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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
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
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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 60,667,305 shares of common stock ($0.50 par value per
share) outstanding as of October 31, 2001.
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RYDER SYSTEM, INC.
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Condensed Statements of Earnings -
Three and Nine months ended September 30, 2001 and 2000
(unaudited) 3
Consolidated Condensed Balance Sheets -
September 30, 2001 (unaudited) and December 31, 2000 4
Consolidated Condensed Statements of Cash Flows -
Nine months ended September 30, 2001 and 2000 (unaudited) 5
Notes to Consolidated Condensed Financial Statements (unaudited) 6
Independent Accountants' Review Report 17
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 18
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk 37
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 38
Signatures 39
Exhibit Index 40
2
ITEM 1. Financial Statements
Ryder System, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Periods ended September 30, 2001 and 2000 Three Months Nine Months
----------------------- ----------------------------
(In thousands, except per share amounts) 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Revenue $1,242,806 1,338,817 $3,818,384 3,979,615
---------- --------- ---------- ---------
Operating expense 531,741 597,966 1,664,106 1,795,768
Salaries and employee-related costs 294,428 308,508 917,113 915,893
Freight under management expense 90,221 101,405 299,888 310,774
Depreciation expense 135,023 142,766 405,333 434,245
Gains on vehicle sales (2,630) (3,666) (9,603) (16,957)
Equipment rental 113,546 98,901 336,862 284,640
Interest expense 29,077 36,613 92,657 117,263
Miscellaneous expense (income), net 4,508 (230) 7,972 2,921
Restructuring and other charges, net 53,803 37,278 83,709 37,278
---------- --------- ---------- ---------
1,249,717 1,319,541 3,798,037 3,881,825
---------- --------- ---------- ---------
Earnings (loss) before income taxes (6,911) 19,276 20,347 97,790
Provision for (benefit from) income taxes (1,405) 7,132 1,880 36,182
---------- --------- ---------- ---------
Net earnings (loss) $ (5,506) 12,144 $ 18,467 61,608
--------- --------- ---------- ---------
Earnings (loss) per common share:
Basic $ (0.09) 0.20 $ 0.31 1.04
--------- --------- ---------- ---------
Diluted $ (0.09) 0.20 $ 0.30 1.03
--------- --------- ---------- ---------
Cash dividends per common share $ 0.15 0.15 $ 0.45 0.45
========= ========= ========== =========
See accompanying notes to consolidated condensed financial statements.
3
ITEM 1. Financial Statements (continued)
Ryder System, Inc. and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
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September 30, December 31,
(In thousands, except share amounts) 2001 2000
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Assets
Current assets:
Cash and cash equivalents $ 131,746 121,970
Receivables, net of allowance for doubtful accounts of $14,895
and $9,236, respectively 584,661 399,623
Inventories 70,757 77,810
Tires in service 133,785 158,854
Prepaid expenses and other current assets 145,466 170,019
------------------ ----------------
Total current assets 1,066,415 928,276
Revenue earning equipment, net of accumulated depreciation of
$1,524,328 and $1,416,062, respectively 2,541,538 3,012,806
Operating property and equipment, net of accumulated depreciation
of $671,629 and $632,216, respectively 578,954 612,626
Direct financing leases and other assets 714,008 693,097
Intangible assets and deferred charges 206,504 228,118
------------------ ----------------
$ 5,107,419 5,474,923
================== ================
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 293,179 412,738
Accounts payable 286,067 379,155
Accrued expenses 519,623 510,411
------------------ ----------------
Total current liabilities 1,098,869 1,302,304
Long-term debt 1,488,632 1,604,242
Other non-current liabilities 277,133 298,365
Deferred income taxes 1,002,380 1,017,304
------------------ ----------------
Total liabilities 3,867,014 4,222,215
------------------ ----------------
Shareholders' equity:
Preferred stock of no par value per share - Authorized 900,000;
none outstanding September 30, 2001 or December 31, 2000 - -
Common stock of $0.50 par value per share - Authorized 400,000,000;
Outstanding, September 30, 2001 - 60,645,690; December 31, 2000 - 60,044,479 534,904 524,432
Retained earnings 759,122 767,802
Deferred compensation (5,726) (3,818)
Accumulated other comprehensive loss (47,895) (35,708)
------------------ ----------------
Total shareholders' equity 1,240,405 1,252,708
------------------ ----------------
$ 5,107,419 5,474,923
================== ================
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)
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Nine months ended September 30, 2001 and 2000
(In thousands) 2001 2000
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Cash flows from operating activities:
Net earnings $ 18,467 61,608
Depreciation expense 405,333 434,246
Gains on vehicle sales (9,603) (16,958)
Amortization expense and other non-cash charges, net 67,502 22,530
Deferred income tax expense (1,605) 41,003
Changes in operating assets and liabilities, net of acquisitions:
Increase (decrease) in aggregate balance of trade receivables sold (220,000) 154,000
Receivables 35,560 24,585
Inventories 7,053 (4,711)
Prepaid expenses and other assets (4,154) (75,421)
Accounts payable (96,212) 14,896
Accrued expenses and other non-current liabilities (16,141) (1,005)
----------------- ----------------
186,200 654,773
----------------- ----------------
Cash flows from financing activities:
Net change in commercial paper borrowings (91,503) 173,740
Debt proceeds 225,457 54,324
Debt repaid, including capital lease obligations (357,484) (457,929)
Dividends on common stock (27,147) (26,783)
Common stock issued 7,187 5,261
----------------- ----------------
(243,490) (251,387)
----------------- ----------------
Cash flows from investing activities:
Purchases of property and revenue earning equipment (541,930) (1,039,469)
Sales of property and revenue earning equipment 140,511 179,718
Sale and leaseback of revenue earning equipment 410,739 372,953
Acquisitions, net of cash acquired - (3,705)
Sale of net assets of business 14,113 -
Collections on direct finance leases 47,204 51,841
Other, net (3,571) 33,961
----------------- ----------------
67,066 (404,701)
----------------- ----------------
Increase (decrease) in cash and cash equivalents 9,776 (1,315)
Cash and cash equivalents at January 1 121,970 112,993
----------------- ----------------
Cash and cash equivalents at September 30 $ 131,746 111,678
================= ================
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 2000 Annual Report 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. Operating results for interim periods
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) EARNINGS PER SHARE INFORMATION
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 September 30, 2001 and 2000 Three Months Nine Months
(In thousands) 2001 2000 2001 2000
-------------------------------------------- ------ ------ ------ ------
Weighted average shares outstanding-Basic 60,160 59,576 60,003 59,504
Effect of dilutive options and unvested
restricted stock - 220 576 168
------ ------ ------ ------
Weighted average shares outstanding-Diluted 60,160 59,796 60,579 59,672
====== ====== ====== ======
Anti-dilutive options not included above 9,089 6,596 6,833 6,574
====== ====== ====== ======
For the three months ended September 30, 2001, only basic per share
amounts are calculated due to recognition of a net loss for the period.
Accordingly, all outstanding options are considered anti-dilutive for
this period.
Key employee plans provide for the issuance of stock appreciation
rights, limited stock appreciation rights, performance units or
restricted stock at no cost to the employee. The value of the
restricted stock, equal to fair market value at the time of grant, is
recorded in shareholders' equity as deferred compensation and
recognized as compensation expense as the restricted stock vest over
the periods established for each grant. The Company did not grant any
restricted stock under employee incentive plans during the third
quarter of 2001. During the nine months ended September 30, 2001, the
Company granted 165,755 shares of restricted stock at a weighted
average grant date fair value of $20.62. The Company granted 40,000
shares of restricted stock at a weighted average grant date fair value
of $21.25 in the third quarter of 2000 and 65,000 shares of restricted
stock at a weighted average grant date fair value of $21.11 during the
nine months ended September 30, 2000.
6
ITEM 1. Financial Statements (continued)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
(C) COMPREHENSIVE INCOME (LOSS)
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 Company's total comprehensive
income consists of net earnings, currency translation adjustments
associated with foreign operations which use the local currency as
their functional currency and recognition of an additional minimum
pension liability adjustment. The additional minimum pension liability
of $3.1 million at September 30, 2001 relates to the Company's Benefit
Restoration Plan and represents the amount by which the plan's
accumulated benefit obligation exceeds the unfunded accrued pension
expense liability. Such additional minimum pension liability is offset
by an intangible asset of $1.9 million equal to the Plan's unrecognized
prior service cost and a reduction to comprehensive income of $1.2
million. No minimum pension liability adjustment was required for the
nine months ended September 30, 2000. Currency translation adjustments
for the three months ended September 30, 2001 and 2000 were $(0.4)
million and $5.8 million, respectively. Currency translation
adjustments for the nine months ended September 30, 2001 and 2000 were
$(11.0) million and $16.8 million, respectively. Total comprehensive
income (loss) for the three months ended September 30, 2001 and 2000
was $(5.9) million and $6.3 million, respectively. Total comprehensive
income for the nine months ended September 30, 2001 and 2000 was $6.3
million and $44.8 million, respectively.
(D) RECENT ACCOUNTING PRONOUNCEMENTS
In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," which addresses
financial accounting and reporting for the impairment and disposal of
long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of", with the exception of impairment and disposal issues
related to goodwill and other intangible assets that are not amortized.
SFAS No. 144 also supersedes the accounting and reporting provisions of
Accounting Principles Board (APB) Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment
of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions."
SFAS No. 144 retains many of the fundamental recognition and
measurement provisions of SFAS No. 121. SFAS No. 144 also retains the
requirement in APB No. 30 to separately identify and report
discontinued operations. Such requirement extends APB No. 30 reporting
requirements for discontinued operations to a component of an entity
that has either been disposed of or is classified as held for sale.
