), net of taxes	(38,319		)	26,174		(19,918		)	(26,588	)

Comprehensive income	$	35,431		111,333		$	109,626		111,360

See accompanying notes to consolidated condensed financial statements.

RYDER SYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(unaudited)



	June 30, 2016			December 31, 2015
	(Dollars in thousands, except per share amount)
Assets:
Current assets:
Cash and cash equivalents	$	65,964		60,945
Receivables, net of allowance of $16,138 and $15,560, respectively	850,504			835,489
Inventories	66,553			63,725
Prepaid expenses and other current assets	143,227			138,143
Total current assets	1,126,248			1,098,302
Revenue earning equipment, net	8,300,108			8,184,735
Operating property and equipment, net of accumulated depreciation of $1,105,458 and $1,083,604, respectively	741,022			714,970
Goodwill	388,278			389,135
Intangible assets, net of accumulated amortization of $48,691 and $45,736, respectively	51,618			55,192
Direct financing leases and other assets	528,853			510,246
Total assets	$	11,136,127		10,952,580

Liabilities and shareholders’ equity:
Current liabilities:
Short-term debt and current portion of long-term debt	$	1,047,208		634,530
Accounts payable	462,335			502,373
Accrued expenses and other current liabilities	508,517			543,352
Total current liabilities	2,018,060			1,680,255
Long-term debt	4,586,806			4,868,097
Other non-current liabilities	828,181			829,595
Deferred income taxes	1,655,982			1,587,522
Total liabilities	9,089,029			8,965,469

Shareholders’ equity:
Preferred stock, no par value per share — authorized, 3,800,917; none outstanding, June 30, 2016 or December 31, 2015	—			—
Common stock, $0.50 par value per share — authorized, 400,000,000; outstanding, June 30, 2016 — 53,478,452; December 31, 2015 — 53,490,603	26,739			26,745
Additional paid-in capital	1,016,173			1,006,021
Retained earnings	1,736,839			1,667,080
Accumulated other comprehensive loss	(732,653		)	(712,735	)
Total shareholders’ equity	2,047,098			1,987,111
Total liabilities and shareholders’ equity	$	11,136,127		10,952,580

See accompanying notes to consolidated condensed financial statements.

RYDER SYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)



	Six months ended June 30,
	2016			2015
	(In thousands)
Cash flows from operating activities from continuing operations:
Net earnings	$	129,544		137,948
Less: Loss from discontinued operations, net of tax	(683		)	(1,295	)
Earnings from continuing operations	130,227			139,243
Depreciation expense	581,043			541,076
Gains on used vehicles, net	(31,129		)	(57,193	)
Share-based compensation expense	10,001			11,169
Amortization expense and other non-cash charges, net	31,407			28,329
Deferred income tax expense	67,031			67,592
Changes in operating assets and liabilities:
Receivables	(39,071		)	(33,535	)
Inventories	(2,633		)	1,006
Prepaid expenses and other assets	(18,734		)	(25,555	)
Accounts payable	68,584			(30,439	)
Accrued expenses and other non-current liabilities	(34,054		)	17,005
Net cash provided by operating activities from continuing operations	762,672			658,698

Cash flows from financing activities:
Net change in commercial paper borrowings and revolving credit facilities	162,105			34,750
Debt proceeds	298,254			930,090
Debt repaid	(328,416		)	(486,103	)
Dividends on common stock	(44,261		)	(39,690	)
Common stock issued	6,259			17,129
Common stock repurchased	(21,899		)	(6,141	)
Excess tax benefits from share-based compensation and other items	(1,710		)	710
Debt issuance costs	(933		)	(5,225	)
Net cash provided by financing activities	69,399			445,520

Cash flows from investing activities:
Purchases of property and revenue earning equipment	(1,120,182		)	(1,329,218	)
Sales of revenue earning equipment	245,681			211,153
Sales of operating property and equipment	6,322			641
Collections on direct finance leases and other items	43,957			33,912
Changes in restricted cash	886			4,849
Net cash used in investing activities	(823,336		)	(1,078,663	)

Effect of exchange rate changes on cash	(3,415		)	(1,198	)
Increase in cash and cash equivalents from continuing operations	5,320			24,357


Decrease in cash and cash equivalents from discontinued operations	(301		)	(1,096	)

Increase in cash and cash equivalents	5,019			23,261
Cash and cash equivalents at January 1	60,945			50,092
Cash and cash equivalents at June 30	$	65,964		73,353

See accompanying notes to consolidated condensed financial statements.

RYDER SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

1. GENERAL

Interim Financial Statements

The accompanying unaudited Consolidated Condensed Financial Statements include the accounts of Ryder System, Inc. (Ryder) and all entities in which Ryder has a controlling voting interest (subsidiaries) and variable interest entities (VIEs) required to be consolidated in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The accompanying unaudited Consolidated Condensed Financial Statements have been prepared in accordance with the accounting policies described in our 2015 Annual Report on Form 10-K and should be read in conjunction with the Consolidated Financial Statements and notes thereto. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation 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.

