SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 number 1-4364
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 | |
| OR | ||
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO | |
| Commission file number 1-4364 |
RYDER SYSTEM, INC.
(Exact
(Exact name of registrant as specified in its charter)
FLORIDA 59-0739250
- ------------------------------------------ --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3600 N.W. 82 AVENUE, MIAMI, FLORIDA 33166 (305) 500-3726
- ------------------------------------------ --------------------
(Address of principal executive (Telephone number
offices including zip code) including area code)
| FLORIDA | 59-0739250 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 3600 N.W. 82 AVENUE, MIAMI, FLORIDA 33166 | (305) 500-3726 | |
| (Address of principal executive offices including zip code) | (Telephone number including area code) |
Indicate by check mark whether the registrant (l) 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]x NO [ ]
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: [ ]
o
Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). YES x NO o
The aggregate market value of the voting and non-voting stockcommon equity held by non-affiliates of the registrant computed by reference to the price at which the stockcommon equity was sold as of January 31,June 30, 2002 was $1,504,389,326.$1,677,366,804. The number of shares of Ryder System, Inc. Common Stock ($.500.50 par value) outstanding as of January 31, 2002,2003 was 60,853,247.
DOCUMENTS INCORPORATED BY PART OF FORM 10-K INTO WHICH
REFERENCE INTO THIS REPORT DOCUMENT IS INCORPORATED
Ryder System, Inc. 2002 Proxy Part III
Statement
- -------------------------------------------------------------------------------
[Cover62,512,753.
| DOCUMENTS INCORPORATED BY REFERENCE INTO THIS REPORT | PART OF FORM 10-K INTO WHICH DOCUMENT IS INCORPORATED | |||
| Ryder System, Inc. 2003 Proxy Statement | Part III |
[Cover page 1 of 32 pages]
1
SECURITIES REGISTERED PURSUANT TO SECTION 12(B)12(b) OF THE ACT:
TITLE OF EACH CLASS OF SECURITIES EXCHANGE ON WHICH REGISTERED
- --------------------------------- ----------------------------
Ryder System, Inc. Common Stock New York Stock Exchange
($.50 par value) and Preferred Pacific Stock Exchange
Share Purchase Rights Chicago Stock Exchange
(the Rights are not currently Berlin Stock Exchange
exercisable, transferable or
exchangeable apart from the
Common Stock)
Ryder System, Inc. 9% Series G Bonds, New York Stock Exchange
due May 15, 2016
Ryder System, Inc. 9 7/8% Series K Bonds, New York Stock Exchange
due May 15, 2017
Ryder System, Inc. 6 1/2% Series O Notes, None
due May 15, 2005
Ryder System, Inc. 6.60% Series P Notes, None
due November 15, 2005
Ryder System, Inc. Medium-Term Notes, None
Series 7, due from 9 months to
30 years from date of issue at
rate based on market rates at time of issuance
Ryder System, Inc. Medium-Term Notes, None
Series 12, due 9 months or more from date
of issue at rate based on market rates
at time of issuance
[Cover page 2 of 3 pages]
2
Ryder System, Inc. Medium-Term Notes, None
Series 13, due 9 months or more from date
of issue at rate based on market rates
at time of issuance
Ryder System, Inc. Medium-Term Notes, None
Series 14, due 9 months or more from date
of issue at rate based on market rates
at time of issuance
Ryder System, Inc. Medium-Term Notes, None
Series 15, due 9 months or more from date
of issue at rate based on market rates
at time of issuance
Ryder System, Inc. Medium-Term Notes, None
Series 16, due 9 months or more from date
of issue at rate based on market rates
at time of issuance
| TITLE OF EACH CLASS OF SECURITIES | EXCHANGE ON WHICH REGISTERED | |
| Ryder System, Inc. Common Stock ($.50 par value) and Preferred Share Purchase Rights (the Rights are not currently exercisable, transferable or exchangeable apart from the Common Stock) | New York Stock Exchange Pacific Stock Exchange Chicago Stock Exchange Berlin Stock Exchange | |
| Ryder System, Inc. 9% Series G Bonds, due May 15, 2016 | New York Stock Exchange | |
| Ryder System, Inc. 9 7/8% Series K Bonds, due May 15, 2017 | New York Stock Exchange |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
[Cover
| None |
[Cover page 32 of 32 pages]
3
RYDER SYSTEM, INC.
Form 10-K Annual Report
TABLE OF CONTENTS
| PAGE NO. | ||||
| PART I | ||||
| ITEM 1 | Business | 4 | ||
| ITEM 2 | Properties | 10 | ||
| ITEM 3 | Legal | 10 | ||
| ITEM 4 | Submission of Matters to a Vote of Security | 10 | ||
| PART II | ||||
| ITEM 5 | Market for | 11 | ||
| ITEM 6 | Selected Financial | 12 | ||
| ITEM 7 | Management’s Discussion and Analysis of Financial Condition and Results of | 13 | ||
| ITEM 7A | Quantitative and Qualitative Disclosures About Market | 40 | ||
| ITEM 8 | Financial Statements and Supplementary | 40 | ||
| ITEM 9 | Changes in and Disagreements with | 82 | ||
| PART III | ||||
| ITEM 10 | Directors and Executive Officers of the | 82 | ||
| ITEM 11 | Executive | 82 | ||
| ITEM 12 | Security Ownership of Certain Beneficial Owners and | 82 | ||
| ITEM 13 | Certain Relationships and Related | 83 | ||
| ITEM 14 | Controls and Procedures | 83 | ||
| PART IV | ||||
| ITEM | Exhibits, Financial Statement Schedules, and Reports on Form | 84 | ||
| Exhibit Index | 85 | |||
| SIGNATURES | 89 | |||
| CERTIFICATIONS | 91 | |||
3
PART I
ITEM 1. BUSINESS
GENERAL
Ryder System, Inc. (the "Company"“Company”) was incorporated in Florida in 1955. 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 U.K.; (2) Supply Chain Solutions (SCS), which provides comprehensive supply chain consulting and lead logistics management solutions that support customers'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. As of December 31, 2001,2002, the Company and its subsidiaries had a fleet of 170,100approximately 161,400 vehicles and 29,50027,800 employees./(1)/
On September 13, 1999, the Company sold its public transportation services
business (RPTS). The disposal of this business has been accounted for as
discontinued operations and, accordingly, its operating results and cash flows
are segregated and reported as discontinued operations in the Company's
consolidated financial statements.
Financial information about business segments is included in Item 8 on pages 7075 through 7379 of this report.
FLEET MANAGEMENT SOLUTIONS
The FMS business segment provides full service truck leasing to over 13,80013,300 customers globallyprincipally in the U.S., Canada and the United Kingdom, ranging from large national enterprises to small companies, with a fleet of 126,900120,900 vehicles. Under a full service lease, the Company provides customers with vehicles, maintenance, supplies and related equipment necessary for operation, while the customers furnish and supervise their own drivers, and dispatch and exercise control over the vehicles. Additionally, the Company provides contract maintenance to service customer vehicles under maintenance contracts and provides short-term truck rental, which tends to be seasonal, to commercial customers to supplement their fleets during peak business periods. The Company also provides additional services for customers, including fleet management, freight management and insurance programs. A fleet of 40,20037,600 vehicles, ranging from heavy-duty tractors and trailers to light-duty trucks, is available for commercial short-term rental. In 2001,2002, the FMS business segment focusedcontinued its focus on increased pricing discipline overon new business, which has resulted in fewer sales but improved margins on business sold. The Company also provides additional services for
customers, including fleetAlso in 2002, the FMS business segment focused on executing cost management freight managementinitiatives, improving commercial rental utilization, increasing used truck sales activity, re-deploying used equipment, and insurance
programs.
term-extending maturing lease contracts, which has contributed to the improved operating performance.
SUPPLY CHAIN SOLUTIONS
The SCS business segment provides global integrated logistics support of customers'customers’ entire supply chains, from in-boundinbound raw materials supply through finished goods distribution, the management of carriers, and inventory deployment, and overall supply chain design and management. Services include varying combinations of logistics system and information technology design, the provision of vehicles and equipment (including maintenance and drivers), warehouse management (including cross docking and flow-through distribution), transportation management, vehicle dispatch, and in-boundinbound and out-boundoutbound just-in-time delivery. Supply chain solutions includes procurement and management of all modes of transportation, shuttles, interstate long-haul operations, just-in-time service to assembly plants and factory-to-warehouse-to-
retailfactory-to-warehouse-to-retail facility service. These services are used in major industry sectors
- ----------
/(1)/ This number does include drivers obtained by certain subsidiaries of the
Company under driver leasing agreements.
5
industries, along with other industries
and the federal sector.industries. Part of Ryder'sthe Company’s strategy is to take advantage of, and build upon, the expertise, market knowledge and infrastructure of strategic alliance and joint venture partners to complement its own expertise in providing supply chain solutions to businesses involved in the over-the-road transportation of goods and to those who move goods around the world using any mode of transportation.
4
In 2001,2002, SCS continuedincreased its emphasis on pricing discipline and operational performance while it implemented profit improvement initiatives. The SCS business segment continues to expandbe focused on its global account management program and expanding its global presence in the logistics market through
internal growth, increased emphasis on global account management and initiation
of strategic alliances while exiting from poorly performing customer contracts.
market.
DEDICATED CONTRACT CARRIAGE
The DCC business segment combines the equipment, maintenance and administrative services of a full service lease with additional services in order to provide a customer with a dedicated transportation solution. Such additional services include driver hiring and training, routing and scheduling, fleet sizing, safety, regulatory compliance, risk management, and other technical support. This business uses a consultative approach to examine and assess the optimal approach to moving the products within a customer’s business, from raw material procurement to finished goods distribution. Ryder has sought to expand its DCC operations in 2001
through internal growth.
growth from existing customers.
DISPOSITION OF REVENUE EARNING EQUIPMENT
The Company'sCompany’s FMS segment has historically disposed of used revenue earning equipment at prices in excess of book value. However, duringDuring 2000, an industry-wide downturn in the market for new and used tractors and trucks, particularly "Class 8 "“Class 8” vehicles (the largest heavy-duty tractors and straight
trucks)tractors), combined with higher average book values per unit, led to the Company
recording reduced gains on the sale of revenue earning equipment. During 2001 and 2002, demand for new and used tractors and trucks, particularly classClass 8 vehicles, continued to be depressed. The Company has reduced the residual values of its
fleetcertain vehicles and increased depreciation and rent expense to account for the reduction in anticipated sales proceeds and gains on certain used vehicles for the
foreseeable future.vehicles.
Gains on the sale of revenue earning equipment were approximately 45 percent, 5 percent and 126 percent of earnings from continuing operations before interest, taxes, restructuring and unusual itemsother charges and cumulative effect of change in accounting principle in 2002, 2001 2000 and 1999,2000, respectively. The extent to which gains will be realized on future disposal of revenue earning equipment is dependent upon various factors including the general state of the used vehicle market, the age and condition of vehicles at the time of their disposal and depreciation methods with respect to vehicles.
COMPETITION
As an alternative to using the Company'sCompany’s services, customers may choose to provide these services for themselves, or may choose to obtain similar or alternative services from other third-party vendors.
The FMS and DCC business segments compete with companies providing similar services on a national, regional and local level. Regional and local competitors may sometimes provide services on a national level through their participation in various cooperative programs and through their membership in various industry
associations.programs. Competitive factors include price, equipment, maintenance, service and geographical coverage and, with respect to DCC, driver and operations expertise. Ryder competes with other finance lessors and also competes, to an extent, and particularly in the U.K., with a number of truck and trailer manufacturers who provide truck and trailer leasing, extended warranty maintenance, rental and other transportation services. Value-added differentiation of the full service truck leasing, truck rental, contract and non-contract truck maintenance service and DCC offerings has been, and will continue to be, Ryder'sRyder’s emphasis.
In the SCS business segment, Ryder competes with companies providing similar services on an international, national, regional and local level. Additionally, this business is subject to potential competition in most of the regions it serves from air cargo, shipping, railroads, motor carriers and other companies that are expanding logistics services such as freight forwarders, contract manufacturers and integrators. Competitive factors include price, service, equipment, maintenance, geographical coverage, market knowledge, expertise in logistics-related technology, and overall performance (e.g., timeliness, accuracy and flexibility). Value-added differentiation of these service offerings across the full global supply chain will continue to be Ryder'sRyder’s overriding strategy.
6
OTHER DEVELOPMENTS AND FURTHER INFORMATION
Many federal, state and local laws designed to protect the environment, and
similar laws in some foreign jurisdictions, have varying degrees
EMPLOYEES
As of impact on
the wayDecember 31, 2002, the Company had approximately 27,800 full-time employees worldwide, of which 22,400 were employed in North America, 1,800 in South America and its subsidiaries conductMexico, 3,200 in Europe and 400 in Asia. The Company has approximately 17,200 hourly employees in the United States, approximately 3,600 of which are organized by labor unions. These employees are principally represented by the International Brotherhood of Teamsters, the International Association of Machinists and Aerospace Workers and the United Auto Workers,
5
and their business operations,
primarily with regard to their use, storagewages and disposalbenefits are governed by approximately 100 labor agreements that are renegotiated periodically. None of petroleum products
and various wastes associated with vehicle maintenance and operating activities.
Based on information presently available, management believes that the ultimate
disposition of such matters, although potentially material tobusinesses in which the Company's
results of operations in any one year, will notCompany currently engages have experienced a material adverse affect
on the Company's financial conditionwork stoppage, slowdown or liquidity.
For further discussion concerning the business ofstrike and the Company andconsiders its subsidiaries, see the information included in Items 7 and 8 of this report.
relationship with its employees to be good.
EXECUTIVE OFFICERS OF THE REGISTRANT
All of the executive officers of the Company were elected or re-elected to their present offices either at or subsequent to the meeting of the Board of Directors held on May 4, 20013, 2002 in conjunction with the Company's 2001Company’s 2002 Annual Meeting on the
same date.Meetings. They all hold such offices, at the discretion of the Board of Directors, until their removal, replacement or retirement.
| NAME | AGE | POSITION | ||||
| Gregory T. Swienton | 53 | Chairman, | ||||
| Corliss J. Nelson | 58 | Senior Executive Vice President and | ||||
| Bobby J. Griffin | 54 | Executive Vice President, | ||||
| Tracy A. Leinbach | 43 | Executive Vice President, Fleet Management Solutions | ||||
| Challis M. Lowe | 57 | Executive Vice President, Human Resources, Public Affairs and Corporate Communications | ||||
| Vicki A. | 45 | Executive Vice President, General Counsel and Secretary | ||||
| Anthony G. Tegnelia | 57 | Executive Vice President, U.S. Supply Chain Solutions | ||||
| Kathleen S. Partridge | 48 | Senior Vice President, Business and Accounting Services | ||||
| Robert E. Sanchez | 37 | Senior Vice President and Chief | ||||
| Art A. Garcia | 41 | Vice President | ||||
Gregory T. Swienton has been Chairman of the Board since May 19852002, President since June 1999 and a director
since December 1979. He also served as the Company's Chief Executive Officer from January 1983 untilsince November 20002000. Before joining Ryder, Mr. Swienton was Senior Vice President of Growth Initiatives of Burlington Northern Santa Fe Corporation (BNSF) and before that Mr. Swienton was BNSF’s Senior Vice President, from December 1979 until
June 1999.
