10-Q 1 ryder3rdquarter201610-q.htm 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016
OR

¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO
Commission File Number: 1-4364
RYDER SYSTEM, INC.
(Exact name of registrant as specified in its charter)

Florida | 59-0739250
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.)
11690 N.W. 105th Street |
Miami, Florida 33178 | (305) 500-3726
(Address of principal executive offices, including zip code) | (Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨
| (Do not check if a smaller reporting company) |

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) ¨ YES þ NO
The number of shares of Ryder System, Inc. Common Stock ($0.50 par value per share) outstanding at September 30, 2016 was 53,468,413.

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 nine months ended September 30, 2016 and 2015 | 1
| Consolidated Condensed Statements of Comprehensive Income — Three and nine months ended September 30, 2016 and 2015 | 2
| Consolidated Condensed Balance Sheets — September 30, 2016 and December 31, 2015 | 3
| Consolidated Condensed Statements of Cash Flows — Nine months ended September 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 | 19
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk | 45
ITEM 4 Controls and Procedures | 45
PART II OTHER INFORMATION |
ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds | 45
ITEM 6 Exhibits | 46
SIGNATURE | 47

i

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(unaudited)

| Three months ended September 30, |  | Nine months ended September 30,
| 2016 |  | 2015 |  | 2016 |  | 2015
| (In thousands, except per share amounts)
Lease and rental revenues | $ | 803,006 |  |  | 802,881 |  |  | $ | 2,369,147 |  |  | 2,310,951 |
Services revenue | 801,004 |  |  | 734,803 |  |  | 2,345,922 |  |  | 2,165,677 |
Fuel services revenue | 120,408 |  |  | 131,382 |  |  | 342,765 |  |  | 422,522 |
Total revenues | 1,724,418 |  |  | 1,669,066 |  |  | 5,057,834 |  |  | 4,899,150 |
Cost of lease and rental | 557,901 |  |  | 550,541 |  |  | 1,665,693 |  |  | 1,600,271 |
Cost of services | 658,793 |  |  | 606,364 |  |  | 1,936,636 |  |  | 1,792,182 |
Cost of fuel services | 116,904 |  |  | 129,562 |  |  | 331,283 |  |  | 408,027 |
Other operating expenses | 27,997 |  |  | 26,957 |  |  | 85,944 |  |  | 88,912 |
Selling, general and administrative expenses | 198,805 |  |  | 203,093 |  |  | 632,466 |  |  | 624,566 |
Gains on used vehicles, net | (1,873 | ) |  | (24,965 | ) |  | (33,002 | ) |  | (82,158 | )
Interest expense | 37,440 |  |  | 38,986 |  |  | 112,597 |  |  | 114,863 |
Miscellaneous income, net | (3,247 | ) |  | (1,372 | ) |  | (10,968 | ) |  | (5,037 | )
| 1,592,720 |  |  | 1,529,166 |  |  | 4,720,649 |  |  | 4,541,626 |
Earnings from continuing operations before income taxes | 131,698 |  |  | 139,900 |  |  | 337,185 |  |  | 357,524 |
Provision for income taxes | 46,560 |  |  | 49,089 |  |  | 121,820 |  |  | 127,470 |
Earnings from continuing operations | 85,138 |  |  | 90,811 |  |  | 215,365 |  |  | 230,054 |
Loss from discontinued operations, net of tax | (386 | ) |  | (192 | ) |  | (1,069 | ) |  | (1,487 | )
Net earnings | $ | 84,752 |  |  | 90,619 |  |  | $ | 214,296 |  |  | 228,567 |
Earnings (loss) per common share — Basic |  |  |  |  |  |  |
Continuing operations | $ | 1.60 |  |  | 1.71 |  |  | $ | 4.05 |  |  | 4.35 |
Discontinued operations | (0.01 | ) |  | — |  |  | (0.02 | ) |  | (0.03 | )
Net earnings | $ | 1.60 |  |  | 1.71 |  |  | $ | 4.03 |  |  | 4.32 |
Earnings (loss) per common share — Diluted |  |  |  |  |  |  |
Continuing operations | $ | 1.59 |  |  | 1.70 |  |  | $ | 4.02 |  |  | 4.31 |
Discontinued operations | (0.01 | ) |  | — |  |  | (0.02 | ) |  | (0.03 | )
Net earnings | $ | 1.59 |  |  | 1.69 |  |  | $ | 4.00 |  |  | 4.28 |
Cash dividends declared per common share | $ | 0.44 |  |  | 0.41 |  |  | $ | 1.26 |  |  | 1.15 |

See accompanying notes to consolidated condensed financial statements.
Note: EPS amounts may not be additive due to rounding
1

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

| Three months ended September 30, |  | Nine months ended September 30,
| 2016 |  | 2015 |  | 2016 |  | 2015
| (In thousands)
Net earnings | $ | 84,752 |  |  | 90,619 |  |  | $ | 214,296 |  |  | 228,567 |
Other comprehensive income (loss): |  |  |  |  |  |  |
Currency translation adjustment and other | (19,296 | ) |  | (42,748 | ) |  | (37,874 | ) |  | (73,093 | )
Amortization of pension and postretirement items | 7,171 |  |  | 6,873 |  |  | 22,040 |  |  | 20,765 |
Income tax expense related to amortization of pension and postretirement items | (2,667 | ) |  | (2,412 | ) |  | (7,854 | ) |  | (7,226 | )
Amortization of pension and postretirement items, net of tax | 4,504 |  |  | 4,461 |  |  | 14,186 |  |  | 13,539 |
Change in net actuarial loss and prior service cost | — |  |  | — |  |  | (17,367 | ) |  | (8,526 | )
Income tax benefit related to change in net actuarial loss and prior service cost | — |  |  | — |  |  | 6,345 |  |  | 3,205 |
Change in net actuarial loss and prior service cost, net of taxes | — |  |  | — |  |  | (11,022 | ) |  | (5,321 | )
Other comprehensive loss, net of taxes | (14,792 | ) |  | (38,287 | ) |  | (34,710 | ) |  | (64,875 | )
Comprehensive income | $ | 69,960 |  |  | 52,332 |  |  | $ | 179,586 |  |  | 163,692 |

See accompanying notes to consolidated condensed financial statements.
2

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

| September 30, 2016 |  | December 31, 2015
| (Dollars in thousands, except per share amount)
Assets: |  |  |
Current assets: |  |  |
Cash and cash equivalents | $ | 74,994 |  |  | 60,945 |
Receivables, net of allowance of $14,911 and $15,560, respectively | 856,763 |  |  | 835,489 |
Inventories | 67,335 |  |  | 63,725 |
Prepaid expenses and other current assets | 138,467 |  |  | 138,143 |
Total current assets | 1,137,559 |  |  | 1,098,302 |
Revenue earning equipment, net | 8,274,832 |  |  | 8,184,735 |
Operating property and equipment, net of accumulated depreciation of $1,116,439 and $1,083,604, respectively | 740,375 |  |  | 714,970 |
Goodwill | 387,730 |  |  | 389,135 |
Intangible assets, net of accumulated amortization of $50,145 and $45,736, respectively | 49,994 |  |  | 55,192 |
Direct financing leases and other assets | 518,283 |  |  | 510,246 |
Total assets | $ | 11,108,773 |  |  | 10,952,580 |
Liabilities and shareholders’ equity: |  |  |
Current liabilities: |  |  |
Short-term debt and current portion of long-term debt | $ | 1,055,146 |  |  | 634,530 |
Accounts payable | 457,843 |  |  | 502,373 |
Accrued expenses and other current liabilities | 516,862 |  |  | 543,352 |
Total current liabilities | 2,029,851 |  |  | 1,680,255 |
Long-term debt | 4,464,495 |  |  | 4,868,097 |
Other non-current liabilities | 817,232 |  |  | 829,595 |
Deferred income taxes | 1,700,154 |  |  | 1,587,522 |
Total liabilities | 9,011,732 |  |  | 8,965,469 |
Shareholders’ equity: |  |  |
Preferred stock, no par value per share — authorized, 3,800,917; none outstanding, September 30, 2016 or December 31, 2015 | — |  |  | — |
Common stock, $0.50 par value per share — authorized, 400,000,000; outstanding, September 30, 2016 — 53,468,413; December 31, 2015 — 53,490,603 | 26,734 |  |  | 26,745 |
Additional paid-in capital | 1,022,307 |  |  | 1,006,021 |
Retained earnings | 1,795,445 |  |  | 1,667,080 |
Accumulated other comprehensive loss | (747,445 | ) |  | (712,735 | )
Total shareholders’ equity | 2,097,041 |  |  | 1,987,111 |
Total liabilities and shareholders’ equity | $ | 11,108,773 |  |  | 10,952,580 |

See accompanying notes to consolidated condensed financial statements.
3

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

| Nine months ended September 30,
| 2016 |  | 2015
| (In thousands)
Cash flows from operating activities from continuing operations: |  |  |
Net earnings | $ | 214,296 |  |  | 228,567 |
Less: Loss from discontinued operations, net of tax | (1,069 | ) |  | (1,487 | )
Earnings from continuing operations | 215,365 |  |  | 230,054 |
Depreciation expense | 878,173 |  |  | 828,148 |
Gains on used vehicles, net | (33,002 | ) |  | (82,158 | )
Share-based compensation expense | 13,870 |  |  | 16,112 |
Amortization expense and other non-cash charges, net | 49,869 |  |  | 46,272 |
Deferred income tax expense | 109,191 |  |  | 111,609 |
Changes in operating assets and liabilities: |  |  |
Receivables | (69,169 | ) |  | (23,751 | )
Inventories | (3,524 | ) |  | 1,275 |
Prepaid expenses and other assets | (24,241 | ) |  | (33,334 | )
Accounts payable | 68,599 |  |  | (19,506 | )
Accrued expenses and other non-current liabilities | (20,387 | ) |  | (3,385 | )
Net cash provided by operating activities from continuing operations | 1,184,744 |  |  | 1,071,336 |
Cash flows from financing activities: |  |  |
Net change in commercial paper borrowings and revolving credit facilities | 73,597 |  |  | 184,750 |
Debt proceeds | 298,254 |  |  | 1,329,810 |
Debt repaid | (340,707 | ) |  | (795,837 | )
Dividends on common stock | (67,651 | ) |  | (61,436 | )
Common stock issued | 9,626 |  |  | 20,397 |
Common stock repurchased | (25,658 | ) |  | (6,141 | )
Excess tax benefits from share-based compensation and other items | (1,685 | ) |  | 723 |
Debt issuance costs | (1,012 | ) |  | (7,483 | )
Net cash (used in) provided by financing activities | (55,236 | ) |  | 664,783 |
Cash flows from investing activities: |  |  |
Purchases of property and revenue earning equipment | (1,511,359 | ) |  | (2,087,294 | )
Sales of revenue earning equipment | 331,720 |  |  | 319,766 |
Sales of operating property and equipment | 6,623 |  |  | 1,203 |
Collections on direct finance leases and other items | 60,229 |  |  | 51,166 |
Changes in restricted cash | 4,203 |  |  | 7,781 |
Net cash used in investing activities | (1,108,584 | ) |  | (1,707,378 | )
Effect of exchange rate changes on cash | (5,567 | ) |  | (2,006 | )
Increase in cash and cash equivalents from continuing operations | 15,357 |  |  | 26,735 |
Decrease in cash and cash equivalents from discontinued operations | (1,308 | ) |  | (1,440 | )
Increase in cash and cash equivalents | 14,049 |  |  | 25,295 |
Cash and cash equivalents at January 1 | 60,945 |  |  | 50,092 |
Cash and cash equivalents at September 30 | $ | 74,994 |  |  | 75,387 |

See accompanying notes to consolidated condensed financial statements.
4

RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. GENERAL
Interim Financial Statements
The accompanying unaudited Consolidated Condensed Financial Statements include the accounts of Ryder System, Inc. (Ryder) and all entities in which Ryder has a controlling voting interest (subsidiaries) and variable interest entities (VIEs) required to be consolidated in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The accompanying unaudited Consolidated Condensed Financial Statements have been prepared in accordance with the accounting policies described in our 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.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Cash Flows
In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-15, Statement of Cash Flows, which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. The guidance will be effective January 1, 2018, with early adoption permitted. The standard is to be adopted on a retrospective basis. We do not expect this standard to have a material impact on the presentation of our consolidated cash flows.
Financial Instruments
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. The standard applies to financial instruments including, but not limited to, trade and other receivables, held-to-maturity debt securities, loans and net investments in leases. The standard requires estimating expected credit losses over the remaining life of an instrument or a portfolio of instruments with similar risk characteristics based on relevant information about past events, current conditions and reasonable forecasts. The initial estimate of and the subsequent changes in expected credit losses will be recognized as credit loss expense through current earnings and will be reflected as an allowance for credit losses offsetting the carrying value of the financial instrument(s) on the balance sheet. The standard is effective January 1, 2020, with early adoption as of January 1, 2019 permitted. The standard is to be applied using a modified retrospective transition method. We do not expect this standard to have a material impact on our consolidated financial position, results of operations or cash flows.
Share-Based Payments
In March 2016, the FASB issued 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 do not expect this standard to have a material impact on our consolidated financial position, results of operations or cash flows.
5

RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
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 evaluating the impact 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. We are evaluating transition methods and the impact on our consolidated financial position and results of operations.
Presentation of Debt Issuance Costs
In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which required 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.
3. REVENUE EARNING EQUIPMENT

| September 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 | $ | 9,460,749 |  |  | (2,979,195 | ) |  | 6,481,554 |  |  | $ | 8,839,941 |  |  | (2,723,605 | ) |  | 6,116,336 |
Commercial rental | 2,529,929 |  |  | (893,545 | ) |  | 1,636,384 |  |  | 2,811,715 |  |  | (907,412 | ) |  | 1,904,303 |
Held for sale | 503,160 |  |  | (346,266 | ) |  | 156,894 |  |  | 496,634 |  |  | (332,538 | ) |  | 164,096 |
Total | $ | 12,493,838 |  |  | (4,219,006 | ) |  | 8,274,832 |  |  | $ | 12,148,290 |  |  | (3,963,555 | ) |  | 8,184,735 |

————————————

(1) | Revenue earning equipment, net includes vehicles acquired under capital leases of $42.9 million, less accumulated depreciation of $21.6 million, at September 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 September 30, 2016 and December 31, 2015, the net investment in direct financing and sales-type leases was $418 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.
6

RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
As of September 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.
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)
| September 30, |  | Three months ended September 30, |  | Nine months ended September 30,
| 2016 |  | 2015 |  | 2016 |  | 2015 |  | 2016 |  | 2015
| (In thousands)
Assets held for sale: |  |  |  |  |  |  |  |  |  |  |
Revenue earning equipment (1): |  |  |  |  |  |  |  |  |  |  |
Trucks | $ | 17,091 |  |  | 7,701 |  |  | $ | 2,528 |  |  | 1,657 |  |  | $ | 6,842 |  |  | 4,400 |
Tractors | 61,480 |  |  | 10,093 |  |  | 7,985 |  |  | 2,062 |  |  | 22,073 |  |  | 3,970 |
Trailers | 2,563 |  |  | 1,195 |  |  | 1,152 |  |  | 610 |  |  | 2,589 |  |  | 1,582 |
Total assets at fair value | $ | 81,134 |  |  | 18,989 |  |  | $ | 11,665 |  |  | 4,329 |  |  | $ | 31,504 |  |  | 9,952 |

————————————

(1) | Assets held for sale in the above table only include the portion of revenue earning equipment held for sale where net book values exceeded fair values and fair value adjustments were recorded. The net book value of assets held for sale not exceeding fair value was $75.8 million and $145.1 million as of September 30, 2016 and 2015, respectively.

