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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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 No. 1-4364
_____________________________________
RYDER SYSTEM, INC.
(a Florida corporation)
3600 N.W. 82nd Avenue
Miami, Florida 33166
Telephone (305) 500-3726
I.R.S. Employer Identification No. 59-0739250
_____________________________________
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 X NO ___
---
Ryder System, Inc. had 62,210,848 shares of common stock ($0.50 par value per
share) outstanding as of July 31, 2002.
RYDER SYSTEM, INC.
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Condensed Statements of Earnings -
Three and six months ended June 30, 2002 and 2001 (unaudited) 3
Consolidated Condensed Balance Sheets -
June 30, 2002 (unaudited) and December 31, 2001 4
Consolidated Condensed Statements of Cash Flows -
Six months ended June 30, 2002 and 2001 (unaudited) 5
Notes to Consolidated Condensed Financial Statements (unaudited) 6
Independent Accountants' Review Report 18
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 34
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 35
ITEM 6. Exhibits and Reports on Form 8-K 36
Signatures 37
Exhibit Index 38
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Ryder System, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------
Periods ended June 30, Three Months Six Months
(in thousands, except per share amounts) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------
Revenue $ 1,209,318 1,294,069 $ 2,359,235 2,575,578
------------ ----------- ------------- -------------
Operating expense 489,559 553,828 963,210 1,114,317
Salaries and employee-related costs 319,097 307,329 630,922 622,685
Freight under management expense 108,031 120,772 200,230 237,146
Depreciation expense 139,433 132,760 272,385 270,310
Gains on vehicle sales, net (4,251) (3,866) (6,171) (6,973)
Equipment rental 87,450 114,562 181,822 213,885
Interest expense 23,909 29,259 48,108 63,580
Miscellaneous (income) expense, net (387) (657) (2,847) 3,464
Restructuring and other unusual charges
(recoveries), net - 19,362 (1,234) 29,906
------------ ----------- ------------ ------------
1,162,841 1,273,349 2,286,425 2,548,320
------------ ----------- ------------ ------------
Earnings before income taxes and
cumulative effect of change in
accounting principle 46,477 20,720 72,810 27,258
Provision for income taxes 16,965 866 26,445 3,285
------------ ----------- ------------ ------------
Earnings before cumulative effect
of change in accounting principle 29,512 19,854 46,365 23,973
Cumulative effect of change in
accounting principle - - (18,899) -
------------ ----------- ------------ ------------
Net earnings $ 29,512 19,854 $ 27,466 23,973
============ =========== ============ ============
Earnings per common share - Basic:
Before cumulative effect of change
in accounting principle $ 0.48 0.33 $ 0.76 0.40
Cumulative effect of change in
accounting principle - - (0.31) -
------------ ----------- ------------ ------------
Net earnings $ 0.48 0.33 $ 0.45 0.40
============ =========== ============ ============
Earnings per common share - Diluted:
Before cumulative effect of change
in accounting principle $ 0.47 0.33 $ 0.74 0.40
Cumulative effect of change in
accounting principle - - (0.30) -
------------ ----------- ------------ ------------
Net earnings $ 0.47 0.33 $ 0.44 0.40
============ =========== ============ ============
Cash dividends per common share $ 0.15 0.15 $ 0.30 0.30
============ =========== ============ ============
See accompanying notes to consolidated condensed financial statements.
3
ITEM 1. Financial Statements (continued)
Ryder System, Inc. and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
- --------------------------------------------------------------------------------------------------------------------
June 30, December 31,
(in thousands, except share amounts) 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 91,275 117,866
Receivables, net of allowance for doubtful accounts of $6,428
and $10,286, respectively 627,212 556,309
Inventories 64,604 65,366
Tires in service 129,460 131,068
Prepaid expenses and other current assets 105,081 111,884
----------- -------------
Total current assets 1,017,632 982,493
Revenue earning equipment, net of accumulated depreciation of
$1,754,830 and $1,590,860, respectively 2,457,404 2,479,114
Operating property and equipment, net of accumulated depreciation
of $709,546 and $684,207, respectively 551,160 566,883
Direct financing leases and other assets 674,466 705,958
Intangible assets and deferred charges 171,569 191,291
------------ -------------
$ 4,872,231 4,925,739
============ =============
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 183,236 317,087
Accounts payable 291,620 255,924
Accrued expenses 420,665 443,970
------------ -------------
Total current liabilities 895,521 1,016,981
Long-term debt 1,370,369 1,391,597
Other non-current liabilities 291,852 283,347
Deferred income taxes 1,035,618 1,003,145
------------ -------------
Total liabilities 3,593,360 3,695,070
------------ -------------
Shareholders' equity:
Preferred stock of no par value per share - Authorized 3,800,917;
none outstanding June 30, 2002 or December 31, 2001 - -
Common stock of $0.50 par value per share - Authorized 400,000,000;
outstanding, June 30, 2002 - 62,210,129; December 31, 2001 - 60,809,628 571,397 537,556
Retained earnings 759,244 750,232
Deferred compensation (4,683) (5,304)
Accumulated other comprehensive loss (47,087) (51,815)
----------- -------------
Total shareholders' equity 1,278,871 1,230,669
----------- -------------
$ 4,872,231 4,925,739
=========== =============
See accompanying notes to consolidated condensed financial statements.
4
ITEM 1. Financial Statements (continued)
Ryder System, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited)
- ----------------------------------------------------------------------------------------------------------------------
Six months ended June 30,
(in thousands) 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $ 27,466 23,973
Cumulative effect of change in accounting principle 18,899 -
Depreciation expense 272,385 270,310
Gains on vehicle sales, net (6,171) (6,973)
Amortization expense and other non-cash charges, net 6,738 17,039
Deferred income tax expense 30,245 1,055
Changes in operating assets and liabilities, net of dispositions:
Decrease in aggregate balance of trade receivables sold (40,000) (294,000)
Receivables (19,459) 48,212
Inventories 762 5,186
Prepaid expenses and other assets 23,097 (8,134)
Accounts payable 35,695 (85,013)
Accrued expenses and other non-current liabilities (20,642) (51,470)
---------- ----------
329,015 (79,815)
---------- ----------
Cash flows from financing activities:
Net change in commercial paper borrowings (133,000) 44,852
Debt proceeds 150,279 170,406
Debt repaid, including capital lease obligations (211,138) (282,819)
Dividends on common stock (18,454) (18,066)
Common stock issued 31,009 4,436
---------- ----------
(181,304) (81,191)
---------- ----------
Cash flows from investing activities:
Purchases of property and revenue earning equipment (280,021) (429,562)
Sales of property and revenue earning equipment 77,145 101,077
Sale and leaseback of revenue earning equipment - 410,739
Sale of net assets of business - 14,113
Collections on direct finance leases 32,281 32,086
Other, net (3,707) (2,582)
---------- ----------
(174,302) 125,871
---------- ----------
Decrease in cash and cash equivalents (26,591) (35,135)
Cash and cash equivalents at January 1 117,866 121,970
---------- ----------
Cash and cash equivalents at June 30 $ 91,275 86,835
========== ==========
See accompanying notes to consolidated condensed financial statements.
5
ITEM 1. Financial Statements (continued)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
(A) INTERIM FINANCIAL STATEMENTS
The accompanying unaudited consolidated condensed financial statements
include the accounts of Ryder System, Inc. and subsidiaries (the "Company")
and have been prepared by the Company in accordance with the accounting
policies described in the 2001 Annual Report on Form 10-K and should be
read in conjunction with the consolidated financial statements and notes
which appear in that report. These statements do not include all of the
information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements.
In the opinion of management, all adjustments (primarily 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. Certain
prior year amounts have been reclassified to conform to current period
presentation.
(B) GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets and deferred charges consisted of the following at June
30, 2002 and December 31, 2001:
June 30, December 31,
(in millions) 2002 2001
----------------------------- -------------- --------------
Goodwill $ 150.3 168.3
Other intangible assets 10.2 10.6
Deferred charges 11.1 12.4
-------------- --------------
$ 171.6 191.3
============== ==============
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and
Other Intangible Assets," which requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but rather be
tested for impairment at least annually. SFAS No. 142 also requires that
intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values.
Additionally, a review for impairment is required to be made consistent
with the provisions of SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets."
The Company adopted the provisions of SFAS No. 142 effective January 1,
2002 and has discontinued the amortization of goodwill and intangible
assets with indefinite useful lives. SFAS No. 142 also required the Company
to perform an assessment of whether there is an indication that the
remaining recorded goodwill is impaired as of the date of adoption. This
involves a two-step transitional impairment test. The first step of the
transitional impairment test required the Company, within the first six
months of 2002, to determine the fair value of each reporting unit, as
defined, and compare it to the reporting unit's carrying amount. The
Company estimates the fair value of its reporting units using discounted
cash flows. To the extent that a reporting unit's carrying amount exceeds
its fair value, an indication exists that the reporting unit's goodwill may
be impaired and the Company must perform the second step of the
transitional impairment test.
6
ITEM 1. Financial Statements (continued)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (unaudited)
(B) GOODWILL AND OTHER INTANGIBLE ASSETS (continued)
The second step of the transitional impairment test requires the Company to
compare the implied fair value of the reporting unit's goodwill, determined
by allocating the reporting unit's fair value to all of its recognized and
unrecognized assets and liabilities in a manner similar to a purchase price
allocation consistent with SFAS No. 141, "Business Combinations," to its
carrying amount, both of which would be measured as of January 1, 2002. The
residual fair value after this allocation is the implicit fair value of the
reporting unit's goodwill.
In June 2002, the Company completed the assessment of all of its existing
goodwill totaling $168.3 million as of January 1, 2002. As a result of this
review, the Company recorded a non-cash charge of $18.9 million on a before
and after-tax basis, or $0.30 per diluted share, associated with the Asian
operations of the Company's Supply Chain Solutions (SCS) business segment.
The transitional impairment charge resulted from the application of the new
impairment methodology introduced by SFAS No. 142. Prior to the adoption of
SFAS No. 142, the Company measured the recoverability of goodwill based
upon management's best estimate of the undiscounted future operating cash
flows (excluding interest charges) related to the asset. Under previous
requirements, no goodwill impairment would have been recorded on January 1,
2002.
In accordance with SFAS No. 142, the transitional impairment was recognized
as the cumulative effect of a change in accounting principle in the
Company's Consolidated Condensed Statements of Earnings effective January
1, 2002. The impact of this accounting change had no effect on the
Company's operating earnings.