Art A. GarciaCoal and Agricultural Commodities Business Unit.
Corliss J. Nelson has been Senior Executive Vice President and Controller since February 2002.
Previously, Mr. Garcia served as Group Director - Accounting Services from
September 2000 to February 2002 and from April 2000 to June 2000. Mr. Garcia was
Chief Financial Officer since April 1999. Previously, Mr. Nelson was President of Blue DotKoch Capital Services and was a Vice President of Koch Industries, Inc., a national providerdiversified energy company engaged in a broad range of heating and air conditioning services, from June 2000 to September 2000. Mr.
Garcia served as Director - Corporate Accounting for Ryder from April 1998 to
April 2000. Mr. Garcia joined Ryder in December 1997 as Senior Manager -
Corporate Accounting. Prior to joining Ryder, Mr. Garcia held various positions
in the audit services practice of Coopers and Lybrand LLP from 1984 to December
1997.
7
Bobby J. Griffin has been Executive Vice President, International Supply Chain Solutions since January 2003. Previously, Mr. Griffin served as Executive Vice President, Global Supply Chain Operations since March 2001. Prior to this appointment, Mr. Griffin was Senior Vice President, Field Management West from January 2000 to March 2001. Mr. Griffin was Vice President, Operations of Ryder Transportation Services from 1997 to December 1999. Mr. Griffin also served Ryder as Vice President and General Manager of ATE Management and Service Company, Inc. and of Managed Logistics Systems, Inc. operating units of the former Ryder Public Transportation Services, positions he held from 1993 to 1997. Mr. Griffin was Executive Vice President, Western Operations of Ryder/ATE from 1987 to 1993. He joined Ryder as Executive Vice President, Consulting of ATE in 1986 after Ryder acquired ATE Management and Service Company.
Tracy A. Leinbach has been Executive Vice President, Fleet Management Solutions since March 2001. Ms. Leinbach served as Senior Vice President, Sales and Marketing from September 2000 to March 2001, and she was Senior Vice President Field Management from July 2000 to September 2000. Ms. Leinbach also served as Managing Director-Europe of Ryder Transportation Services from January 1999 to July 2000 and previously she had served
6
Ryder Transportation Services as Senior Vice President and Chief Financial Officer from 1998 to January 1999, Senior Vice President, Business Services from 1997 to 1998, and Senior Vice President, Purchasing and Asset Management for six months during 1996. From 1985 to 1996, Ms. Leinbach held various financial positions in Ryder subsidiaries.
Challis M. Lowe has served as Executive Vice President, Human Resources, Public Affairs and Corporate Communications since November 2000. Ms. Lowe joined the Company as EVP of Human Resources in May of 2000. Before joining Ryder, Ms. Lowe was a consultant to the merger of Beneficial Management Corp. with Household Finance from 1998 to 1999. From 1997 to 1998 Ms. Lowe was Executive Vice President, Human Resources and Administrative Services at Beneficial Management Corp., a financial services company, from 1997
to 1998.company. Previously, she was Executive Vice President at Heller International, a financial services company, from 1993 to 1997 where she was responsible for Human Resources and Communications.
Corliss J. Nelson has been Senior Executive Vice President and Chief Financial
Officer since April 1999. Previously, Mr. Nelson was President of Koch Capital
Services and was a Vice President of Koch Industries, Inc., a diversified
company.
Vicki A. O'MearaO’Meara has been Executive Vice President and General Counsel since June 1997 and Secretary since February 1998. Previously,Prior to joining Ryder, Ms. O'MearaO’Meara was a partner with the Chicago office of the law firm Jones Day. Previously, she held a variety of Jones Day Reavis & Pogue.positions with the federal government including service as Assistant Attorney General for the Environmental and Natural Resources Division of the Department of Justice, Deputy General Counsel of the Environmental Protection Agency and in the Office of White House Counsel.
Anthony G. Tegnelia has served as Executive Vice President, U.S. Supply Chain Solutions since December 2002. Previously, he was Senior Vice President, Global Business Value Management. Mr. Tegnelia joined Ryder in 1977 and has held a variety of other positions with the Company including Senior Vice President and Chief Financial Officer of the Company’s integrated logistics business segment and Senior Vice President, Field Finance.
Kathleen S. Partridge has been Senior Vice President, Business and Accounting Services since February 2002. Previously, Ms. Partridge served as Senior Vice President and Controller from April 2001 until February 2002. Ms. Partridge was Vice President, Shared Services Center, from August 1997 to April 2001. In 1994, Ms. Partridge became District Manager in Bloomington, Ill., and held that position until she moved to the Ryder Shared Services Center in 1997. In 1989, she moved to Pittsburgh, Pa., where she was a field controller. Ms. Partridge joined Ryder in 1982 as a corporate auditor and held positions of increasing responsibility in the finance and accounting group.
Gregory T. Swienton
Robert E. Sanchez has been President since June 1999 and Chief Executive
Officer since November 2000. Previously, Mr. Swienton was Chief Operating
Officer from June 1999 to November 2000. Before joining Ryder, Mr. Swienton was
Senior Vice President of Growth Initiatives of Burlington Northern Santa Fe
Corporation (BSNF) and before that Mr. Swienton was BNSF's Senior Vice
President, Coal and Agricultural Commodities Business Unit.
Gene R. Tyndall has been Executive Vice President, Global Supply Chain Solutions
since June 2000. Previously, he served as Senior Vice President and Chief Information Officer since January 2003. He previously served as Senior Vice President of Global Customer
SolutionsTransportation Management from 1999March 2002 to January 2003. Previously, he also served as Chief Information Officer from June 2001 to March 2002. Mr. Sanchez joined Ryder in 1993 as a Senior Business System Designer.
Art A. Garcia has been Vice President and Controller since February 2002. Previously, Mr. Garcia served as Group Director — Accounting Services from September 2000 to February 2002 and from April 2000 to June 2000. Mr. Garcia was Chief Financial Officer of Blue Dot Services, Inc., a national provider of heating and air conditioning services, from June 2000 to September 2000. Mr. Garcia served as Director — Corporate Accounting for Ryder from April 1998 to April 2000. Mr. Garcia joined Ryder in December 1997 as Senior Manager — Corporate Accounting. Prior to joining Ryder, Mr. Tyndall was senior
partnerGarcia held various positions in the audit services practice of Coopers and leaderLybrand LLP from 1984 to December 1997.
CERTAIN FACTORS THAT MAY AFFECT THE COMPANY’S BUSINESS
The Company’s business is subject to a number of general economic factors in the United States and worldwide that may have a materially adverse effect on its results of operations, many of which are largely out of the Ernst & Young Global Supply Chain Management
Consulting Practice were he spent twenty years providing logistic consulting
servicesCompany’s control. These include recessionary economic cycles and developingdownturns in customers’ business cycles, particularly in market segments and industries where we have a concentration of customers, interest rate fluctuations, increases in fuel prices or fuel shortages and the global supply chain consulting practice.
Eduardo M. Vitaleffects of future or threatened terrorism. Slow economic conditions in the United States and other countries where the Company operates, principally Brazil and Argentina, contributed to its decline in revenue for the year ended December 31, 2002 compared with 2001.
Numerous competitive factors could impair the ability of the Company to maintain its current profitability. These factors include the following:
7
| • | some of the Company’s competitors periodically reduce their prices to gain business which may limit the ability of the Company to maintain or increase prices; | ||
| • | the trend towards consolidation in the transportation industry may create large competitors with greater financial resources and other competitive advantages relating to their size; | ||
| • | advances in technology require increased investments to remain competitive, and the Company’s customers may not be willing to accept higher prices to cover the cost of these investments; and | ||
| • | competition from logistics and freight management companies that do not operate trucking fleets may adversely affect customer relationships and prices. |
The Company has implemented and continues to implement a variety of strategic initiatives to reduce costs and improve productivity. These initiatives include improving purchasing programs, improving the efficiency of maintenance operations, increasing the efficiency of rental and trailer fleet utilization, extending the duration of expiring leases and generating revenue from increased utilization of idle equipment. The continued successful implementation of these initiatives on a timely basis in the future is one of the keys to the Company’s future competitiveness and profitability.
The Company’s business has been Executive Vice President, Information Technology
Servicesnegatively impacted by an industry-wide downturn in the market for used tractors and Chief Financial Officer since February 2002. Previously, Mr. Vitaltrucks, particularly Class 8 vehicles, which are the largest class of heavy-duty tractors. This overall trend has caused the actual proceeds realized upon the sale of used revenue earning equipment to be lower than what was a partner with Accenture LLP ("Accenture"), a providerrealized historically. The continuation or worsening of managementthis trend may cause further unfavorable differences between residual values realized and technology consulting servicescurrent expectations, thus negatively affecting the profitability and solutions. From 1987 to 2002 as part of his
responsibilities at Accenture, Mr. Vital was partfinancial condition of the Ryder System, Inc.
Solutions Operations UnitCompany.
The Company’s business is subject to regulation by various federal, state and foreign governmental entities. Changes in applicable laws and regulations, or costs of complying with current or future laws and regulations, could have a material adverse effect on the Company’s operations and profitability. The U.S. Department of Transportation and various state agencies exercise broad powers over certain aspects of the Company’s business, generally governing such activities as authorization to engage in motor carrier operations, safety and financial reporting. The Company may also become subject to new or more restrictive regulations imposed by the Environmental Protection Agency, the Department of Transportation, the Occupational Safety and Health Administration or other authorities relating to engine exhaust emissions, drivers’ hours in service, security and ergonomics, compliance which could increase operating costs.
The Environmental Protection Agency has issued regulations that require progressive reductions in exhaust emissions from diesel engines through which Accenture provided2007. Beginning in October 2002, new diesel engines were required to meet new emissions limits. Some of these regulations require subsequent reductions in the sulfur content of diesel fuel beginning in June 2006 and the introduction of emissions after-treatment devices on newly manufactured engines and vehicles beginning with the model year 2007. These regulations have resulted in higher prices for tractors and diesel engines and are likely to decrease demand for new tractors in the short-term and increase fuel and maintenance costs. These adverse effects combined with uncertainty as to the reliability of the vehicles equipped with the newly designed diesel engines and the residual values that will be realized from the disposition of these vehicles could reduce the Company’s revenues from truck leasing, increase costs, make it more difficult to realize expected residual values for used vehicles equipped with the newly designed diesel engines or otherwise adversely affect business.
Many federal, state and local laws designed to protect the environment, and similar laws in some foreign jurisdictions, have varying degrees of impact on the way the Company and its subsidiaries conduct their business operations, primarily with regard to their use, storage and disposal of petroleum products and various wastes associated with vehicle maintenance and operating activities. Based on information technologypresently available, management believes that the ultimate disposition of such matters, although potentially material to the Company’s results of operations in any one year, will not have a material adverse affect on the Company’s financial condition or liquidity.
Certain aspects of the Company’s business are very capital intensive and the Company requires large amounts of capital to finance additions to its fleet. In 2002, the Company had capital expenditures of approximately $600 million. These capital needs are funded through borrowings, sale-leaseback transactions, vehicle securitizations, the sale of trade receivables and cash generated from operations. If the Company should lose access to its current sources of capital or is unable to generate sufficient cash from operations, it may have to limit its growth, find alternative sources of external capital or operate revenue earning equipment for longer periods. A downgrade of the Company’s debt below investment grade level would both limit its ability to issue commercial paper and render it unable to sell trade receivables under its existing facility.
8
In the aftermath of terrorist attacks on the United States, federal, state and municipal authorities have implemented and are implementing various security measures, including checkpoints and travel restrictions on large trucks. Although many companies will be adversely affected by any slowdown in the availability of transportation services, the negative impact could disproportionately affect the Company’s business. New security measures could disrupt or impede the Company’s ability to Ryder.meet the needs of its customers, particularly those related to the timeliness of deliveries. No assurance can be given that these measures will not have a material adverse effect on operating results.
FURTHER INFORMATION
For further discussion concerning the business of the Company and its subsidiaries, see the information included in Items 7 and 8
The Company makes available free of charge through its website at http://www.ryder.com its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.
9
ITEM 2. PROPERTIES
The Company'sCompany’s property consists primarily of vehicles, vehicle maintenance and repair facilities, warehouses and other real estate and improvements. Information regarding
vehicles is included in Item 1 of this Form 10-K.
The Company maintains its
property records based on legal entities, which are different from the Company's
business segments.
Ryder Integrated Logistics, Inc. has approximately 240170 locations in the United States and Canada.Canada in connection with its domestic SCS and DCC businesses. Almost all of these facilities are leased. Such locationsleased and generally include a warehouse and administrative offices.
Ryder Transportation Services
The Company also has approximately 810800 FMS locations in the United States, Puerto Rico and Canada; nearlyapproximately 390 of these facilities are owned and the remainder are leased. SuchThese locations generally include a repair shop and administrative offices.
The Company'sCompany’s international operations (locations outside of the United States and Canada) have over 10070 locations. These locations are in the U.K., Ireland, Germany, Poland, Mexico, Argentina, Brazil, Australia, China, Taiwan, Malaysia and Singapore. The majority of these facilities are leased. SuchThese locations generally include a repair shop, warehouse and administrative offices.
The Company’s headquarters facility is a 400,000 square foot building located on approximately 40 acres of land in Miami, Florida that the Company has owned since 1973. Due to the age of the headquarters building and the headcount reductions experienced over recent years, the Company explored various strategic alternatives for the relocation of its headquarters. As a result, in December 2002, the Company announced that it reached an agreement with a real estate developer to build a new headquarters facility in Miami, Florida. The new building will be approximately 230,000 square feet and will be leased by the Company. The Company expects the new headquarters to be completed within two years and has started marketing its current facility and land for sale.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in various claims, lawsuits, and administrative actions arising in the course of their businesses. Some involve claims for substantial amounts of money and/or claims for punitive damages. While any proceeding or litigation has an element of uncertainty, management believes that the disposition of such matters, in the aggregate, will not have a material impact on the consolidated financial condition, results of operations or liquidity of the Company and its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERHOLDERS
There were no matters submitted to a vote of security holders during the quarter ended December 31, 2001.
2002.
10
PART II
ITEM 5. MARKET FOR REGISTRANTSREGISTRANT’S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Information required by Item 5 is included in Item 8, "Supplementary Data."