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

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

| Three months ended September 30, |  | Nine months ended September 30,
| 2016 |  | 2015 |  | 2016 |  | 2015
| (In thousands)
Gains on vehicle sales, net | $ | (13,538 | ) |  | (29,294 | ) |  | $ | (64,506 | ) |  | (92,110 | )
Losses from fair value adjustments | 11,665 |  |  | 4,329 |  |  | 31,504 |  |  | 9,952 |
Gains on used vehicles, net | $ | (1,873 | ) |  | (24,965 | ) |  | $ | (33,002 | ) |  | (82,158 | )

7

RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
4. ACCRUED EXPENSES AND OTHER LIABILITIES

| September 30, 2016 |  | December 31, 2015
| Accrued Expenses |  | Non-Current Liabilities |  | Total |  | Accrued Expenses |  | Non-Current Liabilities |  | Total
| (In thousands)
Salaries and wages | $ | 88,592 |  |  | — |  |  | 88,592 |  |  | $ | 99,032 |  |  | — |  |  | 99,032 |
Deferred compensation | 2,874 |  |  | 44,702 |  |  | 47,576 |  |  | 2,252 |  |  | 41,691 |  |  | 43,943 |
Pension benefits | 3,808 |  |  | 466,721 |  |  | 470,529 |  |  | 3,790 |  |  | 484,892 |  |  | 488,682 |
Other postretirement benefits | 1,634 |  |  | 19,536 |  |  | 21,170 |  |  | 1,624 |  |  | 20,002 |  |  | 21,626 |
Other employee benefits | 23,843 |  |  | 5,040 |  |  | 28,883 |  |  | 8,956 |  |  | 9,706 |  |  | 18,662 |
Insurance obligations (1) | 140,528 |  |  | 221,254 |  |  | 361,782 |  |  | 157,014 |  |  | 213,256 |  |  | 370,270 |
Environmental liabilities | 3,839 |  |  | 5,911 |  |  | 9,750 |  |  | 3,791 |  |  | 6,554 |  |  | 10,345 |
Operating taxes | 96,813 |  |  | — |  |  | 96,813 |  |  | 101,649 |  |  | — |  |  | 101,649 |
Income taxes | 444 |  |  | 23,467 |  |  | 23,911 |  |  | 3,378 |  |  | 22,366 |  |  | 25,744 |
Interest | 37,128 |  |  | — |  |  | 37,128 |  |  | 31,218 |  |  | — |  |  | 31,218 |
Customer deposits | 62,035 |  |  | 4,688 |  |  | 66,723 |  |  | 61,869 |  |  | 5,085 |  |  | 66,954 |
Deferred revenue | 14,556 |  |  | — |  |  | 14,556 |  |  | 13,038 |  |  | — |  |  | 13,038 |
Restructuring liabilities (2) | 2,391 |  |  | — |  |  | 2,391 |  |  | 12,333 |  |  | — |  |  | 12,333 |
Other | 38,377 |  |  | 25,913 |  |  | 64,290 |  |  | 43,408 |  |  | 26,043 |  |  | 69,451 |
Total | $ | 516,862 |  |  | 817,232 |  |  | 1,334,094 |  |  | $ | 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.

8

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

| Weighted-Average Interest Rate |  |  |  |  |  |
| September 30, 2016 |  | December 31, 2015 |  | Maturities |  | September 30, 2016 |  | December 31, 2015
|  |  |  |  |  |  | (In thousands)
Short-term debt and current portion of long-term debt: |  |  |  |  |  |  |  |  |
Short-term debt | 0.92% |  | 2.26% |  |  |  | $ | 133,713 |  |  | 35,947 |
Current portion of long-term debt |  |  |  |  |  |  | 921,433 |  |  | 598,583 |
Total short-term debt and current portion of long-term debt |  |  |  |  |  | 1,055,146 |  |  | 634,530 |
Long-term debt: |  |  |  |  |  |  |  |  |
U.S. commercial paper (1) | 0.76% |  | 0.55% |  | 2020 |  | 490,685 |  |  | 547,130 |
Global revolving credit facility | 2.06% |  | 2.31% |  | 2020 |  | 60,885 |  |  | 25,291 |
Unsecured U.S. notes — Medium-term notes (1) | 2.91% |  | 2.84% |  | 2016-2025 |  | 4,113,583 |  |  | 4,112,519 |
Unsecured U.S. obligations | 2.09% |  | 1.73% |  | 2018 |  | 50,000 |  |  | 50,000 |
Unsecured foreign obligations | 1.74% |  | 1.92% |  | 2017-2020 |  | 248,376 |  |  | 275,661 |
Asset-backed U.S. obligations (2) | 1.77% |  | 1.81% |  | 2016-2022 |  | 395,898 |  |  | 434,001 |
Capital lease obligations | 3.18% |  | 3.31% |  | 2016-2023 |  | 25,818 |  |  | 32,054 |
Total before fair market value adjustment |  |  |  |  |  |  | 5,385,245 |  |  | 5,476,656 |
Fair market value adjustment on notes subject to hedging (3) |  |  |  |  |  | 14,213 |  |  | 5,253 |
Debt issuance costs (4) |  |  |  |  |  |  | (13,530 | ) |  | (15,229 | )
|  |  |  |  |  |  | 5,385,928 |  |  | 5,466,680 |
Current portion of long-term debt |  |  |  |  |  |  | (921,433 | ) |  | (598,583 | )
Long-term debt |  |  |  |  |  |  | 4,464,495 |  |  | 4,868,097 |
Total debt |  |  |  |  |  |  | $ | 5,519,641 |  |  | 5,502,627 |

————————————

(1) | Amounts are net of aggregate unamortized original issue discounts of $6.8 million and $7.7 million at September 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 September 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 September 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 September 30, 2016 was 206%. At September 30, 2016, there was $514.4 million available under the credit facility.
9

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 September 30, 2016, we classified $490.7 million of short-term commercial paper, $349.9 million of current debt obligations and $60.9 million of short-term borrowings under our global revolving credit facility as long-term. At December 31, 2015, we classified $547.1 million of short-term commercial paper, $300.0 million of current debt obligations and $25.3 million of short-term borrowings under our global revolving credit facility 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 value plus accrued and unpaid interest.
We have a trade receivables purchase and sale program, pursuant to which we sell certain of our domestic trade accounts receivable to a bankruptcy remote, consolidated subsidiary of Ryder, that in turn sells, on a revolving basis, an ownership interest in certain of these accounts receivable to a committed purchaser. The subsidiary is considered a VIE and is consolidated based on our control of the entity’s activities. We use this program to provide additional liquidity to fund our operations, particularly when it is cost effective to do so. The costs under the program may vary based on changes in interest rates. The available proceeds that may be received under the program are limited to $175 million. The program was renewed in October 2016. If no event occurs which causes early termination, the 364-day program will expire on October 23, 2017. 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 September 30, 2016 or December 31, 2015.
At September 30, 2016 and December 31, 2015, we had letters of credit and surety bonds outstanding totaling $338.9 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 September 30, 2016 and December 31, 2015 was approximately $5.21 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.
In February 2016, Ryder filed an automatic shelf registration statement on Form S-3 with the SEC. The registration is for an indeterminate number of securities and is effective for three years. Under this universal shelf registration statement, we have the capacity to offer and sell from time to time various types of securities, including common stock, preferred stock and debt securities, subject to market demand and ratings status.
10

RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
6. 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 September 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 $14.2 million and $5.4 million as of September 30, 2016 and December 31, 2015, respectively. The amounts are 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.
7. 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 program). Under the 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 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 program, which allow for share repurchases during Ryder’s quarterly blackout periods as set forth in the trading plan.
During the nine months ended September 30, 2016 and September 30, 2015, we repurchased 379,896 shares for $25.7 million and 69,107 shares for $6.1 million, respectively.
8. 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 |  | — |  |  | 14,052 |  |  | 134 |  |  | 14,186 |
Other current period change |  | (37,874 | ) |  | (5,495 | ) |  | (5,527 | ) |  | (48,896 | )
September 30, 2016 |  | $ | (173,894 | ) |  | (568,436 | ) |  | (5,115 | ) |  | (747,445 | )

11

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

|  | 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 |  | — |  |  | 14,605 |  |  | (1,066 | ) |  | 13,539 |
Other current period change |  | (73,093 | ) |  | (5,321 | ) |  | — |  |  | (78,414 | )
September 30, 2015 |  | $ | (109,180 | ) |  | (576,657 | ) |  | 692 |  |  | (685,145 | )

_______________________

(1) | These amounts are included in the computation of net pension expense. See Note 11, "Employee Benefit Plans," for further information.

The loss from currency translation adjustments in the nine months ended September 30, 2016 of $37.9 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 nine months ended September 30, 2015 of $73.1 million was due to the weakening of the Canadian Dollar and British Pound against the U.S. Dollar.
9. EARNINGS PER SHARE
The following table presents the calculation of basic and diluted earnings per common share from continuing operations:

| Three months ended September 30, |  | Nine months ended September 30,
| 2016 |  | 2015 |  | 2016 |  | 2015
| (In thousands, except per share amounts)
Earnings per share — Basic: |  |  |  |  |  |  |
Earnings from continuing operations | $ | 85,138 |  |  | 90,811 |  |  | $ | 215,365 |  |  | 230,054 |
Less: Earnings allocated to unvested stock | (261 | ) |  | (266 | ) |  | (674 | ) |  | (654 | )
Earnings from continuing operations available to common shareholders — Basic | $ | 84,877 |  |  | 90,545 |  |  | $ | 214,691 |  |  | 229,400 |
Weighted average common shares outstanding — Basic | 52,953 |  |  | 52,888 |  |  | 53,029 |  |  | 52,770 |
Earnings from continuing operations per common share — Basic | $ | 1.60 |  |  | 1.71 |  |  | $ | 4.05 |  |  | 4.35 |
Earnings per share — Diluted: |  |  |  |  |  |  |
Earnings from continuing operations | $ | 85,138 |  |  | 90,811 |  |  | $ | 215,365 |  |  | 230,054 |
Less: Earnings allocated to unvested stock | (260 | ) |  | (265 | ) |  | (672 | ) |  | (649 | )
Earnings from continuing operations available to common shareholders — Diluted | $ | 84,878 |  |  | 90,546 |  |  | $ | 214,693 |  |  | 229,405 |
Weighted average common shares outstanding — Basic | 52,953 |  |  | 52,888 |  |  | 53,029 |  |  | 52,770 |
Effect of dilutive equity awards | 338 |  |  | 445 |  |  | 315 |  |  | 476 |
Weighted average common shares outstanding — Diluted | 53,291 |  |  | 53,333 |  |  | 53,344 |  |  | 53,246 |
Earnings from continuing operations per common share — Diluted | $ | 1.59 |  |  | 1.70 |  |  | $ | 4.02 |  |  | 4.31 |
Anti-dilutive equity awards not included above | 653 |  |  | 352 |  |  | 836 |  |  | 300 |

12

RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
10. SHARE-BASED COMPENSATION PLANS
Share-based incentive awards are provided to employees under the terms of various share-based compensation plans (collectively, the “Plans”). The Plans are administered by the Compensation Committee of the Board of Directors and principally include at-the-money stock options, unvested stock and cash awards. Unvested stock awards include grants of market-based, performance-based and time-vested restricted stock rights. Under the terms of our Plans, dividends are not paid unless the stock award vests. Upon vesting, the amount of the dividends paid is equal to the aggregate dividends declared on common shares during the period from the grant date of the award until the date the shares underlying the award are delivered.
The following table provides information on share-based compensation expense and income tax benefits recognized during the periods:

| Three months ended September 30, |  | Nine months ended September 30,
| 2016 |  | 2015 |  | 2016 |  | 2015
| (In thousands)
Stock option and stock purchase plans | $ | 1,633 |  |  | 1,948 |  |  | $ | 5,410 |  |  | 6,205 |
Unvested stock | 2,237 |  |  | 2,995 |  |  | 8,460 |  |  | 9,907 |
Share-based compensation expense | 3,870 |  |  | 4,943 |  |  | 13,870 |  |  | 16,112 |
Income tax benefit | (1,321 | ) |  | (1,652 | ) |  | (4,691 | ) |  | (5,395 | )
Share-based compensation expense, net of tax | $ | 2,549 |  |  | 3,291 |  |  | $ | 9,179 |  |  | 10,717 |

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 September 30, |  | Nine months ended September 30,
| 2016 |  | 2015 |  | 2016 |  | 2015
| (In thousands)
Cash awards | $ | 119 |  |  | 197 |  |  | $ | 447 |  |  | 661 |

Total unrecognized pre-tax compensation expense related to all share-based compensation arrangements at September 30, 2016 was $21.2 million and is expected to be recognized over a weighted-average period of 1.8 years.
The following table is a summary of the awards granted under the Plans during the periods presented:

| Nine months ended September 30,
| 2016 |  | 2015
| (Shares 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 |  |  | 87 |
Total | 721 |  |  | 510 |

13

RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
11. EMPLOYEE BENEFIT PLANS
Components of net pension expense were as follows:

| Three months ended September 30, |  | Nine months ended September 30,
| 2016 |  | 2015 |  | 2016 |  | 2015
| (In thousands)
Pension Benefits |  |  |  |  |  |  |
Company-administered plans: |  |  |  |  |  |  |
Service cost | $ | 2,660 |  |  | 3,612 |  |  | $ | 9,065 |  |  | 10,805 |
Interest cost | 22,754 |  |  | 21,777 |  |  | 72,086 |  |  | 65,712 |
Expected return on plan assets | (22,601 | ) |  | (24,697 | ) |  | (68,353 | ) |  | (74,618 | )
Amortization of: |  |  |  |  |  |  |
Net actuarial loss | 7,324 |  |  | 7,665 |  |  | 23,889 |  |  | 23,137 |
Prior service cost/(credit) | 320 |  |  | (80 | ) |  | 3,060 |  |  | (230 | )
| 10,457 |  |  | 8,277 |  |  | 39,747 |  |  | 24,806 |
Union-administered plans | 2,493 |  |  | 1,772 |  |  | 7,221 |  |  | 6,057 |
Net pension expense | $ | 12,950 |  |  | 10,049 |  |  | $ | 46,968 |  |  | 30,863 |
Company-administered plans: |  |  |  |  |  |  |
U.S. | $ | 10,952 |  |  | 8,746 |  |  | $ | 41,389 |  |  | 26,237 |
Non-U.S. | (495 | ) |  | (469 | ) |  | (1,642 | ) |  | (1,431 | )
| 10,457 |  |  | 8,277 |  |  | 39,747 |  |  | 24,806 |
Union-administered plans | 2,493 |  |  | 1,772 |  |  | 7,221 |  |  | 6,057 |
Net pension expense | $ | 12,950 |  |  | 10,049 |  |  | $ | 46,968 |  |  | 30,863 |