SFAS No. 144 is effective for fiscal years beginning after December 15,
2001, and will be adopted by the Company effective January 1, 2002. The
Company is currently evaluating the potential impact, if any, the
adoption of SFAS No. 144 will have on its results of operations, cash
flows or financial position. SFAS No. 144 will result in reporting of
amounts related to components of the Company that are disposed of or
held for sale in discontinued operations that previously could not be
classified as discontinued operations since they did not meet the
definition of a segment under APB No. 30.
7
ITEM 1. Financial Statements (continued)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
(D) RECENT ACCOUNTING PRONOUNCEMENTS (continued)
In July 2001, the FASB issued SFAS No. 141, "Business Combinations,"
SFAS No. 142, "Goodwill and Other Intangible Assets," and SFAS No. 143,
"Accounting for Asset Retirement Obligations."
SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001 as well as
all purchase method business combinations completed after June 30,
2001. SFAS No. 141 also specifies criteria that intangible assets
acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill. The Company is required to
adopt the provisions of SFAS No. 141 immediately.
SFAS No. 142 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. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
The Company is required to adopt the provisions of SFAS No. 142
effective January 1, 2002. Any goodwill and any intangible assets
determined to have an indefinite useful life that are acquired in a
purchase business combination completed during the second half of 2001
will not be amortized, but will continue to be evaluated for impairment
in accordance with the appropriate accounting literature prior to the
issuance of SFAS No. 142. Goodwill and intangible assets acquired in
business combinations completed before July 1, 2001 will continue to be
amortized prior to the adoption of SFAS No. 142.
Upon adoption of SFAS No. 142, the Company is first required to
evaluate its existing intangible assets and goodwill that were acquired
in prior purchase business combinations and make any necessary
reclassifications in order to conform with the new criteria in SFAS No.
141 for recognition apart from goodwill. The Company then will be
required to reassess the useful lives and residual values of all
intangible assets acquired in purchase business combinations, including
those reclassified from goodwill, and make any necessary amortization
period adjustments by the end of the first interim period after
adoption. To the extent an intangible asset is identified as having an
indefinite useful life, SFAS No. 142 requires the Company to test the
intangible asset for impairment consistent with the provisions of SFAS
No. 142 within the first interim period. Any impairment loss will be
measured as of the date of the adoption and recognized as the
cumulative effect of a change in accounting principle in the first
interim period.
After identifying and assessing intangible assets as discussed above,
SFAS No. 142 requires 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. To accomplish this, the Company must identify its
reporting units and determine the carrying value of each reporting unit
by assigning the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units as of January
1, 2002. The first step of the transitional impairment test requires
the Company, within the first six months of 2002, to determine the fair
value of each reporting unit and compare it to the reporting unit's
carrying amount. 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. 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
8
ITEM 1. Financial Statements (continued)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
(D) RECENT ACCOUNTING PRONOUNCEMENTS (continued)
and unrecognized assets and liabilities in a manner similar to a
purchase price allocation consistent with SFAS No. 141, to its carrying
amount, both of which would be measured as of January 1, 2002. This
second step is required to be completed as soon as possible, but no
later than December 31, 2002. Any transitional impairment loss will be
recognized as a cumulative effect of a change in accounting principle
in the Company's Consolidated Statements of Earnings.
At September 30, 2001, intangible assets and deferred charges included
goodwill and intangible assets of $193.9 million subject to SFAS No.
141 and SFAS No. 142. Amortization expense related to goodwill and
intangible assets was $3.3 million and $10.3 million for the three and
nine months ended September 30, 2001, respectively. The Company is
currently assessing the impact of the adoption of SFAS No. 141 and SFAS
No. 142. However, it is not practicable to reasonably estimate the
impact of adopting these statements on the Company's financial
statements at the date of this report, including whether any
transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.
SFAS No. 143 requires entities to record the fair value of a liability
for an asset retirement obligation in the period in which it is
incurred. 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.
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," which replaces SFAS No. 125. SFAS No. 140 provides
consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. SFAS No. 140
is effective for transfers and servicing of financial assets and
extinguishments of liabilities (the "Transfer" provisions) occurring
after March 31, 2001, and is effective for recognition and
reclassification of collateral and for disclosures relating to
sale-leaseback transactions and collateral (the "Disclosure"
provisions) for fiscal years ending after December 15, 2000. The
Company adopted the Disclosure provisions of SFAS No. 140 as discussed
in the 2000 Annual Report and adopted the Transfer provisions for
transactions subsequent to March 31, 2001. Adoption of this statement
did not have a material impact on the Company's financial position and
did not impact cash flows or results of operations.
In September 2001, the FASB issued Emerging Issues Task Force Statement
(EITF) Issue No. 01-10, "Accounting for the Impact of the Terrorist
Attacks of September 11, 2001." Due to the interruptions in business
activity for many entities which disrupted the U.S. economy at many
levels in the aftermath of the tragedy, the Task Force provided
guidance in capturing data related to the effects of the September 11
events and in communicating such data to investors. EITF No. 01-10
states that at minimum, all entities should disclose in the footnotes
to the financial statements in all periods affected by the September 11
events a description of the nature and amounts of losses recognized as
a result of the events, the amount of related insurance recoveries (if
any) recognized and a description of contingencies that have not yet
been recognized in the financial statements, but that are reasonably
expected to impact the entity's financial statements in the near term.
9
ITEM 1. Financial Statements (continued)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
(D) RECENT ACCOUNTING PRONOUNCEMENTS (continued)
The financial impact of the September 11 events on the Company cannot
be quantified or measured objectively. The events did not result in any
damage to Company property, loss of employees or recognition of
related insurance recoveries. Prior to the September 11 events, the
Company was already experiencing reductions in business volumes from
customers in all segments of the business due to the general slowdown
in the world, and in particular the United States' economies.
Additionally, since certain accounting activities take place on a
weekly or monthly basis, it is difficult in some cases to separate
pre-September 11 financial activity from that occurring after the
events. Thus, it is difficult to separate the impact of the September
11 events from the overall trends in the economy and the Company's
business segments.
(E) RESTRUCTURING AND OTHER CHARGES, NET
Restructuring and other charges and the allocation across business
segments for the three and nine months ended September 30, 2001 and
2000 were as follows (in thousands):
Three months Nine months
2001 2000 2001 2000
----------- ---------- ----------- ----------
Restructuring charges:
Severance and employee-related costs $ 8,466 - $26,602 -
Facilities and related costs 1,993 - 4,041 -
------- ------ ------- ------
10,459 - 30,643 -
Other charges (recoveries):
Asset write-downs and valuation
allowances, net 41,342 33,182 44,591 33,182
Other 2,002 4,096 8,475 4,096
------- ------ ------- ------
$53,803 37,278 $83,709 37,278
======= ====== ======= ======
Fleet Management Solutions $26,123 33,182 $36,849 33,182
Supply Chain Solutions 24,336 4,096 34,915 4,096
Dedicated Contract Carriage 88 - 535 -
Central Support Services 3,256 - 11,410 -
------- ------- ------- ------
$53,803 $37,278 $83,709 37,278
======= ======= ======= ======
The Company recorded restructuring and other charges of approximately
$53.8 million and $83.7 million during the three and nine months ended
September 30, 2001, respectively. The components of the charges were as
follows (in thousands):
Three Months Nine Months
------------ -----------
Severance and employee-related costs $ 5,858 23,994
Facilities and related costs 3,164 6,625
Loss on the sale of business 135 3,467
Strategic Consulting Fees 2,002 8,475
Cancellation of IT project 21,727 21,727
Shut-down of U.K. home delivery network 15,471 15,471
Write-off of software licenses 4,564 4,564
Other charges (recoveries) 882 (614)
------- ------
Total $53,803 83,709
======= ======
10
ITEM 1. Financial Statements (continued)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
(E) RESTRUCTURING AND OTHER CHARGES, NET (continued)
In the fourth quarter of 2000, the Company communicated to its
employees its planned strategic initiatives to reduce Company expenses.
As part of such initiatives, the Company is reviewing employee
functions and staffing levels to eliminate redundant work or otherwise
restructure work in a manner that will lead to a reduction in the
workforce. The process has resulted in terminations of over 1,000
employees during 2001. Formal decisions on terminations have been
made on a departmental basis. Severance and employee-related costs
represent the expense for termination benefits for such employees
terminated during 2001. Approximately 200 of these terminations
occurred during the third quarter of 2001.
During the second and third quarters of 2001, the Company identified
more than 40 facilities in the U.S. and in other countries to be closed
in order to improve profitability. Facilities and related costs of
approximately $3.2 million in the third quarter of 2001 include
approximately $2.0 million in contractual lease obligations for closed
facilities and approximately $1.2 million of asset impairments and
other costs related to owned facilities that have been closed and are
held for sale. For the nine months ended September 30, 2001, facilities
and related costs of approximately $6.6 million include approximately
$4.0 million in contractual lease obligations for closed facilities and
approximately $2.6 million of asset impairments and other costs related
to owned facilities that have been closed and are held for sale.
During the quarter ended March 31, 2001, the Company sold the contracts
and related net assets associated with the outbound auto carriage
portion of its Brazilian Supply Chain Solutions (SCS) operation. The
Company incurred a loss of approximately $3.5 million on the sale of
that business.
Strategic consulting fees of approximately $2.0 million and $8.5
million were incurred during the three and nine months ended September
30, 2001, respectively, in relation to the aforementioned strategic
initiatives. Such consulting engagements were substantially complete at
September 30, 2001.
In the third quarter of 2001, the Company cancelled an information
technology (IT) project in its Fleet Management Solutions (FMS)
business segment. The charge of approximately $21.7 million represents
the write-off of software licenses, development costs and assets
related to the project that had no future benefit.
During the third quarter of 2001, the Company initiated the shutdown of
Systemcare, Ryder's shared-user home delivery network in the United
Kingdom. The shutdown will be completed after meeting contractual
obligations to current customers, which extend to December 31, 2002.
The charge includes an impairment of goodwill of approximately $10.6
million. The remainder of the charge includes severance and employee-
related costs of approximately $2.6 million and asset impairment
charges of approximately $2.3 million related to the shutdown of
Systemcare.