9
| Dividends | ||||||||||||
| Stock Price | Per | |||||||||||
| Common | ||||||||||||
| High | Low | Share | ||||||||||
2002 | ||||||||||||
First quarter | $ | 29.95 | 21.77 | 0.15 | ||||||||
Second quarter | 31.09 | 26.31 | 0.15 | |||||||||
Third quarter | 29.00 | 21.90 | 0.15 | |||||||||
Fourth quarter | 25.07 | 21.05 | 0.15 | |||||||||
Total | $ | 31.09 | 21.05 | 0.60 | ||||||||
| 2001 | ||||||||||||
| First quarter | $ | 22.11 | 16.06 | 0.15 | ||||||||
| Second quarter | 23.19 | 17.30 | 0.15 | |||||||||
| Third quarter | 23.10 | 17.02 | 0.15 | |||||||||
| Fourth quarter | 22.57 | 18.67 | 0.15 | |||||||||
| Total | $ | 23.19 | 16.06 | 0.60 | ||||||||
The Company’s common shares are traded on the New York Stock Exchange, the Chicago Stock Exchange, the Pacific Stock Exchange and the Berlin Stock Exchange. As of January 31, 2003, there were 13,157 common stockholders of record and the Company’s stock price was $22.53.
11
ITEM 6. SELECTED FINANCIAL DATA
Five Year Summary
Ryder System, Inc. and Subsidiaries
| Years ended December 31 | |||||||||||||||||||||
| 2002 | 2001 | 2000 | 1999 | 1998 | |||||||||||||||||
| (Dollars in thousands, except per share amounts) | |||||||||||||||||||||
| Revenue | $ | 4,776,265 | 5,006,123 | 5,336,792 | 4,952,204 | 4,606,976 | |||||||||||||||
Earnings from continuing operations:(a) | |||||||||||||||||||||
| Before income taxes | $ | 175,883 | 30,706 | 141,321 | 110,450 | 204,564 | |||||||||||||||
After income taxes(b) | $ | 112,565 | 18,678 | 89,032 | 68,524 | 127,812 | |||||||||||||||
Per diluted common share(b) | $ | 1.80 | 0.31 | 1.49 | 1.00 | 1.74 | |||||||||||||||
Net earnings(b)(c) | $ | 93,666 | 18,678 | 89,032 | 419,678 | 159,071 | |||||||||||||||
Per diluted common share(b)(c) | $ | 1.50 | 0.31 | 1.49 | 6.11 | 2.16 | |||||||||||||||
| Cash dividends per common share | $ | 0.60 | 0.60 | 0.60 | 0.60 | 0.60 | |||||||||||||||
| Average common shares — Diluted (in thousands) | 62,587 | 60,665 | 59,759 | 68,732 | 73,645 | ||||||||||||||||
Average shareholders’ equity(d) | $ | 1,262,605 | 1,242,543 | 1,225,910 | 1,181,750 | 1,094,859 | |||||||||||||||
Return on average shareholders’ equity (%)(d)(e) | 8.9 | 1.5 | 7.3 | 6.8 | 14.5 | ||||||||||||||||
Book value per common share(d) | $ | 17.75 | 20.24 | 20.86 | 20.29 | 15.37 | |||||||||||||||
| Market price — high | $ | 31.09 | 23.19 | 25.13 | 28.75 | 40.56 | |||||||||||||||
| Market price — low | $ | 21.05 | 16.06 | 14.81 | 18.81 | 19.44 | |||||||||||||||
| Total debt | $ | 1,551,468 | 1,708,684 | 2,016,980 | 2,393,389 | 2,583,031 | |||||||||||||||
| Long-term debt | $ | 1,389,099 | 1,391,597 | 1,604,242 | 1,819,136 | 2,099,697 | |||||||||||||||
Debt to equity (%)(d) | 140 | 139 | 161 | 199 | 236 | ||||||||||||||||
| Year-end assets | $ | 4,766,982 | 4,927,161 | 5,474,923 | 5,770,450 | 5,708,601 | |||||||||||||||
Return on average assets (%)(e)(f) | 2.3 | 0.4 | 1.6 | 1.2 | 2.4 | ||||||||||||||||
Average asset turnover (%)(f) | 98.6 | 97.1 | 93.8 | 85.4 | 86.5 | ||||||||||||||||
Cash flow from continuing operating activities and asset sales(g) | $ | 785,472 | 483,836 | 1,245,441 | 671,721 | 1,212,172 | |||||||||||||||
Capital expenditures including capital leases(f) | $ | 600,301 | 656,597 | 1,288,784 | 1,734,566 | 1,333,352 | |||||||||||||||
Number of vehicles(f) | 161,400 | 170,100 | 176,300 | 171,500 | 162,700 | ||||||||||||||||
Number of employees(f) | 27,800 | 29,500 | 33,100 | 30,300 | 29,200 | ||||||||||||||||
| (a) | Earnings from continuing operations | |
| (b) | In 2001, earnings from continuing operations include a one-time reduction in deferred taxes of $7 million, or $0.11 per diluted common share, | |
| (c) | Net earnings for 2002 include the cumulative effect of change in accounting principle for goodwill resulting in an after-tax charge of $19 million, or $0.30 per diluted common | |
| (d) | Shareholders’ equity | |
| (e) | Excludes cumulative effect of change in accounting principle in 2002 and | |
| (f) | Excludes discontinued operations. | |
| (g) | Excludes sale-leaseback transactions. |
12
ITEM 7. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management'sManagement’s Discussion and Analysis of the financial condition and results of operations of Ryder System, Inc. and its subsidiaries (the "Company"“Company”) should be read in conjunction with the consolidated financial statements and related notes.
The Company'sCompany’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 U.K.; (2) Supply Chain Solutions (SCS), which provides comprehensive supply chain consulting and lead logistics management solutions that support customers'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. During 1999,
the Company sold its public transportation services business (RPTS). The
following discussion excludes the results of RPTS, which has been classified as
discontinued operations.
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. As such, e-Commerce is no longer considered a
separate reportable 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
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.
Certain other prior year amounts have been reclassified to conform to
current presentation.
CONSOLIDATED RESULTS
In thousands
- --------------------------------------------------------------------------------
Years ended December 31
| Years ended December 31 | ||||||||||||
| 2002 | 2001 | 2000 | ||||||||||
| (In thousands) | ||||||||||||
Earnings before cumulative effect of change in accounting principle (1)(2) | $ | 112,565 | 18,678 | 89,032 | ||||||||
| Per diluted common share | 1.80 | 0.31 | 1.49 | |||||||||
Net earnings(1)(2)(3) | 93,666 | 18,678 | 89,032 | |||||||||
| Per diluted common share | 1.50 | 0.31 | 1.49 | |||||||||
| Weighted-average shares outstanding — diluted | 62,587 | 60,665 | 59,759 | |||||||||
| (1) | Results include restructuring and other charges of $2 million after-tax, or $0.04 per diluted common share in 2002, $81 million after-tax, or $1.34 per diluted common share in 2001 and $26 million after-tax, or $0.44 per diluted common share in 2000. See “Restructuring and Other Charges, Net” in the Notes to Consolidated Financial Statements for additional discussion. | |
| (2) | Results for 2001 | |
| (3) | Net earnings for 2002 include the cumulative effect of a change in accounting principle for goodwill resulting in an after-tax charge of $19 million, or $0.30 per diluted common share. |
Earnings before the cumulative effect of a change in accounting principle increased 503 percent to $113 million in 2002 compared with 2001. The increase in earnings was due primarily to a significant reduction in restructuring and other charges from $81 million after-tax in 2001 compared with $2 million after-tax in 2002. The increase in earnings was also attributable to the Company’s continued cost containment actions and operational process improvement efforts, improved rental utilization, increased volumes within the automotive sector of SCS, lower interest costs and the discontinuance of amortization of goodwill and intangible assets with indefinite useful lives (See “Summary of Significant Accounting Policies — Goodwill and Other Intangible Assets” in the Notes to Consolidated Financial Statements). These earnings increases were partially offset by a one-time reduction in deferred taxes of $7 million in 2001 as a result of a change in Canadian tax law that affectedand higher pension costs of $19 million after-tax in 2002, compared with the Company's Canadian operations.
11
13
Earnings from continuing operations decreased 79 percent to $19 million in 2001 and
increased 22 percent incompared with 2000. The decrease in earnings from continuing
operations in 2001 iswas due primarily to increased restructuring and other charges as part of the Company'sCompany’s implementation of strategic initiatives during 2001 to reduce Company expenses and improve profitability. See "Restructuring“Restructuring and Other Charges, Net"Net” for a further discussion of such initiatives. The 2001 decrease also resulted from a 6 percent decrease in revenue as discussed below. See "Operating“Operating Results by Business Segment"Segment” for a further discussion of operating results in the past three years.
In 2000, the earnings per share growth rate exceeded the earnings growth
rate because the average number of shares outstanding decreased. The decrease
| Years ended December 31 | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
| (In thousands) | |||||||||||||
| Revenue: | |||||||||||||
| Fleet Management Solutions | $ | 3,183,022 | 3,352,540 | 3,555,990 | |||||||||
| Supply Chain Solutions | 1,388,299 | 1,453,881 | 1,595,252 | ||||||||||
| Dedicated Contract Carriage | 517,961 | 534,962 | 551,706 | ||||||||||
| Eliminations | (313,017 | ) | (335,260 | ) | (366,156 | ) | |||||||
| Total | $ | 4,776,265 | 5,006,123 | 5,336,792 | |||||||||
Revenue decreased 5 percent to $4.8 billion in average shares outstanding reflects the impact of the Company's various stock
repurchase programs conducted through the end of 1999.
In thousands
- -------------------------------------------------------------------------------
Years ended December 31 2001 2000 1999
Revenue:
Fleet Management Solutions $ 3,352,540 3,555,990 3,307,244
Supply Chain Solutions 1,453,881 1,595,252 1,441,029
Dedicated Contract Carriage 534,962 551,706 531,642
Eliminations (335,260) (366,156) (327,711)
- -------------------------------------------------------------------------------
Total revenue $ 5,006,123 5,336,792 4,952,204
===============================================================================
Revenue from continuing operations decreased 6 percent in 20012002 compared with 2000.2001. All business segments experienced a revenue decrease in 2002 over 2001 over 2000.as a result of the continued slow economic conditions in the U.S. and in other countries where the Company operates. The FMS revenue decrease wasof 5 percent also reflects the effects of a smaller overall fleet (primarily rental) and lower fuel services revenue as a result of lower average fuel prices and volumes. For all years reported, the Company realized minimal changes in profitability as a result of fluctuations in fuel services revenue. SCS revenue decreased 5 percent as a result of volume reductions, especially in the electronics, high-tech and telecommunications sector and the non-renewal of certain customer contracts.
Revenue in 2001 decreased 6 percent compared with 2000, led by SCS, which decreased 9 percent. SuchThe decrease was due to volume reductions in the U.S. and in Latin America attributable to the continued
worldwide economic slowdown and to the sale of the contracts and related net assets associated with the disposal of the outbound auto carriageauto-carriage business of the Company'sCompany’s Brazilian SCS operation ("Vehiculos") (see further details in "Restructuring“Restructuring and Other Charges, Net"Net”). FMS experienced a revenue decrease ofdeclined 6 percent due primarily to decreases in fuel sales volumes throughout the year
combined with decreases in fuelservices revenue resulting from lower average prices in the fourth quarter of 2001. For all
years reported, the Company realized minimal changes in margin as a result of
fluctuations in fuel revenue. In addition, FMS experienced decreases in revenue
due to reduced demand for rental vehicles.and volumes. Revenue during 2001 was also reducedimpacted by the
impact of exchange rates on translation of foreign subsidiary revenues, particularly those in the U.K. and Brazil where exchange rates with the U.S.
Dollar have decreased by approximately 4.8 percent and 21.5 percent,
respectively, from 2000.
Revenue from continuing operations increased 8 percent in 2000 compared
with 1999, led by SCS, which grew 11 percent. FMS posted revenue gains of 8
percent, due primarily to increased fuel revenue resulting from increases in
related fuel prices.Brazil.
The FMS segment leases revenue earning equipment, sells fuel and provides maintenance and other ancillary services to the SCS and DCC segments. Eliminations relate to inter-segment sales that are accounted for at approximate fair value as if the sales were made to third parties.
12
In thousands
- -------------------------------------------------------------------------------
Years ended December 31 2001 2000 1999
| Years ended December 31 | ||||||||||||||||||||||||||||||||
| 2002 | 2001 | 2000 | ||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| Operating expense | $ | 1,949,384 | 2,132,500 | 2,324,433 | ||||||||||||||||||||||||||||
| Percentage of revenue | 41 | % | 43 | % | 44 | % | ||||||||||||||||||||||||||
Operating expense $2,132,500 2,324,433 2,074,888
Percentagedecreased 9 percent to $1.9 billion in 2002 compared with 2001. The decrease was a result of revenue 43% 44% 42%
- -------------------------------------------------------------------------------a reduction in FMS fuel costs as a result of lower average prices and volumes in 2002, a reduction in overheads due to the Company’s continuing cost containment actions, including the shut-down of certain facilities in 2001, and the cancellation of an information technology outsourcing contract. Operating expense decreased 8 percent in 2001 compared with 2000. The decrease was a resultprimarily attributable to lower fuel costs due to lower average prices and volumes, reduced overhead and licensing costs.
14
| Years ended December 31 | ||||||||||||
| 2002 | 2001 | 2000 | ||||||||||
| (In thousands) | ||||||||||||
| Salaries and employee-related costs | $ | 1,268,704 | 1,212,184 | 1,226,558 | ||||||||
| Percentage of revenue | 27 | % | 24 | % | 23 | % | ||||||
Salaries and employee-related costs increased 5 percent to $1.3 billion in 2002 compared with 2001. The increase was due to growth in pension and medical benefit costs, higher salary expense from the in-sourcing of a reduction in fuelcertain information technology functions and greater incentive compensation, which was partially offset by decreased salaries and other employee-related costs as a result of lower volumes2001 strategic initiatives that resulted in the termination of over 1,400 employees. See “Restructuring and prices, a reductionOther Charges, Net” for further discussion. The number of employees at December 31, 2002 decreased 6 percent to approximately 27,800, compared with 29,500 at December 31, 2001.
Pension costs for 2002 totaled $29 million compared with pension income of $1 million in overheads due2001, and principally impacted FMS. The increase in pension costs is attributable primarily to the U.S. pension plan and reflects the adverse effect of negative pension asset returns in 2001 as well as a declining interest rate environment resulting in a lower discount rate used to measure benefit obligations. Based on actual returns experienced in 2002 and continued lower interest rate levels, the Company implementing cost
containment actions throughout 2001 andexpects total pension expense for 2003 to increase by approximately $56 million on a reductionpre-tax basis. Such 2003 estimates are subject to change based upon the completion of actuarial analysis of all pension plans. See “Accounting Matters” for further discussion on pension accounting estimates. The anticipated pension expense in fleet maintenance and
licensing costs due to a reduced fleet size. Operating expense increased 12
percent2003 would primarily impact FMS, which employs the majority of the Company’s employees that participate in 2000 compared with 1999. The increase was primarily attributable to
higher fuel costs due to fuel price increases.