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 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 third quarter of 2015, we recorded adjustments of $0.5 million to previously recorded, estimated pension settlement charges related to the exit from U.S. multi-employer pension plans.
During the nine months ended September 30, 2016, we contributed $65.3 million to our pension plans. In 2016, the expected total contributions to our pension plans are 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 nine months ended September 30, 2016.
14

RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
12. 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, various matters related to income taxes and social contribution taxes, as well as tax credits used to offset those taxes, were assessed by the Revenue Department for the 1997, 1998, 2004, 2005 and 2006 tax years. When available and appropriate, we have entered into various amnesty programs offered by the Brazilian tax authorities to settle some of these assessments at a discount and continue to evaluate these when offered. Payments to resolve open matters through these amnesty programs were not material and were reflected as costs in discontinued operations. Open matters, combined, total approximately $4 million in assessments, penalties and interest and are pending at various levels of the administrative tax courts. We believe it is more likely than not that our position will ultimately be sustained either in these administrative courts or in actions before the judicial courts, if required.
13. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information was as follows:

| Nine months ended September 30,
| 2016 |  | 2015
| (In thousands)
Interest paid | $ | 100,903 |  |  | 110,141 |
Income taxes paid | 12,250 |  |  | 13,635 |
Changes in accounts payable related to purchases of revenue earning equipment | (107,177 | ) |  | 18,307 |
Operating and revenue earning equipment acquired under capital leases | 947 |  |  | 5,956 |

15

RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)
14. SEGMENT REPORTING
Our primary measurement of segment financial performance, defined as segment “Earnings Before Tax” (EBT) from continuing operations, includes an allocation of Central Support Services (CSS) and excludes non-operating pension costs and certain professional fees associated with cost savings initiatives. Fleet Management Solutions (FMS) EBT, Dedicated Transportation Solutions (DTS) EBT and Supply Chain Solutions (SCS) EBT are our primary measures of segment performance. 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 FMS segment leases revenue earning equipment and provides fuel, maintenance and other ancillary services to the DTS and SCS segments. Inter-segment revenue and EBT are accounted for at rates similar to those executed with third parties. EBT related to inter-segment equipment and services billed to 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 nine months ended September 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.
16

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 September 30, 2016 |  |  |  |  |  |  |  |
Revenue from external customers | $ | 1,046,599 |  |  | 260,921 |  |  | 416,898 |  |  | — |  |  | 1,724,418 |
Inter-segment revenue | 108,412 |  |  | — |  |  | — |  |  | (108,412 | ) |  | — |
Total revenue | $ | 1,155,011 |  |  | 260,921 |  |  | 416,898 |  |  | (108,412 | ) |  | 1,724,418 |
Segment EBT | $ | 112,282 |  |  | 17,587 |  |  | 30,954 |  |  | (12,606 | ) |  | 148,217 |
Unallocated CSS |  |  |  |  |  |  |  |  | (9,313 | )
Non-operating pension costs |  |  |  |  |  |  |  |  | (7,206 | )
Earnings from continuing operations before income taxes |  |  |  |  |  |  |  |  | $ | 131,698 |
Segment capital expenditures paid (1) | $ | 375,779 |  |  | 1,060 |  |  | 8,181 |  |  | — |  |  | 385,020 |
Unallocated CSS capital expenditures paid |  |  |  |  |  |  |  |  | 6,157 |
Capital expenditures paid |  |  |  |  |  |  |  |  | $ | 391,177 |
For the three months ended September 30, 2015 |  |  |  |  |  |  |  |
Revenue from external customers | $ | 1,054,840 |  |  | 226,921 |  |  | 387,305 |  |  | — |  |  | 1,669,066 |
Inter-segment revenue | 102,738 |  |  | — |  |  | — |  |  | (102,738 | ) |  | — |
Total revenue | $ | 1,157,578 |  |  | 226,921 |  |  | 387,305 |  |  | (102,738 | ) |  | 1,669,066 |
Segment EBT | $ | 126,433 |  |  | 13,296 |  |  | 26,573 |  |  | (11,998 | ) |  | 154,304 |
Unallocated CSS |  |  |  |  |  |  |  |  | (10,070 | )
Non-operating pension costs |  |  |  |  |  |  |  |  | (4,780 | )
Other items (2) |  |  |  |  |  |  |  |  | 446 |
Earnings from continuing operations before income taxes |  |  |  |  |  |  |  |  | $ | 139,900 |
Segment capital expenditures paid (1) | $ | 740,049 |  |  | 1,175 |  |  | 4,195 |  |  | — |  |  | 745,419 |
Unallocated CSS capital expenditures paid |  |  |  |  |  |  |  |  | 12,657 |
Capital expenditures paid |  |  |  |  |  |  |  |  | $ | 758,076 |

————————————

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

(2) | Consists of pension-related adjustments and certain professional fees associated with cost savings initiatives.

17

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

| FMS |  | DTS |  | SCS |  | Eliminations |  | Total
| (In thousands)
For the nine months ended September 30, 2016 |  |  |  |  |  |  |  |
Revenue from external customers | $ | 3,086,144 |  |  | 764,025 |  |  | 1,207,665 |  |  | — |  |  | 5,057,834 |
Inter-segment revenue | 318,308 |  |  | — |  |  | — |  |  | (318,308 | ) |  | — |
Total revenue | $ | 3,404,452 |  |  | 764,025 |  |  | 1,207,665 |  |  | (318,308 | ) |  | 5,057,834 |
Segment EBT | $ | 306,387 |  |  | 48,327 |  |  | 79,121 |  |  | (37,116 | ) |  | 396,719 |
Unallocated CSS |  |  |  |  |  |  |  |  | (30,193 | )
Non-operating pension costs |  |  |  |  |  |  |  |  | (21,691 | )
Pension-related adjustments (1) |  |  |  |  |  |  |  |  | (7,650 | )
Earnings from continuing operations before income taxes |  |  |  |  |  |  |  |  | $ | 337,185 |
Segment capital expenditures paid (2) | $ | 1,438,104 |  |  | 1,940 |  |  | 52,643 |  |  | — |  |  | 1,492,687 |
Unallocated CSS capital expenditures paid |  |  |  |  |  |  |  |  | 18,672 |
Capital expenditures paid |  |  |  |  |  |  |  |  | $ | 1,511,359 |
For the nine months ended September 30, 2015 |  |  |  |  |  |  |  |
Revenue from external customers | $ | 3,080,756 |  |  | 663,094 |  |  | 1,155,300 |  |  | — |  |  | 4,899,150 |
Inter-segment revenue | 313,321 |  |  | — |  |  | — |  |  | (313,321 | ) |  | — |
Total revenue | $ | 3,394,077 |  |  | 663,094 |  |  | 1,155,300 |  |  | (313,321 | ) |  | 4,899,150 |
Segment EBT | $ | 338,603 |  |  | 34,701 |  |  | 69,961 |  |  | (35,120 | ) |  | 408,145 |
Unallocated CSS |  |  |  |  |  |  |  |  | (32,936 | )
Non-operating pension costs |  |  |  |  |  |  |  |  | (14,351 | )
Other items (3) |  |  |  |  |  |  |  |  | (3,334 | )
Earnings from continuing operations before income taxes |  |  |  |  |  |  |  |  | $ | 357,524 |
Segment capital expenditures paid (2) | $ | 2,040,334 |  |  | 2,530 |  |  | 13,752 |  |  | — |  |  | 2,056,616 |
Unallocated CSS capital expenditures paid |  |  |  |  |  |  |  |  | 30,678 |
Capital expenditures paid |  |  |  |  |  |  |  |  | $ | 2,087,294 |

————————————

(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) | Consists of pension-related adjustments and certain professional fees associated with cost savings initiatives.

18

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.
This Management’s Discussion and Analysis (MD&A) includes certain non-GAAP financial measures. Please refer to the “Non-GAAP Financial Measures” section of this MD&A for information on the non-GAAP measures included in the MD&A, reconciliations to the most comparable GAAP financial measure and the reasons why we believe each measure is useful to investors.
19

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Operating results were as follows:

| Three months ended September 30, |  | Nine months ended September 30, |  | Change 2016/2015
| 2016 |  | 2015 |  | 2016 |  | 2015 |  | Three Months | Nine Months
| (In thousands, except per share amounts) |  |  |
Total revenue | $ | 1,724,418 |  |  | 1,669,066 |  |  | $ | 5,057,834 |  |  | 4,899,150 |  |  | 3 | % | 3 | %
Operating revenue (1) | 1,468,293 |  |  | 1,426,465 |  |  | 4,324,019 |  |  | 4,119,369 |  |  | 3 | % | 5 | %
EBT | $ | 131,698 |  |  | 139,900 |  |  | $ | 337,185 |  |  | 357,524 |  |  | (6 | )% | (6 | )%
Comparable EBT (2) | 138,904 |  |  | 144,234 |  |  | 366,526 |  |  | 375,209 |  |  | (4 | )% | (2 | )%
Earnings from continuing operations | 85,138 |  |  | 90,811 |  |  | 215,365 |  |  | 230,054 |  |  | (6 | )% | (6 | )%
Comparable earnings from continuing operations (2) | 89,354 |  |  | 93,268 |  |  | 232,835 |  |  | 238,499 |  |  | (4 | )% | (2 | )%
Net earnings | 84,752 |  |  | 90,619 |  |  | 214,296 |  |  | 228,567 |  |  | (6 | )% | (6 | )%
Earnings per common share (EPS) — Diluted |  |  |  |  |  |  |  |  |  |  |
Continuing operations | $ | 1.59 |  |  | 1.70 |  |  | $ | 4.02 |  |  | 4.31 |  |  | (6 | )% | (7 | )%
Comparable (2) | 1.67 |  |  | 1.74 |  |  | 4.35 |  |  | 4.47 |  |  | (4 | )% | (3 | )%
Net earnings | 1.59 |  |  | 1.69 |  |  | 4.00 |  |  | 4.28 |  |  | (6 | )% | (7 | )%

————————————

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

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

Total revenue and operating revenue (a non-GAAP measure excluding fuel and subcontracted transportation) increased 3% in the third quarter of 2016. For the nine months ended September 30, 2016, total revenue increased 3% and operating revenue increased 5%. Total revenue and operating revenue growth in both periods was due to growth in the full service lease fleet and higher prices on replacement vehicles in FMS and new business, increased volumes and higher pricing in SCS and DTS. These increases were partially offset by lower demand in the commercial rental product line and negative impacts from foreign exchange. Increased total revenue was also partially offset by lower fuel costs passed through to customers.
EBT decreased 6% in both the third quarter of 2016 and nine months ended September 30, 2016, reflecting lower used vehicle and commercial rental results, partially offset by higher full service lease results in FMS, lower insurance costs in DTS and increased pricing, new business and increased volumes in DTS and SCS. The 2016 EBT decrease in the nine months ended September 30, 2016, also reflects a $7.7 million pension 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 three and nine months ended September 30, 2016, by 100 basis points.
20

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

| Three months ended September 30, |  | Nine months ended September 30, |  | Change 2016/2015
| 2016 |  | 2015 |  | 2016 |  | 2015 |  | Three Months |  | Nine Months
| (Dollars in thousands) |  |  |  |
Lease and rental revenues | $ | 803,006 |  |  | 802,881 |  |  | $ | 2,369,147 |  |  | 2,310,951 |  |  | — | % |  | 3 | %
Cost of lease and rental | 557,901 |  |  | 550,541 |  |  | 1,665,693 |  |  | 1,600,271 |  |  | 1 | % |  | 4 | %
Gross margin | 245,105 |  |  | 252,340 |  |  | 703,454 |  |  | 710,680 |  |  | (3 | )% |  | (1 | )%
Gross margin % | 31 | % |  | 31 | % |  | 30 | % |  | 31 | % |  |  |  |

Lease and rental revenues represent full service lease and commercial rental product offerings within our FMS segment. Revenues were approximately $803 million in the third quarter of 2016, consistent with the third quarter of 2015. For 2016, higher full service lease revenue, driven by growth in the average full service lease fleet and higher prices on replacement vehicles, was offset by lower commercial rental revenue reflecting lower demand and a negative impact from foreign exchange. Revenues increased 3% in the nine months ended September 30, 2016, primarily driven by a larger average full service lease fleet and higher prices on replacement vehicles, partially offset by lower commercial rental revenue reflecting lower demand and a negative impact from foreign exchange. Foreign exchange negatively impacted revenue growth by 100 basis points in both periods.
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 costs such as licenses, insurance and operating taxes. Cost of lease and rental excludes interest costs from vehicle financing. Cost of lease and rental increased 1% in the third quarter and 4% in the nine months ended September 30, 2016, primarily due to higher depreciation and maintenance costs from a larger average lease fleet, partially offset by lower depreciation on a smaller average rental fleet (13% lower in the third quarter and 6% lower in the nine months ended September 30, 2016). Cost of lease and rental benefited by approximately $9 million in the third quarter of 2016 and $26 million in the nine months ended September 30, 2016, due to changes in estimated residual values effective January 1, 2016. Foreign exchange also reduced cost of lease and rental by 100 basis points in both periods.
Lease and rental gross margin decreased 3% in the third quarter and 1% in the nine months ended September 30, 2016. Lease and rental gross margin as a percentage of revenue remained at 31% in the third quarter and decreased to 30% in the nine months ended September 30, 2016. The decrease in gross margin dollars in the third quarter of 2016 and the nine months ended September 30, 2016 was due to lower commercial rental demand, partially offset by higher prices on lease replacement vehicles and lease fleet growth, as well as benefits from improved residual values. The decrease in gross margin as a percentage of revenue in the nine months ended September 30, 2016, reflects lower commercial rental fleet utilization, partially offset by benefits from improved residual values.
Services

| Three months ended September 30, |  | Nine months ended September 30, |  | Change 2016/2015
| 2016 |  | 2015 |  | 2016 |  | 2015 |  | Three Months |  | Nine Months
| (Dollars in thousands) |  |  |  |  |
Services revenue | $ | 801,004 |  |  | 734,803 |  |  | $ | 2,345,922 |  |  | 2,165,677 |  |  | 9 | % |  | 8 | %
Cost of services | 658,793 |  |  | 606,364 |  |  | 1,936,636 |  |  | 1,792,182 |  |  | 9 | % |  | 8 | %
Gross margin | 142,211 |  |  | 128,439 |  |  | 409,286 |  |  | 373,495 |  |  | 11 | % |  | 10 | %
Gross margin % | 18 | % |  | 17 | % |  | 17 | % |  | 17 | % |  |  |  |