The carrying amount of goodwill attributable to each reportable business
segment with changes therein was as follows (in millions):
Fleet Supply Dedicated
Management Chain Contract
Solutions Solutions Carriage Total
----------------------------------------------------------
Balance as of December 31, 2001 $ 118.8 44.6 4.9 168.3
Transitional impairment adjustment - (18.9) - (18.9)
Currency translation adjustment - 0.9 - 0.9
---------------------------------------------------------
Balance as of June 30, 2002 $ 118.8 26.6 4.9 150.3
=========================================================
The components of the Company's other intangible assets include the Ryder
trade name with a carrying amount of $8.7 million and an intangible asset
related to the Company's Benefit Restoration Plan with a carrying amount of
$1.5 million equal to the Plan's unrecognized prior service cost. These
intangible assets have been identified as having indefinite useful lives
and were tested for impairment consistent with the transitional provisions
of SFAS No. 142. The Company completed such testing and determined that
there was no impairment of intangible assets. Impairment adjustments
recognized after adoption, if any, are generally required to be recognized
as operating expenses.
The Company completed its annual impairment test for goodwill and
intangible assets with indefinite useful lives as of April 1, 2002 and
determined that there was no impairment.
7
ITEM 1. Financial Statements (continued)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (unaudited)
(B) GOODWILL AND OTHER INTANGIBLE ASSETS (continued)
Actual results of operations for the three and six months ended June 30,
2002 and adjusted results of operations for the three and six months ended
June 30, 2001, had the Company applied the non-amortization provisions of
SFAS No. 142, are as follows (in millions, except per share amounts):
Periods ended June 30, Three Months Six Months
------------ ----------
(in millions) 2002 2001 2002 2001
----------------------------------------- --------- -------- --------- --------
Reported net earnings $ 29.5 19.9 $ 27.5 24.0
Add: Goodwill and intangible
amortization, net of tax - 2.9 - 5.8
--------- -------- --------- --------
Adjusted net earnings $ 29.5 22.8 $ 27.5 29.8
========= ======== ========= ========
Basic earnings per share:
Reported net earnings $ 0.48 0.33 $ 0.45 0.40
Add: Goodwill and intangible
amortization, net of tax - 0.05 - 0.10
--------- -------- --------- --------
Adjusted net earnings $ 0.48 0.38 $ 0.45 0.50
========= ======== ========= ========
Diluted earnings per share:
Reported net earnings $ 0.47 0.33 $ 0.44 0.40
Add: Goodwill and intangible
amortization, net of tax - 0.05 - 0.10
--------- -------- --------- --------
Adjusted net earnings $ 0.47 0.38 $ 0.44 0.50
========= ======== ========= ========
Quarterly and year-to-date computations of per share amounts are made
independently; therefore, the sum of per share amounts for the quarters may
not equal per share amounts for the year.
(C) IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets held and used, excluding
indefinite-lived intangible assets (see "Goodwill and Other Intangible
Assets"), for impairment when circumstances indicate that the carrying
amount of assets may not be recoverable. In August 2001, the FASB issued
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." SFAS No. 144, among other things, amended accounting guidance on
asset impairment. The Company assesses the recoverability of long-lived
assets by determining whether the depreciation or amortization of an asset
over its remaining life can be recovered based upon management's best
estimate of the undiscounted future operating cash flows (excluding
interest charges) related to the long-lived asset or group of assets and
liabilities in which the long-lived asset generates cash flows. If the sum
of such undiscounted cash flows is less than the carrying value of the
asset (group), the asset is considered impaired. The amount of impairment,
if any, represents the excess of the carrying value of the asset (group)
over fair value. Fair value is determined by quoted market price, if
available, or an estimate of projected future operating cash flows
discounted using a rate that reflects the related operating segment's
average cost of funds.
8
ITEM 1. Financial Statements (continued)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (unaudited)
(C) IMPAIRMENT OF LONG-LIVED ASSETS (continued)
In addition, SFAS No. 144 provides a single accounting model for
long-lived assets to be disposed of. Among other provisions, the new
rules change the criteria for classifying an asset as held-for-sale.
Long-lived assets, including indefinite-lived intangible assets, to be
disposed of are reported at the lower of carrying amount or fair value
less costs to sell. Fair value is determined based upon quoted market
prices, if available, or the results of applicable valuation techniques
such as discounted cash flows or independent appraisal. At June 30, 2002
and December 31, 2001, the net carrying value of revenue earning
equipment held for sale was $29.5 million and $45.1 million,
respectively.
The Company adopted the provisions of SFAS No. 144 effective January 1,
2002. Adoption of SFAS No. 144 did not have any impact on the Company's
financial position, cash flows or results of operations.
(D) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
From time to time, the Company enters into interest rate swap and cap
agreements to manage its fixed and variable interest rate exposure and to
better match the repricing of its debt instruments to that of its
portfolio of assets. The Company assesses the risk that changes in
interest rates will have either on the fair value of its debt obligations
or on the amount of its future interest payments by monitoring changes in
interest rate exposures and by evaluating hedging opportunities. The
Company regularly monitors interest rate risk attributable to both the
Company's outstanding or forecasted debt obligations as well as the
Company's offsetting hedge positions. This risk management process
involves the use of analytical techniques, including cash flow
sensitivity analysis, to estimate the expected impact of changes in
interest rates on the Company's future cash flows.
The Company also uses foreign currency option contracts and forward
agreements from time to time to hedge foreign currency transactional
exposure. The Company does not enter into derivative financial
instruments for trading purposes.
During March 2002, the Company entered into interest rate swap agreements
designated as fair value hedges whereby it receives fixed interest rate
payments in exchange for making variable interest rate payments. The
differential to be paid or received is accrued and recognized as interest
expense. At June 30, 2002, these interest rate swap agreements
effectively changed $322.0 million of fixed-rate debt instruments with a
weighted-average fixed interest rate of 6.7 percent to LIBOR-based
floating rate debt at a current weighted-average rate of 3.7 percent.
Changes in the fair value of the interest rate swaps are offset by
changes in the fair value of the debt instruments and no net gain or loss
is recognized in earnings. During the three and six months ended June 30,
2002, the increases in the fair value of interest rate swaps totaled
$12.4 million and $7.1 million, respectively. The fair value of the
interest rate swap agreements of approximately $7.1 million at June 30,
2002 was classified in "Direct financing leases and other assets." These
contracts mature from September 2004 to September 2007.
During March 2002, the Company also entered into two interest rate cap
agreements covering a total notional amount of $160.0 million. These cap
agreements mature in October and November of 2005. The interest rate cap
agreements serve as an economic hedge against increases in interest rates
and have not been designated as hedges for accounting purposes. The fair
value of the interest rate cap agreements of approximately $1.6 million
at June 30, 2002 was classified in "Direct financing leases and other
assets." During the three and six months ended June 30, 2002, the
decreases in the fair value of interest rate caps totaled approximately
$1.3 million and $700,000, respectively, and were reflected as interest
expense.
The Company estimates the fair value of derivatives based on dealer
quotations. For the period ended June 30, 2002, there was no measured
ineffectiveness in the Company's designated hedging transactions.
9
ITEM 1. Financial Statements (continued)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (unaudited)
(E) EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings by the
weighted average number of common shares outstanding. Diluted earnings
per share reflects the dilutive effect of potential common shares from
securities such as stock options and unvested restricted stock. The
dilutive effect of stock options is computed using the treasury stock
method, which assumes the repurchase of common shares by the Company at
the average market price for the period.
A reconciliation of the number of shares used in computing basic and
diluted earnings per share follows:
Periods ended June 30, Three Months Six Months
------------ ----------
(in thousands) 2002 2001 2002 2001
-------------------------------------------------- --------- --------- --------- ---------
Weighted average shares outstanding-Basic 61,644 60,033 61,199 59,955
Effect of dilutive options and unvested restricted stock 1,349 621 1,231 540
--------- --------- --------- ---------
Weighted average shares outstanding-Diluted 62,993 60,654 62,430 60,495
========= ========= ========= =========
Anti-dilutive options not included above 1,678 7,007 1,801 7,007
========= ========= ========= =========
(F) COMPREHENSIVE INCOME
Comprehensive income presents a measure of all changes in shareholders'
equity except for changes resulting from transactions with shareholders
in their capacity as shareholders. The following table provides a
reconciliation of net earnings as reported in the Company's Consolidated
Condensed Statements of Earnings to comprehensive income.
Periods ended June 30, Three Months Six Months
------------ ----------
(in millions) 2002 2001 2002 2001
--------------------------------------------- -------- -------- -------- --------
Net earnings $ 29.5 19.9 $ 27.5 24.0
------- ------- ------- -------
Other comprehensive income (loss):
Foreign currency translation adjustments 14.3 2.5 6.2 (10.5)
Additional minimum pension liability adjustment - - (1.5) (1.2)
Unrealized net gain on derivative instruments (0.1) - - -
------- ------- ------- -------
14.2 2.5 4.7 (11.7)
------- ------- ------- -------
Total comprehensive income $ 43.7 22.4 $ 32.2 12.3
======= ======= ======= =======
10
ITEM 1. Financial Statements (continued)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (unaudited)
(G) RECENT ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires
companies to recognize costs associated with exit (including
restructuring) or disposal activities at fair value when the related
liability is incurred rather than at the date of a commitment to an
exit or disposal plan under current practice. Costs covered by the
standard include certain contract termination costs, certain employee
termination benefits and other costs to consolidate or close facilities
and relocate employees that are associated with an exit activity or
disposal of long-lived assets. The new requirements are effective
prospectively for exit or disposal activities initiated after December
31, 2002 and will be adopted by the Company effective January 1, 2003.
The Company is currently evaluating the potential impact, if any, the
adoption of SFAS No. 146 will have on its results of operations, cash
flows or financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145, among other items, updates and
clarifies existing accounting pronouncements related to gains and
losses from the extinguishment of debt and certain lease modifications
that have economic effects similar to sale-leaseback transactions. The
provisions of SFAS No. 145 are generally effective as of May 15, 2002.