In thousands
- -------------------------------------------------------------------------------
Years ended December 31 2001 2000 1999
Salaries and employee-related costs $1,212,184 1,226,558 1,178,831
Percentage of revenue 24% 23% 24%
- -------------------------------------------------------------------------------the Company’s primary U.S. pension plan.
Salaries and employee-related costs decreased $14 million, or 1 percent in 2001 as compared with 2000. The decrease was a result of planned reductions in headcount due to the Company implementing its strategic initiatives throughout 2001. The
number of employees at December 31, 2001 was approximately 29,500, compared with
slightly over 33,000 at December 31, 2000. Such salary decreaseand was largely offsetoff-set by a reduction in net pension income in 2001 compared with 2000. Net pension income was $1 million and $42 million in 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.
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 as of December 31, 2001. Based on these estimates, the Company
would anticipate recording $25 million to $30 million in net pension expense in
2002 for all pension plans. Such 2002 estimates are subject to change based upon
the completion of actuarial analysis of all pension plans. The expected increase
in net pension expense is attributable primarily to the U.S. pension plan and
reflects the adverse effect of negative asset returns in 2001 as well as a
declining interest rate environment causing a lower discount rate. The
anticipated net 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.
Salaries and employee-related costs increased $48 million, or 4 percent, in
2000 compared with 1999. The increase was due primarily to increased salaries
and wages, specifically in SCS, as a result of higher business volumes and
higher outside driver costs, offset by increased net pension income in 2000.
13
In thousands
- -------------------------------------------------------------------------------
Years ended December 31 2001 2000 1999respectively.
| Years ended December 31 | ||||||||||||
| 2002 | 2001 | 2000 | ||||||||||
| (In thousands) | ||||||||||||
| Freight under management expense | $ | 414,369 | 436,413 | 506,709 | ||||||||
| Percentage of revenue | 9 | % | 9 | % | 10 | % | ||||||
Freight under management (FUM) expense $436,413 506,709 496,248
Percentage of revenue 9% 10% 10%
- -------------------------------------------------------------------------------
Freight under management expense (FUM) represents subcontracted freight costs on logistics contracts for which the Company purchases transportation. FUM expense decreased $705 percent to $414 million or 14 percent, in 2002 compared with 2001. The decrease was due to revenue reductions in related operating units of the SCS business segment as a result of reduced freight volumes decreases in the U.K.U.S. and South America and the non-renewal of unprofitable business. FUM expense decreased 14 percent to $436 million in 2001 compared with 2000. The decrease was due to lost businessreduced freight volumes and decreases in South America as a result of the sale of Vehiculos. FUMthe outbound auto-carriage business of Ryder Brazil.
| Years ended December 31 | ||||||||||||
| 2002 | 2001 | 2000 | ||||||||||
| (In thousands) | ||||||||||||
| Depreciation expense | $ | 552,491 | 545,485 | 580,356 | ||||||||
| Gains on vehicle sales, net | (14,223 | ) | (11,968 | ) | (19,307 | ) | ||||||
| Equipment rental | 343,531 | 427,024 | 373,157 | |||||||||
Depreciation expense relates primarily to FMS revenue earning equipment. Depreciation expense increased $101 percent to $552 million or 2 percent, in 20002002 compared with 1999. The increase
was due primarily to increased freight volumes in the Vehiculos operation, which
was sold in 2001.
In thousands
- -------------------------------------------------------------------------------
Years ended December 31 2001 2000 1999 Depreciation expense $ 545,485 580,356 622,726
Gains on vehicle sales, net (11,968) (19,307) (55,961)
Equipment rental 427,024 373,157 263,484
- -------------------------------------------------------------------------------increased due to a greater number of owned (compared with leased) revenue earning equipment units as well as reduced estimated residual values associated with certain owned tractors. Depreciation expense decreased by $35 million, or 6 percent
15
to $545 million in 2001 compared with 2000. Depreciation expense decreased by $42 million, or 7 percent, in 2000
compared with 1999. DecreasesThe decrease in depreciation expense for both yearsduring 2001 resulted principally from sale-leaseback and other leasing transactions which increased the number of leased (compared with owned) vehicles in the Company'sCompany’s fleet. In
2001, the decreaseSee discussion on Fleet Management Solutions in depreciation expense was partially offset“Operating Results by an increase
in depreciation expense associated with the reduction of estimated residual
values associated with certain classes of tractors.Business Segment” for further detail on vehicle counts.
Gains on vehicle sales decreased $7increased 19 percent to $14 million or 38 percent, in 20012002 compared with 2000. Gains on vehicle sales decreased to $19 million2001. Despite a reduction in 2000 from
$56 million in 1999. Decreasesthe number of vehicles sold, the Company experienced an increase in gains on vehicle sales for both years were due to continuing weak demanda decline in the average book value of units sold. The decline in the average book value of units sold reflects the aforementioned increase in depreciation expense and an increase in the age of vehicles sold. Average proceeds per unit decreased by approximately 9 percent in 2002 reflecting the extension of vehicle lives and the continued weak used truck market. Such weaknessmarket which began to impact the Company during the second quarter of 2000. DuringGains on vehicle sales decreased 38 percent to $12 million in 2001 compared with 2000. The decrease in gains on vehicle sales in 2001 was due to weak demand in the used truck market reflected in lower average sales proceeds per unit decreased by approximately 5 percent compared with 2000.
However, the average book value per unit of units sold in 2001 was approximately
2 percent lower than that of units sold in 2000 as a result of the
aforementioned increase in depreciation expense due to reductions in estimated
residual values.unit.
The Company periodically reviews and adjusts 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. See “Accounting Matters” for further discussion on depreciation and residual value guarantees at "Accounting Matters."guarantees. 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.
Equipment rental primarily consists of rental costs on revenue earning equipment.equipment in FMS. Equipment rental costs decreased 20 percent to $344 million in 2002 compared with 2001. The decrease in 2002 equipment rental is due to a decrease in the number of leased vehicles and lower lease rates due to a changing mix of leased units. Current year results also include decreased lease termination charges as a result of improved market pricing. Equipment rental costs increased 14 percent to $427 million in 2001 and 42 percent incompared with 2000. The increases wereincrease was due to sale-leaseback transactions, including securitization transactions, entered into during 2001 which increased the number of leased vehicles as well as increases in reserves for guaranteed lease termination values to reflect decreases in the estimated residual values of leased equipment.
14
In thousands
- -------------------------------------------------------------------------------
Years ended
The total number of revenue earning equipment units (owned and leased) at December 31, 2002 decreased approximately 5 percent from December 31, 2001 2000 1999
Interest expense $118,549 154,009 187,176
Percentagelevels reflecting the Company’s continued focus on asset management and reducing capital expenditures while maximizing utilization of revenue 2% 3% 4%
- -------------------------------------------------------------------------------the FMS commercial rental fleet.
| Years ended December 31 | ||||||||||||
| 2002 | 2001 | 2000 | ||||||||||
| (In thousands) | ||||||||||||
| Interest expense | $ | 91,718 | 118,549 | 154,009 | ||||||||
| Percentage of revenue | 2 | % | 2 | % | 3 | % | ||||||
Interest expense decreased 23 percent to $92 million in 2002 compared with 2001. The decrease in interest expense reflects lower debt levels due to reduced capital spending, generally lower market interest rates and reduced effective interest rates as a result of hedging transactions entered into during the first quarter of 2002. Interest expense decreased 23 percent to $119 million in 2001 compared with 2000,2000. The decrease in interest expense during 2001 was primarily due primarily to debt reductions associated with the use of proceeds from the aforementioned sale-leaseback transactions and generally lower interest rates compared with 2000. InterestThe reductions in interest expense decreased 18 percentprincipally benefited FMS.
| Years ended December 31 | ||||||||||||
| 2002 | 2001 | 2000 | ||||||||||
| (In thousands) | ||||||||||||
| Miscellaneous (income) expense, net | $ | (9,808 | ) | (1,334 | ) | 7,542 | ||||||
16
The Company had net miscellaneous income of $10 million in 2000 due2002 compared with net miscellaneous income of $1 million in 2001. Net miscellaneous income in 2002 is principally composed of servicing fee income for administrative services provided to vehicle lease trusts related to the Company’s vehicle securitization transactions. The increase in net miscellaneous income during 2002 is primarily attributed to lower
commercial paper interest rates, debt reductions associated witha reduction in losses on the sale of receivables related to the decreased use of proceeds from the RPTSCompany’s revolving facility for the sale of receivables and 2001 losses on the impactsale of sale-leaseback transactions
completed beginning in December 1998.
In thousands
- -------------------------------------------------------------------------------
Years ended December 31 2001 2000 1999
Miscellaneous (income) expense, net $ (1,334) 7,542 (8,825)
- -------------------------------------------------------------------------------operating property and equipment. The Company had net miscellaneous income of $1 million in 2001 compared with net miscellaneous expense of $8 million in 2000. The change was primarily due to lower costsa reduction in losses on the sale of receivables related to the decreased use of the Company'sCompany’s revolving facility for the sale of trade receivables combined with increased servicing fee income related to administrative services provided tothe Company’s vehicle lease trusts related to
the Company's securitization transactions. See "Financing“Financial Resources and Other Funding
Transactions"Liquidity — Off-balance Sheet Arrangements” for further discussion on securitization transactions. The
increase in servicing fee income in 2001 is a result of growth in serviced
assets due to the securitization transaction executed in the first quarter of
2001. The Company recorded net miscellaneous expense in 2000 compared with net
miscellaneous income in 1999. The growth in expense was due to an increase of $7
million in fees (due to an increase in dollar volume) related to the Company's
trade receivables sale facility in 2000. Additionally, in 1999, such fees were
offset by a $5 million gain on the sale of non-operating property and $4 million
of interest income earned on temporarily investing the proceeds from the RPTS
sale.
| Years ended December 31 | ||||||||||||
| 2002 | 2001 | 2000 | ||||||||||
| (In thousands) | ||||||||||||
| Restructuring and other charges, net | $ | 4,216 | 116,564 | 42,014 | ||||||||
In thousands
- -------------------------------------------------------------------------------
Years ended December 31 2001 2000 1999
Unusual items:
Restructuring2002 restructuring and other charges, net $116,564 42,014 52,093
Year 2000 expense -- -- 24,050
- -------------------------------------------------------------------------------
$116,564 42,014 76,143
===============================================================================
In 2001, restructuring and other charges increaseddecreased to $4 million from $117 million fromin 2001 and $42 million in 2000. Restructuring and other charges totaled $42 million in 2000
compared with $52 million in 1999. See "Restructuring“Restructuring and Other Charges, Net"Net” for further discussion.
15
In thousands
- -------------------------------------------------------------------------------
Years ended December 31 2001 2000 1999
Provision for income taxes $ 12,028 52,289 44,577
- -------------------------------------------------------------------------------
| Years ended December 31 | ||||||||||||
| 2002 | 2001 | 2000 | ||||||||||
| (In thousands) | ||||||||||||
| Provision for income taxes | $ | 63,318 | 12,028 | 52,289 | ||||||||
The effective income tax rate is the provision for income taxes as a percentage
of earnings from continuing operations before income taxes. The Company'sCompany’s effective tax rate was 36.0 percent in 2002 compared with 39.2 percent in 2001 and 37.0 percent in 2000 and 37.9
percent in 1999.2000. The higher 2001 effective tax rate in 2001 resulted primarily from an increase inincreased net non-deductible items in 2001, principally the write downwrite-down of goodwill, included in restructuring and other charges. The increase in the Company's
effective tax rate wascharges, partially offset by a permanent reduction in corporate tax rates in Canada. This resulted in a one-time reduction in the Company'sCompany’s related deferred taxes of approximately $7 million. The Company believes the
impact of this tax rate change on its future effective income tax rate will be
nominal. Canadian operations represented approximately 6 percent of the
Company's revenue in 2001.
17
RESTRUCTURING AND OTHER CHARGES, NET
In 2001, the Company recorded pre-tax
The components of restructuring and other charges, net of $117
million. The components of charges(recoveries) in 2002, 2001 2000 and 19992000 were as follows:
In thousands
- -------------------------------------------------------------------------------
Years ended December 31
| Years ended December 31 | ||||||||||||||
| 2002 | 2001 | 2000 | ||||||||||||
| (In thousands) | ||||||||||||||
| Restructuring charges (recoveries), net: | ||||||||||||||
| Severance and employee-related costs | $ | 5,198 | 30,438 | (1,077 | ) | |||||||||
| Facilities and related costs | 106 | 6,261 | (2,009 | ) | ||||||||||
| 5,304 | 36,699 | (3,086 | ) | |||||||||||
| Other (recoveries) charges: | ||||||||||||||
| Asset write-downs | (285 | ) | 40,046 | 44,487 | ||||||||||
| Goodwill impairment | — | 24,425 | — | |||||||||||
| Strategic consulting fees | (64 | ) | 8,586 | 958 | ||||||||||
| Loss on sale of business | — | 3,512 | — | |||||||||||
| Contract termination costs | (219 | ) | 8,345 | — | ||||||||||
| Insurance reserves — sold business | (520 | ) | (2,920 | ) | 700 | |||||||||
| Gain on sale of corporate aircraft | — | (2,129 | ) | — | ||||||||||
| Other | — | — | (1,045 | ) | ||||||||||
| Total | $ | 4,216 | 116,564 | 42,014 | ||||||||||
Allocation of restructuring and other charges across business segments in 2002, 2001 and 2000 1999
Restructuring charges (recoveries):
Severance and employee-related costs:
Shutdown of U.K. home
delivery network $ 2,593 -- --
Other 27,845 (1,077) 16,500
- -------------------------------------------------------------------------------
Total severance and employee-related costs 30,438 (1,077) 16,500
Facilities and related costs 6,261 (2,009) 4,478
- -------------------------------------------------------------------------------
36,699 (3,086) 20,978
Other charges (recoveries):
Cancellation of IT project 21,727 -- --
Goodwill impairment 13,823 -- --
Shutdown of U.K. home
delivery network 12,862 -- --
Contract termination costs 11,204 -- --
Strategic consulting fees 8,586 958 3,935
Asset write-downs 7,273 41,100 14,215
Write-down of software licenses 5,311 -- --
Loss on the sale of business 3,512 -- --
Start-up costs -- -- 7,970
Other (recoveries) charges, net (4,433) 3,042 4,995
- -------------------------------------------------------------------------------
$ 116,564 42,014 52,093
===============================================================================
16
2001is as follows:
| Years ended December 31 | ||||||||||||||
| 2002 | 2001 | 2000 | ||||||||||||
| (In thousands) | ||||||||||||||
| Fleet Management Solutions | $ | (1,042 | ) | 38,268 | 38,992 | |||||||||
| Supply Chain Solutions | 4,082 | 56,221 | 2,422 | |||||||||||
| Dedicated Contract Carriage | 14 | 964 | — | |||||||||||
| Central Support Services | 1,162 | 21,111 | 600 | |||||||||||
| Total | $ | 4,216 | 116,564 | 42,014 | ||||||||||
2002 Charges
During the thirdfourth quarter of 2001,2002, the Company initiated the shutdown of
Systemcare, Ryder's shared-user home delivery network in the U.K. The shutdown
was initiatedeliminated approximately 140 positions as a result of management's reviewcost management actions principally in the Company’s SCS business segment and Central Support Services, which were substantially finalized as of future prospects for the
operation in light of historical and anticipated operating losses. Such review
was performed in conjunction with its restructuring initiatives. The shutdown
will be completed after meeting contractual obligations to current customers,
which extend to December 31, 2002. The charge related to the Systemcare shutdown
totaled $15 million andthese actions included severance and employee-related costs of $3totaling $7 million. The remainderCompany estimates pre-tax cost savings of approximately $14 million as a result of the charge, reported in other charges (recoveries),
includes a goodwill impairment of $11 million and asset impairment charges,
primarily for specialized vehicles2002 cost management activities. These savings are expected to be disposedrealized in salaries and employee-related costs. During 2002, severance and employee-related costs totaling $2 million that had been recorded in prior restructuring charges were reversed due to refinements in the estimates.