Services revenue represents all the revenues associated with our DTS and SCS segments, as well as contract maintenance, contract-related maintenance and fleet support services associated with our FMS segment. Services revenue increased 9% in the third quarter and 8% in the nine months ended September 30, 2016, due to new business, increased volumes and higher pricing in the DTS and SCS segments. The contract-related maintenance and contract maintenance product lines benefited from growth in fleet size, and contract-related maintenance revenue also increased from higher volumes. These increases were partially offset
21

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
by lower fuel prices passed through to our DTS and SCS customers. Foreign exchange also negatively impacted revenue growth by 200 basis points in both periods.
Cost of services represents the direct costs related to services revenue and is primarily comprised of salaries and employee-related costs, subcontracted transportation (purchased transportation from third parties) and maintenance costs. Cost of services increased 9% in the third quarter of 2016 and 8% in the nine months ended September 30, 2016 due to higher volumes, partially offset by lower fuel and insurance costs. Foreign exchange reduced cost of services by 100 basis points in both periods.
Services gross margin increased 11% in the third quarter and 10% in the nine months ended September 30, 2016. Services gross margin as a percentage of revenue increased to 18% in the third quarter and remained at 17% in the nine months ended September 30, 2016. The increase in gross margin dollars reflects benefits from higher pricing, new business and higher volumes in our DTS and SCS segments. Increased gross margin dollars also benefited from growth in the full service lease fleet size, higher volumes in the contract-related business and growth in the contract maintenance fleet.
Fuel

| Three months ended September 30, |  | Nine months ended September 30, |  | Change 2016/2015
| 2016 |  | 2015 |  | 2016 |  | 2015 |  | Three Months |  | Nine Months
| (Dollars in thousands) |  |  |  |  |
Fuel services revenue | $ | 120,408 |  |  | 131,382 |  |  | $ | 342,765 |  |  | 422,522 |  |  | (8 | )% |  | (19 | )%
Cost of fuel services | 116,904 |  |  | 129,562 |  |  | 331,283 |  |  | 408,027 |  |  | (10 | )% |  | (19 | )%
Gross margin | 3,504 |  |  | 1,820 |  |  | 11,482 |  |  | 14,495 |  |  | 93 | % |  | (21 | )%
Gross margin % | 3 | % |  | 1 | % |  | 3 | % |  | 3 | % |  |  |  |

Fuel services revenue represents fuel services provided to our FMS customers. Fuel services revenue decreased 8% in the third quarter and 19% in the nine months ended September 30, 2016, due to lower fuel prices passed through to customers.
Cost of fuel services includes the direct costs associated with providing our customers with fuel. These costs include fuel, salaries and employee-related costs of fuel island attendants and depreciation of our fueling facilities and equipment. Cost of fuel services decreased 10% in the third quarter and 19% in the nine months ended September 30, 2016, as a result of lower fuel prices.
Fuel services gross margin increased 93% in the third quarter and decreased 21% in the nine months ended September 30, 2016. Fuel services gross margin as a percentage of revenue increased to 3% in the third quarter and remained at 3% in the nine months ended September 30, 2016, compared to the same periods of 2015. Fuel is largely a pass-through to customers for which we realize minimal changes in margin during periods of steady market fuel prices. However, fuel services margin is impacted by sudden increases or decreases in market fuel prices during a short period of time, as customer pricing for fuel is established based on trailing market fuel costs. Fuel services gross margin was favorably impacted by these price change dynamics during the third quarter of 2016 and the earlier part of 2015, and adversely impacted during the third quarter of 2015.

| Three months ended September 30, |  | Nine months ended September 30, |  | Change 2016/2015
| 2016 |  | 2015 |  | 2016 |  | 2015 |  | Three Months |  | Nine Months
| (In thousands) |  |  |  |  |
Other operating expenses | $ | 27,997 |  |  | 26,957 |  |  | $ | 85,944 |  |  | 88,912 |  |  | 4 | % |  | (3 | )%

Other operating expenses include costs related to our owned and leased facilities within the FMS segment, such as facility depreciation, rent, purchased insurance, utilities and taxes. These facilities are utilized to provide maintenance to our lease, rental, contract maintenance and fleet support services customers. Other operating expenses increased slightly to $28.0 million in the third quarter and decreased to $85.9 million in the nine months ended September 30, 2016, due to lower utility costs for FMS facilities.
22

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

| Three months ended September 30, |  | Nine months ended September 30, |  | Change 2016/2015
| 2016 |  | 2015 |  | 2016 |  | 2015 |  | Three Months |  | Nine Months
| (Dollars in thousands) |  |  |  |  |
Selling, general and administrative expenses (SG&A) | $ | 198,805 |  |  | 203,093 |  |  | $ | 632,466 |  |  | 624,566 |  |  | (2 | )% |  | 1 | %
Percentage of total revenue | 12 | % |  | 12 | % |  | 13 | % |  | 13 | % |  |  |  |

SG&A expenses decreased 2% in the third quarter and increased 1% in the nine months ended September 30, 2016. The decrease in the third quarter is primarily due to lower compensation-related expenses and marketing-related costs and foreign exchange, partially offset by increased information technology costs and pension expense. The increase in the nine months ended September 30, 2016 is primarily due to increased pension expense and information technology costs, partially offset by lower compensation-related expenses, professional fees and foreign exchange. Foreign exchange reduced the growth in SG&A expenses by 100 basis points. Pension expense, which primarily impacts SG&A expenses, increased $2.9 million in the third quarter and $16.1 million in the nine months ended September 30, 2016, due to the impact of a lower asset return assumption and a higher discount rate. Pension expense in the nine months ended September 30, 2016, also increased due to a one-time charge of $7.7 million in the second quarter to reflect pension benefit improvements made in 2009 that were not fully reflected in our pension benefit obligation.

| Three months ended September 30, |  | Nine months ended September 30, |  | Change 2016/2015
| 2016 |  | 2015 |  | 2016 |  | 2015 |  | Three Months |  | Nine Months
| (Dollars in thousands) |  |  |  |
Gains on used vehicles, net | $ | 1,873 |  |  | 24,965 |  |  | $ | 33,002 |  |  | 82,158 |  |  | (92 | )% |  | (60 | )%

Gains on used vehicles, net includes gains from sales of used vehicles as well as the selling costs associated with used vehicles and write-downs of vehicles to fair market values. Gains on used vehicles, net decreased to $1.9 million in the third quarter and $33.0 million in the nine months ended September 30, 2016, primarily due to a drop in the market value of tractors which has resulted in lower gains on sales of used vehicles and higher fair market value write-downs. Global average proceeds per unit in the third quarter decreased from the prior year reflecting a 13% decrease in tractor proceeds per unit, partially offset by a 2% increase in truck proceeds per unit. Global proceeds per unit in the nine months ended September 30, 2016, decreased from the prior year reflecting a 12% decrease in tractor proceeds per unit, partially offset by a 1% increase in truck proceeds per unit in the nine months ended September 30, 2016.

| Three months ended September 30, |  | Nine months ended September 30, |  | Change 2016/2015
| 2016 |  | 2015 |  | 2016 |  | 2015 |  | Three Months |  | Nine Months
| (Dollars in thousands) |  |  |  |
Interest expense | $ | 37,440 |  |  | 38,986 |  |  | $ | 112,597 |  |  | 114,863 |  |  | (4 | )% |  | (2 | )%
Effective interest rate | 2.7 | % |  | 2.9 | % |  | 2.7 | % |  | 3.0 | % |  |  |  |

Interest expense decreased 4% in the third quarter and 2% in the nine months ended September 30, 2016, reflecting a lower effective interest rate, partially offset by higher average outstanding debt. The lower effective interest rate in 2016 reflects the replacement of higher interest rate debt with debt issuances at lower rates. The increase in average outstanding debt reflects planned vehicle capital spending.

| Three months ended September 30, |  | Nine months ended September 30, |  | Change 2016/2015
| 2016 |  | 2015 |  | 2016 |  | 2015 |  | Three Months |  | Nine Months
| (Dollars in thousands) |  |  |  |
Miscellaneous income, net | $ | 3,247 |  |  | 1,372 |  |  | $ | 10,968 |  |  | 5,037 |  |  | 137 | % |  | 118 | %

Miscellaneous income, net consists of investment income on securities used to fund certain benefit plans, interest income,
gains from sales of operating property, foreign currency transaction gains and other non-operating items. The increase in the third quarter and nine months ended September 30, 2016, is primarily driven by increased rabbi trust investment income.
23

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

| Three months ended September 30, |  | Nine months ended September 30, |  | Change 2016/2015
| 2016 |  | 2015 |  | 2016 |  | 2015 |  | Three Months |  | Nine Months
| (Dollars in thousands) |  |  |  |
Provision for income taxes | $ | 46,560 |  |  | 49,089 |  |  | $ | 121,820 |  |  | 127,470 |  |  | (5 | )% |  | (4 | )%
Effective tax rate from continuing operations | 35.4 | % |  | 35.1 | % |  | 36.1 | % |  | 35.7 | % |  |  |  |

Provision for income taxes decreased 5% in the third quarter and 4% in the nine months ended September 30, 2016. The decrease in the provision for income taxes reflects lower taxable earnings, partially offset by a slightly higher effective income tax rate.
24

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

| Three months ended September 30, |  | Nine months ended September 30, |  | Change 2016/2015
| 2016 |  | 2015 |  | 2016 |  | 2015 |  | Three Months |  | Nine Months
| (Dollars in thousands) |  |  |  |
Revenue: |  |  |  |  |  |  |  |  |  |  |
Fleet Management Solutions | $ | 1,155,011 |  |  | 1,157,578 |  |  | $ | 3,404,452 |  |  | 3,394,077 |  |  | — | % |  | — | %
Dedicated Transportation Solutions | 260,921 |  |  | 226,921 |  |  | 764,025 |  |  | 663,094 |  |  | 15 |  |  | 15 |
Supply Chain Solutions | 416,898 |  |  | 387,305 |  |  | 1,207,665 |  |  | 1,155,300 |  |  | 8 |  |  | 5 |
Eliminations | (108,412 | ) |  | (102,738 | ) |  | (318,308 | ) |  | (313,321 | ) |  | 6 |  |  | 2 |
Total | $ | 1,724,418 |  |  | 1,669,066 |  |  | $ | 5,057,834 |  |  | 4,899,150 |  |  | 3 | % |  | 3 | %
Operating Revenue: (1) |  |  |  |  |  |  |  |  |  |  |  |  |
Fleet Management Solutions | $ | 997,903 |  |  | 988,424 |  |  | $ | 2,955,466 |  |  | 2,846,661 |  |  | 1 | % |  | 4 | %
Dedicated Transportation Solutions | 196,648 |  |  | 184,247 |  |  | 581,213 |  |  | 526,882 |  |  | 7 |  |  | 10 |
Supply Chain Solutions | 345,453 |  |  | 318,759 |  |  | 999,427 |  |  | 934,253 |  |  | 8 |  |  | 7 |
Eliminations | (71,711 | ) |  | (64,965 | ) |  | (212,087 | ) |  | (188,427 | ) |  | 10 |  |  | 13 |
Total | $ | 1,468,293 |  |  | 1,426,465 |  |  | $ | 4,324,019 |  |  | 4,119,369 |  |  | 3 | % |  | 5 | %
EBT: |  |  |  |  |  |  |  |  |  |  |  |
Fleet Management Solutions | $ | 112,282 |  |  | 126,433 |  |  | $ | 306,387 |  |  | 338,603 |  |  | (11 | )% |  | (10 | )%
Dedicated Transportation Solutions | 17,587 |  |  | 13,296 |  |  | 48,327 |  |  | 34,701 |  |  | 32 |  |  | 39 |
Supply Chain Solutions | 30,954 |  |  | 26,573 |  |  | 79,121 |  |  | 69,961 |  |  | 16 |  |  | 13 |
Eliminations | (12,606 | ) |  | (11,998 | ) |  | (37,116 | ) |  | (35,120 | ) |  | 5 |  |  | 6 |
| 148,217 |  |  | 154,304 |  |  | 396,719 |  |  | 408,145 |  |  | (4 | ) |  | (3 | )
Unallocated Central Support Services | (9,313 | ) |  | (10,070 | ) |  | (30,193 | ) |  | (32,936 | ) |  | (8 | ) |  | (8 | )
Non-operating pension costs | (7,206 | ) |  | (4,780 | ) |  | (21,691 | ) |  | (14,351 | ) |  | 51 |  |  | 51 |
Other items | — |  |  | 446 |  |  | (7,650 | ) |  | (3,334 | ) |  | NM |  |  | NM |
Earnings from continuing operations before income taxes | $ | 131,698 |  |  | 139,900 |  |  | $ | 337,185 |  |  | 357,524 |  |  | (6 | )% |  | (6 | )%

————————————

(1) | Non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section of this MD&A for a reconciliation of total revenue to operating revenue, and segment total revenue to segment operating revenue, as well as the reasons why management believes these measures are important to investors.