Beginning in 2016, we reclassified the losses from fair value adjustments on our used vehicles from "Other operating expenses" to "Gains on used vehicles, net" within the Consolidated Condensed Statement of Earnings. Prior year amounts have been reclassified to conform to the current period presentation.

RYDER SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(unaudited)

2. RECENT ACCOUNTING PRONOUNCEMENTS

Share-Based Payments

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09, Stock Compensation, which is intended to simplify several aspects of the accounting for share-based payment award transactions. The guidance will be effective January 1, 2017. We are in the process of evaluating the impacts of the adoption of this standard.

Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases. The standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The standard is effective January 1, 2019, with early adoption permitted. The standard is to be applied using a modified retrospective transition method. We are in the process of determining the effect on our consolidated financial position, results of operations and cash flows.

Revenue Recognition

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which together with related, subsequently issued guidance, requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU is effective January 1, 2018, and will replace most existing revenue recognition guidance. The standard permits the use of either the modified retrospective or cumulative effect transition methods.

In connection with the FASB’s recently issued guidance on leases, the standard requires the lease component of our full service lease product line to be accounted for under the lease accounting guidance and the maintenance and other elements of the product line to be accounted for under the new revenue guidance. Because of the interrelationship of these standards on our full service lease product line, we have not yet selected a transition method. We are in the process of determining the effect on our consolidated financial position, results of operations and cash flows.

Presentation of Debt Issuance Costs

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires an entity to present debt issuance costs as a direct reduction from the carrying amount of the related debt liability on the balance sheet. We adopted this guidance on January 1, 2016 and reclassified $15 million from other assets to long-term debt in our December 31, 2015 balance sheet. Other than the change in presentation within the Consolidated Condensed Balance Sheets, this accounting guidance did not impact our consolidated financial position, results of operations or cash flows.

RYDER SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(unaudited)

3. REVENUE EARNING EQUIPMENT



	June 30, 2016					December 31, 2015
	Cost		Accumulated Depreciation		Net Book Value⁽¹⁾	Cost		Accumulated Depreciation		Net Book Value⁽¹⁾
	(In thousands)
Held for use:
Full service lease	$	9,239,442	(2,838,897	)	6,400,545	$	8,839,941	(2,723,605	)	6,116,336
Commercial rental	2,589,646		(874,713	)	1,714,933	2,811,715		(907,412	)	1,904,303
Held for sale	576,449		(391,819	)	184,630	496,634		(332,538	)	164,096
Total	$	12,405,537	(4,105,429	)	8,300,108	$	12,148,290	(3,963,555	)	8,184,735

————————————


(1)	Revenue earning equipment, net includes vehicles acquired under capital leases of $43.9 million, less accumulated depreciation of $21.1 million, at June 30, 2016, and $47.5 million, less accumulated depreciation of $22.2 million, at December 31, 2015.

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, 2016 and December 31, 2015, the net investment in direct financing and sales-type leases was $431 million and $438 million, respectively. Our direct financing lease customers operate in a wide variety of industries, and we have no significant customer concentrations in any one industry. We assess credit risk for all of our customers including those who lease equipment under direct financing leases prior to signing a 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 which further mitigates our credit risk.

As of June 30, 2016 and December 31, 2015, the amount of direct financing lease receivables past due was not significant, and there were no impaired receivables. Accordingly, we do not believe there is a material risk of default with respect to the direct financing lease receivables.

Revenue earning equipment held for sale is stated at the lower of carrying amount or fair value less costs to sell. Losses on vehicles held for sale for which carrying values exceeded fair value are recognized at the time they arrive at our used truck centers and are presented within “Gains on used vehicles, net ” in the Consolidated Condensed Statements of Earnings. For revenue earning equipment held for sale, we stratify our fleet by vehicle type (trucks, tractors and trailers), weight class, age and other relevant characteristics and create classes of similar assets for analysis purposes. For a certain population of our revenue earning equipment held for sale, fair value was determined based upon recent market prices obtained from our own sales experience for sales of each class of similar assets and vehicle condition. These vehicles held for sale were classified within Level 3 of the fair value hierarchy.

RYDER SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(unaudited)

The following table presents our assets held for sale that are measured at fair value on a nonrecurring basis and considered a Level 3 fair value measurement:



				Total Losses ⁽²⁾
	June 30,			Three months ended June 30,			Six months ended June 30,
	2016		2015	2016		2015	2016		2015
	(In thousands)
Assets held for sale:
Revenue earning equipment ⁽¹⁾:
Trucks	$	13,749	6,805	$	2,570	1,515	$	4,314	2,743
Tractors	51,795		7,389	9,206		1,081	14,088		1,908
Trailers	3,015		1,625	775		656	1,437		972

Total assets at fair value	$	68,559	15,819	$	12,551	3,252	$	19,839	5,623

————————————


(1)	Assets held for sale in the above table only include the portion of revenue earning equipment held for sale where carrying value exceeded fair value.