Other recoveries during 2002 include net gains (recoveries) on sale of within 12 months afterowned facilities identified for closure in prior restructuring charges, and the shutdownreversal of Systemcare's operations,contract termination costs recognized in 2001 resulting from refinements in estimates and the final settlement of $2 million.insurance reserves attributed to a previously sold business.
18
2001 Charges
In late 2000, the Company communicated to its employees its planned strategic initiatives to reduce Company expenses. As part of such initiatives, the Company reviewed employee functions and staffing levels to eliminate redundant work or otherwise restructure work in a manner that led to a workforce reduction. The process resulted in terminations of over 1,400 employees during 2001. Other severance2001, which were substantially finalized as of December 31, 2002. Severance and employee-related costs of $28$30 million included(net of $2 million in recoveries of prior year charges) in 2001 representincluded termination benefits to employees whose jobs were eliminated as part of this review. During the third quarter of 2001, the Company initiated the shutdown of Systemcare, Ryder’s shared user home delivery network in the U.K. The shutdown was initiated as a result of management’s review of future prospects for the operation in light of historical and anticipated operating losses. The shutdown was completed after meeting contractual obligations to current customers, which extended to December 31, 2002. The severance and employee-related charge included $3 million incurred as part of the Systemcare shutdown.
During 2001, the Company identified more than 55 facilities in the U.S. and in other countries to be closed in order to improve profitability. Facilities and related costs of $6 million in 2001 represent contractual lease obligations for closed facilities.
Other charges (recoveries) represent asset impairments and other unusual
costs associated with the Company's strategic restructuring initiatives.
In the third quarter of
Additionally, during 2001 the Company cancelled an information
technology (IT) project in its FMS business segment. The chargerecorded various other charges which are summarized as follows:
Asset write-downs: Asset write-downs of $22$40 million represents the write-down of software licenses, development costswere recorded during 2001 and assets
related to the project that had no future economic benefit.
During the fourth quarter ofare described below:
| • | In 2001, the Company cancelled an information technology project in its FMS business segment. In connection with the cancellation, the Company recorded a non-cash charge of $22 million for the write-down of software licenses acquired for the project that could not be resold or redeployed and software development costs and assets related to the project that had no future economic benefit. | ||
| • | In 1997, the Company entered into an Information Technology Services Agreement (“ITSA”) with Accenture LLP (“Accenture”) under which the Company outsourced many of its information technology needs that were previously provided by Ryder employees. Under the terms of the ITSA, the Company prepaid for a number of services to be provided over the 10-year term of the agreement expiring in 2007. Under the terms of the agreement, the Company was also obligated to pay certain termination costs to Accenture in the event the ITSA was terminated by the Company prior to the expiration date. | ||
| As part of its restructuring initiatives in 2001, management approved and committed the Company to in-source services provided by Accenture under the ITSA. In December 2001, Ryder and Accenture entered into a written agreement to transition certain IT services previously delivered by Accenture under contract to Ryder. Under this agreement, Ryder agreed to waive any right to reimbursement of approximately $3 million in unamortized prepaid expenses related to the ITSA. | |||
| • | The Company’s strategic initiatives during 2001 resulted in asset write-downs to fair value less cost to sell of approximately $4 million for facilities that were identified for closure and held for sale pursuant to the initiatives. At such time, the Company had the ability to remove the facilities from operations upon identification of a buyer or receipt of an acceptable bid. Fair value was determined based on appraisals of these properties. Also, as part of the strategic initiatives, the Company wrote down investments in e-commerce assets of $3 million, including specialized property and equipment and software, that were terminated or abandoned during 2001 and for which the fair value of such investments was zero. | ||
| • | Additionally, during 2001, an investment of $6 million in certain license agreements for supply chain management software was written down. The write-down consisted of the unamortized cost of licenses and related software development costs previously capitalized for which development was abandoned as a result of the Company’s restructuring initiatives. Since the software licenses would no |
19
| longer be used in the business nor could the licenses be resold by the Company, such licenses were valued at zero. | |||
| • | Due to the decision to shut down the aforementioned Systemcare operations, the Company assessed the recoverability of Systemcare’s long-lived assets held for use as described in “Summary of Significant Accounting Policies — Impairment of Long-Lived Assets” in the Notes to Consolidated Financial Statements. Assets of $2 million, consisting primarily of specialized vehicles to be disposed of after the shutdown of Systemcare’s operations, were considered impaired and written down because estimated fair values were less than the carrying values of the assets. Fair values were determined based on internal valuations of similar assets. |
Goodwill Impairment: The Company also identified certain operating units for which current circumstances indicated that the carrying amount of long-lived assets, in particular, goodwill, may not be recoverable. The Company assessed the recoverability of these long-lived assets and determined that the goodwill related to these operating units was not recoverable. See "Summary“Summary of Significant Accounting Policies"Policies — Goodwill and Other Intangible Assets” in the Notes to Consolidated Financial Statements for the Company'sCompany’s policy on impairment of long-livedgoodwill and other intangible assets. In
addition to the aforementioned goodwill impairment in the Systemcare operations,
goodwill impairmentImpairment charges in 2001, all of which related to SCS operating units, are summarized as follows:
In thousands
- --------------------------------------------------------------------------------
Ryder Argentina $ 9,130
Ryder Brazil 3,706
Other 987
- --------------------------------------------------------------------------------
$13,823
================================================================================
| (In thousands) | ||||
| Systemcare -UK home delivery network | $ | 10,602 | ||
| Ryder Argentina | 9,130 | |||
| Ryder Brazil | 3,706 | |||
| Other | 987 | |||
| Total | $ | 24,425 | ||
As part of the decision to shut down the aforementioned Systemcare operations, goodwill of $11 million was considered impaired and written down during 2001.
Goodwill impairment in Ryder Argentina was triggered by the significant adverse change in the business climate in Argentina in the fourth quarter of 2001 that led to a devaluation of the Argentine Peso, breakdowns in the Argentine banking system and repeated turnover in the country'scountry’s leadership. These factors, combined with a history of operating losses and anticipated future operating losses, led to goodwill impairment. Goodwill of $9 million was considered impaired and was written-downwritten down in December 2001. At December 31, 2001, Ryder
Argentina had total assets of $8 million and total equity of $4 million. The
Company is currently committed to continuing to operate in Argentina in order to
serve its global accounts, which it believes are profitable when considered on a
worldwide basis.
17
During the fourth quarter of 2001, the Company reviewed goodwill associated with its remaining investment in Ryder Brazil for impairment. Subsequent to the sale of Vehiculos, asthe contracts and related net assets associated with the disposal of the Company’s outbound auto-carriage business (“Vehiculos”) in Ryder Brazil discussed below, the Company made a significant effort to restructure the operations of Ryder Brazil. However, such restructuring was not sufficient to offset the impact of lost business, the side effectsimpact of the Argentine economic crisis and the marginal historical and anticipated cash flows related to the remaining business. At December 31, 2001, Ryder Brazil had total
assets of $18 million and total equity of $6 million. Like Argentina, the
Company is currently committed to operate in Brazil in order to serve its global
accounts, which it believes are profitable when considered on a worldwide basis.
As a result of the Company'sCompany’s analysis, goodwill of $4 million was considered impaired and was written-downwritten down in December 2001.
In 2001, as part of its restructuring initiatives, the Company reached an
agreement with Accenture LLP ("Accenture") to transition certain IT services
previously delivered by Accenture under contract to Ryder. Contract termination
costs of $11 million represent termination penalties and the write-down of
certain prepaid expenses associated with the Accenture relationship.
Strategic consulting fees:Strategic consulting fees of $9 million were incurred during 2001 in relation to the aforementioned strategic initiatives. Such consulting engagements were completed byfees represented one-time costs of engaging consultants to assist the endCompany in its restructuring initiatives in 2001.
Loss on sale of 2001.
The Company's strategic initiatives during 2001 resulted in asset
write-downs of $7 million primarily for owned real estate, operating property
and technology that would no longer be used in the business. These assets are
planned to be disposed of within the next 12 months.
An investment of $5 million in certain license agreements for supply chain
management software was written down in 2001 because the software no longer had
a viable business or customer application in light of the Company's
restructuring initiatives.: During the quarter ended March 31, 2001, the Company sold Vehiculos in Ryder Brazil for $14 million and incurred a loss of $4 million on the sale of the business.
Other net recoveries in
Contract termination costs: In connection with the agreement to in-source information technology services provided by Accenture, the Company agreed to pay termination fees and certain demobilization costs of
20
approximately $8 million. Also during 2001, primarily representthe Company made a decision to terminate a long-term marketing arrangement to reduce marketing costs.
Insurance reserves — sold business: During 2001, the Company recognized $3 million in recoveries from an insurance settlement attributed to a previouslybusiness sold business combined
within 1989. The insurance recovery represents an adjustment to the Company’s indemnification reserve for favorable actuarial developments since the time of the sale.
Gain on sale of corporate aircraft:As a gaindirect result of $2 million recorded inthe Company’s 2001 restructuring and cost reduction initiatives, the Company decided to sell its corporate aircraft. The Company sold the aircraft during the first quarter of 2001 and recorded a $2 million gain on the sale of
the corporate aircraft.
The Company estimates pre-tax cost savings of approximately $22 million on
2002 earnings as a result of the 2001 restructuring initiatives. These savings
are expected to be realized primarily in operating expense and salaries and
employee-related costs.
sale.
2000 Charges
In 2000, severance and employee-related costs of $1 million that had been recorded in the 1999 restructuring were reversed due to refinements in estimates. Facilities and related costs reflect $2 million of recoveries in 2000net gains (recoveries) on sale of owned facilities identified for charges recordedclosure in the 1999 and 1996 restructuring.
A charge of $958,000 for consulting fees was incurred during 2000 related
to the completion of the Company's 1999 profitability improvement study.
In 2000, an asset write-down of $41 million resulted from the rapid industry-wide downturn in the market for new and used "Class 8"“Class 8” vehicles (the largest heavy-duty tractors and straight trucks)tractors) which led to a decrease in the market value of used tractors during the second half of 2000. The Company'sCompany’s unsold Class 8 inventory consists of units previously used by customers of the FMS segment. Approximately $15 million of the charge related to Class 8 tractors held for sale and identified in 2000 as increasingly undesirable and unmarketable due to lower-powered engines or a potential lack of future support for parts and service. The remainder of the charge related to other owned and leased tractors held for sale 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 2000. These charges were slightly offset with gains of $570,000$1 million on vehicles sold in the U.K. during 2000, for which an impairment charge had been recorded in the 1999 restructuring.
18
During 2000, the Company settled long-standing litigation with a former customer, OfficeMax, relating to a logistics services agreement that was terminated in 1997. In 2000, other net charges includesasset write-downs include $4 million in impairment
charges related to the write-down, net of recoveries, of certain assets related to the OfficeMax contract offset bycontract.
A charge of $1 million infor consulting fees was incurred during 2000 related to the completion of the Company’s 1999 profitability improvement study. Also during 2000, the Company recorded a $1 million charge for an adjustment to the Company’s indemnification reserve associated with the aforementioned insurance settlement and a $1 million reversal of certain other charges recorded in the 1999 restructuring.
1999 Charges
During 1999, the Company implemented several restructuring initiatives
designed to improve profitability and align the organizational structure with
the strategic direction of the Company. The restructuring initiatives resulted
in identification of approximately 250 employees whose jobs were terminated.
Contractual lease obligations associated with facilities to be closed as a
result of the restructuring amounted to $4 million. Strategic consulting fees of
$4 million were incurred during 1999 in relation to that year's restructuring
initiatives.
The Company also recorded asset impairments of $14 million in 1999 for
certain classes of specialized used vehicles, real estate and other assets held
for sale and software development projects that would not be implemented or
further utilized in the future. The Company also identified certain assets that
would be sold or for which development would be abandoned as a result of the
restructuring. During 1999, the Company also restructured its FMS operations in
the U.K. following the 1998 decision to retain the business.
In conjunction with the 1999 restructuring, the Company formed a captive
insurance subsidiary under which the Company's various self-insurance programs
are administered. Costs incurred related to the start-up of this entity totaled
$8 million. The Company also recorded $5 million for other costs incurred in
connection with the restructuring initiatives.
See "Restructuring and Other Charges, Net" in the Notes to Consolidated
Financial Statements for additional discussion.