An investment of approximately $4.6 million in certain license
agreements for supply chain management software was written off in the
third quarter of 2001 because the software no longer has a viable
business or customer application. Other charges (recoveries) primarily
represent a gain of approximately $2.2 million recorded in the first
quarter of 2001 on the sale of the corporate aircraft offset with
charges of approximately $1.6 million in the nine months ended
September 30, 2001 representing impairment of other assets.
11
ITEM 1. Financial Statements (continued)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
(E) RESTRUCTURING AND OTHER CHARGES, NET (continued)
During the third quarter of 2000, the Company recorded a pre-tax charge
of approximately $37.3 million. Approximately $33.8 million of the
charge represents an asset write-down resulting from the industry-wide
downturn in the market for new and used "Class 8" vehicles (the largest
heavy-duty tractors and straight trucks) which led to a decrease in the
market value of used tractors during the second half of 2000. The
Company's unsold Class 8 inventory consists of units previously used by
customers of the FMS segment. Tractors identified for accelerated
disposal represent revenue earning equipment held for sale that the
Company identified in the third quarter of 2000 as increasingly
undesirable and unmarketable due to lower-powered engines or a
potential lack of future support for parts and service. Impairment of
other tractors reflects owned and leased units for which estimated fair
value less costs to sell declined below carrying value (or termination
value, which represents the final payment due to lessors, in the case
of leased units) in the third quarter of 2000.
The third quarter 2000 charge is reduced by a recovery of $570,000 of
prior impairment charges which represents gains on vehicles sold in the
U.K. during the third quarter of 2000, for which an impairment charge
had been recorded in the 1999 restructuring.
During 2000, the Company was involved in litigation with a former
customer, OfficeMax, relating to a logistics services agreement that
was terminated in 1997. In October 2000, Ryder agreed to an
out-of-court settlement with OfficeMax, ending this litigation.
Approximately $4.1 million representing the write-off of certain assets
related to the OfficeMax contract is included in the third quarter 2000
charge.
Activity related to restructuring reserves for the nine months ended
September 30, 2001 was as follows:
Dec. 31, Sept. 30,
2000 2001
In thousands Balance Additions Deductions Balance
---------------------------------------- ------------- ------------- -------------- -----------------
Employee severance and benefits $ 3,908 26,602 14,033 16,477
Facilities and related costs 2,012 4,041 1,730 4,323
------------- ------------- -------------- -----------------
$ 5,920 30,643 15,763 20,800
============= ============= ============== =================
Additions relate to liabilities for employee severance and benefits and
lease obligations on facility closures, all incurred in 2001.
Deductions represent payments made related to restructuring charges. At
September 30, 2001, employee severance and benefits obligations are
required to be paid over the next three years. At September 30, 2001,
lease obligations are noncancellable and contractually required to be
paid principally over the next three years.
12
ITEM 1. Financial Statements (continued)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
(F) SALE OF TRADE RECEIVABLES
The Company participates in an agreement, as amended from time to time,
to sell, with limited recourse, up to $375.0 million of trade
receivables on a revolving basis. Such agreement expires in July 2004.
The receivables are sold at a discount, which approximates the
purchaser's financing costs of issuing its own commercial paper backed
by the trade receivables. The Company is responsible for servicing
receivables sold but has no retained interests. At September 30, 2001
and December 31, 2000 the outstanding balance of receivables sold
pursuant to this agreement was $125.0 million and $345.0 million,
respectively. Sales of receivables are reflected as a reduction of
receivables in the accompanying consolidated balance sheets. The costs
associated with this program were $1.3 million and $4.5 million for the
third quarters of 2001 and 2000, respectively, and are included in
miscellaneous expense (income), net. For the nine months ended
September 30, 2001 and 2000, the costs associated with this program
were $8.2 million and $12.5 million, respectively. The Company
maintains an allowance for doubtful receivables based on the expected
collectability of all receivables, including receivables sold. As
mentioned in the previous note, the Company adopted the Disclosure
provisions of SFAS No. 140 and adopted the Transfer provisions for
transactions subsequent to March 31, 2001.
(G) INCOME TAXES
The Company's effective income tax rate was a 20.3 percent benefit for
the third quarter of 2001 compared with a 37.0 percent expense for the
third quarter of 2000. For the nine months ended September 30, 2001,
the Company's effective income tax rate was 9.2 percent compared with
37.0 percent in the same period last year. In June 2001, legislation
was enacted in Canada that will reduce future 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, which was recorded in June 2001 as a reduction of the
Company's income tax provision for the nine months ended September 30,
2001 and provided a one-time reduction of the Company's effective tax
rate. For the three months ended September 30, 2001, the Company's
effective tax rate was reduced by certain items included in
restructuring and other charges, principally goodwill, for which the
Company receives no income tax deduction.
(H) DEBT AND OTHER FINANCING
The Company's outstanding debt balances were as follows:
September 30, December 31,
In millions 2001 2000
------------------------------------------------------------------------------------
U.S. commercial paper $ 380.4 441.1
Canadian commercial paper -- 31.7
Unsecured U.S. notes:
Debentures 325.7 425.6
Medium-term notes 637.2 755.9
Unsecured foreign obligations 340.6 332.7
Other debt, including capital leases 97.9 30.0
------------------------------------------------------------------------------------
Total debt 1,781.8 2,017.0
Current portion (293.2) (412.8)
------------------------------------------------------------------------------------
Long-term debt $1,488.6 1,604.2
------------------------------------------------------------------------------------
13
ITEM 1. Financial Statements (continued)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
(H) DEBT AND OTHER FINANCING (continued)
During the first quarter of 2001, the Company replaced its $720.0
million global revolving credit facility which was to expire in June
2002 with a new $860.0 million global revolving credit facility. The new
facility is composed of $300.0 million which matures in March 2002 and
is renewable annually, and $560.0 million which matures in March 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. The credit facility's annual facility fee ranges from 12.5 to
15.0 basis points applied to the total facility of $860.0 million based
on the Company's current credit ratings. At September 30, 2001, $378.0
million was available under this global revolving credit facility. Of
such amount, $274.6 million was available at a maturity of less than one
year. Foreign borrowings of $96.1 million were outstanding under the
facility at September 30, 2001.
In September 1998, the Company filed an $800.0 million shelf
registration statement with the Securities and Exchange Commission.
Proceeds from debt issuances under the shelf registration have been and
are expected to be used for capital expenditures, debt refinancing and
general corporate purposes. During the nine months ended September 30,
2001, $40.0 million of medium-term notes were issued under the shelf
registration. At September 30, 2001, the Company had $447.0 million of
debt securities available for issuance under this shelf registration
statement.
In the first quarter of 2001, the Company entered into a sale-leaseback
transaction in which the Company sold a beneficial interest in certain
revenue earning equipment and pledged a portion of the beneficial
interests in the underlying customer leases to a separately rated and
unconsolidated vehicle lease trust (Ryder Vehicle Lease Trust 2001-A). A
total of $426.6 million in securities (including $409.9 million of bonds
that are traded in public markets) were issued. These securities are
supported by a portion of the future cash flow stream generated by full
service lease contracts and the eventual disposition of the underlying
leased vehicles. The related vehicles total 9,700 full service lease
units in 40 states.
(I) 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.
At September 30, 2001, the Company had letters of credit outstanding
totaling $117.3 million, which primarily guarantee certain 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
$20.0 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 (continued)
(J) 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) 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 2001, e-Commerce was reported as a
separate business segment. Initial costs to build the e-Commerce
platform were included in Central Support Services (CSS) through
December 31, 2000. During the first and second quarters of 2001, such
costs were reclassified from CSS for all previous periods in order to
report e-Commerce results independently. In July 2001, in conjunction
with the Company's restructuring initiatives, responsibility for the
Company's e-Commerce operations was transferred to the leadership of
the SCS business segment. Such operations, which had evolved to provide
similar services compared with other SCS operations, were integrated
into the SCS customer base. Discrete financial information for these
operations is no longer provided to the Company's chief operating
decision-maker as of July 2001. As such, e-Commerce is no longer
considered a separate business segment.
In addition to the transfer of responsibility for the e-Commerce
operations to the SCS leadership, responsibility for certain SCS
accounts that had become more similar to the Company's DCC product was
transferred from the SCS leadership to the DCC leadership in July 2001.
Also, costs and personnel associated with the maintenance of the
Company's general web site, previously reported as a component of
e-Commerce, began being reported internally as a component of CSS in
July 2001. The business segment revenue and contribution margin
information furnished herein reflects the aforementioned
reclassifications to conform to the Company's current reporting and
presentation.
Management evaluates business segment financial performance based upon
several factors, of which the primary measure relied upon is
contribution margin. Contribution margin represents each business
segment's revenue, less direct costs and direct overheads related to
the segment's operations. Business segment contribution margin for all
segments (net of eliminations), less CSS expenses and restructuring and
other charges, net, is equal to earnings (loss) before income taxes.
CSS are 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 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 contribution margin are accounted
for at approximate fair value as if the transactions were made to
independent third parties. Contribution margin 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 (presented as "Eliminations"). Equipment
contribution included in SCS contribution margin for the three months
ended September 30, 2001 and 2000 was $3.6 million and $4.9 million,
respectively, and $12.1 million and $14.8 million for the nine months
ended September 30, 2001 and 2000, respectively. Equipment contribution
included in DCC contribution margin for the three months ended
15
ITEM 1. Financial Statements (continued)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
(J) SEGMENT INFORMATION (continued)
September 30, 2001 and 2000 was $5.4 million and $5.5 million,
respectively, and $14.9 million and $16.4 million for the nine months
ended September 30, 2001 and 2000, 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.
The following tables set forth the revenue and contribution margin for
each of the Company's business segments for the three and nine months
ended September 30, 2001 and 2000. 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.