As part of management’s evaluation of segment operating performance, we define the primary measurement of our segment financial performance as “Earnings Before Taxes” (EBT) from continuing operations, which includes an allocation of Central Support Services (CSS), and excludes non-operating pension costs and other items discussed in Note 14, "Segment Reporting," in the Notes to Consolidated Condensed Financial Statements. CSS represents those costs incurred to support all segments, including human resources, finance, corporate services and 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. 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. Certain costs are not attributable to any segment and remain unallocated in CSS, including costs for investor relations, public affairs and certain executive compensation.
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 as well as the net gains on sale of this equipment (equipment contribution) and inter-segment fuel services are included in FMS, DTS and SCS and then eliminated (presented as “Eliminations” in the table above). Prior year amounts have been revised to conform to the current period presentation.
25

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The following table sets forth equipment contribution included in EBT for our DTS and SCS segments:

| Three months ended September 30, |  | Nine months ended September 30, |  | Change 2016/2015
| 2016 |  | 2015 |  | 2016 |  | 2015 |  | Three Months |  | Nine Months
| (Dollars in thousands) |  |  |  |
Equipment Contribution: |  |  |  |  |  |  |  |  |  |  |
Dedicated Transportation Solutions | $ | 8,047 |  |  | 8,527 |  |  | $ | 24,214 |  |  | 24,351 |  |  | (6 | )% |  | (1 | )%
Supply Chain Solutions | 4,559 |  |  | 3,471 |  |  | 12,902 |  |  | 10,769 |  |  | 31 |  |  | 20 |
Total | $ | 12,606 |  |  | 11,998 |  |  | $ | 37,116 |  |  | 35,120 |  |  | 5 | % |  | 6 | %

The decrease in DTS equipment contribution is primarily driven by lower net gains on sales of vehicles previously used in DTS operations, partially offset by higher volumes. The increase in SCS equipment contribution is primarily driven by higher volumes.
Items excluded from our segment EBT measure and their classification within our Consolidated Condensed Statements of Earnings follow:

|  |  |  | Three months ended September 30, |  | Nine months ended September 30,
Description |  | Classification |  | 2016 |  | 2015 |  | 2016 |  | 2015
|  |  |  | (In thousands)
Non-operating pension costs |  | SG&A |  | $ | (7,206 | ) |  | (4,780 | ) |  | $ | (21,691 | ) |  | (14,351 | )
Pension-related adjustments (1) |  | SG&A |  | — |  |  | 509 |  |  | (7,650 | ) |  | 509 |
Professional fees (2) |  | SG&A |  | — |  |  | (63 | ) |  | — |  |  | (3,843 | )
|  |  |  | $ | (7,206 | ) |  | (4,334 | ) |  | $ | (29,341 | ) |  | (17,685 | )

———————————

(1) | See Note 11, “Employee Benefit Plans,” in the Notes to Consolidated Condensed Financial Statements for a discussion of adjustments.

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

Fleet Management Solutions

| Three months ended September 30, |  | Nine months ended September 30, |  | Change 2016/2015
| 2016 |  | 2015 |  | 2016 |  | 2015 |  | Three Months |  | Nine Months
| (Dollars in thousands) |  |  |  |  |
Full service lease | $ | 649,208 |  |  | 609,300 |  |  | $ | 1,918,419 |  |  | 1,782,106 |  |  | 7 | % |  | 8 | %
Contract maintenance | 50,186 |  |  | 48,623 |  |  | 151,489 |  |  | 143,559 |  |  | 3 |  |  | 6 |
Contractual revenue | 699,394 |  |  | 657,923 |  |  | 2,069,908 |  |  | 1,925,665 |  |  | 6 |  |  | 7 |
Commercial rental | 216,592 |  |  | 250,601 |  |  | 636,028 |  |  | 694,745 |  |  | (14 | ) |  | (8 | )
Contract-related maintenance | 62,907 |  |  | 59,904 |  |  | 189,861 |  |  | 169,585 |  |  | 5 |  |  | 12 |
Other | 19,010 |  |  | 19,996 |  |  | 59,669 |  |  | 56,666 |  |  | (5 | ) |  | 5 |
Fuel services revenue | 157,108 |  |  | 169,154 |  |  | 448,986 |  |  | 547,416 |  |  | (7 | ) |  | (18 | )
FMS total revenue | $ | 1,155,011 |  |  | 1,157,578 |  |  | $ | 3,404,452 |  |  | 3,394,077 |  |  | — | % |  | — | %
FMS operating revenue (1) | $ | 997,903 |  |  | 988,424 |  |  | $ | 2,955,466 |  |  | 2,846,661 |  |  | 1 |  |  | 4 |
FMS EBT | $ | 112,282 |  |  | 126,433 |  |  | $ | 306,387 |  |  | 338,603 |  |  | (11 | )% |  | (10 | )%
FMS EBT as a % of FMS total revenue | 9.7 | % |  | 10.9 | % |  | 9.0 | % |  | 10.0 | % |  | (120) bps |  | (100) bps
FMS EBT as a % of FMS operating revenue (1) | 11.3 | % |  | 12.8 | % |  | 10.4 | % |  | 11.9 | % |  | (150) bps |  | (150) bps

————————————

(1) | Non-GAAP financial measures. Reconciliations of FMS total revenue to FMS operating revenue, FMS EBT as a % of FMS total revenue to FMS EBT as a % of FMS operating revenue, as well as the reasons why management believes these measures are important to investors are included in the “Non-GAAP Financial Measures” section of this MD&A.

26

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The following table summarizes the components of the change in FMS revenue on a percentage basis versus the prior year:

| Three months ended September 30, 2016 |  | Nine months ended September 30, 2016
| Total |  | Operating (1) |  | Total |  | Operating (1)
Organic, including price and volume | 2 | % |  | 2 | % |  | 4 | % |  | 5 | %
Fuel | (1 | ) |  | — |  |  | (3 | ) |  | — |
Foreign exchange | (1 | ) |  | (1 | ) |  | (1 | ) |  | (1 | )
Net increase | — | % |  | 1 | % |  | — | % |  | 4 | %

————————————

(1) | Non-GAAP financial measure. A reconciliation of FMS total revenue to FMS operating revenue as well as the reasons why management believes this measure is important to investors is included in the "Non-GAAP Financial Measures" section of this MD&A.

FMS total revenue remained at $1.16 billion in the third quarter and increased slightly to $3.40 billion in the nine months ended September 30, 2016 due to higher FMS operating revenue (a non-GAAP measure excluding fuel), largely offset by a decline in fuel services revenue and negative impacts from foreign exchange. FMS operating revenue increased 1% in the third quarter and 4% in the nine months ended September 30, 2016 as a result of organic growth, primarily in the full service lease product line, partially offset by lower commercial rental revenue. In the third quarter and nine months ended September 30, 2016, foreign exchange negatively impacted both total and operating revenue growth by 100 basis point s.
Full service lease revenue increased 7% in the third quarter and 8% in the nine months ended September 30, 2016, reflecting a larger average fleet size and higher prices on replacement vehicles. Foreign exchange negatively impacted full service lease revenue growth by 100 basis points in both the third quarter and the nine months ended September 30, 2016. We expect favorable full service lease revenue comparisons to continue through the end of the year based on sales activity. Commercial rental revenue decreased 14% in the third quarter and 8% in the nine months ended September 30, 2016 due to lower demand. We expect unfavorable commercial rental revenue comparisons through the end of the year based on a weaker demand environment. Contract-related maintenance revenue increased 5% in the third quarter and 12% in the nine months ended September 30, 2016, reflecting favorable impacts from growth in the full service lease fleet and higher volumes.
The following table provides commercial rental statistics on our global fleet:

| Three months ended September 30, |  | Nine months ended September 30, |  | Change 2016/2015
| 2016 |  | 2015 |  | 2016 |  | 2015 |  | Three Months |  | Nine Months
| (Dollars in thousands) |  |  |  |
Rental revenue from non-lease customers | $ | 141,836 |  |  | 159,912 |  |  | $ | 397,305 |  |  | 420,356 |  |  | (11 | )% |  | (5 | )%
Rental revenue from lease customers (1) | $ | 74,756 |  |  | 90,689 |  |  | $ | 238,723 |  |  | 274,389 |  |  | (18 | )% |  | (13 | )%
Average commercial rental power fleet size — in service (2), (3) | 30,900 |  |  | 35,500 |  |  | 31,700 |  |  | 33,400 |  |  | (13 | )% |  | (5 | )%
Commercial rental utilization — power fleet (2) | 76.7 | % |  | 76.4 | % |  | 73.9 | % |  | 76.0 | % |  | 30 bps |  | (210) bps

————————————

(1) | Represents revenue from rental vehicles provided to our existing full service lease customers, generally in place of a lease vehicle.

(2) | Number of units rounded to nearest hundred and calculated using quarterly average unit counts.

(3) | Excluding trailers.

FMS EBT decreased 11% in the third quarter and 10% in the nine months ended September 30, 2016, reflecting lower used vehicle and commercial rental results, partially offset by higher full service lease results. Used vehicle results decreased due to lower tractor pricing as well as lower sales volume in third quarter. Commercial rental results declined from lower demand in both periods. The commercial rental results for the nine months ended September 30, 2016, were also negatively impacted by a 210 basis point decline in utilization. Full service lease results benefited from growth in the average lease fleet size. Full service lease and commercial rental results benefited from approximately $9 million of lower depreciation in the third quarter and $26 million in the nine months ended September 30, 2016, due to residual value changes implemented January 1, 2016.
27

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Our global fleet of revenue earning equipment, contract maintenance vehicles and vehicles under on-demand maintenance is summarized as follows (number of units rounded to the nearest hundred):

|  |  |  |  |  |  | Change
| September 30, 2016 |  | December 31, 2015 |  | September 30, 2015 |  | Sept. 2016/Dec. 2015 |  | Sept. 2016/Sept. 2015
End of period vehicle count |  |  |  |  |  |  |  |  |
By type: |  |  |  |  |  |  |  |  |
Trucks (1) | 73,500 |  |  | 72,800 |  |  | 72,900 |  |  | 1 | % |  | 1 | %
Tractors (2) | 68,600 |  |  | 68,700 |  |  | 67,100 |  |  | — |  |  | 2 |
Trailers (3), (4) | 42,300 |  |  | 42,400 |  |  | 42,500 |  |  | — |  |  | — |
Other | 1,200 |  |  | 1,300 |  |  | 1,300 |  |  | (8 | ) |  | (8 | )
Total | 185,600 |  |  | 185,200 |  |  | 183,800 |  |  | — | % |  | 1 | %
By ownership: |  |  |  |  |  |  |  |  |
Owned | 184,100 |  |  | 184,700 |  |  | 182,200 |  |  | — | % |  | 1 | %
Leased | 1,500 |  |  | 500 |  |  | 1,600 |  |  | 200 |  |  | (6 | )
Total | 185,600 |  |  | 185,200 |  |  | 183,800 |  |  | — | % |  | 1 | %
By product line: (4) |  |  |  |  |  |  |  |  |
Full service lease | 136,600 |  |  | 131,800 |  |  | 130,600 |  |  | 4 | % |  | 5 | %
Commercial rental | 38,000 |  |  | 42,100 |  |  | 43,800 |  |  | (10 | ) |  | (13 | )
Service vehicles and other | 3,500 |  |  | 3,300 |  |  | 3,300 |  |  | 6 |  |  | 6 |
Active units | 178,100 |  |  | 177,200 |  |  | 177,700 |  |  | 1 |  |  | — |
Held for sale | 7,500 |  |  | 8,000 |  |  | 6,100 |  |  | (6 | ) |  | 23 |
Total | 185,600 |  |  | 185,200 |  |  | 183,800 |  |  | — | % |  | 1 | %
Customer vehicles under contract maintenance | 49,300 |  |  | 46,700 |  |  | 41,500 |  |  | 6 | % |  | 19 | %
Quarterly average vehicle count |  |  |  |  |  |  |  |  |
By product line: |  |  |  |  |  |  |  |  |
Full service lease | 135,100 |  |  | 131,100 |  |  | 129,900 |  |  | 3 | % |  | 4 | %
Commercial rental | 38,300 |  |  | 43,200 |  |  | 43,800 |  |  | (11 | ) |  | (13 | )
Service vehicles and other | 3,300 |  |  | 3,300 |  |  | 3,300 |  |  | — |  |  | — |
Active units | 176,700 |  |  | 177,600 |  |  | 177,000 |  |  | (1 | ) |  | — |
Held for sale | 8,700 |  |  | 6,900 |  |  | 5,900 |  |  | 26 |  |  | 47 |
Total | 185,400 |  |  | 184,500 |  |  | 182,900 |  |  | — | % |  | 1 | %
Customer vehicles under contract maintenance | 49,600 |  |  | 45,500 |  |  | 41,400 |  |  | 9 | % |  | 20 | %
Customer vehicles under on-demand maintenance (5) | 8,000 |  |  | 7,200 |  |  | 8,200 |  |  | 11 | % |  | (2 | )%
Total vehicles under service | 243,000 |  |  | 237,200 |  |  | 232,500 |  |  | 2 | % |  | 5 | %
Year-to-date average vehicle count |  |  |  |  |  |  |  |  |
By product line: |  |  |  |  |  |  |  |  |
Full service lease | 133,800 |  |  | 128,800 |  |  | 128,000 |  |  | 4 | % |  | 5 | %
Commercial rental | 39,600 |  |  | 42,400 |  |  | 42,100 |  |  | (7 | ) |  | (6 | )
Service vehicles and other | 3,400 |  |  | 3,200 |  |  | 3,200 |  |  | 6 |  |  | 6 |
Active units | 176,800 |  |  | 174,400 |  |  | 173,300 |  |  | 1 |  |  | 2 |
Held for sale | 8,600 |  |  | 6,100 |  |  | 5,800 |  |  | 41 |  |  | 48 |
Total | 185,400 |  |  | 180,500 |  |  | 179,100 |  |  | 3 | % |  | 4 | %
Customer vehicles under contract maintenance | 49,000 |  |  | 43,300 |  |  | 42,600 |  |  | 13 | % |  | 15 | %
Customer vehicles under on-demand maintenance (5) | 22,700 |  |  | 20,000 |  |  | 16,900 |  |  | NM |  |  | 34 | %

———————————

(1) | Generally comprised of Class 1 through Class 7 type vehicles with a Gross Vehicle Weight (GVW) up to 33,000 pounds.

(2) | Generally comprised of over the road on highway tractors and are primarily comprised of Class 8 type vehicles with a GVW of over 33,000 pounds.

(3) | Generally comprised of dry, flatbed and refrigerated type trailers.

(4) | Includes 5,400 UK trailers (3,500 full service lease and 1,900 commercial rental), 6,100 UK trailers (3,900 full service lease and 2,200 commercial rental) and 6,500 UK trailers (4,300 full service lease and 2,200 commercial rental) as of September 30, 2016, December 31, 2015, and September 30, 2015, respectively.

(5) | Comprised of the number of unique vehicles serviced under on-demand maintenance agreements for the quarterly and year-to-date periods. This does not represent averages for the periods. Vehicles included in the count may have been serviced more than one time during the respective period.