21
OPERATING RESULTS BY BUSINESS SEGMENT
In thousands
- -------------------------------------------------------------------------------
Years ended December 31 2001 2000 1999
Revenue:
Fleet Management Solutions:
Full service lease and
program maintenance $ 1,855,865 1,865,345 1,816,599
Commercial rental 468,438 523,776 540,734
Fuel 658,325 773,320 587,193
Other 369,912 393,549 362,718
- -------------------------------------------------------------------------------
3,352,540 3,555,990 3,307,244
Supply Chain Solutions 1,453,881 1,595,252 1,441,029
Dedicated Contract Carriage 534,962 551,706 531,642
Eliminations (335,260) (366,156) (327,711)
- -------------------------------------------------------------------------------
Total revenue $ 5,006,123 5,336,792 4,952,204
===============================================================================
19
In thousands
- -------------------------------------------------------------------------------
Years ended December 31 2001 2000 1999
Contribution margin:
Fleet Management Solutions $ 339,326 382,851 372,164
Supply Chain Solutions 51,236 65,484 54,832
Dedicated Contract Carriage 57,679 60,828 59,633
Eliminations (36,989) (41,888) (40,280)
- -------------------------------------------------------------------------------
411,252 467,275 446,349
| Years ended December 31 | ||||||||||||||
| 2002 | 2001 | 2000 | ||||||||||||
| (In thousands) | ||||||||||||||
| Revenue: | ||||||||||||||
| Fleet Management Solutions: | ||||||||||||||
| Full service lease and program maintenance | $ | 1,795,254 | 1,855,865 | 1,865,345 | ||||||||||
| Commercial rental | 458,355 | 468,438 | 523,776 | |||||||||||
| Fuel | 582,643 | 658,325 | 773,320 | |||||||||||
| Other | 346,770 | 369,912 | 393,549 | |||||||||||
| 3,183,022 | 3,352,540 | 3,555,990 | ||||||||||||
| Supply Chain Solutions | 1,388,299 | 1,453,881 | 1,595,252 | |||||||||||
| Dedicated Contract Carriage | 517,961 | 534,962 | 551,706 | |||||||||||
| Eliminations | (313,017 | ) | (335,260 | ) | (366,156 | ) | ||||||||
| Total | $ | 4,776,265 | 5,006,123 | 5,336,792 | ||||||||||
| NBT: | ||||||||||||||
| Fleet Management Solutions | $ | 214,384 | 194,398 | 225,088 | ||||||||||
| Supply Chain Solutions | (6,221 | ) | (6,760 | ) | 10,035 | |||||||||
| Dedicated Contract Carriage | 31,157 | 34,755 | 37,282 | |||||||||||
| Eliminations | (34,636 | ) | (36,989 | ) | (41,888 | ) | ||||||||
| 204,684 | 185,404 | 230,517 | ||||||||||||
| Unallocated Central Support Services | (24,585 | ) | (25,396 | ) | (35,522 | ) | ||||||||
| Goodwill Amortization | — | (12,738 | ) | (11,660 | ) | |||||||||
| Earnings before restructuring and other charges, taxes and cumulative effect of change in accounting principle | 180,099 | 147,270 | 183,335 | |||||||||||
| Restructuring and other charges, net | (4,216 | ) | (116,564 | ) | (42,014 | ) | ||||||||
| Earnings before income taxes and cumulative effect of change in accounting principle | $ | 175,883 | 30,706 | 141,321 | ||||||||||
Beginning in the first quarter of 2002, the primary measurement of segment financial performance, defined as “Net Before Tax” (NBT), includes an allocation of Central Support Services (263,982) (283,940) (252,712)
Restructuring(CSS) and other charges, net (116,564) (42,014) (52,093)
Year 2000 expense -- -- (24,050)
Earnings from continuing operations
before income taxes $ 30,706 141,321 117,494
===============================================================================
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 expensesexcludes goodwill impairment, goodwill amortization and restructuring and other charges, is equalnet. Prior-year segment results have been restated to earnings from continuing
operations before income taxes.conform to the new measurement standard. CSS arerepresents those costs incurred to support all business segments, including sales and marketing, human resources, finance, corporate services shared management information systems, customer solutions, health and safety, legal and communications. Contribution marginThe objective of the NBT measurement is to provide clarity on the profitability of each business segment and, ultimately, to hold leadership of each business segment and each operating segment within each business segment accountable for their allocated share of CSS costs. To facilitate the comparison of 2002 business segment NBT to prior periods, prior-year goodwill amortization is now treated as a corporate, rather than segment, cost and is segregated as such.
Certain costs are considered to be overhead not attributable to any segment and remain unallocated in CSS. Included within the unallocated overhead remaining within CSS are the costs for investor relations, corporate communications, public affairs and certain executive compensation.
22
The FMS segment leases revenue earning equipment and provides fuel, maintenance and other ancillary services to the SCS and DCC segments. Inter-segment revenues and NBT are accounted for at approximate fair value as if the transactions were made with third parties. NBT related to inter-segment equipment and services billed to customers (equipment contribution) is included in both FMS and the business segment which served the customer and then eliminated (presented as "Eliminations"“Eliminations”). Equipment
The following table sets forth equipment contribution included in NBT for the Company’s SCS contribution margin in
2001, 2000 and 1999 was $17 million, $20 million and $19 million, respectively.
Equipment contribution included in DCC contribution margin in 2001, 2000 and
1999 was $20 million, $22 million and $21 million, respectively.segments:
| Years ended December 31 | ||||||||||||||
| 2002 | 2001 | 2000 | ||||||||||||
| (In millions) | ||||||||||||||
| Supply Chain Solutions | $ | 16 | 17 | 20 | ||||||||||
| Dedicated Contract Carriage | 19 | 20 | 22 | |||||||||||
| Total | $ | 35 | 37 | 42 | ||||||||||
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.FMS; however, with the availability of segment balance sheet information in 2002 (including targeted segment leverage ratios), interest expense (income) is also reflected in SCS and DCC.
These segment results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented.
Fleet Management Solutions
FMS revenue decreased 65 percent to $3.2 billion in 2002 compared with 2001. Results in 2002 were impacted by decreases in fuel services revenue. Dry revenue (revenue excluding fuel) decreased 3 percent in 20012002 compared with 2000.2001 reflecting revenue declines in leasing and commercial rental revenue. Full service lease and program maintenance revenue remained relatively flatdecreased 3 percent to $1.8 billion in 20012002 compared with 2000.2001. The Company anticipates generally flat to slightly lower full service
lease and program maintenance revenue in 2002decrease was primarily due to negative net sales over
recent periods primarily as a result of the slowingweak U.S. economy as well as decreases in variable billings, which are generally a function of total miles run by leased vehicles. Net sales takes into consideration new business with new
or existing customersThe Company anticipates unfavorable full service lease and program maintenance revenue changes with existing customerscomparisons to continue over the near term. Full service lease and program maintenance revenue may improve in the latter half of 2003 due to replacement vehicles or rate changes, netan increased emphasis on new sales and business retention and the expected improvement of full service leases that reach the end of their term during the reported period.U.S. economy.
All elements of commercial rental revenue (consisting of pure rental, lease extra and await new lease revenue) decreased in 20012002 compared with 2000.2001 reflecting slow economic conditions and a planned rental fleet reduction, which offset improved rental utilization and pricing. However, commercial rental revenue comparisons have steadily improved in 2002 and, in the fourth quarter of 2002, revenue grew 6 percent compared with the year-earlier period, marking the first rental revenue improvement in 10 quarters. U.S. rental fleet utilization improved to 76 percent in 2002 compared with 66 percent in 2001. In the U.S., pure rental revenue (total rental revenue less rental revenue related to units provided to full service lease customers) decreased 54 percent to $184$177 million in 20012002 compared with 20002001 due to the slowingcontinued softness in the U.S. economy. Lease extra revenue represents revenue on rental vehicles provided to existing full service
20
178 percent to $116$107 million in 2001.2002 compared with the prior year. 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 2001,2002, await new lease revenue decreased 47 percent toof $18 million marginally declined in the U.S. Suchin comparison to prior year. The U.S. commercial rental fleet size declined 8 percent in 2002 as compared with 2001. Rental statistics are monitored for the U.S. only; however, management believes such metrics to be indicative of rental product performance for the Company as a whole. The Company expects commercial rental revenue to improve in 2003 based on positive revenue trends experienced in the second half of 2002 and the expected improvement of the U.S. economy in 2003.
23
FMS revenue decreased 6 percent to $3.4 billion in 2001 compared with 2000. Dry revenue decreased 3 percent in 2001 compared with 2000 reflecting revenue declines were due toin commercial rental revenue. Full service lease and program maintenance remained relatively flat in 2001 compared with 2000. All elements of commercial rental revenue decreased in 2001 compared with 2000 as a result of lower 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. RentalU.S. rental fleet utilization was 66 percent in 2001 compared with 71 percent in 2000. RentalThe U.S. commercial rental fleet utilization
decreased less than rentalsize declined 8 percent in 2001 as compared with 2000.
Fuel services revenue declined 11 percent to $583 million in 2002 compared with 2001, as a result of lower volume and pricing, particularly during the implementationfirst half 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.2002. Fuel services revenue decreased 15 percent in 2001 compared with 2000 due to lower volume and pricing. Other transportation services revenue, consisting of non-contractual third-party maintenance, trailer rentals and other ancillary revenue to support product lines decreased 6 percent in 2002 and 2001, compared with prior years.
FMS NBT increased 10 percent to $214 million in 2002 compared with 2001. The increase was due primarily to decreased sales volumeimproved rental utilization, lower interest expense and secondly,operating expense reductions due to cost management and process improvement initiatives since last year. NBT for 2002 also benefited from lower carrying costs on used vehicles held for sale (owned and leased) because of reduced sales
prices.vehicle counts and, to a lesser extent, improved pricing on tractor sales. Such improvements were partially offset by increased pension expense of $23 million in 2002 over 2001. FMS revenue increased 8 percent in 2000 compared with 1999. Full service
lease and program maintenance revenue increased in 2000 compared with 1999 as a
result of growth in both fleet size and average revenue per unit. Commercial
rental revenue decreased in 2000 compared with 1999 due to increased revenue in
1999 as a result of a backlog in the arrival of new vehicles for full service
lease customers. Rental vehicles were provided to these customers until new full
service lease vehicles arrived and were prepared for use. In 2000, fuel revenue
increased as a result of increases in fuel prices. FMS realized minimal changes
in margin as a result of fuel price increases.
Contribution marginNBT as a percentage of dry revenue (revenue excluding fuel)was 8 percent in 2002 compared with 7 percent in 2001. FMS NBT decreased 14 percent to 13$194 million in 2001 compared with 2000. FMS NBT as a percentage of dry revenue was 7 percent in 2001 compared with 148 percent in 2000 and was flat in
2000 compared with 1999.2000. The decrease in 2001 was attributable to the decrease in gains from the sale of equipment due to weakened used truck market demand, lower net pension income in 2001 compared with 2000 and decreased rental contribution marginprofitability resulting from the decline in rental revenue. In 2000,
improvements in full service lease margins, decreased running costs and the
impact of net pension income on benefits costs were offset by reduced gains in
vehicle sales compared with 1999. Decreased running costs in 2000 were generally
attributable to a decrease in the average age of the fleet. Pension income attributable to FMS from the Company's principal pension plan in the U.S.
decreased by more than $33 million in 2001 compared with 2000 and increased by $27 million
in 2000 compared with 1999.2000.
The Company'sCompany’s fleet of owned and leased revenue earning equipment is summarized as follows:
Numberfollows (number of Units
- --------------------------------------------------------------------------------
December 31 2001 2000
By type:
Trucks 66,000 66,800
Tractors 52,400 56,400
Trailers 46,700 48,500
Other 5,000 4,600
- --------------------------------------------------------------------------------
170,100 176,300
================================================================================
By business:
Full service lease 126,900 130,700
Commercial rental 40,200 42,200
Service and other vehicles 3,000 3,400
- --------------------------------------------------------------------------------
170,100 176,300
================================================================================
21
| December 31 | |||||||||
| Number of Units | 2002 | 2001 | |||||||
| By type: | |||||||||
| Trucks | 62,200 | 66,000 | |||||||
| Tractors | 48,800 | 52,400 | |||||||
| Trailers | 44,800 | 46,700 | |||||||
| Other | 5,600 | 5,000 | |||||||
| Total | 161,400 | 170,100 | |||||||
| By business: | |||||||||
| Full service lease | 120,900 | 126,900 | |||||||
| Commercial rental | 37,600 | 40,200 | |||||||
| Service and other vehicles | 2,900 | 3,000 | |||||||
| Total | 161,400 | 170,100 | |||||||
| Owned | 124,800 | 117,700 | |||||||
| Leased | 36,600 | 52,400 | |||||||
| Total | 161,400 | 170,100 | |||||||
24
The totals in each of the tables above include the following non-revenue earning equipment:
Numberequipment (number of Units
- --------------------------------------------------------------------------------
December 31 2001 2000
Not yet earning revenue (NYE) 1,200 2,400
No longer earning revenue (NLE):
Units held for sale 5,200 5,100
Other NLE units 4,700 3,200
- --------------------------------------------------------------------------------
11,100 10,700
================================================================================rounded to the nearest hundred):
| December 31 | |||||||||
| Number of Units | 2002 | 2001 | |||||||
| Not yet earning revenue (NYE) | 1,100 | 1,200 | |||||||
| No longer earning revenue (NLE): | |||||||||
| Units held for sale | 3,500 | 5,200 | |||||||
| Other NLE units | 3,500 | 4,700 | |||||||
| Total | 8,100 | 11,100 | |||||||
NYE units represent new units on hand that are being prepared for deployment to a lease customer or into the rental fleet. Preparations include activities such as adding lift gates, paint, decals, cargo area and refrigeration units. NLE units represent units held for sale, as well as other units for which no revenue has been earned in the previous 30 days. These vehicles may be temporarily out of service, being prepared for sale or not rented due to lack of demand. The total number of units not earning revenue of 8,100 units is at a 48 month low due to the Company’s efforts to redeploy surplus units and the continued downsizing of the commercial rental fleet.
Supply Chain Solutions
SCS revenue in 2002 decreased 5 percent to $1.4 billion compared with 2001. Operating revenue (which excludes FUM) decreased 4 percent in 2002 compared with 2001. The declines in revenue for 2002 reflect volume reductions in the electronics, high-tech and telecommunications and consumer products operating units as a result of the slowdown in the U.S. economy in general and those sectors specifically. The revenue decline was also impacted by the non-renewal of certain customer contracts and the currency devaluation and economic downturn in Argentina. Such revenue decreases were partially offset by new and expanded business in the automotive sector in the Company’s U.S. and European operations. Overall, in light of these factors, the Company expects unfavorable revenue comparisons to continue over the near term.
SCS revenue decreased 9 percent to $1.5 billion in 2001 compared with 2000 mostly due to volume reductions in North America and Latin America as a result of the continued worldwide economic slowdown. In North America, volume reductions were experienced in the Company'sCompany’s automotive operating unit were the result of
reduced auto production. Theand electronics, high-tech and high techtelecommunications operating units saw
reduced volumes due to slowed consumer demand in those sectors combined with lost business inthe non-renewal of certain customer contracts 2001. Volume decreases in Latin America were due to the slowing economies in Brazil and Argentina and to the sale of VehiculosBrazil’s outbound auto-carriage business in 2001. Additionally, revenue reductions occurred in 2001 due to the impact of exchange rates on translation of foreign subsidiaries, particularlysubsidiaries.
SCS NBT improved 8 percent to a deficit of $6 million in the U.K. and
Brazil, as well as to lost business2002 from a deficit of $7 million in the U.K. Such revenue decreases were
partially offset by business expansion in Mexico and Asia. The Company's Asian
operating unit was acquired at the end of the third quarter of 2000.2001. SCS revenue increased 11 percent in 2000 compared with the previous year.
Revenue growth in 2000 was due to expansion of business with existing customers
and addition of new customers, particularly automotive suppliers, aerospace,
electronics and technology companies.