The adoption of SFAS No. 145 did not have a material impact on the
Company's results of operations, cash flows or financial position.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which requires entities to record the fair
value of a liability for an asset retirement obligation in the period
in which it incurs a legal obligation associated with the retirement of
tangible long-lived assets that result from the acquisition,
construction, development and/or normal use of the assets. When the
liability is initially recorded, the Company is required to capitalize
a cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each
period, and the capitalized cost is depreciated over the useful life of
the related asset. SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002 and will be adopted by the Company effective
January 1, 2003. The Company is currently evaluating the potential
impact, if any, the adoption of SFAS No. 143 will have on its results
of operations, cash flows or financial position.
(H) RESTRUCTURING AND OTHER UNUSUAL CHARGES (RECOVERIES), NET
The components of restructuring and other unusual charges (recoveries)
for the three and six months ended June 30, 2002 and 2001 were as
follows:
Periods ended June 30, Three Months Six Months
------------ ----------
(in millions) 2002 2001 2002 2001
-------------------------------------- -------- -------- -------- ---------
Restructuring charges (recoveries):
Severance and employee-related costs $ - 11,499 $ (640) 18,136
Facilities and related costs - 2,049 - 2,049
-------- -------- -------- ---------
- 13,548 (640) 20,185
Other unusual charges (recoveries):
Asset write-downs - 2,115 - 2,115
Loss on the sale of business - 62 - 3,332
Strategic consulting fees - 3,637 - 6,473
Other charges (recoveries), net - - (594) (2,199)
-------- -------- -------- ---------
$ - 19,362 $(1,234) 29,906
========= ======== ======== =========
11
ITEM 1. Financial Statements (continued)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (unaudited)
(H) RESTRUCTURING AND OTHER UNUSUAL CHARGES (RECOVERIES), NET (continued)
Allocation of restructuring and other unusual charges (recoveries)
across reportable business segments for the three and six months ended
June 30, 2002 and 2001 was as follows:
Periods ended June 30, Three Months Six Months
------------ ----------
(in millions) 2002 2001 2002 2001
------------------------------- -------- ------- -------- ------
Fleet Management Solutions $ - 8,067 $ (23) 10,730
Supply Chain Solutions - 5,489 - 10,579
Dedicated Contract Carriage - 447 - 447
Central Support Services - 5,359 (1,211) 8,150
-------- ------- -------- ------
$ - 19,362 $(1,234) 29,906
======== ======= ======== ======
2002 Recoveries
---------------
During the first quarter of 2002, severance and employee related costs
that had been recorded in the 1999 restructuring were reversed due to
refinements in estimates.
Other net recoveries in the first quarter of 2002 primarily consisted
of the final settlement of reserves attributed to a previously sold
business.
2001 Charges
------------
In late 2000, the Company communicated to its employees its planned
strategic initiatives to reduce Company expenses. As part of such
initiatives, the Company reviewed employee functions and staffing
levels to eliminate redundant work or otherwise restructure work in a
manner that led to a workforce reduction. The process resulted in
terminations of over 1,400 employees during 2001. Approximately 600 of
these terminations occurred during the three months ended June 30, 2001
resulting in total terminations of 800 during the six months ended June
30, 2001. Severance and employee-related costs of $11.5 million and
$18.1 million represent termination benefits related to employees whose
jobs were eliminated as part of this review during the three and six
months ended June 30, 2001, respectively.
During the second quarter of 2001, the Company identified more than 20
facilities in the U.S. and other countries to be closed in order to
improve profitability. Facilities and related costs of $2.0 million
represent contractual lease obligations for closed leased facilities.
During the first quarter ended March 31, 2001, the Company sold the
contracts and related net assets associated with the disposal of the
outbound auto carriage portion of its Brazilian Supply Chain Solutions
operation ("Vehiculos"). The Company sold Vehiculos for $14.1 million
and incurred a loss of $3.3 million on the sale of the business.
Asset write-downs of $2.1 million were recorded during the quarter
ended June 30, 2001, primarily for real estate and other assets held
for sale in connection with facility closures identified in the
quarter. Strategic consulting fees of $3.6 million and $6.5 million
were incurred during the three and six months ended June 30, 2001,
respectively, in relation to the aforementioned strategic initiatives.
Other charges (recoveries) represent a gain of approximately $2.2
million realized on the sale of the corporate aircraft.
12
ITEM 1. Financial Statements (continued)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (unaudited)
(H) RESTRUCTURING AND OTHER UNUSUAL CHARGES (RECOVERIES), NET (continued)
Activity related to restructuring reserves for the six months ended
June 30, 2002 was as follows:
Dec. 31, June 30,
2001 2002
(in thousands) Balance Additions Deductions Balance
---------------------------------------- ---------- ----------- ------------ ---------
Employee severance and benefits $ 14,050 - 6,099 7,951
Facilities and related costs 5,767 - 1,340 4,427
---------- ---------- ------------ ---------
$ 19,817 - 7,439 12,378
========== =========== ============ =========
Deductions include cash payments of $6.8 million and prior year charge
reversals of $640,000. At June 30, 2002, employee severance and
benefits obligations are required to be paid approximately over the
next two and a half years. At June 30, 2002, lease obligations recorded
in facilities and related costs are noncancelable and contractually
required to be paid principally over the next two and a half years.
(I) RECEIVABLES
The Company participates in an agreement, as amended from time to time,
to sell, with limited recourse, trade receivables on a revolving and
uncommitted basis. This agreement expires in July 2004. In June 2002,
the Company reduced the amount available for sale under its trade
receivables facility from $375.0 million to $275.0 million as a result
of a reduction in overall capital needs. At June 30, 2002 and
December 31, 2001, the outstanding balance of receivables sold pursuant
to this agreement was $70.0 million and $110.0 million, respectively.
The total amount of available recourse as of June 30, 2002 and
December 31, 2001 was $5.1 million and $13.7 million, respectively.
Receivables are sold with limited recourse for uncollectible accounts.
(J) INCOME TAXES
The Company's effective income tax rate on earnings was 36.5 percent
and 36.3 percent for the three and six months ended June 30, 2002,
respectively, compared with 4.2 percent and 12.1 percent for the three
and six months ended June 30, 2001, respectively. In June 2001,
legislation was enacted in Canada that prospectively reduced income tax
rates applicable to the Company's Canadian operations. This resulted in
a one-time reduction in the Company's related deferred taxes of $6.8
million, and lowered the Company's income tax provision for the three
and six months ended June 30, 2001.
The consolidated federal income tax returns for 1995, 1996 and 1997 are
being audited by the IRS. Years prior to 1995 are closed and no longer
subject to audit. Management believes that taxes accrued on the balance
sheet fairly represent the amount of future tax liability due by the
Company.
13
ITEM 1. Financial Statements (continued)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (unaudited)
(K) DEBT AND OTHER FINANCING
The Company's outstanding debt balances were as follows:
June 30, December 31,
(in millions) 2002 2001
-----------------------------------------------------------------
U.S. commercial paper $ 77.0 210.0
Unsecured U.S. notes:
Debentures 327.5 325.7
Medium-term notes 762.1 742.5
Unsecured foreign obligations 301.7 331.3
Other debt, including capital leases 85.3 99.2
-----------------------------------------------------------------
Total debt 1,553.6 1,708.7
Current portion (183.2) (317.1)
-----------------------------------------------------------------
Long-term debt $ 1,370.4 1,391.6
==================================================================
The Company can borrow up to $860.0 million through a global credit
facility. The facility is composed of $300.0 million, which matures in
May 2003 and is renewable annually, and $560.0 million, which matures
in May 2006. The primary purposes of the credit facility are to finance
working capital and provide support for the issuance of commercial
paper. At the Company's option, the interest rate on borrowings under
the credit facility is based on LIBOR, prime, federal funds or local
equivalent rates. At June 30, 2002, $695.4 million was available under
this global credit facility. Of such amount, $300.0 million was
available at a maturity of less than one year. In order to maintain
availability of funding, the global revolving credit facility requires
the Company to maintain a ratio of debt to consolidated adjusted
tangible net worth, as defined, of less than or equal to 300.0 percent.
The ratio at June 30, 2002 was 101.0 percent.
During the second quarter of 2002, the Company added capital lease
obligations of $16.0 million in connection with the extension of
existing operating leases of revenue earning equipment.
In 1998, the Company filed an $800.0 million shelf registration
statement with the Securities and Exchange Commission. Proceeds from
debt issued under the shelf registration have been and are expected to
be used for capital expenditures, debt refinancing and general
corporate purposes. At June 30, 2002, the Company had $237.0 million of
debt securities available for issuance under this shelf registration
statement.
At June 30, 2002 and December 31, 2001, the Company had letters of
credit outstanding totaling $122 million and $115 million,
respectively, which primarily guarantee various insurance activities.
Certain of these letters of credit guarantee insurance activities
associated with insurance claim liabilities transferred in conjunction
with the sale of certain businesses reported as discontinued operations
in previous years. To date, such insurance claims, representing per
claim deductibles payable under third-party insurance policies, have
been paid by the companies that assumed such liabilities. However, if
all or a portion of such assumed claims of approximately $17 million
are unable to be paid, the third-party insurers may have recourse
against certain of the outstanding letters of credit provided by the
Company in order to satisfy the unpaid claim deductibles.
14
ITEM 1. Financial Statements (continued)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (unaudited)
(L) SEGMENT INFORMATION
The Company's operating segments are aggregated into reportable business
segments based primarily upon similar economic characteristics, products,
services and delivery methods. The Company operates in three reportable
business segments: (1) Fleet Management Solutions (FMS), which provides
full service leasing, commercial rental and programmed maintenance of
trucks, tractors and trailers to customers, principally in the U.S.,
Canada and the United Kingdom; (2) SCS, which provides comprehensive
supply chain consulting and lead logistics management solutions that
support customers' entire supply chains, from inbound raw materials
through distribution of finished goods throughout North America, in Latin
America, Europe and Asia; and (3) Dedicated Contract Carriage (DCC), which
provides vehicles and drivers as part of a dedicated transportation
solution, principally in North America.
Beginning in the first quarter of 2002, the primary measurement of segment
financial performance, defined as "Net Before Taxes" (NBT), includes an
allocation of Central Support Services (CSS) and excludes goodwill
impairment, goodwill amortization and restructuring and other unusual
(charges) recoveries. CSS represents those costs incurred to support all
business segments, including sales and marketing, human resources,
finance, shared management information systems, customer solutions, health
and safety, legal and communications. The objective of the NBT measurement
is to provide management clarity on the profitability of each business
segment and, ultimately, to hold leadership of each business segment and
each operating segment within each business segment accountable for their
allocated share of CSS costs. To facilitate the comparison of 2002
business segment NBT to prior periods, prior-year goodwill amortization
(see "Goodwill and Other Intangible Assets") is now treated as a
corporate, rather than segment, cost and is segregated as such. Prior year
segment results have been restated to conform to the new measurement of
segment financial performance.