Three Months Nine Months
----------------------- ----------------------
In millions 2001 2000 2001 2000
---------- ---------- ----------- ----------
Revenue:
Fleet Management Solutions:
Full service lease and program maintenance $ 465.3 471.4 $1,399.2 1,395.8
Commercial rental 125.0 137.7 355.4 394.3
Fuel 161.4 191.4 519.3 574.8
Other 91.8 99.8 284.3 303.1
--------- ------ -------- -------
Total Fleet Management Solutions 843.5 900.3 2,558.2 2,668.0
Supply Chain Solutions 345.6 390.8 1,114.7 1,175.9
Dedicated Contract Carriage 135.6 139.6 401.5 411.0
Eliminations (81.9) (91.9) (256.0) (275.3)
--------- -------- -------- -------
Total revenue $ 1,242.8 1,338.8 $3,818.4 3,979.6
========= ======== ======== =======
In millions Three Months Nine Months
---------------------- ---------------------
Contribution margin: 2001 2000 2001 2000
---------- --------- ---------- ---------
Fleet Management Solutions $ 94.6 107.2 $ 257.3 285.7
Supply Chain Solutions 12.9 15.8 32.1 46.8
Dedicated Contract Carriage 15.6 15.3 41.9 44.0
Eliminations (9.0) (10.4) (27.0) (31.2)
----------- --------- ---------- ---------
114.1 127.9 304.3 345.3
Central Support Services (67.2) (71.3) (200.3) (210.2)
----------- --------- ---------- ---------
Earnings before restructuring and other
charges and income taxes 46.9 56.6 104.0 135.1
Restructuring and other charges, net (53.8) (37.3) (83.7) (37.3)
---------- --------- --------- --------
Earnings (loss) before income taxes $ (6.9) 19.3 $ 20.3 97.8
========= ========= ========= =======
Asset information, including capital expenditures, is not maintained on
a business segment basis nor provided to the chief operating
decision-maker, and as such is not presented.
16
KPMG LLP
CERTIFIED PUBLIC ACCOUNTANTS
One Biscayne Tower Telephone 305-358-2300
2 South Biscayne Boulevard Fax 305-913-2692
Suite 2900
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 September 30, 2001, and the related
consolidated condensed statements of earnings for the three and nine months
ended September 30, 2001 and 2000 and the consolidated condensed statements of
cash flows for the nine months ended September 30, 2001 and 2000. 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, 2000, 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,
2001, 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, 2000, is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
/S/ KPMG LLP
Miami, Florida
October 17, 2001
17
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
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. Unless
otherwise noted, discussion and analysis for the nine months ended September 30,
2001 is consistent with that for the three months ended September 30, 2001.
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.
Beginning in the first quarter of 2001, e-Commerce was reported as a separate
business segment. Initial costs to build the e-Commerce platform were included
in Central Support Services (CSS) through December 31, 2000. During the first
and second quarters of 2001, such costs were reclassified from CSS for all
previous periods in order to report e-Commerce results independently. In July
2001, in conjunction with the Company's restructuring initiatives,
responsibility for the Company's e-Commerce operations was transferred to the
leadership of the SCS business segment. Such operations, which had evolved to
provide similar services compared with other SCS operations, were integrated
into the SCS customer base. Discrete financial information for these operations
is no longer provided to the Company's chief operating decision-maker as of July
2001. As such, e-Commerce is no longer considered a separate business segment.
In addition to the transfer of responsibility for the e-Commerce operations to
the SCS leadership, responsibility for certain SCS accounts that had become more
similar to the Company's DCC product was transferred from the SCS leadership to
the DCC leadership in July 2001. Also, costs and personnel associated with the
maintenance of the Company's general web site, previously reported as a
component of e-Commerce, began being reported internally as a component of CSS
in July 2001. The business segment revenue and contribution margin information
furnished in "Operating Results by Business Segment" herein reflects the
aforementioned reclassifications to conform to the Company's current reporting
and presentation.
Revenue decreased 7.2 percent to $1.24 billion for the three months ended
September 30, 2001 compared with $1.34 billion in the same period of 2000.
Revenue decreased 4.1 percent to $3.82 billion for the nine months ended
September 30, 2001 compared with $3.98 billion in the comparable period last
year. All business segments experienced a decline in revenue over the same
period in 2000. The decrease was due primarily to decreases in demand for rental
vehicles, decreases in fuel sales volumes and to a lesser extent prices, and SCS
volume reductions in the U.S. and in Latin America attributable to the continued
worldwide economic slowdown. Volume reductions in SCS were also due to the sale
of the contracts and related net assets associated with the disposal of the
outbound auto carriage business of the Company's Brazilian SCS operation (see
further details in the restructuring and other charges discussion of this
Management's Discussion and Analysis). Revenue was also reduced by the impact of
exchange rates on translation of foreign subsidiary revenues, particularly those
in the U.K. and Brazil where exchange rates have decreased by approximately 6.1
percent and 21.4 percent, respectively, from the comparable period last year.
18
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
OVERVIEW (continued)
Operating expense decreased $66.2 million, or 11.1 percent, to $531.7 million in
the three months ended September 30, 2001 compared with the same period in 2000.
Operating expense decreased $131.7 million, or 7.3 percent, to $1.66 billion in
the nine months ended September 30, 2001 compared with the comparable period in
2000. The decrease was a result of a reduction in overheads due to the Company
implementing cost containment actions throughout 2001 and a reduction in fuel
costs as a result of lower volumes and prices. The decrease also reflects lower
operating expense in the U.K. due to lost business and in South America as a
result of the sale of the contracts and related net assets associated with the
disposal of the Company's outbound auto carriage business of the Company's
Brazilian SCS operation.
Salaries and employee-related costs decreased $14.1 million, or 4.6 percent, to
$294.4 million in the third quarter of 2001 compared to same period in 2000. The
decrease was a result of planned reductions in headcount due to the Company
implementing its strategic initiatives throughout 2001 (See discussion on
Restructuring and other charges, net below). The decrease was partially offset
with a decrease in pension income during the third quarter compared with the
same period in 2000. Pension income for the Company's primary U.S. pension plan
was $2.9 million and $14.2 million for the three months ended September 30, 2001
and 2000, respectively, and $8.6 million and $35.3 million for the nine months
ended September 30, 2001 and 2000, respectively, and principally benefits FMS.
Pension income from the Company's primary U.S. pension plan is partially offset
by pension expense from the Company's other pension plans. In the nine months
ended September 30, 2001, salaries and employee related costs increased $1.2
million, or 0.1 percent, to $917.1 million. The increase was a result of the
aforementioned decrease in pension income for the nine months ended September
30, 2001 compared with the same period in 2000. The increase in pension income
for the nine months ended September 30, 2001 was largely offset by the effect of
the planned reductions in headcount implemented throughout 2001.
The Company has calculated preliminary pension estimates for 2002 based on
interest rate, participation and other assumptions and the market related value
of plan assets in the Company's primary U.S. pension plan as of September 30,
2001. Based on these estimates, the Company would anticipate recording $25.0
million to $30.0 million in pension expense in 2002 for all pension plans,
compared to $1.0 million to $5.0 million in pension income forecasted for 2001.
Such 2002 estimates are subject to change based upon changes in the
aforementioned assumptions and completion of actuarial analysis of all pension
plans as of December 31, 2001. The anticipated pension expense in 2002 would
primarily impact FMS, which employs the majority of the Company's employees that
participate in the Company's primary U.S. pension plan.
Freight under management expense (FUM) decreased by $11.2 million, or 11.0
percent, to $90.2 million in the third quarter of 2001 compared with the same
period in 2000. FUM decreased by 3.5 percent to $299.9 million in the nine
months ended September 30, 2001, as compared to $310.8 million in the comparable
period of 2000. The decrease was due to revenue reductions in related operating
units of the SCS business segment as a result of reduced freight volume.
Depreciation expense in the third quarter of 2001 decreased by $7.7 million, or
5.4 percent, to $135.0 million compared with the third quarter of 2000.
Depreciation expense decreased by $28.9 million, or 6.7 percent in the nine
months ended September 30, 2001 compared with the same period last year. The
decrease resulted principally from sale-leaseback and other transactions which
increased the number of leased (as opposed to owned) vehicles in the Company's
fleet since the first quarter of 2000. The decrease in depreciation expense was
partially offset by an increase in depreciation expense associated with the
reduction of estimated residual values associated with certain classes of
tractors. In the third quarter of 2000, the Company reduced residual values for
certain classes of vehicles currently in use and expected to be disposed of
during the next several years. This was applied consistent with the charge
recorded in the third quarter of 2000 to reflect decreases in the estimates in
residual values of certain classes of tractors held for sale.
19
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
OVERVIEW (continued)
Gains on vehicle sales decreased $1.0 million, or 28.3 percent, to $2.6 million
in the third quarter of 2001 compared with the third quarter of 2000 and
decreased $7.4 million, or 43.4 percent, to $9.6 million in the nine months
ended September 30, 2001 compared with the same period last year. The decrease
in gains on vehicle sales for the three and nine months ended September 30, 2001
was due to the continuing weak demand in the used truck market. Such weakness
began to impact the Company during the second quarter of 2000. Average sales
proceeds per unit decreased by approximately 10.1 percent during the third
quarter of 2001 compared with the same period last year and decreased by
approximately 4.6 percent compared with the second quarter of 2001. However, the
average book value per unit of units sold for the three months ended September
30, 2001 was approximately 4.8 percent lower than that of units sold in the same
period of 2000 as a result of the aforementioned increases in depreciation
expense due to reductions in estimated residual values.
The Company periodically reviews and adjusts the residual values, reserves for
guaranteed lease termination values and useful lives of revenue earning
equipment based on current and expected operating trends and projected
realizable values. The Company believes that its carrying values and estimated
sales proceeds for revenue earning equipment are appropriate. However, a greater
than anticipated decline in the market for used vehicles may require the Company
to further adjust such values and estimates which will impact the amounts
ultimately reported in the Company's financial statements and accompanying
notes.