Contribution marginNBT as a percentage of operating revenue was negative 0.6 percent in 2002 compared with negative 0.7 percent in 2001. SCS NBT was negatively impacted by facility lease termination charges of $3 million recorded in the fourth quarter of 2002, reduced revenue and higher overhead spending. The increased overhead spending was due to increased costs associated with profit improvement initiatives and higher employee benefit costs. These decreases were partially offset by new and expanded profitable business in the automotive and electronics, high-tech and telecommunications operating units, improvement in SCS European operations and continued benefits from margin improvement initiatives, including the elimination of certain unprofitable business and the implementation of cost containment controls.
SCS NBT decreased to 5
percenta deficit of $7 million in 2001 compared with 6 percentearnings of $10 million in 2000. The decrease in contribution
marginNBT was due primarily to the previously mentioned volume reductions as a result of the current economic downturn, lost businessthe non-renewal of customer contracts and increased operating costs, particularly related to the Company'sCompany’s transportation management operations. Contribution marginNBT as a percentage of operating revenue was negative 0.7 percent in 2001 compared with 0.9 percent in 2000.
25
Dedicated Contract Carriage
DCC revenue in 2002 decreased 3 percent to $518 million compared with the same period in 2001. NBT decreased 10 percent to $31 million in 2002 compared with 2001. The decrease in revenue was due primarily to the non-renewal of unprofitable business partially offset by new business in 2002. The decrease in NBT for 2002 reflects increased overhead spending partially offset by the non-renewal of unprofitable business and margin improvements in other operational areas. Higher sales and marketing costs, salaries and employee-related costs and insurance costs contributed to the higher overhead spending. NBT as a percentage of operating revenue was 6 percent in 20002002 compared with 57 percent in 1999. The improved contribution
margin percentage in 2000 compared with 1999 was the result of improved
performance in the Company's operations outside the U.S.
Dedicated Contract Carriage2001.
DCC revenue decreased 3 percent in 2001 compared with 20002000. NBT decreased 7 percent to $35 million in 2001 compared with 2000. The decreases were due primarily to volume reductions as a result of the current economic downturn and lost business. DCC revenue increased 4 percent in 2000 compared with 1999. In 2000,
such revenue growth was due to increased fuel costs billed to customers and net
business growth. Contribution marginNBT as a percentage of operating revenue remained relatively flat(which excludes FUM) was 7 percent in 2001 and 2000.
Central Support Services
CSS expenses were as follows:
| Years ended December 31 | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
| (In thousands) | |||||||||||||
| Sales and marketing | $ | 12,636 | 15,045 | 20,292 | |||||||||
| Human resources | 21,151 | 21,911 | 21,001 | ||||||||||
| Finance | 55,516 | 53,464 | 57,097 | ||||||||||
| Corporate services/public affairs | 7,672 | 8,023 | 10,099 | ||||||||||
| Information technology | 81,631 | 98,373 | 99,471 | ||||||||||
| Customer solutions | 7,845 | 13,280 | 19,297 | ||||||||||
| Health and safety | 9,192 | 9,046 | 9,840 | ||||||||||
| Other | 37,789 | 26,082 | 27,933 | ||||||||||
| Total CSS | 233,432 | 245,224 | 265,030 | ||||||||||
| Allocation of CSS to business segments | 208,847 | 219,828 | 229,508 | ||||||||||
| Unallocated CSS | $ | 24,585 | 25,396 | 35,522 | |||||||||
CSS decreased 5 percent to $233 million in 2002 compared with 20002001. The decrease in total CSS expense was due primarily to reductions in several elements of CSS expense as a result of expanded
businessthe Company’s continued cost containment actions, most notably in information technology (IT). Technology costs were lower in 2002 due primarily to lower costs resulting from in-sourcing of certain IT services combined with certain existing customersdecreased development and support costs as a result of the cancellation of an FMS IT project in the third quarter of 2001. Such decreases were partially offset by higher incentive compensation due to the impact of lost
business and volume reductions in 2001. DCC contribution margin as a percentage
of operating revenue was flat in 2000 compared with 1999.
22
Central Support Services
CSS expenses were as follows:
In thousands
- --------------------------------------------------------------------------------
Years ended December 31 2001 2000 1999
Sales and marketing $ 27,071 39,202 47,840
Human resources 21,911 21,001 17,775
Finance 53,464 57,097 53,600
Corporate services/public affairs 8,023 10,099 13,308
MIS 98,373 99,471 84,862
Customer solutions 20,909 19,297 15,845
Health and safety 9,046 9,840 8,964
Other 25,185 27,933 10,518
- --------------------------------------------------------------------------------
Total CSS $263,982 283,940 252,712
================================================================================improved overall Company performance.
CSS decreased 7 percent to $245 million in 2001 compared with 2000. The decrease in total CSS expense waswere due primarily to spending reductions in sales and marketing, corporate services and MIS expensecustomer solutions as a result of the Company's expense reduction initiatives. SuchThese initiatives in these areas included endingterminating the Company'sCompany’s sponsorship of the Doral Ryder Open, the sale of the Company'sCompany’s corporate jetaircraft and reducing the spending rate for new technology projects,
respectively.
CSS increased 12 percent in 2000 compared with 1999 due to increased
spending for MIS. Additionally, in 1999, CSS was reduced by a $5 million gain on
a real estate sale as well as $4 million of interest income earned on
temporarily investing the proceeds from the RPTS sale.
Currently, contribution margin is the measure of segment financial
performance that is primarily relied upon by management. In 2001, the Company
began a project to allocate CSS expenses to each business segment, as
appropriate. The objective is to provide management more clarity on the
profitability of each business segment (similar to a "earnings before income
taxes" or "NBT" measure) 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. 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. However, the Company has decided to provide contribution margin
after allocated CSS by business segment as additional information through the
end of its refinement period which is year-end 2001.
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. Thoseprojects.
CSS costs attributable to the business segments are generally allocated to FMS, SCS and DCC as follows:
. Sales and marketing, finance, corporate services and health and safety
- allocated based upon estimated and planned resource utilization.
. Human resources - individual costs within this category are allocated
in several ways, including allocation based on estimated utilization
and number of personnel supported.
. MIS - allocated principally based upon utilization-related metrics
such as number of users or minutes of CPU time.
. Customer Solutions - represents project costs and expenses incurred in
excess of amounts billable to a customer during the period. Expenses
are allocated to the business segment responsible for the project.
. Other - where allocated, the allocation is based on the number of
personnel supported.
23
The following table sets forth contribution margin for each of the Company's
business segments after CSS allocation for 2001 and 2000 (such information is
not available for 1999):
In thousands
- --------------------------------------------------------------------------------
Years ended December 31 2001 2000
Contribution margin after allocated CSS:
Fleet Management Solutions $ 187,965 219,759
Supply Chain Solutions (12,851) 3,918
Dedicated Contract Carriage 34,541 37,068
Eliminations (36,989) (41,888)
- --------------------------------------------------------------------------------
172,666 218,857
Central Support Services (unallocated) (25,396) (35,522)
Restructuring and other charges, net (116,564) (42,014)
- --------------------------------------------------------------------------------
Earnings before income taxes $ 30,706 141,321
================================================================================
DISCONTINUED OPERATIONS
On September 13, 1999, the Company completed the sale of RPTS for $940 million
in cash and realized a $339 million after-tax gain ($4.94 per diluted common
share). After-tax earnings from discontinued operations amounted to $12 million
in 1999. The transaction generated gains from the settlement and curtailment of
certain employee benefit and postretirement plans, offset by provisions for
severance and direct transaction and other costs. The RPTS disposal has been
accounted for as discontinued operations and accordingly, its operating results
and cash flows are segregated and reported as discontinued operations in the
accompanying consolidated financial statements.
| • | 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. | ||
| • | Information Technology— allocated principally based upon utilization-related metrics such as number of users or minutes of CPU time. |
26
| • | Customer Solutions— represents project costs and expenses incurred in excess of amounts billable to customers during the period. Expenses are allocated to the business segment responsible for the project. | ||
| • | Other— represents purchasing, legal, and other centralized costs and expenses including certain incentive compensation costs. Expenses, where allocated, are based primarily on the number of personnel supported. |
FINANCIAL RESOURCES AND LIQUIDITY
Cash Flows
The following is a summary of the Company'sCompany’s cash flows from continuing operating, financing and investing activities:
In thousands
- --------------------------------------------------------------------------------
Years ended December 31 2001 2000 1999
Net cash provided by (used in):
Operating activities $ 308,702 1,015,533 269,819
Financing activities (319,699) (363,599) (527,848)
Investing activities 6,893 (642,957) 228,067
- --------------------------------------------------------------------------------
Net cash flows from continuing operations $ (4,104) 8,977 (29,962)
================================================================================
| Years ended December 31 | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
| (In thousands) | |||||||||||||
| Net cash provided by (used in): | |||||||||||||
| Operating activities | $ | 632,787 | 308,702 | 1,015,533 | |||||||||
| Financing activities | (269,508 | ) | (319,699 | ) | (363,599 | ) | |||||||
| Investing activities | (376,908 | ) | 6,893 | (642,957 | ) | ||||||||
| Net cash flows from operations | $ | (13,629 | ) | (4,104 | ) | 8,977 | |||||||
A summarydetail of the individual items contributing to the cash flow changes is included in the Consolidated Statements of Cash Flows.
24
The increase in cash from operating activities in 2002 compared with 2001 was attributable to a reduction in overall working capital needs, changes in the aggregate balance of trade receivables sold and improved operating performance. The lower working capital needs in 2002 related primarily to lower levels of business activity as reflected in decreased revenue compared with the prior year. The decrease in cash used in financing activities in 2002 compared with the prior year reflects increased proceeds from stock option exercises, principally during the first half of 2002, and lower debt repayments. The increase in cash used in investing activities reflects proceeds of $411 million from a vehicle securitization in 2001 partially offset with a reduction in capital expenditures in 2002.
The decrease in cash flow from operating activities in 2001 compared with 2000 was primarily attributable to decreaseschanges 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 39 percent
to $556 million at December 31, 2001 compared with December 31, 2000. Cash used in financing activities slightly decreased in 2001 compared with 2000 as the
Company's increased2000. In 2001, lower net commercial paper borrowings were almostvirtually offset by decreased usehigher utilization of its
commercial paper program due primarily to interest rate decreases in the
Company's other more cost effective funding facilities as compared with the Company's commercial paper program. The increase in cash provided by investing activities in 2001 compared with 2000 was attributable to lower capital expenditures in 2001. Higher proceeds provided from the sale-leaseback of revenue earning equipment in 2001 (see "Financing and Other Funding Transactions"“Off-balance Sheet Arrangements”) were offset by decreased proceeds from the sales of property and revenue earning equipment primarily due to lower volumes and the continued weak demand in the used truck market.
Cash provided by
The Company refers to the net amount of cash generated from operating activities, increasedexcluding changes in 2000 compared with 1999
primarily due to increases inthe aggregate balance of trade receivables sold, and including collections on direct finance leases, proceeds from sale of assets and capital expenditures as “free cash flow.” The following table shows the sources of the Company’s free cash flow:
27
| Years ended December 31 | ||||||||||||
| 2002 | 2001 | 2000 | ||||||||||
| (In thousands) | ||||||||||||
| | ||||||||||||
| Cash provided by operating activities | $ | 632,787 | 308,702 | 1,015,533 | ||||||||
| Changes in the aggregate balance of trade receivables sold | 110,000 | 235,000 | (270,000 | ) | ||||||||
| Collections on direct finance leases | 66,489 | 66,204 | 67,462 | |||||||||
| Sales of property and revenue earning equipment | 152,685 | 175,134 | 229,908 | |||||||||
| Purchases of property and revenue earning equipment | (600,301 | ) | (656,597 | ) | (1,288,784 | ) | ||||||
| Net free cash flows | $ | 361,660 | 128,443 | (245,881 | ) | |||||||
The increase in 2000 and lowerfree cash flow in 2002 compared with 2001 was primarily attributable to a reduction in overall working capital needs and improved operating performance. The decrease in 1999. Cash usedworking capital is attributable in financing activitiespart to lower levels of business activity in 2002 as reflected in decreased in 2000revenue compared with 1999. During 1999,the prior year. The Company expects free cash of $528 million was usedflow to decline in financing
activities, primarily to repurchase $275 million of common stock and reduce debt
by $220 million. The stock repurchase program was completed in 1999 and there
was no such program in 2001 or 2000. Cash used in investing activities was $643
million compared with cash provided by investing activities of $228 million in
1999. In 1999, cash provided by investing activities was the result of proceeds
from the RPTS sale. After adjusting for such proceeds, cash used in investing
activities decreased in 2000 compared with 1999 primarily2003 as a result of reducedthe increased capital spending requirements discussed below. The increase in free cash flow in 2001 compared with 2000 was primarily attributable to a reduction in net capital spending levels ofoffset by lower operating performance and increased overall working capital expenditures.needs.
The following is a summary of capital expenditures:
In thousands
- --------------------------------------------------------------------------------
Years ended December 31 2001 2000 1999
Revenue earning equipment $ 579,320 1,186,787 1,627,206
Operating property and equipment 77,277 101,997 107,013
- --------------------------------------------------------------------------------
$ 656,597 1,288,784 1,734,219
================================================================================
| Years ended December 31 | ||||||||||||
| 2002 | 2001 | 2000 | ||||||||||
| (In thousands) | ||||||||||||
| | ||||||||||||
| Revenue earning equipment* | $ | 556,328 | 579,320 | 1,186,787 | ||||||||
| Operating property and equipment | 43,973 | 77,277 | 101,997 | |||||||||
| | ||||||||||||
| Total | $ | 600,301 | 656,597 | 1,288,784 | ||||||||
| * | 2002 excludes non-cash additions of $67 million in assets held under capital lease resulting from the extension of existing operating leases and other additions. |
The decreasedecreases in capital expenditures in 2002 and 2001 was principallywere due primarily to reduced market demand, for new units as well as increased pricing disciplineimproved controls over new business,
which has resultedcapital expenditures and a reduction in fewer sales but improved margins on business sold.the volume of early replacements of full service leases compared with 2000. 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,over the past two years. As part of its initiatives, the Company is pursuingsuccessfully implemented a strategy of extending certain full service leases rather than leasing new units. This allowsunits, which has allowed the Company to further control capital expenditures while frequently providing customers with vehicles at favorable pre-owned rates compared with rates on new units. Capital expenditures are anticipated to increase to approximately $890 million in 2003 as a result of higher levels of vehicle replacements. The Company expects to fund 20022003 capital expenditures with internally generated funds and borrowings. Such capital expenditures are anticipated to be approximately $580
million in 2002.
The decrease in capital spending in 2000 was planned based upon the
significant increase in capital spending and fleet replacement in FMS that took
place during the first half of 1999. Capital spending for 1999 was consistent
with management's expectations of anticipated growth and fleet replacement in
full service leasing and commercial rental. However, capital spending was
significantly above plan during the first half of 1999. The excess spending
reflected higher than anticipated requirements for replacement.