Certain costs are considered to be overhead not attributable to any
segment and as such, remain unallocated in CSS. Included among the
unallocated overhead remaining within CSS are the costs for investor
relations, corporate communications, public affairs and certain executive
compensation.
CSS costs attributable to the business segments are generally allocated to
FMS, SCS and DCC as follows:
. Sales and marketing, finance, corporate services and health and safety
- allocated based upon estimated and planned resource utilization.
. Human resources - individual costs within this category are allocated
in several ways, including allocation based on estimated utilization
and number of personnel supported.
. MIS - allocated principally based upon utilization-related metrics
such as number of users or minutes of CPU time.
. Customer Solutions - represents project costs and expenses incurred in
excess of amounts billable to a customer during the period. Expenses
are allocated to the business segment responsible for the project.
15
ITEM 1. Financial Statements (continued)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (unaudited)
(L) SEGMENT INFORMATION (continued)
The FMS segment leases revenue earning equipment, sells fuel and
provides maintenance and other ancillary services to the SCS and DCC
segments. Inter-segment revenues and NBT are accounted for at
approximate fair value as if the transactions were made to third
parties. NBT related to inter-segment equipment and services billed to
customers (equipment contribution) is included in both FMS and the
business segment which served the customer, then eliminated. Equipment
contribution included in SCS NBT was $3.9 million and $4.4 million for
the three months ended June 30, 2002 and 2001, respectively. Equipment
contribution included in SCS NBT was $7.7 million and $8.5 million for
the six months ended June 30, 2002 and 2001, respectively. Equipment
contribution included in DCC NBT was $4.4 million and $4.9 million for
the three months ended June 30, 2002 and 2001, respectively. Equipment
contribution included in DCC NBT was $8.9 million and $9.5 million for
the six months ended June 30, 2002 and 2001, respectively. Interest
expense is primarily allocated to the FMS business segment; however,
with the availability of segment balance sheet information in 2002
(including targeted segment leverage ratios), interest expense
(revenue) is also reflected in SCS and DCC.
The following table sets forth revenue for each of the Company's
business segments for the three and six months ended June 30, 2002 and
2001. These 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.
Periods ended June 30, Three Months Six Months
------------ ----------
(in millions) 2002 2001 2002 2001
----------------------------------------------- ----------- ----------- ----------- -----------
Fleet Management Solutions $ 803.4 860.5 $ 1,568.5 1,714.7
Supply Chain Solutions 358.3 385.7 695.4 769.1
Dedicated Contract Carriage 127.7 132.3 253.3 265.9
Eliminations (80.1) (84.4) (158.0) (174.1)
----------- ----------- ----------- -----------
Total revenue $1,209.3 1,294.1 $ 2,359.2 2,575.6
=========== =========== =========== ===========
The following table sets forth NBT for each of the Company's reportable
business segments for the three and six months ended June 30, 2002 and
2001.
Periods ended June 30, Three Months Six Months
------------ ----------
(in millions) 2002 2001 2002 2001
----------------------------------------------- ----------- ----------- ----------- -----------
Fleet Management Solutions $ 55.4 50.9 $ 92.0 90.3
Supply Chain Solutions (2.2) (0.6) (4.4) (9.3)
Dedicated Contract Carriage 8.4 9.2 13.4 15.0
Eliminations (8.3) (9.3) (16.6) (18.0)
----------------------- ----------------------
53.3 50.2 84.4 78.0
Unallocated Central Support Services (6.8) (6.8) (12.8) (14.2)
Goodwill amortization -- (3.3) -- (6.6)
----------------------- ----------------------
Earnings before restructuring and other
unusual (charges) recoveries, taxes
and cumulative effect of change in
accounting principle 46.5 40.1 71.6 57.2
Restructuring and other unusual (charges) recoveries -- (19.4) 1.2 (29.9)
---------------------- ----------------------
Earnings before income taxes and
cumulative effect of change in
accounting principle $ 46.5 20.7 $ 72.8 27.3
====================== ======================
16
ITEM 1. Financial Statements (continued)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (unaudited)
(L) SEGMENT INFORMATION (continued)
Pre-tax goodwill amortization reported in reportable business segment
operating results during the three and six months ended June 30, 2001 was
as follows:
Three Six
Periods ended June 30, Months Months
(in millions) 2001 2001
----------------------------------- -------- --------
Fleet Management Solutions $ 1.6 3.2
Supply Chain Solutions 1.6 3.2
Dedicated Contract Carriage 0.1 0.2
-------- --------
Total pre-tax goodwill amortization $ 3.3 6.6
======== ========
The following table sets forth total assets as provided to the chief
operating decision-maker for each of the Company's reportable business
segments at June 30, 2002 and December 31, 2001.
June 30, December 31,
(in millions) 2002 2001
----------------------------------------- ------------ -------------
Fleet Management Solutions $ 4,360.4 4,413.4
Supply Chain Solutions 417.0 414.4
Dedicated Contract Carriage 113.3 113.3
Central Support Services 212.7 220.7
Receivables sold (70.0) (110.0)
Inter-segment eliminations (161.2) (126.1)
----------- -------------
Total assets $ 4,872.2 4,925.7
=========== =============
Capital expenditure data is not maintained nor provided to the chief
operating decision-maker on a reportable business segment basis, and as
such is not presented. However, capital expenditures are primarily
attributable to the FMS segment.
(M) OTHER MATTERS
The Company is a party to various claims, legal actions and complaints
arising in the ordinary course of business. While any proceeding or
litigation has an element of uncertainty, management believes that the
disposition of these matters will not have a material impact on the
consolidated financial position, liquidity or results of operations of the
Company.
17
KPMG LLP
One Biscayne Tower Telephone 305-358-2300
2 South Biscayne Boulevard Fax 305-913-2692
Suite 2800
Miami, Florida 33131
Independent Accountants' Review Report
The Board of Directors and Shareholders
Ryder System, Inc.:
We have reviewed the accompanying consolidated condensed balance sheet of Ryder
System, Inc. and subsidiaries as of June 30, 2002, and the related consolidated
condensed statements of earnings for the three and six months ended June 30,
2002 and 2001 and the consolidated condensed statements of cash flows for the
six months ended June 30, 2002 and 2001. These consolidated condensed financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated condensed financial statements referred to above in
order for them to be in conformity with accounting principles generally accepted
in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Ryder System, Inc. and subsidiaries as of December 31, 2001, and the related
consolidated statements of earnings, shareholders' equity and cash flows for the
year then ended (not presented herein); and in our report dated February 7,
2002, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated condensed balance sheet as of December 31, 2001, is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
As discussed in the notes to the consolidated condensed financial statements,
the Company changed its method of accounting for goodwill and other intangible
assets in 2002.
/S/ KPMG LLP
Miami, Florida
July 24, 2002
18
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations --
Three and six months ended June 30, 2002 and 2001
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 the Company's audited
consolidated financial statements and notes thereto and related Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's most recent Annual Report on Form 10-K.
The Company's operating segments are aggregated into reportable business
segments based primarily upon similar economic characteristics, products,
services and delivery methods. The Company operates in three reportable business
segments: (1) Fleet Management Solutions (FMS), which provides full service
leasing, commercial rental and programmed maintenance of trucks, tractors and
trailers to customers, principally in the U.S., Canada and the United Kingdom;
(2) Supply Chain Solutions (SCS), which provides comprehensive supply chain
consulting and lead logistics management solutions that support customers'
entire supply chains, from inbound raw materials through distribution of
finished goods throughout North America, in Latin America, Europe and Asia; and
(3) Dedicated Contract Carriage (DCC), which provides vehicles and drivers as
part of a dedicated transportation solution, principally in North America.
CONSOLIDATED RESULTS
Periods ended June 30, Three Months Six Months
------------ ----------
(in thousands) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------
Earnings before restructuring and other
unusual charges (recoveries) and cumulative
effect of change in accounting principle /(1)//(2)/ $ 29,512 32,052 $ 45,391 42,814
Per diluted common share 0.47 0.53 0.73 0.71
Earnings before cumulative effect of change
in accounting principle /(2)/ $ 29,512 19,854 $ 46,365 23,973
Per diluted common shares 0.47 0.33 0.74 0.40
Net earnings /(2)//(3)/ $ 29,512 19,854 $ 27,466 23,973
Per diluted common shares 0.47 0.33 0.44 0.40
- --------------------------------------------------------------------------------------------------------------
Weighted average shares
outstanding - diluted 62,993 60,654 62,430 60,495
- --------------------------------------------------------------------------------------------------------------
(1) Management believes that pro forma operating results provide additional
information useful in analyzing the underlying business results. However, pro
forma operating results should be considered in addition to, not as a substitute
for, reported results of operations.
(2) Results for the three and six months ended June 30, 2001 include a one-time
reduction in deferred taxes of $6.8 million, or $0.11 per diluted common share,
as a result of a change in Canadian tax law that affected the Company's Canadian
operations. Results for the three months ended June 30, 2001 include goodwill
and intangible amortization of $2.9 million after-tax, or $0.05 per diluted
common share. Results for the six months ended June 30, 2001 include goodwill
and intangible amortization of $5.8 million after-tax, or $0.10 per diluted
common share.
(3) Net earnings for the six months ended June 30, 2002 include the cumulative
effect of a change in accounting for goodwill resulting in an after-tax charge
of $18.9 million, or $0.30 per diluted common share.
Earnings before cumulative effect of change in accounting principle increased
48.6 percent to $29.5 million in the second quarter of 2002 compared with the
same period last year and increased 93.4 percent to $46.4 million compared with
the first half of 2001. The increases in earnings were due primarily to
restructuring and other unusual charges of $12.2 million after-tax and $18.8
million after-tax in the second quarter and first half of 2001, respectively,
compared with no restructuring and other unusual charges in the second quarter
and a recovery of $975,000 after-tax in the first half of 2002. The increases in
earnings were also attributable to the Company's continued cost containment
actions and operational process improvement efforts, improved rental
utilization, lower interest costs and the discontinuance of amortization of
goodwill and intangible assets with indefinite useful
19
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations --
Three and six months ended June 30, 2002 and 2001
CONSOLIDATED RESULTS (continued)
lives (see "Goodwill and Other Intangible Assets" in the Notes to Consolidated
Condensed Financial Statements). Such earnings increases were partially offset
by a one-time reduction in deferred taxes of $6.8 million in the second quarter
and first half of 2001 as a result of a change in Canadian tax law and higher
benefit costs (primarily pension) in the second quarter and first half of 2002,
respectively, compared with the same periods last year. See "Operating Results
by Segment" for a further discussion of operating results for the three and six
months ended June 30, 2002 and 2001.