Equipment rental primarily consists of rental costs on revenue earning
equipment. Equipment rental costs increased $14.6 million, or 14.8 percent, to
$113.5 million in the third quarter of 2001 compared with the same period in
2000 and increased $52.2 million, or 18.3 percent, to $336.9 million in the nine
months ended September 30, 2001 compared with the same period in 2000. The
increases were due to sale-leaseback transactions, including securitization
transactions, completed in the last 12 months as well as increases in reserves
for guaranteed lease termination values to reflect decreases in the estimate in
termination values.
Interest expense decreased $7.5 million, or 20.6 percent, to $29.1 million
during the second quarter of 2001 compared with the same period in 2000. In the
nine months ended September 30 2001, interest expense decreased $24.6 million,
or 20.9 percent, to $92.7 million compared with the same period of 2000. The
decrease in interest expense principally reflects debt reductions associated
with the use of proceeds from the aforementioned sale-leaseback transactions and
generally lower market interest rates compared with the prior periods.
The Company had miscellaneous expense of $4.5 million in the third quarter of
2001 compared with $230,000 of income in the same period last year. For the nine
months ended September 30, 2001, miscellaneous expense increased $5.1 million to
$8.0 million compared with the same period in 2000. The increase in
miscellaneous expense during the three and nine months ended September 30, 2001
was due primarily to increased net unrealized losses on investments used to fund
certain benefit plans compared with increased net unrealized gains on such
during 2000. Such investments are considered to be trading securities under
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," and are included in Direct
financing leases and other assets. The increase in miscellaneous expense was
slightly offset by lower costs related to the decreased use of the Company's
revolving facility for the sale of trade receivables.
20
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
OVERVIEW (continued)
The Company recorded restructuring and other charges of approximately $53.8
million and $83.7 million during the three and nine months ended September 30,
2001, respectively. The components of the charges were as follows (in
thousands):
Three Months Nine Months
------------- -------------
Severance and employee-related costs $ 5,858 23,994
Facilities and related costs 3,164 6,625
Loss on the sale of business 135 3,467
Strategic Consulting Fees 2,002 8,475
Cancellation of IT project 21,727 21,727
Shut-down of U.K. home delivery network 15,471 15,471
Write-off of software licenses 4,564 4,564
Other charges (recoveries) 882 (614)
------------- -------------
Total $ 53,803 83,709
============= =============
In the fourth quarter of 2000, the Company communicated to its employees its
planned strategic initiatives to reduce Company expenses. As part of such
initiatives, the Company is reviewing employee functions and staffing levels to
eliminate redundant work or otherwise restructure work in a manner that will
lead to a reduction in the workforce. The process has resulted in terminations
of over 1,000 employees during 2001. Formal decisions on terminations have been
made on a departmental basis. Severance and employee-related costs represent the
expense for termination benefits for such employees terminated during 2001.
Approximately 200 of these terminations occurred during the third quarter of
2001.
During the second and third quarters of 2001, the Company identified more than
40 facilities in the U.S. and in other countries to be closed in order to
improve profitability. Facilities and related costs of approximately $3.2
million in the third quarter of 2001 include approximately $2.0 million in
contractual lease obligations for closed facilities and approximately $1.2
million of asset impairments and other costs related to owned facilities that
have been closed and are held for sale. For the nine months ended September 30,
2001, facilities and related costs of approximately $6.6 million include
approximately $4.0 million in contractual lease obligations for closed
facilities and approximately $2.6 million of asset impairments and other costs
related to owned facilities that have been closed and are held for sale.
During the quarter ended March 31, 2001, the Company sold the contracts and
related net assets associated with the outbound auto carriage portion of its
Brazilian SCS operation. The Company incurred a loss of approximately $3.5
million on the sale of that business.
Strategic consulting fees of approximately $2.0 million and $8.5 million were
incurred during the three and nine months ended September 30, 2001,
respectively, in relation to the aforementioned strategic initiatives. Such
consulting engagements were substantially complete at September 30, 2001.
In the third quarter of 2001, the Company cancelled an information technology
(IT) project in its FMS business segment. The charge of approximately $21.7
million represents the write-off of software licenses, development costs and
assets related to the project that had no future benefit.
During the third quarter of 2001, the Company initiated the shutdown of
Systemcare, Ryder's shared-user home delivery network in the United Kingdom. The
shutdown will be completed after meeting contractual obligations to current
customers, which extend to December 31, 2002. The charge includes an impairment
of goodwill of approximately $10.6 million. The remainder of the charge includes
severance and employee-related costs of approximately $2.6 million and asset
impairment charges of approximately $2.3 million related to the shutdown of
Systemcare.
21
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
OVERVIEW (continued)
An investment of approximately $4.6 million in certain license agreements for
supply chain management software was written off in the third quarter of 2001
because the software no longer has a viable business or customer application.
Other charges (recoveries) primarily represent a gain of approximately $2.2
million recorded in the first quarter of 2001 on the sale of the corporate
aircraft offset with charges of approximately $1.6 million in the nine months
ended September 30, 2001 representing impairment of other assets.
During the third quarter of 2000, the Company recorded a pre-tax charge of
approximately $37.3 million. Approximately $33.8 million of the charge
represents an asset write-down resulting from the industry-wide downturn in the
market for new and used "Class 8" vehicles (the largest heavy-duty tractors and
straight trucks) which led to a decrease in the market value of used tractors
during the second half of 2000. The Company's unsold Class 8 inventory consists
of units previously used by customers of the FMS segment. Tractors identified
for accelerated disposal represent revenue earning equipment held for sale that
the Company identified in the third quarter of 2000 as increasingly undesirable
and unmarketable due to lower-powered engines or a potential lack of future
support for parts and service. Impairment of other tractors reflects owned and
leased units for which estimated fair value less costs to sell declined below
carrying value (or termination value, which represents the final payment due to
lessors, in the case of leased units) in the third quarter of 2000.
The third quarter 2000 charge is reduced by a recovery of $570,000 of prior
impairment charges which represents gains on vehicles sold in the U.K. during
the third quarter of 2000, for which an impairment charge had been recorded in
the 1999 restructuring.
During 2000, the Company was involved in litigation with a former customer,
OfficeMax, relating to a logistics services agreement that was terminated in
1997. In October 2000, Ryder agreed to an out-of-court settlement with
OfficeMax, ending this litigation. Approximately $4.1 million representing the
write-off of certain assets related to the OfficeMax contract is included in the
third quarter 2000 charge.
Activity related to restructuring reserves for the nine months ended September
30, 2001 was as follows:
Dec. 31, Sept. 30,
2000 2001
In thousands Balance Additions Deductions Balance
---------------------------------------- ------------- ------------- -------------- -----------------
Employee severance and benefits $ 3,908 26,602 14,033 16,477
Facilities and related costs 2,012 4,041 1,730 4,323
----------- ----------- ------------ ---------------
$ 5,920 30,643 15,763 20,800
=========== =========== ============ ===============
Additions relate to liabilities for employee severance and benefits and lease
obligations on facility closures, all incurred in 2001. Deductions represent
payments made related to restructuring charges. At September 30, 2001, employee
severance and benefits obligations are required to be paid over the next three
years. At September 30, 2001, lease obligations are noncancellable and
contractually required to be paid principally over the next three years.
22
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
OVERVIEW (continued)
The Company's effective income tax rate was a 20.3 percent benefit for the third
quarter of 2001 compared with a 37.0 percent expense for the third quarter of
2000. For the nine months ended September 30, 2001, the Company's effective
income tax rate was 9.2 percent compared with 37.0 percent in the same period
last year. In June 2001, legislation was enacted in Canada that will reduce
future 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, which was recorded in June 2001 as a reduction of the Company's income
tax provision for the nine months ended September 30, 2001 and provided a
one-time reduction of the Company's effective tax rate. The Company believes the
impact of this legislation on its future effective income tax rate will be
nominal as Canadian operations represent approximately 6.6 percent of the
Company's revenue at September 30, 2001. For the three months ended September
30, 2001, the Company's effective tax rate was reduced by certain items included
in restructuring and other charges, principally goodwill, for which the Company
receives no income tax deduction.
23
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
OPERATING RESULTS BY BUSINESS SEGMENT
Three Months Nine Months
--------------------------- ---------------------------
In millions 2001 2000 2001 2000
------------ ------------ ------------ ------------
Fleet Management Solutions
Total revenue $ 843.5 900.3 $2,558.2 2,668.0
Fuel revenue (161.4) (191.4) (519.3) (574.8)
----------- ----------- ------------ ------------
Dry revenue $ 682.1 708.9 $2,038.9 2,093.2
=========== =========== ============ ============
Contribution margin $ 94.6 107.2 $ 257.3 285.7
=========== =========== ============ ============
Contribution margin as % of total revenue 11.2% 11.9% 10.1% 10.7%
=========== =========== ============ ============
Contribution margin as % of dry revenue 13.9% 15.1% 12.6% 13.6%
=========== =========== ============ ============
Supply Chain Solutions
Total revenue $ 345.6 390.8 $1,114.7 1,175.9
Freight under management expense (89.0) (99.2) (296.0) (306.4)
----------- ----------- ------------ ------------
Operating revenue $ 256.6 291.6 $ 818.7 869.5
=========== =========== ============ ============
Contribution margin $ 12.9 15.8 $ 32.1 46.8
=========== =========== ============ ============
Contribution margin as % of total revenue 3.7% 4.0% 2.9% 4.0%
=========== =========== ============ ============
Contribution margin as % of operating revenue 5.0% 5.4% 3.9% 5.4%
=========== =========== ============ ============
Dedicated Contract Carriage
Total revenue $ 135.6 139.6 $ 401.5 411.0
Freight under management expense (1.2) (2.2) (3.9) (4.4)
----------- ----------- ------------ ------------
Operating revenue $ 134.4 137.4 $ 397.6 406.6
=========== =========== ============ ============
Contribution margin $ 15.6 15.3 $ 41.9 44.0
=========== =========== ============ ============
Contribution margin as % of total revenue 11.5% 11.0% 10.4% 10.7%
=========== =========== ============ ============
Contribution margin as % of operating revenue 11.6% 11.1% 10.5% 10.8%
=========== =========== ============ ============
24
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
OPERATING RESULTS BY BUSINESS SEGMENT (continued)
Management evaluates business segment financial performance based upon several
factors, of which the primary measure relied upon is contribution margin.