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

For the three and six months ended June 30, 2016 and 2015, the components of gains on used vehicles, net were as follows:



	Three months ended June 30,					Six months ended June 30,
	2016			2015		2016			2015
	(In thousands)
Gains on vehicle sales, net	$	(24,551	)	(33,237	)	$	(50,968	)	(62,816	)
Losses from fair value adjustments	12,551			3,252		19,839			5,623
Gains on used vehicles, net	$	(12,000	)	(29,985	)	$	(31,129	)	(57,193	)

RYDER SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(unaudited)

4. GOODWILL

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



	Fleet Management Solutions			Dedicated Transportation Solutions	Supply Chain Solutions		Total
	(In thousands)
Balance at January 1, 2016:
Goodwill	$	231,358		40,808	146,190		418,356
Accumulated impairment losses	(10,322		)	—	(18,899	)	(29,221	)
	221,036			40,808	127,291		389,135
Foreign currency translation adjustments	(1,246		)	—	389		(857	)
Balance at June 30, 2016:
Goodwill	230,112			40,808	146,579		417,499
Accumulated impairment losses	(10,322		)	—	(18,899	)	(29,221	)
	$	219,790		40,808	127,680		388,278

We assess goodwill for impairment on April 1st of each year or more often if deemed necessary. In the second quarter of 2016, we completed our annual goodwill impairment test. We performed quantitative assessments on two of our reporting units and determined there was no impairment. We performed qualitative assessments for three 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 assessments, we concluded it was more likely than not that fair value is greater than the carrying value and determined there was no impairment.

5. ACCRUED EXPENSES AND OTHER LIABILITIES



	June 30, 2016				December 31, 2015
	Accrued Expenses		Non-Current Liabilities	Total	Accrued Expenses		Non-Current Liabilities	Total
	(In thousands)
Salaries and wages	$	87,558	—	87,558	$	99,032	—	99,032
Deferred compensation	2,725		42,378	45,103	2,252		41,691	43,943
Pension benefits	3,822		482,187	486,009	3,790		484,892	488,682
Other postretirement benefits	1,637		19,677	21,314	1,624		20,002	21,626
Other employee benefits	18,404		4,290	22,694	8,956		9,706	18,662
Insurance obligations ⁽¹⁾	139,959		218,058	358,017	157,014		213,256	370,270
Environmental liabilities	3,997		6,333	10,330	3,791		6,554	10,345
Operating taxes	97,187		—	97,187	101,649		—	101,649
Income taxes	448		24,110	24,558	3,378		22,366	25,744
Interest	31,369		—	31,369	31,218		—	31,218
Customer deposits	63,272		4,791	68,063	61,869		5,085	66,954
Deferred revenue	16,738		—	16,738	13,038		—	13,038
Restructuring liabilities ⁽²⁾	3,489		—	3,489	12,333		—	12,333
Other	37,912		26,357	64,269	43,408		26,043	69,451
Total	$	508,517	828,181	1,336,698	$	543,352	829,595	1,372,947

————————————


(1)	Insurance obligations primarily represent claims for which we are self-insured.


(2)	The reduction in restructuring liabilities from December 31, 2015 principally represents cash payments for employee termination costs. The majority of the balance remaining in restructuring liabilities is expected to be paid by the end of 2016.

RYDER SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(unaudited)

6. DEBT



	Weighted-Average Interest Rate
	June 30, 2016	December 31, 2015	Maturities	June 30, 2016			December 31, 2015
				(In thousands)
Short-term debt and current portion of long-term debt:
Short-term debt	0.94%	2.26%		$	122,354		35,947
Current portion of long-term debt				924,854			598,583
Total short-term debt and current portion of long-term debt				1,047,208			634,530
Long-term debt:
U.S. commercial paper ⁽¹⁾	0.71%	0.55%	2020	599,605			547,130
Global revolving credit facility	2.01%	2.31%	2020	53,037			25,291
Unsecured U.S. notes — Medium-term notes⁽¹⁾	2.88%	2.84%	2016-2025	4,113,137			4,112,519
Unsecured U.S. obligations	1.86%	1.73%	2018	50,000			50,000
Unsecured foreign obligations	1.93%	1.92%	2016-2020	254,448			275,661
Asset-backed U.S. obligations ⁽²⁾	1.78%	1.81%	2016-2022	407,217			434,001
Capital lease obligations	3.22%	3.31%	2016-2022	28,031			32,054
Total before fair market value adjustment				5,505,475			5,476,656
Fair market value adjustment on notes subject to hedging ⁽³⁾				20,989			5,253
Debt issuance costs ⁽⁴⁾				(14,804		)	(15,229	)
				5,511,660			5,466,680
Current portion of long-term debt				(924,854		)	(598,583	)
Long-term debt				4,586,806			4,868,097
Total debt				$	5,634,014		5,502,627

————————————


(1)	Amounts are net of aggregate unamortized original issue discounts of $7.2 million and $7.7 million at June 30, 2016 and December 31, 2015, respectively.