Note: Quarterly and year-to-date amounts were computed using a 6-point and 18-point average, respectively, based on monthly information.
28

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The following table provides a breakdown of our non-revenue earning equipment included in our global fleet count (number of units rounded to nearest hundred):

|  |  |  |  |  |  | Change
| September 30, 2016 |  | December 31, 2015 |  | September 30, 2015 |  | Sept. 2016/Dec. 2015 |  | Sept. 2016/Sept. 2015
Not yet earning revenue (NYE) | 1,900 |  | 2,800 |  | 2,800 |  | (32 | )% |  | (32 | )%
No longer earning revenue (NLE): |  |  |  |  |  |  |  |  |
Units held for sale | 7,500 |  | 8,000 |  | 6,100 |  | (6 | ) |  | 23 |
Other NLE units | 5,000 |  | 3,300 |  | 3,900 |  | 52 |  |  | 28 |
Total | 14,400 |  | 14,100 |  | 12,800 |  | 2 | % |  | 13 | %

NYE units represent new vehicles on hand that are being prepared for deployment to a lease customer or into the rental fleet. Preparations include activities such as adding lift gates, paint, decals, cargo area and refrigeration equipment. NYE units decreased compared to September 30, 2015, reflecting lower lease fleet growth and the redeployment of used vehicles to fulfill lease sales. NLE units represent vehicles held for sale and vehicles for which no revenue has been earned in the previous 30 days. Accordingly, these vehicles may be temporarily out of service, being prepared for sale or awaiting redeployment. NLE units increased compared to September 30, 2015 primarily due to higher used vehicle inventories and a higher number of units being prepared for sale. We expect NLE levels to remain around current levels through the end of the year.
Dedicated Transportation Solutions

| Three months ended September 30, |  | Nine months ended September 30, |  | Change 2016/2015
| 2016 |  | 2015 |  | 2016 |  | 2015 |  | Three Months |  | Nine Months
| (Dollars in thousands) |  |  |  |
DTS total revenue | $ | 260,921 |  |  | 226,921 |  |  | $ | 764,025 |  |  | 663,094 |  |  | 15 | % |  | 15 | %
DTS operating revenue (1) | $ | 196,648 |  |  | 184,247 |  |  | $ | 581,213 |  |  | 526,882 |  |  | 7 | % |  | 10 | %
DTS EBT | $ | 17,587 |  |  | 13,296 |  |  | $ | 48,327 |  |  | 34,701 |  |  | 32 | % |  | 39 | %
DTS EBT as a % of DTS total revenue | 6.7 | % |  | 5.9 | % |  | 6.3 | % |  | 5.2 | % |  | 80 bps |  | 110 bps
DTS EBT as a % of DTS operating revenue (1) | 8.9 | % |  | 7.2 | % |  | 8.3 | % |  | 6.6 | % |  | 170 bps |  | 170 bps
Memo: |  |  |  |  |  |  |  |  |  |  |
Average fleet | 8,300 |  |  | 7,900 |  |  | 8,200 |  |  | 7,700 |  |  | 5 | % |  | 6 | %

————————————

(1) | Non-GAAP financial measures. Reconciliations of DTS total revenue to DTS operating revenue, DTS EBT as a % of DTS total revenue to DTS EBT as a % of DTS operating revenue, as well as the reasons why management believes these measures are important to investors are included in the “Non-GAAP Financial Measures” section of this MD&A.

29

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The following table summarizes the components of the change in DTS revenue on a percentage basis versus the prior year:

| Three months ended September 30, 2016 |  | Nine months ended September 30, 2016
| Total |  | Operating(1) |  | Total |  | Operating(1)
Organic, including price and volume | 16 | % |  | 7 | % |  | 18 | % |  | 10 | %
Fuel | (1 | ) |  | — |  |  | (3 | ) |  | — |
Net increase | 15 | % |  | 7 | % |  | 15 | % |  | 10 | %

————————————

(1) | Non-GAAP financial measure. A reconciliation of DTS total revenue to DTS operating revenue, as well as the reasons why management believes this measure is important to investors is included in the "Non-GAAP Financial Measures" section of this MD&A.

In the third quarter of 2016, DTS total revenue increased 15% reflecting organic growth, partially offset by lower fuel prices passed through to our customers. DTS operating revenue (a non-GAAP measure excluding fuel and subcontracted transportation) increased 7% due to increased volumes, new business and higher pricing. DTS EBT increased 32% in the third quarter of 2016, primarily due to increased revenue.
In the nine months ended September 30, 2016, DTS total revenue increased 15% reflecting organic growth, partially offset by lower fuel prices passed through to our customers. DTS operating revenue increased 10% due to new business, increased volumes and higher pricing. We expect DTS total revenue and DTS operating revenue comparisons to remain favorable through the end of the year; however, at a lower growth rate. DTS EBT increased 39% in the nine months ended September 30, 2016, due to increased revenue.
Supply Chain Solutions

| Three months ended September 30, |  | Nine months ended September 30, |  | Change 2016/2015
| 2016 |  | 2015 |  | 2016 |  | 2015 |  | Three Months |  | Nine Months
| (Dollars in thousands) |  |  |  |
Automotive | $ | 140,785 |  |  | 118,786 |  |  | $ | 407,083 |  |  | 347,284 |  |  | 19 | % |  | 17 | %
Technology and healthcare | 61,425 |  |  | 62,456 |  |  | 177,138 |  |  | 185,762 |  |  | (2 | ) |  | (5 | )
CPG and Retail | 110,840 |  |  | 109,550 |  |  | 324,814 |  |  | 322,977 |  |  | 1 |  |  | 1 |
Industrial and other | 32,403 |  |  | 27,967 |  |  | 90,392 |  |  | 78,230 |  |  | 16 |  |  | 16 |
Subcontracted transportation | 56,089 |  |  | 53,960 |  |  | 162,743 |  |  | 171,957 |  |  | 4 |  |  | (5 | )
Fuel (1) | 15,356 |  |  | 14,586 |  |  | 45,495 |  |  | 49,090 |  |  | 5 |  |  | (7 | )
SCS total revenue | $ | 416,898 |  |  | 387,305 |  |  | $ | 1,207,665 |  |  | 1,155,300 |  |  | 8 | % |  | 5 | %
SCS operating revenue (2) | $ | 345,453 |  |  | 318,759 |  |  | $ | 999,427 |  |  | 934,253 |  |  | 8 | % |  | 7 | %
SCS EBT | $ | 30,954 |  |  | 26,573 |  |  | $ | 79,121 |  |  | 69,961 |  |  | 16 | % |  | 13 | %
SCS EBT as a % of SCS total revenue | 7.4 | % |  | 6.9 | % |  | 6.6 | % |  | 6.1 | % |  | 50 bps |  | 50 bps
SCS EBT as a % of SCS operating revenue (2) | 9.0 | % |  | 8.3 | % |  | 7.9 | % |  | 7.5 | % |  | 70 bps |  | 40 bps
Memo: |  |  |  |  |  |  |  |  |  |  |
Average fleet | 7,400 |  |  | 6,500 |  |  | 7,100 |  |  | 6,300 |  |  | 14 | % |  | 13 | %

————————————

(1) | Includes intercompany fuel sales from FMS to SCS.

(2) | Non-GAAP financial measures. Reconciliations of SCS total revenue to SCS operating revenue, SCS EBT as a % of SCS total revenue to SCS EBT as a % of SCS operating revenue, as well as the reasons why management believes these measures are important to investors are included in the “Non-GAAP Financial Measures” section of this MD&A.

30

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The following table summarizes the components of the change in SCS revenue on a percentage basis versus the prior year:

| Three months ended September 30, 2016 |  | Nine months ended September 30, 2016
| Total |  | Operating(1) |  | Total |  | Operating(1)
Organic, including price and volume | 9 | % |  | 9 | % |  | 7 | % |  | 9 | %
Foreign exchange | (1 | ) |  | (1 | ) |  | (2 | ) |  | (2 | )
Net increase | 8 | % |  | 8 | % |  | 5 | % |  | 7 | %

————————————

(1) | Non-GAAP financial measure. A reconciliation of SCS total revenue to SCS operating revenue, as well as the reasons why management believes this measure is important to investors is included in the "Non-GAAP Financial Measures" section of this MD&A.

In the third quarter of 2016, SCS total revenue increased 8% as growth in SCS operating revenue (a non-GAAP measure excluding fuel and subcontracted transportation) was partially offset by a negative impact from foreign exchange. SCS operating revenue increased 8% in the third quarter of 2016, primarily due to new business and increased volumes, partially offset by a negative impact from foreign exchange. SCS EBT increased 16% in the third quarter of 2016 due to the benefits of higher revenue.
In the nine months ended September 30, 2016, SCS total revenue increased 5%, as growth in SCS operating revenue was partially offset by a negative impact from foreign exchange. SCS operating revenue increased 7% due to new business, increased volumes and higher pricing, partially offset by a negative impact from foreign exchange. We expect SCS total revenue and SCS operating revenue comparisons to remain favorable through the end of the year; however, at a lower growth rate. SCS EBT increased 13% in the nine months ended September 30, 2016, due to higher pricing, new business and increased volumes.
Central Support Services

| Three months ended September 30, |  | Nine months ended September 30, |  | Change 2016/2015
| 2016 |  | 2015 |  | 2016 |  | 2015 |  | Three Months |  | Nine Months
| (Dollars in thousands) |  |  |  |
Human resources | $ | 4,184 |  |  | 4,596 |  |  | $ | 12,968 |  |  | 14,976 |  |  | (9 | )% |  | (13 | )%
Finance | 15,143 |  |  | 15,269 |  |  | 44,267 |  |  | 44,317 |  |  | (1 | ) |  | — |
Corporate services and public affairs | 2,471 |  |  | 2,694 |  |  | 7,463 |  |  | 7,803 |  |  | (8 | ) |  | (4 | )
Information technology | 20,466 |  |  | 22,104 |  |  | 60,369 |  |  | 63,228 |  |  | (7 | ) |  | (5 | )
Legal and safety | 5,711 |  |  | 5,974 |  |  | 17,798 |  |  | 18,406 |  |  | (4 | ) |  | (3 | )
Marketing | 4,336 |  |  | 7,049 |  |  | 14,220 |  |  | 17,177 |  |  | (38 | ) |  | (17 | )
Other | 4,949 |  |  | 6,172 |  |  | 19,550 |  |  | 24,278 |  |  | (20 | ) |  | (19 | )
Total CSS | 57,260 |  |  | 63,858 |  |  | 176,635 |  |  | 190,185 |  |  | (10 | ) |  | (7 | )
Allocation of CSS to business segments | (47,947 | ) |  | (53,788 | ) |  | (146,442 | ) |  | (157,249 | ) |  | (11 | ) |  | (7 | )
Unallocated CSS | $ | 9,313 |  |  | 10,070 |  |  | $ | 30,193 |  |  | 32,936 |  |  | (8 | )% |  | (8 | )%

Total CSS costs decreased 10% and 7% in the third quarter and nine months ended September 30, 2016, respectively, due to lower compensation-related expenses and lower marketing-related and information technology costs. Unallocated CSS decreased 8% in both the third quarter and the nine months ended September 30, 2016, primarily due to lower compensation-related expenses.
31

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
FINANCIAL RESOURCES AND LIQUIDITY
Cash Flows
The following is a summary of our cash flows from continuing operations:

| Nine months ended September 30,
| 2016 |  | 2015
| (In thousands)
Net cash provided by (used in): |  |  |
Operating activities | $ | 1,184,744 |  |  | 1,071,336 |
Financing activities | (55,236 | ) |  | 664,783 |
Investing activities | (1,108,584 | ) |  | (1,707,378 | )
Effect of exchange rates on cash | (5,567 | ) |  | (2,006 | )
Net change in cash and cash equivalents | $ | 15,357 |  |  | 26,735 |

Cash provided by operating activities increased to $1.18 billion in the nine months ended September 30, 2016, compared with $1.07 billion in 2015, due to higher earnings adjusted for non-cash items, primarily depreciation, and working capital improvements, partially offset by higher pension contributions. Cash used in financing activities was $55.2 million in the nine months ended September 30, 2016, compared with cash provided from financing activities of $664.8 million in 2015, due to lower borrowing needs. Cash used in investing activities decreased to $1.11 billion in the nine months ended September 30, 2016, compared with $1.71 billion in 2015, primarily due to lower payments for capital expenditures.
Our principal sources of operating liquidity are cash from operations and proceeds from the sale of revenue earning equipment. We refer to the sum of operating cash flows, proceeds from the sale of revenue earning equipment and operating property and equipment, collections on direct finance leases and other investing cash inflows from continuing operations as “total cash generated”, a non-GAAP financial measure. We refer to the net amount of cash generated from operating and investing activities (excluding changes in restricted cash and acquisitions) from continuing operations as “free cash flow”, also a non-GAAP financial measure.
The following table shows our free cash flow computation:

| Nine months ended September 30,
| 2016 |  | 2015
| (In thousands)
Net cash provided by operating activities from continuing operations | $ | 1,184,744 |  |  | 1,071,336 |
Sales of revenue earning equipment (1) | 331,720 |  |  | 319,766 |
Sales of operating property and equipment (1) | 6,623 |  |  | 1,203 |
Collections on direct finance leases and other items (1) | 60,229 |  |  | 51,166 |
Total cash generated (2) | 1,583,316 |  |  | 1,443,471 |
Purchases of property and revenue earning equipment (1) | (1,511,359 | ) |  | (2,087,294 | )
Free cash flow (2) | $ | 71,957 |  |  | (643,823 | )
Memo: |  |  |
Net cash (used in) provided by financing activities | $ | (55,236 | ) |  | 664,783 |
Net cash used in investing activities | $ | (1,108,584 | ) |  | (1,707,378 | )

———————————

(1) | Included in cash flows from investing activities.

(2) | Non-GAAP financial measures. Reconciliations of net cash provided by operating activities to total cash generated and to free cash flow are set forth in this table. Refer to the “Non-GAAP Financial Measures” section of this MD&A for the reasons why management believes these measures are important to investors.