Periods ended June 30, Three Months Six Months
------------ ----------
(in thousands) 2002 2001 2002 2001
------------ ------------- ------------ ------------
Revenue:
Fleet Management Solutions $ 803,413 860,499 $ 1,568,474 1,714,697
Supply Chain Solutions 358,276 385,692 695,387 769,050
Dedicated Contract Carriage 127,756 132,294 253,358 265,952
Eliminations (80,127) (84,416) (157,984) (174,121)
------------ ------------- ------------ ------------
$ 1,209,318 1,294,069 $ 2,359,235 2,575,578
Total revenue ============ ============= ============ ============
Revenue decreased 6.5 percent to $1.21 billion in the second quarter of 2002
compared with the same period in 2001. In the first half of 2002, revenue
decreased 8.4 percent to $2.36 billion compared with the same period last year.
The decreases were primarily a result of the continued slow economic conditions
in the U.S. and other countries where the Company operates and lower fuel
revenue resulting from lower fuel prices and volumes. During 2002, FMS
experienced revenue reductions in full service lease and program maintenance and
in commercial rental due primarily to reduced variable billings as
transportation miles run by lease and rental vehicles have decreased and a lower
overall fleet count (especially rental). SCS revenue declined in 2002 compared
with the same period in 2001 as a result of volume reductions primarily in the
electronics, high tech and communications sector, combined with the termination
of certain unprofitable business.
Periods ended June 30, Three Months Six Months
------------ ----------
(in thousands) 2002 2001 2002 2001
----------------------------------------------------------------------------------------
Operating expense $ 489,559 553,828 $ 963,210 1,114,317
Percentage of revenue 40% 43% 41% 43%
----------------------------------------------------------------------------------------
Operating expense decreased 11.6 percent to $489.6 million in the second quarter
of 2002 compared with the same period in 2001. Operating expense decreased 13.6
percent to $963.2 million in the first half of 2002 compared with the first half
of 2001. The decreases were due to a reduction in fuel cost as a result of lower
prices and volumes in 2002, a reduction in overhead costs due to the Company's
continuing cost containment actions, including the shut-down of certain
facilities in 2001 and the cancellation of an information technology outsourcing
contract. The decrease in operating expense for the first half of 2002 also
resulted from a reduction in fleet maintenance and licensing costs due to a
reduced fleet size from the same period in 2001.
Periods ended June 30, Three Months Six Months
------------ ----------
(in thousands) 2002 2001 2002 2001
----------------------------------------------------------------------------------------
Salaries and employee-related costs $ 319,097 307,329 $ 630,922 622,685
Percentage of revenue 26% 24% 27% 24%
----------------------------------------------------------------------------------------
Salaries and employee-related costs increased 3.8 percent to $319.1 million in
the second quarter of 2002 compared with the same period in 2001. In the first
half of 2002, salaries and employee-related costs increased by 1.3 percent to
$630.9 million compared with the same period in 2001. The increases were due to
higher benefit
20
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations --
Three and six months ended June 30, 2002 and 2001
CONSOLIDATED RESULTS (continued)
costs (primarily pension). The increases in pension expense were partially
offset by decreased salaries and other employee-related costs as a result of
strategic initiatives in 2001. The process resulted in terminations of over
1,400 employees during 2001; approximately 800 of which occurred through the
second quarter of 2001.
Net pension expense for all plans is expected to total $26 million in 2002
compared with net pension income of $1 million in 2001. The increase in net
pension costs is attributable primarily to the U.S. pension plan and reflects
the adverse effect of negative pension asset returns in 2001 as well as a
declining interest rate environment causing a lower discount rate. Pension asset
returns have continued to be negative for the first half of 2002. If this trend
continues, the Company expects 2003 pension costs to significantly increase from
current year levels.
Periods ended June 30, Three Months Six Months
------------ ----------
(in thousands) 2002 2001 2002 2001
----------------------------------------------------------------------------
Freight under management expense $ 108,031 120,772 $ 200,230 237,146
Percentage of revenue 9% 9% 8% 9%
----------------------------------------------------------------------------
Freight under management (FUM) expense represents subcontracted freight costs on
logistics contracts for which the Company purchases transportation. FUM expense
decreased 10.5 percent to $108.0 million in the second quarter of 2002 compared
with the same period in 2001. FUM expense decreased 15.6 percent to $200.2
million in the first half of 2002 compared with the first half of 2001. The
decreases were due to revenue declines in the SCS and DCC business segments as a
result of reduced freight volumes in the U.S. and in South America and the
termination of unprofitable business.
Periods ended June 30, Three Months Six Months
------------ ----------
(in thousands) 2002 2001 2002 2001
----------------------------------------------------------------------------
Depreciation expense $ 139,433 132,760 $ 272,385 270,310
Gains on vehicle sales, net (4,251) (3,866) (6,171) (6,973)
Equipment rental 87,450 114,562 181,822 213,885
----------------------------------------------------------------------------
Depreciation expense in the second quarter of 2002 increased by 5.0 percent to
$139.4 million compared with the second quarter of 2001. Depreciation expense
increased by 0.8 percent to $272.4 million in the first half of 2002 compared
with the same period last year. The increases were due primarily to a greater
number of owned (compared with leased) revenue earning equipment units as well
as reduced estimated residual values associated with certain classes of owned
tractors.
Gains on vehicle sales increased 10.0 percent to $4.3 million in the second
quarter of 2002 compared with the second quarter in 2001. Gains on vehicle sales
decreased 11.5 percent to $6.2 million in the first half of 2002 compared with
the first half of 2001. The increase in gains on vehicle sales during the second
quarter was due to higher volumes of units sold and a decline in the average
book value per unit of units sold. The decrease in gains on vehicle sales during
the first half of 2002 reflects lower pricing of used vehicles sold, principally
during the first quarter of 2002. During the second quarter of 2002 the Company
experienced higher pricing of used vehicles sold, particularly in the tractor
class, in comparison to the first quarter of 2002.
21
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations --
Three and six months ended June 30, 2002 and 2001
CONSOLIDATED RESULTS (continued)
Equipment rental consists primarily of rental costs on revenue earning equipment
held under operating leases. Equipment rental costs decreased 23.7 percent to
$87.5 million in the second quarter 2002 compared with 2001 and decreased 15.0
percent to $181.8 million in the first half of 2002 compared with the first half
of 2001 as a result of a decrease in the number of leased vehicles compared with
2001. The total number of revenue earning equipment units (owned and leased) at
June 30, 2002 was down approximately 6.0 percent from December 31, 2001 levels
reflecting the Company's continued focus on asset management and reducing
capital expenditures while maximizing utilization of the FMS commercial rental
fleet.
Periods ended June 30, Three Months Six Months
------------ ----------
(in thousands) 2002 2001 2002 2001
-----------------------------------------------------------------------------
Interest expense $ 23,909 29,259 $ 48,108 63,580
Percentage of revenue 2% 2% 2% 2%
-----------------------------------------------------------------------------
Interest expense decreased 18.3 percent to $23.9 million during the second
quarter of 2002 compared with the same period in 2001. In the first half of
2002, interest expense decreased 24.3 percent to $48.1 million compared with the
first half of 2001. The decreases in interest expense principally reflect lower
debt levels due to reduced capital spending, overall lower market interest rates
and reduced interest rates as a result of hedging agreements entered into during
the first quarter of 2002 (see "Derivative Instruments and Hedging Activities"
in the Notes to Consolidated Condensed Financial Statements).
Periods ended June 30, Three Months Six Months
------------ ----------
(in thousands) 2002 2001 2002 2001
----------------------------------------------------------------------------
Miscellaneous (income) expense, net $ (387) (657) $ (2,847) 3,464
-----------------------------------------------------------------------------
Miscellaneous income of $0.4 million slightly decreased in the second quarter of
2002 compared with the second quarter of 2001. The Company had miscellaneous
income of $2.8 million in the first half of 2002 compared with miscellaneous
expense of $3.5 million in the first half of 2001. The decrease in miscellaneous
income during the second quarter of 2002 is due primarily to increased losses of
$2.5 million on investments classified as trading securities used to fund
certain benefit plans which almost offset the reduction in losses on the sale of
receivables related to the decreased use of the Company's revolving facility for
the sale of trade receivables. The increase in miscellaneous income in the first
half of 2002 is due to the reduction in losses on the sale of receivables.
Periods ended June 30, Three Months Six Months
------------ ----------
(in thousands) 2002 2001 2002 2001
----------------------------------------------------------------------------
Provision for income taxes $ 16,965 866 $ 26,445 3,285
----------------------------------------------------------------------------
22
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations --
Three and six months ended June 30, 2002 and 2001
CONSOLIDATED RESULTS (continued)
The Company's effective income tax rate on earnings was 36.5 percent and 36.3
percent for the three and six months ended June 30, 2002, respectively, compared
with 4.2 and 12.1 percent for the three and six months ended June 30, 2001,
respectively. In June 2001, legislation was enacted in Canada that prospectively
reduced income tax rates applicable to the Company's Canadian operations. This
resulted in a one-time reduction in the Company's related deferred taxes of $6.8
million and lowered the Company's income tax provision for the three and six
months ended June 30, 2001. Excluding this item, the Company's effective tax
rate was 37.0 percent for both the three and six months ended June 30, 2001.
RESTRUCTURING AND OTHER UNUSUAL CHARGES (RECOVERIES), NET
The Company had restructuring and other unusual charges of $19.4 million and
$29.9 million in the second quarter and first half of 2001, respectively,
compared with no restructuring and other unusual charges in the second quarter
and a recovery of $1.2 million in the first half of 2002. See "Restructuring and
Other Unusual Charges (Recoveries), Net" in the Notes to Consolidated Condensed
Financial Statements for additional discussion.