Contribution margin represents each business segment's revenue, less direct
costs and direct overheads related to the segment's operations. Business segment
contribution margin for all segments (net of eliminations), less CSS expenses
and restructuring and other charges, net, is equal to earnings before income
taxes. CSS are 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 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 contribution margin are accounted for at approximate
fair value as if the transactions were made with independent third parties.
Contribution margin 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 (presented as
"Eliminations"). Equipment contribution included in SCS contribution margin for
the three months ended September 30, 2001 and 2000 was $3.6 million and $4.9
million, respectively, and $12.1 million and $14.8 million for the nine months
ended September 30, 2001 and 2000, respectively. Equipment contribution included
in DCC contribution margin for the three months ended September 30, 2001 and
2000 was $5.4 million and $5.5 million, respectively, and $14.9 million and
$16.4 million for the nine months ended September 30, 2001 and 2000,
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.
Fleet Management Solutions
In the FMS segment, dry revenue (revenue excluding fuel) in the third quarter of
2001 totaled $682.1 million, a decrease of 3.8 percent from the same period in
2000. Dry revenue in the nine months ended September 30, 2001 totaled $2.04
billion, a decrease of 2.6 percent from the same period in 2000. Full service
lease and contract maintenance revenue decreased 1.3 percent in the third
quarter of 2001 due to a decrease in variable full service lease billings
attributable to a reduction in the number of miles driven as a result of the
softening U.S. economy. U.S. lease product line miles decreased approximately
3.5 percent for the quarter ended September 30, 2001 and approximately 2.5
percent for the nine months ended September 30, 2001 compared with the same
periods in 2000. Despite the decrease in miles driven, full service lease and
contract maintenance revenue remained flat for the nine months ended September
30, 2001 due primarily to an increase in revenue per mile and a year-to-date
increase in revenue per unit. The Company anticipates generally flat to slightly
lower full service lease and contract maintenance revenue in the fourth quarter
of 2001 compared with the fourth quarter of 2000 due to negative net sales over
recent periods primarily as a result of the slowing U.S. economy as well as
decreases in variable billings. Net sales takes into consideration new business
with new or existing customers, revenue changes with existing customers due to
replacement vehicles or rate changes, net of full service leases that reach the
end of their term during the reported period.
Rental revenue decreased $12.7 million, or 9.2 percent in the third quarter of
2001 and $38.9 million, or 9.9 percent in the nine months ended September 30,
2001 compared with the same periods in 2000 due primarily to reductions in all
elements of rental revenue (consisting of pure rental, lease extra and await new
lease revenue). Pure rental revenue (total rental revenue less rental revenue
related to units provided to full service lease customers) decreased 4.7 percent
for the three months ended September 30, 2001 compared with the same period in
2000. Pure rental revenue decreased 4.0 percent for the nine months ended
September 30, 2001 compared with the same period in 2000 due to the slowing
economy. 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 $6.4 million, or 18.0
percent, and $17.5 million, or 16.6 percent, in the three and nine
25
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
OPERATING RESULTS BY BUSINESS SEGMENT (continued)
Fleet Management Solutions (continued)
months ended September 30, 2001, respectively, compared with the same periods in
2000. Await new lease revenue represents revenue on rental vehicles provided to
new full service lease customers who have not taken delivery of full service
lease units. In the U.S., await new lease revenue decreased $3.1 million, or
43.1 percent and $13.6 million, or 49.3 percent, in the three and nine months
ended September 30, 2001, respectively, compared with the same periods in 2000.
Such revenue declines were due to lower rental fleet utilization, a decrease in
the number of units in the rental fleet and shorter lead times to place full
service lease vehicles into service compared with 2000.
Rental fleet utilization for the nine months ended September 30, 2001 was 68.2
percent, compared with 71.2 percent for the same period in 2000. Rental fleet
utilization decreased less than rental revenue as a result of the implementation
of planned reductions in the size of the rental fleet. Pure rental revenue,
lease extra, await new lease and rental fleet utilization 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 15.7 percent and 9.7 percent for the three and nine
months ended September 30, 2001, respectively, over the same periods in 2000 due
principally to decreased sales volumes.
Contribution margin as a percentage of dry revenue was 13.9 percent in the third
quarter of 2001 compared margin 15.1 percent in the third quarter of 2000. For
the nine months ended September 30, 2001, contribution margin as a percentage of
dry revenue was 12.6 percent compared with 13.6 percent in the same period of
2000. Decreased contribution margin was primarily attributable to the decrease
in gains from the sale of equipment due to weakened used truck market demand,
lower pension income in 2001 compared with 2000 and decreased rental
contribution margin resulting from the decline in rental revenue.
The Company's fleet of owned and leased revenue earning equipment is summarized
as follows (approximate number of units):
September 30, December 31,
By type: 2001 2000
----------------- -----------------
Trucks 66,800 66,800
Tractors 53,900 56,400
Trailers 47,200 48,500
Other 5,200 4,600
----------------- -----------------
173,100 176,300
================= =================
September 30, December 31,
By business: 2001 2000
----------------- -----------------
Full service lease 128,500 130,700
Commercial rental 41,500 42,200
Service vehicles and other 3,100 3,400
----------------- -----------------
173,100 176,300
================= =================
The totals in each of the tables above include the following non-revenue earning
equipment:
Not yet earning revenue (NYE) 1,400 2,400
No longer earning revenue (NLE) 9,600 8,300
----------------- -----------------
11,000 10,700
================= =================
26
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
OPERATING RESULTS BY BUSINESS SEGMENT (continued)
Fleet Management Solutions (continued)
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, which declined to 5,600 vehicles at
September 30, 2001 from 5,900 vehicles at December 31, 2000, 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.
Supply Chain Solutions
In the SCS business segment, third quarter 2001 gross revenue decreased 11.6
percent to $345.6 million compared with the third quarter of 2000. Gross revenue
for the nine months ended September 30, 2001 decreased 5.2 percent to $1.11
billion compared with the same period in 2000. Third quarter 2001 operating
revenue was $256.6 million, a decrease of 12.0 percent from the comparable
period a year ago. Operating revenue for the nine months ended September 30,
2001 decreased 5.8 percent to $818.7 million compared with the same period of
2000. Revenue reductions are mostly attributed to volume reductions in North
America and Latin America due to the continued worldwide economic slowdown. In
North America, volume reductions were mostly experienced in the Company's
automotive industry due primarily to reduced auto production causing some plants
to shut down and in the electronics and high technology industry due to slowed
consumer business in those sectors combined with lost business. Lost business in
the consumer packaged goods industry also contributed to the revenue decrease
for the nine months ended September 30, 2001 compared with the same period in
2000. Volume decreases in Latin America were due to the slowing economies in
Brazil and Argentina and to the sale of the contracts and related net assets
associated with the outbound auto carriage business of the Company's Brazilian
SCS operations. Additionally, revenue reductions occurred in 2001 due to the
impact of exchange rates on translation of subsidiary revenues, particularly
those in the U.K. and Brazil, as well as due to lost business in the U.K. Such
revenue decreases were partially offset by business expansion in Mexico and
Asia. The Company's Asian subsidiary was acquired at the end of the third
quarter of 2000.
The SCS business segment contribution margin decreased 18.4 percent to $12.9
million in the third quarter of 2001 compared with the third quarter of 2000.
For the nine months ended September 30, 2001, contribution margin decreased 31.4
percent to $32.1 million compared with the same period last year. Contribution
margin as a percentage of operating revenue was 5.0 percent in the third quarter
of 2001, compared with 5.4 percent in the same quarter of 2000. Contribution
margin as a percentage of operating revenue for the nine months ended September
30, 2001 was 3.9 percent compared with 5.4 percent in the same period of 2000.
The decrease in contribution margin was due primarily to the previously
mentioned volume reductions, lost business and increased operating costs,
particularly related to the Company's transportation management operations.
27
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
OPERATING RESULTS BY BUSINESS SEGMENT (continued)
Dedicated Contract Carriage
In the DCC business segment, third quarter gross revenue totaled $135.6 million,
a decrease of 2.9 percent from the third quarter of 2000. Gross revenue for the
nine months ended September 30, 2001 totaled $401.5 million, a decrease of 2.3
percent from the comparable period in 2000. Third quarter operating revenue was
$134.4 million, a decrease of 2.2 percent from the comparable period last year.
For the nine months ended September 30, 2001, operating revenue decreased 2.2
percent to $397.6 million compared with the same period in 2000. The decline in
revenue was due to volume reductions and lost business.
Contribution margin increased 2.0 percent to $15.6 million in the third quarter
of 2001 compared with the third quarter of 2000. Contribution margin for the
nine months ended September 30, 2001 decreased 4.8 percent to $41.9 million
compared with the same period last year. Contribution margin as a percentage of
operating revenue was 11.6 percent in the third quarter of 2001 compared with
11.1 percent in the third quarter of 2000. For the nine months ended September
30, 2001, contribution margin as a percentage of operating revenue was 10.5
percent compared with 10.8 percent in the same period of 2000. The increase in
contribution margin in the third quarter of 2001 was due primarily to a
reduction in operating expense and certain overhead spending categories and
expanded business with certain existing customers. Such increases were partially
offset by the impact of lost business and volume reductions. The decrease in
contribution margin for the nine months ended September 30, 2001 compared with
the same period last year was attributed to continued revenue-related price
pressures due to competition, volume reductions, lost business and increased
labor costs due to driver shortages.