32

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The following table provides a summary of capital expenditures:

| Nine months ended September 30,
| 2016 |  | 2015
| (In thousands)
Revenue earning equipment: |  |  |
Full service lease | $ | 1,223,141 |  |  | 1,509,420 |
Commercial rental | 79,204 |  |  | 513,307 |
| 1,302,345 |  |  | 2,022,727 |
Operating property and equipment | 101,837 |  |  | 82,874 |
Total capital expenditures | 1,404,182 |  |  | 2,105,601 |
Changes in accounts payable related to purchases of revenue earning equipment | 107,177 |  |  | (18,307 | )
Cash paid for purchases of property and revenue earning equipment | $ | 1,511,359 |  |  | 2,087,294 |

Capital expenditures decreased 33% to $1.40 billion in the nine months ended September 30, 2016, reflecting planned lower investments in our commercial rental and lease fleet. We expect full-year 2016 capital expenditures to be approximately $2 billion. We expect to fund 2016 capital expenditures primarily with internally generated funds and additional debt financing.
Financing and Other Funding Transactions
We utilize external capital primarily to support working capital needs and growth in our asset-based product lines. The variety of debt financing alternatives typically available to fund our capital needs include commercial paper, long-term and medium-term public and private debt, asset-backed securities, bank term loans, leasing arrangements and bank credit facilities. Our principal sources of financing are issuances of commercial paper and medium-term notes.
Our ability to access unsecured debt in the capital markets is impacted by both our short-term and long-term debt ratings. These ratings are intended to provide guidance to investors in determining the credit risk associated with particular Ryder securities based on current information obtained by the rating agencies from us or from other sources. Lower ratings generally result in higher borrowing costs, as well as reduced access to unsecured capital markets. A significant downgrade of our short-term debt ratings would impair our ability to issue commercial paper and likely require us to rely on alternative funding sources. A significant downgrade would not affect our ability to borrow amounts under our revolving credit facility described below, assuming ongoing compliance with the terms and conditions of the credit facility.
Our debt ratings and rating outlooks at September 30, 2016, were as follows:

| Rating Summary |  |
| Short-Term |  | Long-Term |  | Outlook
Fitch Ratings | F-2 |  | A- |  | Stable
Standard & Poor’s Ratings Services | A-2 |  | BBB |  | Positive
Moody’s Investors Service | P-2 |  | Baa1 |  | Stable

Cash and equivalents totaled $75 million as of September 30, 2016. As of September 30, 2016, approximately $45 million was held outside the U.S. and is available to fund operations and other growth of non-U.S. subsidiaries. If we decide to repatriate cash and equivalents held outside the U.S., we may be subject to additional U.S. income taxes and foreign withholding taxes. However, our intent is to permanently reinvest these foreign amounts outside the U.S. and our current plans do not demonstrate a need to repatriate these foreign amounts to fund our U.S. operations.
We believe that our operating cash flows, together with our access to the public unsecured bond market, commercial paper market and other available debt financing, will be adequate to meet our operating, investing and financing needs in the foreseeable future. However, there can be no assurance that unanticipated volatility and disruption in the public unsecured debt market or the commercial paper market would not impair our ability to access these markets on terms commercially acceptable to us or at all. If we cease to have access to public bonds, commercial paper and other sources of unsecured borrowings, we would meet our liquidity needs by drawing upon contractually committed lending agreements as described below and/or by seeking other funding sources.
33

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
As of September 30, 2016, we had the following amounts available to fund operations under the following facilities:

| (In millions)
Global revolving credit facility | $514
Trade receivables program | $175

See Note 5, "Debt", in the Notes to Consolidated Condensed Financial Statements for a discussion of these debt facilities.
The following table shows the movements in our debt balance:

| Nine months ended September 30,
| 2016 |  | 2015
| (In thousands)
Debt balance at January 1 | $ | 5,502,627 |  |  | 4,717,524 |
Cash-related changes in debt: |  |  |
Net change in commercial paper borrowings | 73,597 |  |  | 184,750 |
Proceeds from issuance of medium-term notes | 298,254 |  |  | 998,551 |
Proceeds from issuance of other debt instruments | — |  |  | 331,259 |
Retirement of medium term notes | (300,000 | ) |  | (660,000 | )
Other debt repaid | (40,707 | ) |  | (135,837 | )
Debt issuance costs paid | (622 | ) |  | (3,395 | )
| 30,522 |  |  | 715,328 |
Non-cash changes in debt: |  |  |
Fair value adjustment on notes subject to hedging | 8,960 |  |  | 10,964 |
Addition of capital lease obligations | 948 |  |  | 5,956 |
Changes in foreign currency exchange rates and other non-cash items | (23,416 | ) |  | (15,565 | )
Total changes in debt | 17,014 |  |  | 716,683 |
Debt balance at September 30 | $ | 5,519,641 |  |  | 5,434,207 |

In accordance with our funding philosophy, we attempt to match the aggregate average remaining re-pricing life of our debt with the aggregate average remaining re-pricing life of our assets. We utilize both fixed-rate and variable-rate debt to achieve this match and generally target a mix of 20% - 40% variable-rate debt as a percentage of total debt outstanding. The variable-rate portion of our total debt (including notional value of swap agreements) was 32% and 30% as of September 30, 2016 and December 31, 2015, respectively.
Refer to Note 5, “Debt,” in the Notes to Consolidated Condensed Financial Statements for further discussion around the global revolving credit facility, the trade receivables program, the issuance of medium-term notes under our shelf registration statement, asset-backed financing obligations and debt maturities.
Ryder’s debt to equity ratios were 263% and 277% as of September 30, 2016 and December 31, 2015, respectively. The debt to equity ratio represents total debt divided by total equity.
34

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Pension Information
The funded status of our pension plans is dependent upon many factors, including returns on invested assets and the level of certain market interest rates. We review pension assumptions regularly and we may, from time to time, make voluntary contributions to our pension plans, which exceed the amounts required by statute. In 2016, the expected total contributions to our pension plans are approximately $80 million. During the nine months ended September 30, 2016, we contributed $65.3 million to our pension plans. Changes in interest rates and the market value of the securities held by the plans during 2016 could materially change, positively or negatively, the funded status of the plans and affect the level of pension expense and contributions in 2016 and beyond. See Note 11, “Employee Benefit Plans,” in the Notes to Consolidated Condensed Financial Statements for additional information.
Share Repurchases and Cash Dividends
See Note 7, “Share Repurchase Programs,” in the Notes to Consolidated Condensed Financial Statements for a discussion of share repurchases.
In October 2016, our Board of Directors declared a quarterly cash dividend of $0.44 per share of common stock.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2, “Recent Accounting Pronouncements," in the Notes to Consolidated Condensed Financial Statements for a discussion of recent accounting pronouncements.
35

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
NON-GAAP FINANCIAL MEASURES
This Quarterly Report on Form 10-Q includes information extracted from consolidated condensed financial information but not required by generally accepted accounting principles (GAAP) to be presented in the financial statements. Certain elements of this information are considered “non-GAAP financial measures” as defined by SEC rules. Non-GAAP financial measures should be considered in addition to, but not as a substitute for or superior to, other measures of financial performance or liquidity prepared in accordance with GAAP. Also, our non-GAAP financial measures may not be comparable to financial measures used by other companies. We provide a reconciliation of each of these non-GAAP financial measures to the most comparable GAAP measure in the management's discussion and analysis or in this non-GAAP financial measures section. We also provide the reasons why management believes each non-GAAP financial measure is useful to investors in this section.
Specifically, we refer to the following non-GAAP financial measures in this Form 10-Q:

Non-GAAP Financial Measure | Comparable GAAP Measure | Reconciliation in Section Entitled | Page
Operating Revenue Measures: |  |  |
Operating Revenue | Total Revenue | MD&A - Non-GAAP Financial Measures section | 39
FMS Operating Revenue | FMS Total Revenue | MD&A - Non-GAAP Financial Measures section | 40
DTS Operating Revenue | DTS Total Revenue | MD&A - Non-GAAP Financial Measures section | 40
SCS Operating Revenue | SCS Total Revenue | MD&A - Non-GAAP Financial Measures section | 40
FMS EBT as a % of FMS Operating Revenue | FMS EBT as a % of FMS Total Revenue | MD&A - Operating Results by Segment, Fleet Management Solutions section | 40
DTS EBT as a % of DTS Operating Revenue | DTS EBT as a % of DTS Total Revenue | MD&A - Operating Results by Segment, Dedicated Transportation Solutions section | 40
SCS EBT as a % of SCS Operating Revenue | SCS EBT as a % of SCS Total Revenue | MD&A - Operating Results by Segment, Supply Chain Solutions section | 40
Comparable Earnings Measures: |  |  |
Comparable Earnings Before Income Tax | Earnings Before Income Tax | MD&A, Non-GAAP Financial Measures section | 39
Comparable Earnings | Earnings from Continuing Operations
Comparable EPS | EPS from Continuing Operations
Cash Flow Measures: |  |  |
Total Cash Generated and Free Cash Flow | Cash Provided by Operating Activities | MD&A - Financial Resources and Liquidity, Cash Flows section | 32

36

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Set forth in the table below is an explanation of each non-GAAP financial measure and why management believes that presentation of each non-GAAP financial measure provides useful information to investors:

| Operating Revenue Measures: |  |  |
| Operating Revenue FMS Operating Revenue DTS Operating Revenue SCS Operating Revenue FMS EBT as a % of FMS Operating Revenue DTS EBT as a % of DTS Operating Revenue SCS EBT as a % of SCS Operating Revenue | Operating revenue is defined as total revenue for Ryder System, Inc. or each business segment (FMS, DTS and SCS), respectively, excluding any (1) fuel and (2) subcontracted transportation. We believe operating revenue provides useful information to investors as we use it to evaluate the operating performance of our core businesses and as a measure of sales activity at the consolidated level for Ryder System, Inc., as well as for each of our business segments. We also use segment EBT as a percentage of segment operating revenue for each business segment for the same reason. Note: FMS EBT, DTS EBT and SCS EBT, our primary measures of segment performance, are not non-GAAP measures. Fuel: We exclude FMS, DTS and SCS fuel from the calculation of our operating revenue measures, as fuel is an ancillary service that we provide our customers, which is impacted by fluctuations in market fuel prices, and the costs are largely a pass-through to our customers, resulting in minimal changes in our profitability during periods of steady market fuel prices. However, profitability may be positively or negatively impacted by rapid changes in market fuel prices during a short period of time, as customer pricing for fuel services is established based on trailing market fuel costs. Subcontracted transportation: We also exclude subcontracted transportation from the calculation of our operating revenue measures, as these services are also typically a pass-through to our customers and, therefore, fluctuations result in minimal changes to our profitability. While our DTS and SCS business segments subcontract certain transportation services to third party providers, our FMS business segment does not engage in subcontracted transportation and, therefore, this item is not applicable to FMS.
| Comparable Earnings Measures: |  |  |
| Comparable earnings before income tax (EBT) Comparable Earnings Comparable earnings per diluted common share (EPS) | Comparable EBT, comparable earnings and comparable EPS are defined, respectively, as GAAP EBT, earnings and EPS, all from continuing operations, excluding (1) non-operating pension costs and (2) any other significant items that are not representative of our business operations. We believe these comparable earnings measures provide useful information to investors and allow for better year-over-year comparison of operating performance. Non-Operating Pension Costs: Our comparable earnings measures exclude non-operating pension costs, which include the amortization of net actuarial loss, interest cost and expected return on plan assets components of pension and postretirement costs. We exclude non-operating pension costs because we consider these to be impacted by financial market performance and outside the operational performance of our business. Other Significant Items: Our comparable earnings measures also exclude other significant items that are not representative of our business operations. These other significant items vary from period to period and, in some periods, there may be no such significant items. In this reporting period, we exclude the following other significant items from our comparable earnings measures in this Form 10-Q: ___(1) Pension-related adjustments (in the year to date 2016, third quarter 2015 and year to date 2015). In the second quarter of 2016, it was determined that certain pension benefit improvements made in 2009 were not fully reflected in our projected benefit obligation, resulting in a charge to reflect those pension benefits. Additionally, in the third quarter of 2015, we recognized a benefit from lower than anticipated settlement charges to exit multi-employer pension plans. (2) Professional fees (in the third quarter and year to date 2015). These charges represent professional fees associated with the assessment of potential cost savings initiatives. ___(3) A benefit from a tax law change (in the year to date 2015). In the second quarter of 2015, the states of Connecticut and Texas and the city of New York enacted changes to their tax systems, which decreased Ryder's provision for income taxes in each jurisdiction. Calculation of comparable tax rate: The comparable provision for income taxes is computed using the same methodology as the GAAP provision for income taxes. Income tax effects of non-GAAP adjustments are calculated based on the statutory tax rates of the jurisdictions to which the non-GAAP adjustments relate.

37

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

Cash Flow Measures: |  |  |
Total Cash Generated Free Cash Flow | We consider total cash generated and free cash flow to be important measures of comparative operating performance, as our principal sources of operating liquidity are cash from operations and proceeds from the sale of revenue earning equipment. Total Cash Generated: Total cash generated is defined as the sum of (1) net cash provided by operating activities, (2) net cash provided by the sale of revenue earning equipment and (3) operating property and equipment, (4) collections on direct finance leases and (5) other cash inflows from investing activities. We believe total cash generated is an important measure of total cash flows generated from our ongoing business activities. Free Cash Flow: We refer to the net amount of cash generated from operating activities and investing activities (excluding changes in restricted cash and acquisitions) from continuing operations as “free cash flow”. We calculate free cash flow as the sum of (1) net cash provided by operating activities, (2) net cash provided by the sale of revenue earning equipment and (3) operating property and equipment, (4) collections on direct finance leases and (5) other cash inflows from investing activities, less (6) purchases of property and revenue earning equipment. We believe free cash flow provides investors with an important perspective on the cash available for debt service and for shareholders, after making capital investments required to support ongoing business operations. Our calculation of free cash flow may be different from the calculation used by other companies and, therefore, comparability may be limited.

38

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The following table provides a reconciliation of GAAP earnings before taxes (EBT), earnings, and earnings per diluted share (EPS) from continuing operations to comparable EBT, earnings and EPS from continuing operations, which was not provided within the MD&A discussion.
EBT, earnings and diluted EPS from continuing operations in the nine months ended September 30, 2016 and 2015, included certain items we do not consider indicative of our business operations and have been excluded from our comparable EBT, earnings and diluted EPS measures. The following table lists a summary of these items, which are discussed in more detail throughout our MD&A and within the Notes to Consolidated Condensed Financial Statements:

| EBT |  | Earnings |  | Diluted EPS
| 2016 |  | 2015 |  | 2016 |  | 2015 |  | 2016 |  | 2015
Three months ended September 30, | (In thousands, except per share amounts)
EBT/Earnings/EPS | $ | 131,698 |  |  | 139,900 |  |  | $ | 85,138 |  |  | 90,811 |  |  | $ | 1.59 |  |  | 1.70 |
Non-operating pension costs | 7,206 |  |  | 4,780 |  |  | 4,216 |  |  | 2,727 |  |  | 0.08 |  |  | 0.05 |
Pension-related adjustments | — |  |  | (509 | ) |  | — |  |  | (309 | ) |  | — |  |  | (0.01 | )
Professional fees | — |  |  | 63 |  |  | — |  |  | 39 |  |  | — |  |  | — |
Comparable EBT/ Earnings/ EPS | $ | 138,904 |  |  | 144,234 |  |  | $ | 89,354 |  |  | 93,268 |  |  | $ | 1.67 |  |  | 1.74 |
Nine months ended September 30, |  |  |  |  |  |  |  |  |  |  |
EBT/Earnings/EPS | $ | 337,185 |  |  | 357,524 |  |  | $ | 215,365 |  |  | 230,054 |  |  | $ | 4.02 |  |  | 4.31 |
Non-operating pension costs | 21,691 |  |  | 14,351 |  |  | 12,653 |  |  | 8,190 |  |  | 0.24 |  |  | 0.15 |
Pension-related adjustments | 7,650 |  |  | (509 | ) |  | 4,817 |  |  | (309 | ) |  | 0.09 |  |  | (0.01 | )
Professional fees | — |  |  | 3,843 |  |  | — |  |  | 2,424 |  |  | — |  |  | 0.04 |
Tax law change | — |  |  | — |  |  | — |  |  | (1,860 | ) |  | — |  |  | (0.03 | )
Comparable EBT/ Earnings/ EPS | $ | 366,526 |  |  | 375,209 |  |  | $ | 232,835 |  |  | 238,499 |  |  | $ | 4.35 |  |  | 4.47 |

The following table provides a reconciliation of the provision for income taxes to the comparable provision for income taxes:

| Three months ended September 30, |  | Nine months ended September 30,
| 2016 |  | 2015 |  | 2016 |  | 2015
| (Dollars in thousands)
Provision for income taxes (1) | $ | (46,560 | ) |  | (49,089 | ) |  | $ | (121,820 | ) |  | (127,470 | )
Income tax effects of non-GAAP adjustments (1) | (2,990 | ) |  | (1,877 | ) |  | (11,871 | ) |  | (7,380 | )
Tax law change (1) | — |  |  | — |  |  | — |  |  | (1,860 | )
Comparable provision for income taxes (1) | $ | (49,550 | ) |  | (50,966 | ) |  | $ | (133,691 | ) |  | (136,710 | )

———————————

(1) | The comparable provision for income taxes is computed using the same methodology as the GAAP provision of income taxes. Income tax effects of non-GAAP adjustments are calculated based on statutory tax rates of the jurisdictions to which the non-GAAP adjustments related.