OPERATING RESULTS BY REPORTABLE BUSINESS SEGMENT
Periods ended June 30, Three Months Six Months
------------ ----------
(in millions) 2002 2001 2002 2001
----------------------------------------------- ----------- --------- --------- ---------
Revenue:
Fleet Management Solutions:
Full service lease and program maintenance $ 452.1 468.8 $ 899.6 933.9
Commercial rental 116.8 121.1 215.8 230.4
Fuel 146.4 175.5 281.1 357.9
Other 88.1 95.1 172.0 192.5
----------- --------- ---------- ---------
Total Fleet Management Solutions 803.4 860.5 1,568.5 1,714.7
Supply Chain Solutions 358.3 385.7 695.4 769.1
Dedicated Contract Carriage 127.7 132.3 253.3 265.9
Eliminations (80.1) (84.4) (158.0) (174.1)
----------- ---------- ----------- ---------
Total revenue $ 1,209.3 1,294.1 $ 2,359.2 2,575.6
=========== ========== =========== =========
NBT:
Fleet Management Solutions $ 55.4 50.9 $ 92.0 90.3
Supply Chain Solutions (2.2) (0.6) (4.4) (9.3)
Dedicated Contract Carriage 8.4 9.2 13.4 15.0
Eliminations (8.3) (9.3) (16.6) (18.0)
----------- ---------- ----------- ---------
53.3 50.2 84.4 78.0
Unallocated Central Support Services (6.8) (6.8) (12.8) (14.2)
Goodwill amortization - (3.3) - (6.6)
----------- ---------- ----------- ---------
Earnings before restructuring and
other unusual (charges) recoveries,
taxes and cumulative effect of change
in accounting principle 46.5 40.1 71.6 57.2
Restructuring and other unusual (charges)
recoveries - (19.4) 1.2 (29.9)
----------- ---------- ----------- ---------
Earnings before income taxes and cumulative
effect of change in accounting principle $ 46.5 20.7 $ 72.8 27.3
=========== ========== =========== =========
23
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations --
Three and six months ended June 30, 2002 and 2001
OPERATING RESULTS BY REPORTABLE BUSINESS SEGMENT (continued)
Beginning in the first quarter of 2002, the primary measurement of segment
financial performance, defined as "Net Before Taxes" (NBT), includes an
allocation of Central Support Services (CSS) and excludes goodwill impairment,
goodwill amortization and restructuring and other unusual (charges) recoveries.
Prior-year segment results have been restated to conform to the new measurement
standard. CSS represents those costs incurred to support all business segments,
including sales and marketing, human resources, finance, shared management
information systems, customer solutions, health and safety, legal and
communications. The objective of the NBT measurement is to provide management
clarity on the profitability of each business segment and, ultimately, to hold
leadership of each business segment and each operating segment within each
business segment accountable for their allocated share of CSS costs. To
facilitate the comparison of 2002 business segment NBT to prior periods,
prior-year goodwill amortization (see "Goodwill and Other Intangible Assets" in
the Notes to Consolidated Condensed Financial Statements) is now treated as a
corporate, rather than segment, cost and is segregated as such.
Certain costs are considered to be overhead not attributable to any segment and
remain unallocated in CSS. Included among the unallocated overhead remaining
within CSS are the costs for investor relations, corporate communications,
public affairs and certain executive compensation. See "Segment Information" in
the Notes to Consolidated Condensed Financial Statements for a description of
how the remainder of CSS costs are allocated to the business segments.
The FMS segment leases revenue earning equipment, sells fuel and provides
maintenance and other ancillary services to the SCS and DCC segments.
Inter-segment revenues and NBT are accounted for at approximate fair value as if
the transactions were made to third parties. NBT related to inter-segment
equipment and services billed to customers (equipment contribution) is included
in both FMS and the business segment which served the customer, then eliminated.
Equipment contribution included in SCS NBT was $3.9 million and $4.4 million for
the three months ended June 30, 2002 and 2001, respectively. Equipment
contribution included in SCS NBT was $7.7 million and $8.5 million for the six
months ended June 30, 2002 and 2001, respectively. Equipment contribution
included in DCC NBT was $4.4 million and $4.9 million for the three months ended
June 30, 2002 and 2001, respectively. Equipment contribution included in DCC NBT
was $8.9 million and $9.5 million for the six months ended June 30, 2002 and
2001, respectively. Interest expense is primarily allocated to the FMS business
segment since such borrowings are used principally to fund the purchase of
revenue earning equipment used in FMS; however, with the availability of segment
balance sheet information in 2002 (including targeted segment leverage ratios),
interest expense (revenue) is also reflected in SCS and DCC.
These 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.
Fleet Management Solutions
FMS revenue in the second quarter of 2002 decreased 6.6 percent to $803.4
million compared with the same period in 2001. FMS revenue for the first half of
2002 decreased 8.5 percent to $1.57 billion compared with the first half in
2001. 2002 results were impacted by fluctuations in fuel revenue. Dry revenue
(revenue excluding fuel) decreased 4.1 percent in the second quarter of 2002 and
5.1 percent in the first half of 2002 compared to 2001 periods reflecting
declines in leasing and rental revenue.
Full service lease and program maintenance revenue decreased 3.6 and 3.7 percent
in the second quarter and first half of 2002, respectively, as a result of
decreases in variable billings, which are generally a function of total miles
run by leased vehicles, and negative net sales over recent periods due primarily
to the slowing U.S. economy. Net sales takes into consideration new business
with new or existing customers and revenue changes with existing customers due
to replacement vehicles or rate changes, net of full service leases that reach
the end of their term or are cancelled during the reported period. The Company
anticipates a continued decrease in full service lease and program maintenance
revenue in the near term due to a recent trend in negative net sales.
24
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations --
Three and six months ended June 30, 2002 and 2001
OPERATING RESULTS BY REPORTABLE BUSINESS SEGMENT (continued)
Fleet Management Solutions (continued)
Commercial rental revenue decreased 3.6 and 6.3 percent in the second quarter
and first half of 2002, respectively, compared with the same periods in 2001. In
the U.S., pure rental revenue (total rental revenue less rental revenue related
to units provided to full service lease customers) decreased 5.5 and 4.6 percent
to $46.9 million and $84.2 million for the three and six months ended June 30,
2002, respectively, compared with the same periods in 2001. Lease extra revenue
represents revenue on rental vehicles provided to existing full service lease
customers generally during peak periods in their operations. In the U.S., lease
extra revenue decreased 9.2 and 14.1 percent to $26.4 million and $50.4 million
in the second quarter and first half of 2002, respectively, compared with the
same periods of 2001. Await new lease rental revenue represents revenue on
rental vehicles provided to new full service lease customers who have not taken
delivery of full service lease units. During the second quarter and first half
of 2002, await new lease revenue decreased 1.5 and 16.4 percent to $4.3 million
and $8.2 million, respectively, in the U.S. compared with the same periods in
2001. Despite improved rental utilization during the second quarter and first
half of 2002, revenue declined due to a continued weak demand for rental in the
U.S. as a result of slow economic conditions and a planned rental fleet
reduction. U.S. rental fleet utilization for the second quarter and first half
of 2002 was 73.2 percent and 68.3 percent, respectively, compared to 69.0
percent and 67.5 percent for the same periods in 2001. The U.S. rental fleet
size at June 30, 2002 decreased 11.4 percent compared with June 30, 2001. Rental
statistics are monitored for the U.S. only; however, management believes such
metrics to be indicative of rental product performance for the Company as a
whole.
Fuel revenue decreased 16.6 and 21.5 percent to $146.4 million and $281.1
million in the second quarter and first half of 2002, respectively, over the
same periods in 2001 due primarily to lower fuel prices and, to a lesser extent,
lower volumes. The Company realized minimal changes in margin as a result of
fluctuations in fuel revenue.
FMS NBT increased 8.8 percent to $55.4 million in the second quarter of 2002
over the second quarter of 2001. FMS NBT increased 1.9 percent to $92.0 million
in the first half of 2002 compared with the same period of 2001. The increases
were due primarily to improved rental utilization, lower interest expense from
declining interest rates and operating expense reductions due to cost management
and process improvement initiatives since last year. NBT for the second quarter
of 2002 also benefited from lower carrying costs on used vehicles held for sale
(owned and leased) because of improved used truck sales pricing and reduced
vehicle counts. Such increases were partially offset by increased pension
expense and benefit costs. FMS NBT as a percentage of dry revenue (revenue
excluding fuel) was 8.4 and 7.1 percent in the second quarter and first half of
2002, respectively, compared with 7.4 and 6.7 percent in the same periods of
2001.
The Company's fleet of owned and leased revenue earning equipment is summarized
as follows (number of units rounded to the nearest hundred):
June 30, December 31,
2002 2001
--------------- -----------------
By type:
Trucks 64,100 66,000
Tractors 49,500 52,400
Trailers 45,900 46,700
Other 5,300 5,000
--------------- -----------------
164,800 170,100
=============== =================
By business:
Full service lease 123,100 126,900
Commercial rental 38,600 40,200
Service vehicles and other 3,100 3,000
--------------- -----------------
164,800 170,100
=============== =================
25
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations --
Three and six months ended June 30, 2002 and 2001
OPERATING RESULTS BY REPORTABLE BUSINESS SEGMENT (continued)
Fleet Management Solutions (continued)
The totals in each of the tables above include the following non-revenue earning
equipment (number of units rounded to the nearest hundred):
June 30, December 31,
2002 2001
--------------- ----------------
Not yet earning revenue (NYE) 1,100 1,200
No longer earning revenue (NLE)
Units held for sale 4,200 5,200
Other NLE units 3,400 4,700
--------------- ----------------
8,700 11,100
=============== ================
NYE units represent new units 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 units. NLE
units represent units held for sale, as well as units for which no revenue has
been earned for the previous 30 days. These vehicles may be temporarily out of
service, being prepared for sale or not rented due to lack of demand. The total
number of non-revenue earning equipment of 8,700 units is at a 42 month low due
to the Company's efforts in redeploying surplus units and the continued
downsizing of the commercial rental fleet.
Supply Chain Solutions
SCS revenue in the second quarter of 2002 decreased 7.1 percent to $358.3
million compared with the same period in 2001. SCS revenue for the first half of
2002 decreased 9.6 percent to $695.4 million compared with the first half in
2001. SCS revenue declines reflect volume reductions in the electronics, high
tech and telecommunications industries as a result of the slowdown in both the
U.S. economy and those sectors. Revenues were also reduced in Argentina due to
the currency devaluation and economic downturn in that region. Some SCS revenue
declines were also due to the termination of certain unprofitable business over
the prior year as a result of margin improvement initiatives. Overall, in light
of these factors, the Company expects unfavorable revenue comparisons to
continue over the near term.
