10-Q 1 d10q.txt PERIOD ENDING 06/30/2002 -------------------------------------------------------------------------------- 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