(2)	Asset-backed U.S. obligations are related to financing transactions involving revenue earning equipment.


(3)	The notional amount of executed interest rate swaps designated as fair value hedges was $825 million at June 30, 2016 and December 31, 2015.


(4)	See Note 2, "Recent Accounting Pronouncements," for further discussion of the presentation of debt issuance costs.

We maintain a $1.2 billion global revolving credit facility with a syndicate of twelve lending institutions led by Bank of America N.A., Bank of Tokyo-Mitsubishi UFJ, Ltd., BNP Paribas, Mizuho Corporate Bank, Ltd., Royal Bank of Canada, Lloyds Bank Plc, U.S. Bank National Association and Wells Fargo Bank, N.A. The facility matures in January 2020. The agreement provides for annual facility fees which range from 7.5 basis points to 25 basis points based on Ryder's long-term credit ratings. The annual facility fee is currently 10 basis points, which applies to the total facility size of $1.2 billion.

The credit facility is used primarily to finance working capital but can also be used to issue up to $75 million in letters of credit (there were no letters of credit outstanding against the facility at June 30, 2016). At our option, the interest rate on borrowings under the credit facility is based on LIBOR, prime, federal funds or local equivalent rates. The credit facility contains no provisions limiting its availability in the event of a material adverse change to Ryder’s business operations; however, the credit facility does contain standard representations and warranties, events of default, cross-default provisions and certain affirmative and negative covenants.

In order to maintain availability of funding, we must maintain a ratio of debt to consolidated net worth of less than or equal to 300%. Net worth, as defined in the credit facility, represents shareholders' equity excluding any accumulated other comprehensive income or loss associated with our pension and other postretirement plans. The ratio at June 30, 2016 was 214%. At June 30, 2016, there was $424.7 million available under the credit facility.

RYDER SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(unaudited)

Our global revolving credit facility enables us to refinance short-term obligations on a long-term basis. Short-term commercial paper obligations not expected to require the use of working capital are classified as long-term as we have both the intent and ability to refinance on a long-term basis. In addition, we have the intent and ability to refinance the current portion of certain long-term debt on a long-term basis. At June 30, 2016, we classified $599.6 million of short-term commercial paper and $351.9 million of current debt obligations as long-term. At December 31, 2015, we classified $547.1 million of short-term commercial paper and $300.0 million of current debt obligations as long-term.

In February 2016, we issued $300 million of unsecured medium-term notes maturing in November 2021. The proceeds from these notes were used to pay off maturing debt and for general corporate purposes. If these notes are downgraded below investment grade following, and as a result of, a change in control, the note holders can require us to repurchase all or a portion of the notes at a purchase price equal to 101% of principal 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 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 21, 2016. The program contains provisions restricting its availability in the event of a material adverse change to our business operations or the collectibility of the collateralized receivables. Sales of receivables under this program are accounted for as secured borrowings based on our continuing involvement in the transferred assets. No amounts were outstanding under the program at June 30, 2016 or December 31, 2015.

At June 30, 2016 and December 31, 2015, we had letters of credit and surety bonds outstanding totaling $339.1 million and $345.7 million, respectively, which primarily guarantee the payment of insurance claims.

The fair value of total debt (excluding capital lease and asset-backed U.S. obligations) at June 30, 2016 and December 31, 2015 was approximately $5.31 billion and $5.06 billion, respectively. For publicly-traded debt, estimates of fair value were based on market prices. For other debt, fair value was estimated based on a model-driven approach using rates currently available to us for debt with similar terms and remaining maturities. The fair value measurements of our publicly-traded debt and other debt were classified within Level 2 of the fair value hierarchy. The carrying amounts reported in the Consolidated Condensed Balance Sheets for “Cash and cash equivalents,” “Receivables, net” and “Accounts payable” approximate fair value because of the immediate or short-term maturities of these financial instruments.

7. DERIVATIVES

From time to time, we enter into interest rate derivatives to manage our fixed and variable interest rate exposure and to better match the repricing of debt instruments to that of our portfolio of assets. We assess the risk that changes in interest rates will have either on the fair value of debt obligations or on the amount of future interest payments by monitoring changes in interest rate exposures and by evaluating hedging opportunities. We regularly monitor interest rate risk attributable to both our outstanding or forecasted debt obligations as well as any offsetting hedge positions. This risk management process involves the use of analytical techniques, including cash flow sensitivity analyses, to estimate the expected impact of changes in interest rates on our future cash flows.

As of June 30, 2016, we had interest rate swaps outstanding which are designated as fair value hedges for certain debt obligations, with a total notional value of $825 million and maturities through 2020. Interest rate swaps are measured at fair value on a recurring basis using Level 2 fair value inputs. The fair value of these interest rate swaps was approximately $21.0 million as of June 30, 2016, and was presented in "Direct financing leases and other assets" in our Consolidated Condensed Balance Sheets. Changes in the fair value of our interest rate swaps were offset by changes in the fair value of the hedged debt instruments. Accordingly, there was no ineffectiveness related to the interest rate swaps.