SCS NBT amounted to a deficit of $2.2 million in the second quarter of 2002
compared with a deficit of $0.6 million in the same period of 2001. SCS NBT
improved 52.7 percent to a deficit of $4.4 million in the first half of 2002
from a deficit of $9.3 million in the same period of 2001. The decrease in NBT
for the second quarter of 2002 was the result of higher start-up and overhead
costs which more than offset the impact of ongoing cost containment efforts and
uneven performance in international markets. The increase in start-up costs is
attributable to a higher number of start-up accounts (at various stages of the
start-up phase) during the quarter, while the cost of new margin improvement
initiatives and higher employee benefit costs contributed to the increase in
overhead costs. The improved results in the first half of 2002 compared to the
same period last year were due primarily to operational improvements across all
industry groups, principally in the automotive and electronics and high tech
groups, as a result of margin improvement initiatives, including the elimination
of certain unprofitable business and the implementation of cost containment
controls. NBT as a percentage of operating revenue was -0.9 percent in the
second quarter and first half of 2002, respectively, compared with -0.2 percent
in the second quarter of 2001 and -1.7 percent in the first half of 2001.
26
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations --
Three and six months ended June 30, 2002 and 2001
OPERATING RESULTS BY REPORTABLE BUSINESS SEGMENT (continued)
Dedicated Contract Carriage
DCC revenue decreased 3.5 percent to $127.7 million compared with the same
period in 2001. DCC revenue in the first half of 2002 decreased 4.7 percent to
$253.3 million compared with the first half of 2001. NBT decreased 8.7 and 10.7
percent to $8.4 million and $13.4 million in the second quarter and first half
of 2002, respectively, compared with the same periods of 2001. The decreases in
revenue were due primarily to volume reductions associated with the downturn in
the U.S. economy. Segment NBT for the second quarter of 2002 was negatively
affected by higher sales and marketing costs compared with the same period last
year, which offset margin improvements in other operational areas. The decrease
in NBT for the first half of 2002 compared with the same period last year also
reflects higher safety and insurance costs resulting from increased severity of
claims during the first quarter of 2002. NBT as a percentage of operating
revenue was 6.6 and 5.3 percent in the second quarter and first half of 2002,
respectively, compared with 7.0 and 5.7 percent in the same periods of 2001.
Central Support Services
CSS expenses were as follows:
Periods ended June 30, Three Months Six Months
------------ ----------
(in millions) 2002 2001 2002 2001
------------------------------------------ ----------- ------------ ------------ -----------
Sales and marketing $ 3.0 4.0 $ 6.3 8.0
Human resources 5.1 5.4 10.0 10.8
Finance 13.3 13.4 26.6 27.1
Corporate services/public affairs 1.9 1.9 3.7 4.0
Information technology 19.7 24.1 41.7 49.1
Customer solutions 2.2 3.2 4.8 5.9
Health and safety 2.4 2.3 4.6 4.6
Other 10.7 7.5 17.3 13.6
---------- ---------- ------------ ---------
Total CSS 58.3 61.8 115.0 123.1
Allocation of CSS to business segments (51.5) (55.0) (102.2) (108.9)
---------- ----------- ------------ ---------
Unallocated CSS $ 6.8 6.8 $ 12.8 14.2
========== =========== ============ =========
The decrease in total CSS expenses in the second quarter and first half of 2002
compared with the same periods in 2001 was due to reductions in nearly all
elements of CSS expense as a result of the Company's continued cost containment
actions, most notably in information technology (IT). Technology costs were
lower due primarily to decreased development and support costs as a result of
the cancellation of an FMS IT project in the third quarter of 2001, combined
with lower costs resulting from the in-sourcing of certain IT services.
27
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations --
Three and six months ended June 30, 2002 and 2001
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The following is a summary of the Company's cash flows from operating, financing
and investing activities for the six months ended June 30, 2002 and 2001 (in
thousands):
2002 2001
-------------- ------------
Net cash provided by (used in):
Operating activities $ 329,015 (79,815)
Financing activities (181,304) (81,191)
Investing activities (174,302) 125,871
------------- -----------
Net cash flows $ (26,591) (35,135)
============= ===========
A summary of the individual items contributing to the cash flow changes is
included in the Consolidated Condensed Statements of Cash Flows.
The increase in cash from operating activities in the first half of 2002,
compared with the same period last year, was primarily attributable to decreases
in the aggregate balance of trade receivables sold and a reduction in overall
working capital needs. The increase in cash used in financing activities in the
first six months of 2002, compared to the same period last year, reflects lower
commercial paper borrowings in 2002 due to lower capital needs. The increase in
cash used in investing activities in the first six months of 2002 reflects the
proceeds received in 2001 from the $410.7 million vehicle securitization
partially offset with a reduction in capital expenditures in 2002.
The Company refers to the net amount of cash generated from operating
activities, excluding changes in the aggregate balance of trade receivables
sold, and including collections on direct finance leases, proceeds from sale of
assets and capital expenditures as "free cash flow". The following table shows
the sources of the Company's free cash flow for the first six months ended June
30, 2002 and 2001 (in thousands):
Six Months Ended
2002 2001
------------- -------------
Cash provided by (used in) operating activities $ 329,015 (79,815)
Changes in the aggregate balance of trade receivables sold 40,000 294,000
Collections on direct finance leases 32,281 32,086
Sale of property and revenue earning equipment 77,145 101,077
Purchases of property and revenue earning equipment (280,021) (429,562)
------------ ------------
Free cash flow $ 198,420 (82,214)
============ ============
28
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations --
Three and six months ended June 30, 2002 and 2001
LIQUIDITY AND CAPITAL RESOURCES (continued)
Cash Flows (continued)
The increase in free cash flow in the first half of 2002 compared with the same
period last year was primarily attributable to a reduction in overall working
capital needs and the continued reduction in capital spending levels. The
decrease in working capital accounts is attributable in part to the lower levels
of business activity in 2002 as reflected in decreased revenue over prior year.
A summary of capital expenditures for the six months ended June 30 follows (in
thousands):
2002 2001
-------------- -------------
Revenue earning equipment* $ 258,284 384,468
Operating property and equipment 21,737 45,094
------------- -------------
$ 280,021 429,562
============= =============
* Excludes non-cash additions of $16 million in assets held under capital leases
resulting from the extension of existing operating leases.
The decrease in capital expenditures was principally due to reduced market
demand, improved controls over capital expenditures and a reduction in the
volume of early replacements of full service leases compared to the first half
of 2001. Management expects capital expenditures for the full year 2002 will be
approximately 12.0 percent less than full year 2001 levels. The Company expects
to fund its remaining 2002 capital expenditures with internally generated funds
and borrowings.
Financing and Other Funding Transactions
Ryder utilizes external capital to support growth in its asset-based product
lines. The Company has a variety of financing alternatives available to fund its
capital needs. These alternatives include long-term and medium-term public and
private debt, including asset-backed securities, bank term loans and leasing
arrangements as well as fixed-rate and variable-rate financing available through
bank credit facilities, commercial paper and receivable conduits.
The Company also periodically enters into sale and leaseback agreements on
revenue earning equipment, which are generally accounted for as operating
leases. The Company executes sale-leaseback transactions with third-party
financial institutions as well as with substantive special purpose entities,
which facilitate sale-leaseback transactions with multiple third-party investors
("securitizations"). In general, sale-leaseback transactions result in a
reduction in revenue earning equipment and debt on the balance sheet, as
proceeds from the sale of revenue earning equipment are primarily used to repay
debt. Accordingly, sale-leaseback transactions classified as operating leases
will result in reduced depreciation and interest expense and increased equipment
rental expense.
Sale-leaseback transactions (including securitizations) are generally executed
from time to time in order to lower the total cost of funding the Company's
operations, to diversify the Company's funding among different classes of
investors (e.g. regional banks, pension plans, insurance companies, etc.) and to
diversify the Company's funding among different types of funding instruments.
The Company did not enter into any sale-leaseback or securitization transactions
during the first half of 2002.
29
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations --
Three and six months ended June 30, 2002 and 2001
LIQUIDITY AND CAPITAL RESOURCES (continued)
Financing and Other Funding Transactions (continued)
Total debt was $1.55 billion at June 30, 2002, a decrease of 9.1 percent from
December 31, 2001. During the first six months of 2002, the Company issued
$100.0 million of medium-term notes and retired $86.0 million of medium-term
notes. U.S. commercial paper outstanding at June 30, 2002 decreased to $77.0
million, compared with $210.0 million at December 31, 2001. During the second
quarter of 2002, the Company added capital lease obligations of $16.0 million in
connection with the extension of existing operating leases of revenue earning
equipment. The Company's foreign debt decreased approximately $29.7 million from
December 31, 2001 to $312.8 million at June 30, 2002. The Company's percentage
of variable-rate financing obligations (including swap agreements) was 38.2
percent at June 30, 2002, compared with 26.9 percent at December 31, 2001.
Generally, the Company targets a variable-rate exposure of 25.0 to 45.0 percent
of total obligations. The Company's debt-to-equity and related ratios were as
follows:
June 30, 2002 December 31, 2001
------------------ ---------------------
Debt to equity 122% 139%
Total obligations to equity 167% 199%
Total obligations to equity, including securitizations 197% 234%
Debt to equity consists of the Company's on-balance sheet debt for the period
divided by total equity. Total obligations to equity represents debt plus the
following off-balance sheet funding, all divided by total equity: (1)
receivables sold, and (2) the present value of minimum lease payments and
guaranteed residual values under operating leases for equipment, discounted at
the interest rate implicit in the lease. Total obligations to equity, including
securitizations, consists of total obligations, described above, plus the
present value of contingent rentals under the Company's securitizations
(assuming customers make all lease payments on securitized vehicles when
contractually due), discounted at the average interest rate paid to investors in
the trust, all divided by total equity. Off-balance sheet obligations with
special-purpose entities, primarily securitizations, amounted to approximately
$454.0 million at June 30, 2002.
The decrease in all of the above ratios in the first half of 2002 was driven by
the Company's reduced funding needs as a result of decreases in purchases of
revenue earning equipment. For the remainder of 2002, the Company anticipates
these ratios to approximate current levels.