Central Support Services
CSS expenses were as follows:
Three Months Nine Months
----------------- ---------------------
In millions 2001 2000 2001 2000
-------- -------- --------- -----------
Sales and marketing $ 6.3 9.9 $ 21.6 31.4
Human resources 4.9 5.9 15.7 16.3
Finance 13.2 14.3 40.1 40.9
Corporate services/public affairs 2.0 2.6 6.0 8.3
MIS 24.7 24.8 73.9 75.0
Customer solutions 5.4 4.9 14.7 14.5
Health and safety 2.2 2.4 6.8 7.0
Other 8.5 6.5 21.5 16.8
-------- -------- --------- -----------
Total Central Support Services $ 67.2 71.3 $ 200.3 210.2
======== ======== ========= ===========
The decrease in total CSS expense was due primarily to spending reductions in
sales and marketing, MIS expense and corporate services as a result of the
Company's expense reduction initiatives. Such initiatives in these areas
included ending the Company's sponsorship of the Doral Ryder Open, reducing the
spending rate for new technology projects and the sale of the Company's
corporate jet, respectively. Other CSS expense increased as a result of
increased net unrealized losses compared with increased net unrealized gains
during 2000 on investments used to fund certain benefit plans that are
considered to be trading securities under SFAS No. 115.
28
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
OPERATING RESULTS BY BUSINESS SEGMENT (continued)
Central Support Services (continued)
Currently, contribution margin is the measure of segment financial performance
that is primarily relied upon by management. In the second quarter of 2001, the
Company began a project to allocate CSS expenses to each business segment, as
appropriate. The objective of the project is to provide management more 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 expenses. This
new measure of segment profitability, "contribution margin after allocated CSS,"
is still under refinement by the Company and is being reported to the Company's
chief operating decision-maker periodically. As such, during the refinement
period, which is expected to last until year-end 2001, the Company has decided
to provide contribution margin after allocated CSS by business segment as
additional information. Beginning in 2002, the Company intends to complete its
refinement of the allocation methodology and will utilize contribution margin
after allocated CSS as its primary 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. The remaining
CSS costs 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.
. Other - where allocated, the allocation is based on the number of personnel
supported.
The following table sets forth contribution margin for each of the Company's
business segments after CSS allocation for the three and nine months ended
September 30, 2001 and 2000:
In millions Three Months Nine Months
---------------------- ---------------------
Contribution margin after allocated CSS: 2001 2000 2001 2000
----------- --------- ---------- ---------
Fleet Management Solutions $ 56.0 65.8 $ 142.0 161.9
Supply Chain Solutions (3.0) (0.2) (15.4) 0.2
Dedicated Contract Carriage 10.1 9.1 25.3 25.4
Eliminations (8.9) (10.5) (27.0) (31.3)
----------- -------- ---------- --------
54.2 64.2 124.9 156.2
Central Support Services (unallocated) (7.3) (7.6) (20.9) (21.1)
----------- -------- ---------- --------
Earnings before restructuring and other
Charges and income taxes 46.9 56.6 104.0 135.1
Restructuring and other charges, net (53.8) (37.3) (83.7) (37.3)
---------- ------- ----------- --------
Earnings (loss) before income taxes $ (6.9) 19.3 $ 20.3 97.8
========== ======= ========== ========
29
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
IMPACT OF SEPTEMBER 11 EVENTS
The financial impact on the Company of the September 11, 2001 terrorist attacks
on the United States (the September 11 events) cannot be quantified or measured
objectively. The September 11 events did not result in any damage to Company
property or loss of employees. Prior to the September 11 events, as discussed
elsewhere in this document, the Company was already experiencing reductions in
business volumes from customers in all segments of the business due to the
general slowdown in the global economy, and in particular, the United States'
economy. Additionally, since certain accounting activities take place on a
weekly or monthly basis, it is difficult in some cases to separate pre-September
11, 2001 financial activity from that occurring after the events. Thus, it is
difficult to separate the impact of the September 11 events from the overall
trends in the economy and the Company's business segments. The discussion below
was compiled from business and financial statistics and various internal
communications subsequent to the September 11 events. It is largely qualitative
and somewhat subjective, should be treated accordingly, and considered in
conjunction with the discussion of operating performance by business segment
included elsewhere in this document.
In FMS, the most immediate, quantifiable impact was noted at the Company's used
vehicle sales centers, which experienced a significant decrease in sales
activity in the week following the September 11 events. Through the remainder of
September, used vehicle sales volumes slowly returned to more normalized levels.
However, the impact on total units sold in September was significant, as
approximately 800 units were sold, compared with over 1,100 in August 2001. FMS
also experienced volume-driven decreases of over 10 percent in fuel and rental
revenue in September compared to September 2000. However, it is difficult to
separate the overall economic trend from the impact of the September 11 events
on fuel and rental. The FMS business segment donated a number of vehicles to the
Federal Emergency Management Agency and the American Red Cross for their use in
their relief efforts in New York and Washington, D.C.
DCC operations experienced some delays in transportation of goods from Canada to
the United States immediately after the September 11 events due to delays at the
Canada - United States border. Reduced DCC volumes are difficult to correlate to
the September 11 events. The Company does not provide DCC services related to
the delivery of mail in the United States, and was not impacted by additional
over-the-road mail volume (due to lack of air service) that was widely reported
in the days after September 11, 2001.
In SCS, the impact of the September 11 events was mixed, and was largely
industry- and customer-specific. SCS automotive customers experienced temporary
assembly line delays and shutdowns as transportation delays related to border
crossings (see DCC above) and reduced air travel created temporary shortages of
assembly parts. However, certain SCS electronics, hi-tech and telecom customers
experienced an increase in business after September 11, 2001 as they responded
to orders for equipment to replace equipment destroyed in the attacks on the
World Trade Center and the Pentagon.
Financial and money markets in the United States were disrupted for several
weeks after the September 11 events. However, the Company was able to renew
$75.0 million in the commercial paper market in the week after September 11 and
did not experience any disruption in its normal financing activities.
30
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
IMPACT OF SEPTEMBER 11 EVENTS (continued)
The near- to medium-term impact of the September 11 events and the current
United States response on the Company's businesses and the economy is difficult
to predict. The Company believes that its diversified portfolio of customers
across a full array of transportation and logistics solutions and across many
industries will help to mitigate the impact of adverse downturns in specific
sectors of the economy in the near- to medium-term. The Company's portfolio of
full service lease and commercial rental customers is not concentrated in any
one particular industry or geographic region, with the largest concentration
being in non-cyclical industries such as food, groceries and beverages. While
the Company derives a significant portion of its SCS revenue (over 40 percent
for the nine months ended September 30, 2001) and DCC revenue from the
automotive industry, the business is derived from numerous manufacturers and
suppliers of original equipment parts, none of which constitute more than 10
percent of the Company's total revenue. Additionally, as discussed elsewhere in
this document, the Company has access to substantial liquidity and capital
resources to fund its operations.
While the Company believes it will experience some business volume decreases or
losses of certain customers as a result of the September 11 events and the
current economic downturn, the Company believes that lost business with any
individual customer as a result of the September 11 events will not have a
material adverse effect on the Company in the near term.
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 nine months ended September 30, (in thousands):
2001 2000
---- ----
Net cash provided by (used in):
Operating activities $ 186,200 654,773
Financing activities (243,490) (251,387)
Investing activities 67,066 (404,701)
--------- ---------
Net cash flows $ 9,776 (1,315)
========= =========
A summary of the individual items contributing to the cash flow changes is
included in the Consolidated Condensed Statements of Cash Flows.
The decrease in cash flow from operating activities in the nine months ended
September 30, 2001 compared with the same period in 2000, was primarily
attributable to decreases in the aggregate balance of trade receivables sold. As
a result of the decrease in the aggregate balance of trade receivables sold, the
Company's accounts receivable balance increased 46.3 percent to $584.7 million
at September 30, 2001 compared with December 31, 2000. Cash used in financing
activities in the nine months ended September 30, 2001, compared with the same
period in 2000, slightly decreased as the Company's increased net borrowings
were almost offset by decreased use of its commercial paper program due
primarily to interest rate decreases in the Company's other funding facilities
at the end of the third quarter compared with the Company's commercial paper
program. The increase in cash provided by investing activities in the nine
months ended September 30, 2001 compared with the same period in 2000, was
attributable to lower capital expenditures in 2001. Higher proceeds provided
from the sale-leaseback of revenue earning equipment in 2001 (see Debt and Other
Financing note in the Notes to Consolidated Condensed Financial Statements
included in this Form 10-Q) were offset by decreased proceeds from the sales of
property and revenue earning equipment primarily due to continued weak demand in
the used truck market.
31
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
Cash Flows (continued)
A summary of capital expenditures for the nine months ended September 30 follows
(in thousands):
2001 2000
---- ----
Revenue earning equipment $ 480,727 970,018
Operating property and equipment 61,203 69,451
---------- ----------
$ 541,930 1,039,469
========== ==========
The decrease in capital expenditures was principally due to reduced demand for
new units as well as increased pricing discipline over new business, which has
resulted in fewer sales but improved margins on business sold. Additionally, the
Company has worked to improve controls over capital expenditures and reduce the
volume of early terminations of full service leases compared with 2000. In
contrast to 2000, the Company is pursuing a strategy of extending certain full
service leases rather than leasing new units. This allows the Company to further
control capital expenditures while frequently providing customers with vehicles
at favorable pre-owned rates compared with rates on new units. As a result of
these factors and initiatives, management now expects that capital expenditures
for the full year 2001 will be less than $700 million. The Company expects to
fund its remaining 2001 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, asset-backed securities, bank term loans and operating leases, as
well as variable-rate financing available through bank credit facilities,
commercial paper and receivable conduits. The Company also periodically enters
into sale-leaseback agreements on revenue earning equipment, which are accounted
for as operating leases.