RYDER SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(unaudited)

8. SHARE REPURCHASE PROGRAMS

In December 2015, our Board of Directors authorized a share repurchase program intended to mitigate the dilutive impact of shares issued under our employee stock plans (the December 2015 program). Under the December 2015 program, management is authorized to repurchase (i) up to 1.5 million shares of common stock, the sum of which will not exceed the number of shares issued to employees under the Company’s employee stock plans from December 1, 2015 to December 9, 2017, plus (ii) 0.5 million shares issued to employees that were not repurchased under the Company’s previous share repurchase program. The December 2015 program limits aggregate share repurchases to no more than 2 million shares of Ryder common stock. Share repurchases of common stock are made periodically in open-market transactions and are subject to market conditions, legal requirements and other factors. Management may establish prearranged written plans for the Company under Rule 10b5-1 of the Securities Exchange Act of 1934 as part of the December 2015 program, which allow for share repurchases during Ryder’s quarterly blackout periods as set forth in the trading plan.

During the six months ended June 30, 2016 and June 30, 2015, we repurchased 321,718 shares for $21.9 million and 69,107 shares for $6.1 million, respectively.

9. ACCUMULATED OTHER COMPREHENSIVE LOSS

The following summary sets forth the components of accumulated other comprehensive loss, net of tax:



	Currency Translation Adjustments and Other			Net Actuarial Loss ⁽¹⁾		Prior Service (Cost)/ Credit ⁽¹⁾		Accumulated Other Comprehensive Loss
	(In thousands)
December 31, 2015	$	(136,020	)	(576,993	)	278		(712,735	)
Amortization	—			9,754		(72	)	9,682
Other current period change	(18,578		)	(5,597	)	(5,425	)	(29,600	)
June 30, 2016	$	(154,598	)	(572,836	)	(5,219	)	(732,653	)



	Currency Translation Adjustments and Other			Net Actuarial Loss ⁽¹⁾		Prior Service Credit ⁽¹⁾		Accumulated Other Comprehensive Loss
	(In thousands)
December 31, 2014	$	(36,087	)	(585,941	)	1,758		(620,270	)
Amortization	—			9,790		(712	)	9,078
Other current period change	(30,345		)	(5,321	)	—		(35,666	)
June 30, 2015	$	(66,432	)	(581,472	)	1,046		(646,858	)

_______________________


(1)	These amounts are included in the computation of net periodic benefit cost. See Note 12, "Employee Benefit Plans," for further information.

The loss from currency translation adjustments in the six months ended June 30, 2016 of $18.6 million was primarily due to the weakening of the British Pound against the U.S. Dollar, partially offset by the strengthening of the Canadian Dollar against the U.S. Dollar. The loss from currency translation adjustments in the six months ended June 30, 2015 of $30.3 million was due to the weakening of the Canadian Dollar and British Pound against the U.S. Dollar.

RYDER SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(unaudited)

10. EARNINGS PER SHARE

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



	Three months ended June 30,					Six months ended June 30,
	2016			2015		2016			2015
	(In thousands, except per share amounts)
Earnings per share — Basic:
Earnings from continuing operations	$	74,042		85,917		$	130,227		139,243
Less: Earnings allocated to unvested stock	(235		)	(246	)	(398		)	(393	)
Earnings from continuing operations available to common shareholders — Basic	$	73,807		85,671		$	129,829		138,850

Weighted average common shares outstanding — Basic	53,057			52,827		53,067			52,712

Earnings from continuing operations per common share — Basic	$	1.39		1.62		$	2.45		2.63

Earnings per share — Diluted:
Earnings from continuing operations	$	74,042		85,917		$	130,227		139,243
Less: Earnings allocated to unvested stock	(234		)	(244	)	(397		)	(390	)
Earnings from continuing operations available to common shareholders — Diluted	$	73,808		85,673		$	129,830		138,853

Weighted average common shares outstanding — Basic	53,057			52,827		53,067			52,712
Effect of dilutive equity awards	320			468		303			492
Weighted average common shares outstanding — Diluted	53,377			53,295		53,370			53,204

Earnings from continuing operations per common share — Diluted	$	1.38		1.61		$	2.43		2.61

Anti-dilutive equity awards not included above	669			363		928			273

RYDER SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(unaudited)

11. SHARE-BASED COMPENSATION PLANS

Share-based incentive awards are provided to employees under the terms of various share-based compensation plans (collectively, the “Plans”). The Plans are administered by the Compensation Committee of the Board of Directors and principally include at-the-money stock option, unvested stock and cash awards. Unvested stock awards include grants of market-based, performance-based and time-vested restricted stock rights. Under the terms of our Plans, dividends may be paid on our unvested stock awards but 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 grant date of the award until the date the shares underlying the award are delivered.