The following table provides a reconciliation of total revenue to operating revenue, which was not provided within the MD&A discussion:

| Three months ended September 30, |  | Nine months ended September 30,
| 2016 |  | 2015 |  | 2016 |  | 2015
| (In thousands)
Total revenue | $ | 1,724,418 |  |  | 1,669,066 |  |  | $ | 5,057,834 |  |  | 4,899,150 |
Fuel | (162,293 | ) |  | (174,984 | ) |  | (464,176 | ) |  | (565,007 | )
Subcontracted transportation | (93,832 | ) |  | (67,617 | ) |  | (269,639 | ) |  | (214,774 | )
Operating revenue | $ | 1,468,293 |  |  | 1,426,465 |  |  | $ | 4,324,019 |  |  | 4,119,369 |

39

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The following table provides a reconciliation of FMS total revenue to FMS operating revenue, which was not provided within the MD&A discussion:

| Three months ended September 30, |  | Nine months ended September 30,
| 2016 |  | 2015 |  | 2016 |  | 2015
| (In thousands)
FMS total revenue | $ | 1,155,011 |  |  | 1,157,578 |  |  | $ | 3,404,452 |  |  | 3,394,077 |
Fuel (1) | (157,108 | ) |  | (169,154 | ) |  | (448,986 | ) |  | (547,416 | )
FMS operating revenue | $ | 997,903 |  |  | 988,424 |  |  | $ | 2,955,466 |  |  | 2,846,661 |
FMS EBT | $ | 112,282 |  |  | 126,433 |  |  | $ | 306,387 |  |  | 338,603 |
FMS EBT as a % of FMS total revenue | 9.7 | % |  | 10.9 | % |  | 9.0 | % |  | 10.0 | %
FMS EBT as a % of FMS operating revenue | 11.3 | % |  | 12.8 | % |  | 10.4 | % |  | 11.9 | %

————————————

(1) | Includes intercompany fuel sales from FMS to DTS and SCS.

The following table provides a reconciliation of DTS total revenue to DTS operating revenue, which was not provided within the MD&A discussion:

| Three months ended September 30, |  | Nine months ended September 30,
| 2016 |  | 2015 |  | 2016 |  | 2015
| (In thousands)
DTS total revenue | $ | 260,921 |  |  | 226,921 |  |  | $ | 764,025 |  |  | 663,094 |
Subcontracted transportation | (37,743 | ) |  | (13,657 | ) |  | (106,896 | ) |  | (42,817 | )
Fuel (1) | (26,530 | ) |  | (29,017 | ) |  | (75,916 | ) |  | (93,395 | )
DTS operating revenue | $ | 196,648 |  |  | 184,247 |  |  | $ | 581,213 |  |  | 526,882 |
DTS EBT | $ | 17,587 |  |  | 13,296 |  |  | $ | 48,327 |  |  | 34,701 |
DTS EBT as a % of DTS total revenue | 6.7 | % |  | 5.9 | % |  | 6.3 | % |  | 5.2 | %
DTS EBT as a % of DTS operating revenue | 8.9 | % |  | 7.2 | % |  | 8.3 | % |  | 6.6 | %

————————————

(1) | Includes intercompany fuel sales from FMS to DTS.

The following table provides a reconciliation of SCS total revenue to SCS operating revenue, which was not provided within the MD&A discussion:

| Three months ended September 30, |  | Nine months ended September 30,
| 2016 |  | 2015 |  | 2016 |  | 2015
| (In thousands)
SCS total revenue | $ | 416,898 |  |  | 387,305 |  |  | $ | 1,207,665 |  |  | 1,155,300 |
Subcontracted transportation | (56,089 | ) |  | (53,960 | ) |  | (162,743 | ) |  | (171,957 | )
Fuel (1) | (15,356 | ) |  | (14,586 | ) |  | (45,495 | ) |  | (49,090 | )
SCS operating revenue | $ | 345,453 |  |  | 318,759 |  |  | $ | 999,427 |  |  | 934,253 |
SCS EBT | $ | 30,954 |  |  | 26,573 |  |  | $ | 79,121 |  |  | 69,961 |
SCS EBT as a % of SCS total revenue | 7.4 | % |  | 6.9 | % |  | 6.6 | % |  | 6.1 | %
SCS EBT as a % of SCS operating revenue | 9.0 | % |  | 8.3 | % |  | 7.9 | % |  | 7.5 | %

————————————

(1) | Includes intercompany fuel sales from FMS to SCS.

40

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
FORWARD-LOOKING STATEMENTS
Forward-looking statements (within the meaning of the Federal Private Securities Litigation Reform Act of 1995) are statements that relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends concerning matters that are not historical facts. These statements are often preceded by or include the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will,” “may,” “could,” “should” or similar expressions. This Quarterly Report on Form 10-Q contains forward-looking statements including, but not limited to, statements regarding:

• | our expectations in our FMS business segment regarding anticipated full service lease and commercial rental revenue and demand;

• | our expectations in our DTS and SCS business segments regarding anticipated operating revenue trends and growth rates;

• | our expectations of the long-term residual values of revenue earning equipment;

• | the anticipated decline in NLE vehicles in inventory through the end of the year;

• | our expectations of operating cash flow and capital expenditures through the end of 2016;

• | the adequacy of our accounting estimates and reserves for pension expense, compensation expense and employee benefit plan obligations, depreciation and residual value guarantees and income taxes;

• | the anticipated timing of payment of restructuring liabilities;

• | the adequacy of our fair value estimates of employee incentive awards under our share-based compensation plans, publicly traded debt and other debt;

• | our beliefs regarding the default risk of our direct financing lease receivables;

• | our ability to fund all of our operating, investing and financial needs for the foreseeable future through internally generated funds and outside funding sources;

• | the anticipated impact of fuel price fluctuations;

• | our expectations as to return on pension plan assets, future pension expense and estimated contributions;

• | our expectations regarding the scope, anticipated outcomes and the adequacy of our loss provisions with respect to certain claims, proceedings and lawsuits;

• | our expectations about the need to repatriate foreign cash to the U.S.;

• | our ability to access commercial paper and other available debt financing in the capital markets;

• | our expectations regarding the future use and availability of funding sources; and

• | the anticipated impact of recent accounting pronouncements.

41

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
These statements, as well as other forward-looking statements contained in this Quarterly Report, are based on our current plans and expectations and are subject to risks, uncertainties and assumptions. We caution readers that certain important factors could cause actual results and events to differ significantly from those expressed in any forward-looking statements. These risk factors include, but are not limited to, the following:

• | Market Conditions:

| Ÿ |  | Changes in general economic and financial conditions in the U.S. and worldwide leading to decreased demand for our services, lower profit margins, increased levels of bad debt and reduced access to credit

| Ÿ |  | Decreases in freight demand which would impact both our transactional and variable-based contractual business

| Ÿ |  | Changes in our customers’ operations, financial condition or business environment that may limit their need for, or ability to purchase, our services

| Ÿ |  | Further decreases in market demand affecting the commercial rental market and used vehicle sales as well as global economic conditions

| Ÿ |  | Volatility in customer volumes and shifting customer demand in the industries serviced by our SCS business

| Ÿ |  | Changes in current financial, tax or regulatory requirements that could negatively impact the leasing market

• | Competition:

| Ÿ |  | Advances in technology may require increased investments to remain competitive, and our customers may not be willing to accept higher prices to cover the cost of these investments

| Ÿ |  | Competition from other service providers, some of which have greater capital resources or lower capital costs, or from our customers, who may choose to provide services themselves

| Ÿ |  | Continued consolidation in the markets in which we operate which may create large competitors with greater financial resources

| Ÿ |  | Our inability to maintain current pricing levels due to economic conditions, demand for services, customer acceptance or competition

42

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

• | Profitability:

| Ÿ |  | Our inability to obtain adequate profit margins for our services

| Ÿ |  | Lower than expected sales volumes or customer retention levels

| Ÿ |  | Lower full service lease sales activity

| Ÿ |  | Decreases in commercial rental fleet utilization and pricing

| Ÿ |  | Lower than expected used vehicle sales pricing levels and fluctuations in the anticipated proportion of retail versus wholesale sales

| Ÿ |  | Loss of key customers in our DTS and SCS business segments

| Ÿ |  | Our inability to adapt our product offerings to meet changing consumer preferences on a cost-effective basis

| Ÿ |  | The inability of our legacy information technology systems to provide timely access to data

| Ÿ |  | Sudden changes in fuel prices and fuel shortages

| Ÿ |  | Higher prices for vehicles, diesel engines and fuel as a result of new environmental standards

| Ÿ |  | Higher than expected maintenance costs and lower than expected benefits associated with our maintenance initiatives

| Ÿ |  | Our inability to successfully execute our asset management initiatives, maintain our fleet at normalized levels and right-size our fleet in line with demand

| Ÿ |  | Our inability to redeploy vehicles and prepare vehicles for sale in a cost-efficient manner

| Ÿ |  | Our key assumptions and pricing structure of our DTS and SCS contracts prove to be invalid

| Ÿ |  | Increased unionizing, labor strikes and work stoppages

| Ÿ |  | Difficulties in attracting and retaining drivers and technicians due to driver and technician shortages, which may result in higher costs to procure drivers and technicians and higher turnover rates affecting our customers

| Ÿ |  | Our inability to manage our cost structure

| Ÿ |  | Our inability to limit our exposure for customer claims

| Ÿ |  | Unfavorable or unanticipated outcomes in legal proceedings or uncertain positions

| Ÿ |  | Business interruptions or expenditures due to severe weather or natural occurrences

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

• | Financing Concerns:

| Ÿ |  | Higher borrowing costs and possible decreases in available funding sources caused by an adverse change in our debt ratings

| Ÿ |  | Unanticipated interest rate and currency exchange rate fluctuations

| Ÿ |  | Negative funding status of our pension plans caused by lower than expected returns on invested assets and unanticipated changes in interest rates

| Ÿ |  | Withdrawal liability as a result of our participation in multi-employer plans

| Ÿ |  | Instability in U.S. and worldwide credit markets, resulting in higher borrowing costs and/or reduced access to credit

• | Accounting Matters:

| Ÿ |  | Impact of unusual items resulting from ongoing evaluations of business strategies, asset valuations, acquisitions, divestitures and our organizational structure

| Ÿ |  | Reductions in residual values or useful lives of revenue earning equipment

| Ÿ |  | Increases in compensation levels, retirement rate and mortality resulting in higher pension expense; regulatory changes affecting pension estimates, accruals and expenses

| Ÿ |  | Increases in health care costs resulting in higher insurance costs

| Ÿ |  | Changes in accounting rules, assumptions and accruals

| Ÿ |  | Impact of actual insurance claim and settlement activity compared to historical loss development factors used to project future development

• | Other risks detailed from time to time in our SEC filings

New risk factors emerge from time to time and it is not possible for management to predict all such risk factors or to assess the impact of such risk factors on our business. As a result, no assurance can be given as to our future results or achievements. You should not place undue reliance on the forward-looking statements contained herein, which speak only as of the date of this Quarterly Report. We do not intend, or assume any obligation, to update or revise any forward-looking statements contained in this Quarterly Report, whether as a result of new information, future events or otherwise.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to Ryder’s exposures to market risks since December 31, 2015. Please refer to the 2015 Annual Report on Form 10-K for a complete discussion of Ryder’s exposures to market risks.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the third quarter of 2016, we carried out an evaluation, under the supervision and with the participation of management, including Ryder’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Ryder’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of the end of the third quarter of 2016, Ryder’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) were effective.
Changes in Internal Controls over Financial Reporting
During the nine months ended September 30, 2016, there were no changes in Ryder’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect such internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information with respect to purchases we made of our common stock during the three months ended September 30, 2016:

| Total Number of Shares Purchased(1) |  | Average Price Paid per Share |  | Total Number of Shares Purchased as Part of Publicly Announced Programs |  | Maximum Number of Shares That May Yet Be Purchased Under the Anti-Dilutive Program (2)
July 1 through July 30, 2016 | — |  |  | $ | — |  |  | — |  |  | 1,678,282 |
August 1 through August 31, 2016 | 58,178 |  |  | 64.59 |  |  | 58,178 |  |  | 1,620,104 |
September 1 through September 30, 2016 | 2,083 |  |  | 67.23 |  |  | — |  |  | 1,620,104 |
Total | 60,261 |  |  | $ | 64.68 |  |  | 58,178 |  |  |

————————————

(1) | During the three months ended September 30, 2016, we purchased an aggregate of 60,261 shares of our common stock in employee-related transactions. Employee-related transactions may include: (i) shares of common stock withheld as payment for the exercise price of options exercised or to satisfy the employees' tax withholding liability associated with our share-based compensation programs and (ii) open-market purchases by the trustee of Ryder’s deferred compensation plans relating to investments by employees in our stock, one of the investment options available under the plans.

(2) | In December 2015, our Board of Directors authorized a new share repurchase program intended to mitigate the dilutive impact of shares issued under our employee stock plans. 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 purchased 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.

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ITEM 6. EXHIBITS

3.2 |  |  | By-Laws of Ryder System, Inc., as amended through February 22, 2016*
12.1 |  |  | Calculation of Ratio of Earnings to Fixed Charges
31.1 |  |  | Certification of Robert E. Sanchez pursuant to Rule 13a-14(a) or Rule 15d-14(a)
31.2 |  |  | Certification of Art A. Garcia pursuant to Rule 13a-14(a) or Rule 15d-14(a)
32 |  |  | Certification of Robert E. Sanchez and Art A. Garcia pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350

* By-Laws are filed with this Form 10-Q to correct a typographical error in the previously filed By-Laws.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

| RYDER SYSTEM, INC.
| (Registrant)
Date: October 25, 2016 | By: | /s/ Art A. Garcia
|  | Art A. Garcia
|  | Executive Vice President and Chief Financial Officer
|  | (Principal Financial & Accounting Officer)

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