The Company participates in an agreement, as amended from time to time, to sell,
with limited recourse, trade receivables on a revolving and uncommitted basis.
This agreement expires in July 2004. In June 2002, the Company reduced the
amount available for sale under its trade receivables facility from $375.0
million to $275.0 million as a result of a reduction in overall capital needs.
The total amount of available recourse as of June 30, 2002 and December 31, 2001
was $5.1 million and $13.7 million, respectively. At June 30, 2002 and December
31, 2001, the outstanding balance of receivables sold pursuant to this agreement
was $70.0 million and $110.0 million, respectively.
30
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations --
Three and six months ended June 30, 2002 and 2001
LIQUIDITY AND CAPITAL RESOURCES (continued)
Financing and Other Funding Transactions (continued)
The Company's ability to access the capital markets for unsecured debt is linked
to both its short and long-term debt ratings. These ratings are intended to
provide guidance to investors in determining the credit risk associated with
particular securities based on current information obtained by the rating
organizations from the Company or other sources that such organizations consider
to be reliable. Lower ratings generally result in higher borrowing costs as well
as reduced access to capital markets. The Company's debt ratings as of June 30,
2002 were as follows:
Short Long
Term Term
------- -------
Moody's Investors Service P2 Baa1
Standard & Poor's Ratings Group A2 BBB
Fitch Ratings F2 BBB+
Certain downgrades of the Company's debt ratings below investment grade level
would limit the Company's ability to issue commercial paper and result in the
Company no longer having the ability to sell trade receivables. As a result, the
Company would have to rely on other established funding sources described below.
The Company can borrow up to $860.0 million through a global revolving credit
facility. The facility is composed of $300.0 million, which matures in May 2003
and is renewable annually, and $560.0 million, which matures in May 2006. The
primary purposes of the credit facility are to finance working capital and
provide support for the issuance of commercial paper. At the Company's option,
the interest rate on borrowings under the credit facility is based on LIBOR,
prime, federal funds or local equivalent rates. At June 30, 2002, $695.4 million
was available under this global credit facility. Of such amount, $300.0 million
was available at a maturity of less than one year. In order to maintain
availability of funding, the global revolving credit facility requires the
Company to maintain a ratio of debt to consolidated adjusted tangible net worth,
as defined, of less than or equal to 300.0 percent. The ratio at June 30, 2002
was 101.0 percent.
In 1998, the Company filed an $800.0 million shelf registration statement with
the Securities and Exchange Commission. Proceeds from debt issues under the
shelf registration have been and are expected to be used for capital
expenditures, debt refinancing and general corporate purposes. At June 30, 2002,
the Company had $237.0 million of debt securities available for issuance under
this shelf registration statement.
As of June 30, 2002, the Company had the following amounts available to fund
operations under the aforementioned facilities:
(in millions)
Global revolving credit facility $ 695.4 ($300.0 limited to less than one year)
Shelf registration statement 237.0
Trade receivables facility 205.0 (uncommitted basis)
The Company believes such facilities, along with the Company's commercial paper
program and other funding sources, will be sufficient to fund operations in
2002.
31
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations --
Three and six months ended June 30, 2002 and 2001
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The standard requires companies to recognize
costs associated with exit (including restructuring) or disposal activities at
fair value when the related liability is incurred rather than at the date of a
commitment to an exit or disposal plan under current practice. Costs covered by
the standard include certain contract termination costs, certain employee
termination benefits and other costs to consolidate or close facilities and
relocate employees that are associated with an exit activity or disposal of
long-lived assets. The new requirements are effective prospectively for exit
activity or disposal activities initiated after December 31, 2002 and will be
adopted by the Company effective January 1, 2003. The Company is currently
evaluating the potential impact, if any, the adoption of SFAS No. 146 will have
on its results of operations, cash flows or financial position.
In June 2002, the FASB issued a proposed interpretation of Accounting Research
Bulletin (ARB) No. 51, "Consolidated Financial Statements," to provide
additional guidance to assist companies in identifying and accounting for
special purpose entities (SPEs), including when SPEs should be consolidated by
the investor. The interpretation, expected to be issued in the fourth quarter of
this year, would introduce a concept requiring consolidation of an SPE by its
primary beneficiary unless the SPE can meet certain sufficient independent
economic substantive criteria. It is not possible to determine at this time what
conclusions will be included in the final interpretation; however, the result
could impact the accounting treatment of these entities. The Company's 2001
Annual Report on Form 10-K on file with the Securities and Exchange Commission
provides a detailed description of the Company's off-balance sheet activities.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS No. 145 among other items, updates and clarifies existing accounting
pronouncements related to gains and losses from the extinguishment of debt and
certain lease modifications that have economic effects similar to sale-leaseback
transactions. The provisions of SFAS No. 145 are generally effective as of May
15, 2002. The adoption of SFAS No. 145 did not have a material impact on the
Company's results of operations, cash flows or financial position.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which requires entities to record the fair value of a liability
for an asset retirement obligation in the period in which it incurs a legal
obligation associated with the retirement of tangible long-lived assets that
result from the acquisition, construction, development and/or normal use of the
assets. When the liability is initially recorded, the Company is required to
capitalize a cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002
and will be adopted by the Company effective January 1, 2003. The Company is
currently evaluating the potential impact, if any, the adoption of SFAS No. 143
will have on its results of operations, cash flows or financial position.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. These
statements are based on the Company's current plans and expectations and involve
risks and uncertainties that may cause actual results to differ materially from
the forward-looking statements. Generally, the words "believe," "expect,"
"estimate," "anticipate," "will" and similar expressions identify
forward-looking statements.
Important factors that could cause such differences include, among others:
general economic conditions in the U.S. and worldwide; the market for the
Company's used equipment; the highly competitive environment applicable to the
Company's operations (including competition in supply chain solutions and
dedicated contract carriage from other logistics companies as well as from air
cargo, shippers, railroads and motor carriers and competition in full service
leasing and commercial rental from companies providing similar services as well
as truck and trailer manufacturers that provide leasing, extended warranty
maintenance, rental and other transportation services); greater than expected
expenses associated with the Company's activities (including increased cost of
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations --
Three and six months ended June 30, 2002 and 2001
FORWARD-LOOKING STATEMENTS (continued)
fuel, freight and transportation) or personnel needs; availability of equipment;
changes in customers' business environments (or the loss of a significant
customer) or changes in government regulations.
The risks included here are not exhaustive. 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 the Company's business.
Accordingly, the Company undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.
33
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, the Company is exposed to fluctuations in
interest rates, foreign exchange rates and fuel prices. The Company manages such
exposures in several ways including, in certain circumstances, the use of a
variety of derivative financial instruments when deemed prudent. The Company
does not enter into leveraged derivative financial transactions or use
derivative financial instruments for trading purposes.
Exposure to market risk for changes in interest rates relates primarily to debt
obligations. The Company's interest rate risk management program objectives are
to limit the impact of interest rate changes on earnings and cash flows and to
lower overall borrowing costs. The Company manages its exposure to interest rate
risk through the proportion of fixed-rate and variable-rate debt in the total
debt portfolio. From time to time, the Company also uses interest rate swap and
cap agreements to manage its fixed-rate and variable-rate exposure and to better
match the repricing of its debt instruments to that of its portfolio of assets.
The following table summarizes interest rate swaps and caps outstanding as of
June 30, 2002 expressed in U.S. Dollar Equivalents. The table shows the notional
amount and fair value of the swaps and caps and related weighted average
interest rates by contractual maturity dates. Weighted average variable rates
are based on implied forward rates in the yield curve at June 30, 2002. This
information should be read in conjunction with "Derivative Instruments and
Hedging Activities" in the Notes to Consolidated Condensed Financial Statements.
Expected Maturity Date
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 2002 Years ended December 31 Fair Value
(in thousands) 2002 2003 2004 2005 2006 Thereafter Total Asset (Liab.)
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate swaps:
Fixed-to-variable swaps (Dollar denominated)-
Fair value hedges: $ - - 37,000 100,000 150,000 35,000 322,000 7,070
Average pay variable-rate 3.50% 4.60% 5.91% 6.64% 6.84% 7.18%
Average receive fixed-rate 6.70% 6.70% 6.70% 6.70% 6.54% 6.61%
Variable-to-fixed swaps (Pound Sterling
denominated) - Cash flow hedges: $ - - 22,982 - - - 22,982 35
Average pay fixed-rate 5.91% 5.91% 5.91% - - -
Average receive variable-rate 2.80% 3.96% 5.27% - - -
Interest rate caps (Dollar denominated)-
No hedging designation: $ - - - 160,000 - - 160,000 1,596
Average rate 6.25% 6.25% 6.25% 6.25% - -
34
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of stockholders of Ryder System, Inc. was held on
May 3, 2002.
(b) All directors nominees described in (c) below were elected. The
following directors continued in office after the meeting: Edward T.
Foote II, David I. Fuente, John A. Georges, Corliss J. Nelson, Gregory
T. Swienton and Christine A. Varney.
(c) Certain matters voted on at the meeting and the votes cast with respect
to such matters are as follows:
ELECTION OF DIRECTORS
Director Votes Received Votes Withheld
-------- -------------- --------------
John H. Dasburg 47,929,258 2,946,333
Joseph L. Dionne 48,083,454 2,792,137
Lynn M. Martin 48,496,347 2,379,244
Votes Cast Broker
----------
For Against Abstain Non-votes
--- ------- ------- ---------
MANAGEMENT PROPOSAL
Ratification of appointment of
KPMG LLP as independent
auditors 49,587,415 1,191,108 97,068 --
SHAREHOLDER PROPOSAL
Redemption of preferred share
purchase rights 32,552,709 12,187,735 248,088 5,887,059
35
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
--------
(15) Letter regarding unaudited interim financial statements.
(b) Reports on Form 8-K
-------------------
There were no reports on Form 8-K filed by the Registrant during the
period covered by this report.
36
SIGNATURES
----------
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: August 7, 2002 By: /S/ Corliss J. Nelson
----------------------------------
Corliss J. Nelson
Senior Executive Vice President
and Chief Financial Officer
(Principal Financial Officer and Duly
Authorized Officer)
Date: August 7, 2002 By: /S/ Art A. Garcia
-----------------------------------
Art A. Garcia
Vice President and Controller
(Principal Accounting Officer)
37
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
(15) Letter regarding unaudited interim financial statements.
38