The following table provides information on share-based compensation expense and income tax benefits recognized during the periods:



	Three months ended June 30,					Six months ended June 30,
	2016			2015		2016			2015
	(In thousands)
Stock option and stock purchase plans	$	1,904		1,956		$	3,777		4,257
Unvested stock	3,209			3,548		6,224			6,912
Share-based compensation expense	5,113			5,504		10,001			11,169
Income tax benefit	(1,715		)	(1,860	)	(3,370		)	(3,743	)
Share-based compensation expense, net of tax	$	3,398		3,644		$	6,631		7,426

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,
	2016		2015	2016		2015
	(In thousands)
Cash awards	$	177	281	$	328	464

Total unrecognized pre-tax compensation expense related to all share-based compensation arrangements at June 30, 2016 was $26.8 million and is expected to be recognized over a weighted-average period of 1.9 years.

The following table is a summary of the awards granted under the Plans during the periods presented:



	Six months ended June 30,
	2016	2015
	(In thousands)
Stock options	513	362
Market-based restricted stock rights	34	19
Performance-based restricted stock rights	45	42
Time-vested restricted stock rights	129	80
Total	721	503

RYDER SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(unaudited)

12. EMPLOYEE BENEFIT PLANS

Components of net pension expense were as follows:



	Three months ended June 30,					Six months ended June 30,
	2016			2015		2016			2015
	(In thousands)

Pension Benefits
Company-administered plans:
Service cost	$	3,005		3,566		$	6,405		7,193
Interest cost	27,093			22,048		49,332			43,935
Expected return on plan assets	(22,667		)	(25,021	)	(45,752		)	(49,921	)
Amortization of:
Net actuarial loss	8,600			7,664		16,565			15,472
Prior service cost/(credit)	2,740			(74	)	2,740			(150	)
	18,771			8,183		29,290			16,529
Union-administered plans	2,406			2,113		4,728			4,285
Net pension expense	$	21,177		10,296		$	34,018		20,814

Company-administered plans:
U.S.	$	19,263		8,599		$	30,437		17,491
Non-U.S.	(492		)	(416	)	(1,147		)	(962	)
	18,771			8,183		29,290			16,529
Union-administered plans	2,406			2,113		4,728			4,285
Net pension expense	$	21,177		10,296		$	34,018		20,814

During the second quarter of 2016, we determined that certain pension benefit improvements made in 2009 had not been fully reflected in our projected benefit obligation. Because the amounts were not material to our consolidated financial statements in any individual prior period, and the cumulative amount is not material to 2016 results, we recognized a one-time, non-cash charge of $7.7 million in "Selling, general and administrative expenses" and a $12.8 million pre-tax increase to “Accumulated other comprehensive loss” in our second quarter 2016 consolidated condensed financial statements to correctly state the pension benefit obligation and account for these 2009 benefit improvements.

During the six months ended June 30, 2016 we contributed $42.3 million to our pension plans. In 2016, we expect total contributions to our pension plans to be approximately $80 million. We also maintain other postretirement benefit plans that are not reflected in the above table. The amount of postretirement benefit expense was not material for the three or six months ended June 30, 2016.

RYDER SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(unaudited)

13. 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, we believe that the resolution of these claims, complaints and legal proceedings will not have a material effect on our consolidated condensed financial statements.

Our estimates regarding potential losses and materiality are based on our judgment and assessment of the claims utilizing currently available information. Although we will continue to reassess our reserves and estimates based on future developments, our objective assessment of the legal merits of such claims may not always be predictive of the outcome and actual results may vary from our current estimates.

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, we believe that such losses will not have a material effect on our consolidated condensed financial statements.

In Brazil, we were assessed $5 million in prior years for various federal income taxes and social contribution taxes for the 1997 and 1998 tax years. These federal tax assessments were overturned 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 amount of any potential loss.

14. SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information was as follows:



	Six months ended June 30,
	2016			2015
	(In thousands)
Interest paid	$	71,141		69,681
Income taxes paid	10,233			9,970
Changes in accounts payable related to purchases of revenue earning equipment	(105,480		)	124,766
Operating and revenue earning equipment acquired under capital leases	777			5,847

RYDER SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(unaudited)

15. SEGMENT REPORTING

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 and professional fees. CSS represents those costs incurred to support all business segments, including human resources, finance, corporate services, public affairs, information technology, health and safety, legal, marketing and corporate communications. The objective of the EBT measurement is to provide clarity on the profitability of each segment and, ultimately, to hold leadership of each segment accountable for their allocated share of CSS costs. Certain costs are not attributable to any segment and remain unallocated in CSS, including costs for investor relations, public affairs and certain executive compensation.