The Company's debt ratings as of September 30, 2001 were as follows:
Commercial Unsecured
Paper Notes
------------- ------------
Moody's Investors Service P2 Baa1
Standard & Poor's Ratings Group A2 BBB
Fitch F2 BBB+
Total debt was $1.78 billion at September 30, 2001, a decrease of 11.7 percent
from December 31, 2000. During the nine months ended September 30, 2001, the
Company issued $40.0 million and retired $159.0 million of medium-term notes. In
addition, in October 2001, the Company issued an additional $110.0 million in
medium-term notes. During the nine months ended September 30, 2001, the Company
retired $100.0 million of debentures. U.S. commercial paper outstanding at
September 30, 2001 decreased to $380.4 million, compared with $441.1 million at
December 31, 2000, due primarily to interest rate decreases in the Company's
other short-term funding facilities at the end of the third quarter compared
with the Company's commercial paper program.
The Company's foreign debt decreased approximately $30.0 million from December
31, 2000 to $354.7 million at September 30, 2001. The Company's percentage of
variable-rate financing obligations was 35.3 percent at September 30, 2001
compared with 31.8 percent at December 31, 2000. The Company's debt-to-equity
ratio at September 30, 2001 decreased to 143.6 percent from 161.0 percent at
December 31, 2000.
32
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
Financing and Other Funding Transactions (continued)
The Company participates in an agreement, as amended from time to time, to sell,
with limited recourse, up to $375.0 million of trade receivables on a revolving
basis through July 2004. At September 30, 2001 and December 31, 2000, the
outstanding balance of receivables sold pursuant to this agreement was $125.0
million and $345.0 million, respectively. The decrease in trade receivables sold
since December 31, 2000 is due to a reduced need for cash as a result of the
sale-leaseback transaction completed in the first quarter as well as increased
use of the Company's other funding facilities.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which
addresses financial accounting and reporting for the impairment and disposal of
long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
with the exception of impairment and disposal issues related to goodwill and
other intangible assets that are not amortized. SFAS No. 144 also supersedes the
accounting and reporting provisions of Accounting Principles Board (APB) Opinion
No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions."
SFAS No. 144 retains many of the fundamental recognition and measurement
provisions of SFAS No. 121. SFAS No. 144 also retains the requirement in APB No.
30 to separately identify and report discontinued operations. Such requirement
extends APB No. 30 reporting requirements for discontinued operations to a
component of an entity that has either been disposed of or is classified as held
for sale.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001,
and will be adopted by the Company effective January 1, 2002. The Company is
currently evaluating the potential impact, if any, the adoption of SFAS No. 144
will have on its results of operations, cash flows or finanical position. SFAS
No. 144 will result in reporting of amounts related to components of the Company
that are disposed of or held for sale in discontinued operations that previously
could not be classified as discontinued operations since they did not meet the
definition of a segment under APB No. 30.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," SFAS No.
142, "Goodwill and Other Intangible Assets," and SFAS No. 143, "Accounting for
Asset Retirement Obligations."
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001 as well as all purchase
method business combinations completed after June 30, 2001. SFAS No. 141 also
specifies criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill. The
Company is required to adopt the provisions of SFAS No. 141 immediately.
SFAS No. 142 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. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
The Company is required to adopt the provisions of SFAS No. 142 effective
January 1, 2002. Any goodwill and any intangible assets determined to have an
indefinite useful life that are acquired in a purchase business combination
completed during the second half of 2001 will not be amortized, but will
continue to be evaluated for impairment in accordance with the appropriate
accounting literature prior to the issuance of SFAS No. 142. Goodwill and
intangible assets acquired in business combinations completed before July 1,
2001 will continue to be amortized prior to the adoption of SFAS No. 142.
33
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
RECENT ACCOUNTING PRONOUNCEMENTS (continued)
Upon adoption of SFAS No. 142, the Company is first required to evaluate its
existing intangible assets and goodwill that were acquired in prior purchase
business combinations and make any necessary reclassifications in order to
conform with the new criteria in SFAS No. 141 for recognition apart from
goodwill. The Company then will be required to reassess the useful lives and
residual values of all intangible assets acquired in purchase business
combinations, including those reclassified from goodwill, and make any necessary
amortization period adjustments by the end of the first interim period after
adoption. To the extent an intangible asset is identified as having an
indefinite useful life, SFAS No. 142 requires the Company to test the intangible
asset for impairment consistent with the provisions of SFAS No. 142 within the
first interim period. Any impairment loss will be measured as of the date of the
adoption and recognized as the cumulative effect of a change in accounting
principle in the first interim period.
After identifying and assessing intangible assets as discussed above, SFAS No.
142 requires 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. To accomplish
this, the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of
January 1, 2002. The first step of the transitional impairment test requires the
Company, within the first six months of 2002, to determine the fair value of
each reporting unit and compare it to the reporting unit's carrying amount. 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. 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, to its carrying amount, both of which
would be measured as of January 1, 2002. This second step is required to be
completed as soon as possible, but no later than December 31, 2002. Any
transitional impairment loss will be recognized as a cumulative effect of a
change in accounting principle in the Company's Consolidated Statements of
Earnings.
At September 30, 2001, intangible assets and deferred charges included goodwill
and intangible assets of $193.9 million subject to SFAS No. 141 and SFAS No.
142. Amortization expense related to goodwill and intangible assets was $3.3
million and $10.3 million for the three and nine months ended September 30,
2001, respectively. The Company is currently assessing the impact of the
adoption of SFAS No. 141 and SFAS No. 142. However, it is not practicable to
reasonably estimate the impact of adopting these statements on the Company's
financial statements at the date of this report, including whether any
transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.
SFAS No. 143 requires entities to record the fair value of a liability for an
asset retirement obligation in the period in which it is incurred. 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.
34
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
RECENT ACCOUNTING PRONOUNCEMENTS (continued)
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
replaces SFAS No. 125. SFAS No. 140 provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. SFAS No. 140 is effective for transfers and servicing of
financial assets and extinguishments of liabilities (the "Transfer" provisions)
occurring after March 31, 2001, and is effective for recognition and
reclassification of collateral and for disclosures relating to sale-leaseback
transactions and collateral (the "Disclosure" provisions) for fiscal years
ending after December 15, 2000. The Company adopted the Disclosure provisions of
SFAS No. 140 as discussed in the 2000 Annual Report and adopted the Transfer
provisions for transactions subsequent to March 31, 2001. Adoption of this
statement did not have a material impact on the Company's financial position and
did not impact cash flows or results of operations.
In September 2001, the FASB issued Emerging Issues Task Force Statement (EITF)
Issue No. 01-10, "Accounting for the Impact of the Terrorist Attacks of
September 11, 2001." Due to the interruptions in business activity for many
entities which disrupted the U.S. economy at many levels in the aftermath of the
tragedy, the Task Force provided guidance in capturing data related to the
effects of the September 11 events and in communicating such data to investors.
EITF No. 01-10 states that at minimum, all entities should disclose in the
footnotes to the financial statements in all periods affected by the September
11 events a description of the nature and amounts of losses recognized as a
result of the events, the amount of related insurance recoveries (if any)
recognized and a description of contingencies that have not yet been recognized
in the financial statements, but that are reasonably expected to impact the
entity's financial statements in the near term. The impact of the September 11
events is discussed above.
35
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
FORWARD-LOOKING STATEMENTS
This management's discussion and analysis of results of operations and financial
condition 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
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.
36
ITEM 3. Quantitative and Qualitative Disclosure 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.
The Company's quantitative and qualitative disclosures about market risk for
changes in interest rates and foreign exchange rates have not materially changed
since December 31, 2000. The Company's disclosures about market risk are
contained in the Annual Report on Form 10-K for the year ended December 31,
2000. No interest rate swap or cap agreements or foreign currency option
contracts or forward agreements were outstanding at September 30, 2001 or
December 31, 2000.
37
ITEM 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
(3.1) The Ryder System, Inc. Restated Articles of Incorporation,
dated November 8, 1985, as amended through May 18, 1990,
previously filed with the Commission as an exhibit to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1990, are incorporated by reference into this
report.
(3.2) The Ryder System, Inc. By-Laws, as amended through February
16, 2001, previously filed with the Commission as an
exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 2000, are incorporated by reference
into this report.
(10.4(f)) The Ryder System, Inc. 1995 Stock Incentive Plan, as
amended and restated at May 4, 2001.
(10.5(c)) The Ryder System, Inc. Directors Stock Plan, as amended and
restated through May 4, 2001.
(15) Letter regarding unaudited interim financial statements.
(b) Reports on Form 8-K
On September 26, 2001, the Company furnished information under Item 9.
Regulation FD Disclosure in a report on Form 8-K.
The 8-K provides answers to questions that were submitted by analysts
and investors subsequent to the Company's July 25, 2001 earnings
conference call. Additionally, on September 24, 2001, the Company
announced a third quarter restructuring charge and reaffirmed earnings
guidance for the third quarter of 2001 (which is included therein).
38
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: November 8, 2001 /S/ CORLISS J. NELSON
-------------------------------
Corliss J. Nelson
Senior Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: November 8, 2001 /S/ KATHLEEN S. PARTRIDGE
------------------------------
Kathleen S. Partridge
Senior Vice President and Controller
(Principal Accounting Officer)
39
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
(3.1) The Ryder System, Inc. Restated Articles of Incorporation, dated
November 8, 1985, as amended through May 18, 1990, previously filed
with the Commission as an exhibit to the Company's Annual Report on
Form 10-K for the year ended December 31, 1990, are incorporated by
reference into this report.
(3.2) The Ryder System, Inc. By-Laws, as amended through February 16,
2001, previously filed with the Commission as an exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31,
2000, are incorporated by reference into this report.
(10.4(f)) The Ryder System, Inc. 1995 Stock Incentive Plan, as amended and
restated at May 4, 2001.
(10.5(c)) The Ryder System, Inc. Directors Stock Plan, as amended and restated
through May 4, 2001.
(15) Letter regarding unaudited interim financial statements.
40