Our Fleet Management Solutions (FMS) segment leases revenue earning equipment and provides fuel, maintenance and other ancillary services to the Dedicated Transportation Solutions (DTS) and Supply Chain Solutions (SCS) segments. Inter-segment revenue and EBT are accounted for at rates similar to those executed with third parties. EBT related to inter-segment equipment and services billed to customers (equipment contribution) are included in both FMS and the segment which served the customer and then eliminated (presented as “Eliminations”).

The following tables set forth financial information for each of our segments and provide a reconciliation between segment EBT and earnings from continuing operations before income taxes for the three and six months ended June 30, 2016 and 2015. 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		DTS	SCS	Eliminations		Total
	(In thousands)
For the three months ended June 30, 2016
Revenue from external customers	$	1,043,430	258,262	402,052	—		1,703,744
Inter-segment revenue	108,083		—	—	(108,083	)	—
Total revenue	$	1,151,513	258,262	402,052	(108,083	)	1,703,744

Segment EBT	$	111,184	16,472	28,371	(12,766	)	143,261
Unallocated CSS							(11,215		)
Non-operating pension costs							(7,617		)
Pension-related charge ⁽¹⁾							(7,650		)
Earnings from continuing operations before income taxes							$	116,779

Segment capital expenditures paid ⁽²⁾	$	502,040	363	37,139	—		539,542
Unallocated CSS							5,609
Capital expenditures paid							$	545,151


For the three months ended June 30, 2015
Revenue from external customers	$	1,042,476	223,514	396,941	—		1,662,931
Inter-segment revenue	106,873		—	—	(106,873	)	—
Total revenue	$	1,149,349	223,514	396,941	(106,873	)	1,662,931

Segment EBT	$	122,452	12,435	27,699	(11,588	)	150,998
Unallocated CSS							(10,924		)
Non-operating pension costs							(4,688		)
Professional fees ⁽³⁾							(1,939		)
Earnings from continuing operations before income taxes							$	133,447

Segment capital expenditures paid	$	761,542	646	3,570	—		765,758
Unallocated CSS							10,218
Capital expenditures paid							$	775,976

————————————


(1)	During the second quarter of 2016, we determined that certain pension benefit improvements made in 2009 were not fully reflected in our projected benefit obligation. We recognized a charge of $7.7 million related to these benefit improvements.


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


(3)	Charges related to professional fees associated with cost savings initiatives.

RYDER SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(unaudited)



	FMS		DTS	SCS	Eliminations		Total
	(In thousands)
For the six months ended June 30, 2016
Revenue from external customers	$	2,039,545	503,104	790,767	—		3,333,416
Inter-segment revenue	209,896		—	—	(209,896	)	—
Total revenue	$	2,249,441	503,104	790,767	(209,896	)	3,333,416

Segment EBT	$	194,105	30,740	48,167	(24,510	)	248,502
Unallocated CSS							(20,880		)
Non-operating pension costs							(14,485		)
Pension-related charge ⁽¹⁾							(7,650		)
Earnings from continuing operations before income taxes							$	205,487

Segment capital expenditures paid ⁽²⁾	$	1,062,325	880	44,462	—		1,107,667
Unallocated CSS							12,515
Capital expenditures paid							$	1,120,182


For the six months ended June 30, 2015
Revenue from external customers	$	2,025,916	436,173	767,995	—		3,230,084
Inter-segment revenue	210,583		—	—	(210,583	)	—
Total revenue	$	2,236,499	436,173	767,995	(210,583	)	3,230,084

Segment EBT	$	212,170	21,405	43,388	(23,122	)	253,841
Unallocated CSS							(22,866		)
Non-operating pension costs							(9,571		)
Professional fees ⁽³⁾							(3,780		)
Earnings from continuing operations before income taxes							$	217,624

Segment capital expenditures paid ⁽²⁾	$	1,300,285	1,355	9,557	—		1,311,197
Unallocated CSS							18,021
Capital expenditures paid							$	1,329,218

————————————


(1)	During the second quarter of 2016, we determined that certain pension benefit improvements made in 2009 were not fully reflected in our projected benefit obligation. We recognized a charge of $7.7 million related to these benefit improvements.


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


(3)	Charges related to professional fees associated with cost savings initiatives.

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 2015 Annual Report on Form 10-K.

Ryder System, Inc. (Ryder) is a global leader in transportation and supply chain management solutions. We report our financial performance based on three segments: (1) FMS, which provides full service leasing, commercial rental, contract maintenance, and contract-related maintenance of trucks, tractors and trailers to customers principally in the U.S., Canada and the U.K.; (2) DTS, which provides vehicles and drivers as part of a dedicated transportation solution in the U.S.; and (3) SCS, which provides comprehensive supply chain solutions including distribution and transportation services in North America and Asia. Dedicated transportation services provided as part of an integrated, multi-service, supply chain solution to SCS customers are reported in the SCS business segment.

We operate in highly competitive markets. Our customers select us based on numerous factors including service quality, price, technology and service offerings. As an alternative to using our services, customers may choose to provide these services for themselves, or may choose to obtain similar or alternative services from other third-party vendors. Our customer base includes enterprises operating in a variety of industries including automotive, industrial, food and beverage service, consumer packaged goods (CPG), transportation and warehousing, technology and healthcare, retail, housing, business and personal services, and paper and publishing.

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

AND RESULTS OF OPERATIONS - (Continued)

Operating results were as follows:



	Three months ended June 30,			Six months ended June 30,			Change 2016/2015
	2016		2015	2016		2015	Three Months		Six Months
	(In thousands, except per share amounts)
Total revenue	$	1,703,744	1,662,931	$	3,333,416	3,230,084	2	%	3	%
Operating revenue ⁽¹⁾	1,449,713		1,392,618	2,855,726		2,692,904	4	%	6	%


EBT	$	116,779	133,447	$	205,487	217,624	(12	)%	(6	)%
Comparable EBT ⁽²⁾	132,046		140,074	227,622		230,975	(6	)%	(1	)%
Earnings from continuing operations	74,042		85,917	130,227		139,243	(14	)%	(6	)%
Comparable earnings from continuing operations ⁽²⁾	83,307		87,952	143,481		145,231	(5	)%	(1	)%
Net earnings	73,750		85,159	129,544		137,948	(13	)%	(6	)%


Earnings per common share (EPS) — Diluted
Continuing operations	$	1.38	1.61	$	2.43	2.61	(14	)%	(7	)%
Comparable ⁽²⁾	1.56		1.65	2.68		2.72	(5	)%	(1	)%
Net earnings	1.38		1.59	2.42		2.59	(13	)%	(7	)%

————————————


(1)	Non-GAAP financial measure. Refer to the“Non-GAAP Financial Measures” section for a reconciliation of total revenue to operating revenue and the reasons why management believes this measure is important to investors.


(2)	Non-GAAP financial measures. Refer to the “Non-GAAP Financial Measures” section for a reconciliation of EBT, net earnings and earnings per diluted common share to the comparable measures and the reasons why management believes these measures are important to investors.

Total revenue increased 2% to $1.70 billion and operating revenue increased 4% to $1.45 billion in the second quarter of 2016. For the first half of 2016, total revenue increased 3% to $3.33 billion and operating revenue increased 6% to $2.86 billion. These increases reflect higher revenue across all business segments, partially offset by negative impacts from foreign exchange. Increased total revenue was also partially offset by lower fuel costs passed through to customers.

FMS total revenue in the second quarter was consistent with the prior year as higher operating revenue was partially offset by lower fuel prices passed through to customers and a negative impact from foreign exchange. FMS total revenue in the first half of 2016 increased as higher operating revenue was partially offset by lower fuel prices passed through to customers and a negative impact from foreign exchange. FMS operating revenue growth in both periods was due to growth in the full service lease fleet and higher prices on replacement vehicles, partially offset by lower demand in the commercial rental product line. The increase in DTS and SCS total revenue was driven by operating revenue growth, partially offset by lower fuel costs passed through to customers in the second quarter and first half of 2016. Increased subcontracted transportation also contributed to DTS total revenue growth, while lower subcontracted transportation partially offset total revenue growth in SCS. DTS and SCS operating revenue growth was due to new business, increased volumes and higher pricing in the second quarter and first half of 2016.

EBT decreased 12% in the second quarter of 2016 to $116.8 million and 6% in the first half of 2016, reflecting lower commercial rental and used vehicle results, partially offset by higher full service lease results, lower insurance costs in DTS and increased pricing, new business and increased volumes in DTS and SCS. The 2016 EBT decrease also reflects a $7.7 million pension-related charge related to certain 2009 pension benefit improvements that were not fully reflected in our pension benefit obligation. EBT was negatively impacted by foreign exchange in the second quarter and first half of 2016 by 100 basis points.

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

AND RESULTS OF OPERATIONS - (Continued)

CONSOLIDATED RESULTS

Lease and Rental



	Three months ended June 30,					Six months ended June 30,					Change 2016/2015
	2016			2015		2016			2015		Three Months		Six Months
	(Dollars in thousands)
Lease and rental revenues	$	798,387		779,046		$	1,566,141		1,508,070		2	%	4	%
Cost of lease and rental	555,302			531,308		1,107,792			1,049,730		5	%	6	%
Gross margin	243,085			247,738		458,349			458,340		(2	)%	—	%
Gross margin %	30		%	32	%	29		%	30	%

Lease and rental revenues represent full service lease and commercial rental product offerings within our FMS segment. Revenues increased 2% in the second quarter of 2016 and 4% in the first half of 2016 primarily driven by a 5% larger average full service lease fleet and higher prices on replacement vehicles, partially offset by lower commercial rental revenue reflecting lower demand. Foreign exchange negatively impacted revenue growth by 100 basis points.

Cost of lease and rental represents the direct costs related to lease and rental revenues. These costs consist of depreciation of revenue earning equipment, maintenance costs (primarily repair parts and labor), and other cost