No acquisitions were completed in 2002 or 2001. During 2000, and 1999, the Company completed a few immaterial acquisitions, each of which was accounted for using the purchase method of accounting. Total consideration for these acquisitions was $28 million in 2000 and $13 million in 1999.million. The Company will continue to evaluate selective acquisitions in FMS, SCS and SCSDCC in 2002.
25
Financing and Other Funding Transactions
Ryder
The Company 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
28
medium-term public and private debt, including asset-backed securities, bank term loans, and
leasing arrangements, as well as fixed-rate and variable-rate financing available
through bank credit facilities, commercial paper and sale of receivable conduits.program.
Total debt was $1.6 billion at December 31, 2002, a decrease of 9 percent from December 31, 2001. The Company also periodically enters into sale-leaseback agreements onissued $150 million of medium-term notes and retired $166 million of medium-term notes in 2002. U.S. commercial paper outstanding at December 31, 2002 decreased to $118 million, compared with $210 million at December 31, 2001. During 2002, the Company added capital lease obligations of $67 million primarily in connection with the extension of existing operating leases of revenue earning equipment, which are primarily accounted for as operating leases.equipment. The Company’s foreign debt was $238 million at December 31, 2002, a decrease of approximately $104 million from December 31, 2001. The Company’s percentage of variable-rate financing obligations (including notional value of swap agreements) was 37 percent at December 31, 2002, compared with 27 percent at December 31, 2001. Generally, the Company targets a variable-rate exposure of 25 to 45 percent of total obligations.
Debt totaled $1.7 billion at the end of 2001 compared with $2.0 billion at the end of 2000. The decrease in debt in 2001 was principally due to repayment of $100 million in debentures in addition toand a decrease of $231 million in commercial paper borrowings, which were repaid with proceeds of sale-leaseback transactions described below. In addition to the Company'sCompany’s reduced debt in 2001, receivables sold decreased $235 million in 2001 compared with 2000. Decreased debt levels and reduced overall funding needs were generally the result of reduced levels of capital expenditures on revenue-earningrevenue earning equipment.
Debt totaled $2.0 billion at the end of 2000 compared with $2.4 billion at
the end of 1999.
The decrease inCompany’s debt in 2000 was principally due to repayment
of $426 million in medium-term notes, net of an increase of $108 million in
commercial paper borrowing. The Company's reduced debt in 2000 was also due to
an increase of $270 million of trade receivables sold in 2000 compared with
1999.
The Company's debt ratings as of December 31, 2001 were as follows:
- -----------------------------------------------------------------------------
Short Long
Term Term
Moody's Investors Service P2 Baa1
Standard & Poor's Ratings Group A2 BBB
Fitch Ratings F2 BBB+
- -----------------------------------------------------------------------------
A downgrade of the Company's debt below investment grade level would limit the
Company's ability to issue commercial paper and would result in the Company no
longer having the ability to sell trade receivables under the agreement
described below. As a result, the Company would have to rely on other
established funding sources described below.
The Company's debt-to-equityequity and related ratios were as follows:
- --------------------------------------------------------------------------------
December 31 2001 2000
Debt to equity 139% 161%
Total obligations to equity 199% 258%
Total obligations to equity, including securitizations 234% 275%
- --------------------------------------------------------------------------------
| December 31 | ||||||||
| 2002 | 2001 | |||||||
| (In thousands) | ||||||||
| | ||||||||
| On-balance sheet debt | $ | 1,551,468 | 1,708,684 | |||||
| Debt to equity | 140 | % | 139 | % | ||||
| Total obligations excluding securitizations | 1,921,905 | 2,443,104 | ||||||
| Total obligations to equity excluding securitizations | 173 | % | 199 | % | ||||
| Total obligations including securitizations | 2,232,860 | 2,884,483 | ||||||
| Total obligations to equity including securitizations | 201 | % | 234 | % | ||||
Debt to equity consists of the Company'sCompany’s on-balance sheet debt for the period divided by total equity. Total obligations to equity represents debt plus the following off-balance sheet funding, all divided by total equity: . Receivables(1) receivables sold, . Theand (2) the present value of minimum lease payments and guaranteed residual values under operating leases for equipment, discounted at the interest rate implicit in the leaselease. Total obligations to equity, including securitizations, consists of total obligations, described above, plus the present value of contingent rentals under the Company'sCompany’s securitizations (assuming customers make all lease payments on securitized vehicles when contractually due), discounted at the average interest rate paid to investors in the trust, all divided by total equity. 26
The decreaseOff-balance sheet obligations with special-purpose entities, primarily securitizations, were approximately $381 million and $536 million at December 31, 2002 and 2001, respectively.
All leverage ratios in 2002 were impacted by a non-cash equity charge of $228 million (after-tax) recorded as of December 31, 2002 in connection with additional minimum pension liability adjustments — see “Pension Information” below for additional discussion. Excluding the pension equity charge, all ratios declined in 2002 as a result of the above ratios in 2001 was driven by the Company'sCompany’s reduced funding needs as a result ofattributable to decreases in purchases of revenue earning equipment. For 2003, the Company anticipates these ratios to increase as a result of higher anticipated capital spending.
The Company participates in an agreement, as amended from time to time, to sell with limited recourse, trade receivables on a revolving and uncommitted basis. This agreement expires in July 2004. In June 2002, the Company anticipates additional reductionsreduced the amount available for sale under its trade receivable facility from $375 million to $275 million as a result of a reduction in eachoverall capital needs. The Company sells receivables in order to fund operations,
29
particularly when the cost of these ratiossuch sales is cost effective compared with other means of funding, notably, commercial paper. Receivables are sold first to a bankruptcy-remote special-purpose entity, Ryder Receivables Funding LLC (“RRF LLC”), that is included in the Company’s consolidated financial statements. RRF LLC then sells certain receivables to unrelated commercial entities at a loss, which approximates the purchasers’ financing cost of issuing its own commercial paper backed by the trade receivables over the period of anticipated collection. The Company is responsible for servicing receivables sold, but has no retained interests. At December 31, 2002 and 2001, the outstanding balance of receivables sold pursuant to this agreement was $0 and $110 million, respectively. Losses on receivable sales associated with this program were $2 million in 2002, $9 million in 2001 and $17 million in 2000 and are included in miscellaneous (income) expense, net. RRF LLC records estimates of losses under the recourse provision which are included in accrued liabilities. Since no receivables were sold at the end of 2002, no amount of available recourse or recognized recourse obligation existed as of December 31, 2002. At December 31, 2001, the amount of available recourse was $14 million and the estimated losses under the recourse obligation attributed to receivables sold were $1 million. The decrease in trade receivables sold since December 31, 2001 is due to expected improvementsa reduced need for cash as a result of lower working capital needs. See “Receivables” in operating cash flowthe Notes to Consolidated Financial Statements for a further discussion on the Company’s sale of receivables.
The Company’s ability to access unsecured debt in the capital markets is linked to both its short and reduced
cash needs duelong-term debt ratings. These ratings are intended to planned further reductionsprovide guidance to investors in capital expenditures.
During 2001,determining the credit risk associated with particular Company securities based on current information obtained by the rating agencies from the Company replacedor other sources that such agencies consider to be reliable. Lower ratings generally result in higher borrowing costs as well as reduced access to capital markets.
The Company’s debt ratings as of December 31, 2002 were as follows:
| Short- | Long- | |||||||
| Term | Term | |||||||
| Moody’s Investors Service | P2 | Baa1 | ||||||
| Standard & Poor’s Ratings Group | A2 | BBB | ||||||
| Fitch Ratings | F2 | BBB+ | ||||||
On December 19, 2001, Moody’s Investor Service confirmed the Company’s long-term debt rating and changed its $720 million global revolving credit
facility withlong-term debt rating outlook to negative. The Company’s debt ratings have remained unchanged since the first quarter of 2001. A downgrade of the Company’s debt below investment grade level would limit the Company’s ability to issue commercial paper and would result in the Company no longer having the ability to sell trade receivables under the agreement described above or participate in existing derivative transactions. As a newresult, the Company would have to rely on other established funding sources described below.
The Company has established an $860 million global revolving credit facility. The new facility is composed of $300 million which matures in May 20022003 and is renewable annually (and is in the process of being renewed), and $560 million which matures in May 2006. The primary purposes of the credit facility are to finance working capital and provide support for the issuance of commercial paper. At the Company'sCompany’s option, the interest rate on borrowings under the credit facility is based on libor,LIBOR, prime, federal funds or local equivalent rates. The credit facility'sfacility’s annual facility fee ranges from 12.5 to 15.0 basis points applied to the total facility of $860 million based on the Company'sCompany’s current credit ratings. At December 31, 2002, $674 million was available under this global credit facility. Of this amount, $300 million was available at a maturity of less than one year. Foreign borrowings of $100$68 million were outstanding under the facility at December 31, 2001.2002. In order to maintain availability of funding, the global revolving credit facility requires the Company to maintain a ratio of debt to consolidated tangible net worth, as defined, of less than or equal to 300 percent. The ratio at December 31, 20012002 was 117119 percent.
In September 1998, the Company filed an $800 million shelf registration statement with the Securities and Exchange Commission (SEC). Proceeds from debt issues under the shelf registration have been and are availableexpected to
30
be used for capital expenditures, debt refinancing and general corporate purposes. The Company participates in an agreement, as amended from time to time, to
sell with limited recourse up to $375 million of trade receivables on a
revolving basis. This agreement expires in July 2004. The Company sells the
receivables in order to fund the Company's operations, particularly when the
cost of such sales is cost effective compared with other means of funding,
notably, commercial paper. The receivables are sold first to a bankruptcy remote
special purpose entity, Ryder Receivables Funding LLC ("RRF LLC"), that is
included in the Company's consolidated financial statements. RRF LLC then sells
certain receivables to unrelated commercial entities at a loss, which
approximates the purchaser's financing cost of issuing its own commercial paper
backed by the trade receivables over the period of anticipated collection. The
Company is responsible for servicing receivables sold but has no retained
interests. At December 31, 2001 and 2000,2002, the outstanding balanceCompany had $187 million of receivables
sold pursuant todebt securities available for issuance under this agreement was $110 million and $345 million, respectively.
Losses on receivable sales associated with this program were $9 million in 2001,
$17 million in 2000 and $10 million in 1999 and are included in miscellaneous
(income) expense, net. The Company maintains an allowance for doubtful
receivables based on the expected collectibility of all receivables, including
receivables sold. 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 2001 (described below) as well as increased use of the Company's
other funding facilities. See "Receivables" in the Notes to Consolidated
Financial Statements for a further discussion on the Company's sale of
receivables.shelf registration statement.
As of December 31, 20012002 the Company had the following amounts available to fund operations under the aforementioned facilities:
In millions
- --------------------------------------------------------------------------------
Global revolving credit facility ($300 limited to less than one year) $550
Shelf registration statement 337
Trade receivables facility 265
- --------------------------------------------------------------------------------
| (In millions) | ||||
| Global revolving credit facility ($300 limited to less than one year) | $ | 674 | ||
| Shelf registration statement | 187 | |||
| Trade receivables facility — uncommitted | 275 | |||
The Company believes such facilities, along with the Company's commercial paper
program and other funding sources, will be sufficient to fund operations in 2002.
27
Off-balance Sheet Arrangements
In addition to the financing activities described above, the Company executes sale-leaseback transactions with third-party financial institutions as well as with substantive special purposespecial-purpose entities ("SPEs"(“SPEs”) which facilitate sale-leaseback transactions with multiple third-party investors ("securitizations"(“vehicle securitizations”). In general, sale-leaseback transactions result in a reduction in revenue earning equipment and debt on the balance sheet, as proceeds from the sale of revenue earning equipment are primarily used to repay debt. Accordingly, sale-leaseback transactions will result in reduced depreciation and interest expense and increased equipment rental expense. Sale-leaseback transactions (including vehicle securitizations) are generally executed from time to time for the following reasons:
. Toin order to lower the total cost of funding the Company'sCompany’s operations, . Toto diversify the Company'sCompany’s funding among different classes of investors (e.g. regional banks, pension plans, insurance companies, etc.)
. To, and to diversify the Company'sCompany’s funding among different types of funding instrumentsinstruments.
The Company did not enter into any sale-leaseback or securitization transactions during the year ended December 31, 2002. Proceeds from sale-leaseback transactions were $411 million $373 million and $594$373 million in 2001 and 2000, and 1999, respectively. Included inUnder the transactions, the vehicles were sold for approximately their carrying value. The sale-leaseback transactionstransaction in 2001 and 1999 werewas a vehicle securitization
transactions in which the Company sold a beneficial interest in certain leased
vehicles subject to leases to a separately rated and unconsolidated vehicle lease truststrust and subsequently entered into an operating lease ("(“program operating lease"lease”) with those trusts.the trust. A prospectus for eachthe transaction is on file with the SEC. Such
securitizations generated cash proceeds of $411 million and $294 millionThe Company has executed other similar vehicle securitization transactions in 2001
and 1999, respectively. The vehicles were sold for approximately their carrying
value.previous years. The Company retained an interest in the vehicle lease truststrust in the form of subordinated notes issued at the date of eachthe sale. The Company has provided credit enhancement for eachthe sale in the form of a one-time up front cash reserve deposit and a pledge of the subordinated notes, including interest thereon, as additional security for the vehicle securitization trusts to the extent that payments under the program operating leaseslease are not made due to delinquencies and incurred losses under the program operating leaseslease and related vehicle sales. The trusts relytrust relies on collections from the program operating leases,lease, sales proceeds from the disposition of such vehicles and cash reserve fundscredit enhancements to make payments to investors. The trusts aretrust is solely liable for such payments to investors, who are all independent of the Company. Other than the credit enhancement noted above, the Company does not guarantee investors'investors’ interests in the securitization trusts.trust. See "Leases"“Leases” in the Notes to Consolidated Financial Statements for a further discussion on the Company'sCompany’s securitization transactions.
31
The following table summarizes the Company'sCompany’s undiscounted on and off-balance sheet contractual cash obligations and contingent rentals at December 31, 2001:
2002:
| 2003 | 2004 | 2005 | 2006 | 2007 | Thereafter | Total | |||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| Long-term debt | $ | 139,769 | 165,490 | 208,438 | 383,458 | 235,761 | 347,787 | 1,480,703 | |||||||||||||||||||||
| Capital leases | 22,600 | 37,960 | 9,912 | 293 | — | — | 70,765 | ||||||||||||||||||||||
| Total debt | 162,369 | 203,450 | 218,350 | 383,751 | 235,761 | 347,787 | 1,551,468 | ||||||||||||||||||||||
Operating leases (a) | 297,964 | 128,679 | 75,079 | 53,914 | 41,650 | 56,393 | 653,679 | ||||||||||||||||||||||
| Total contractual cash obligations | 460,333 | 332,129 | 293,429 | 437,665 | 277,411 | 404,180 | 2,205,147 | ||||||||||||||||||||||
Contingent rentals(b) | 101,898 | 89,371 | 65,805 | 29,077 | 6,608 | 690 | 293,449 | ||||||||||||||||||||||
| Total | $ | 562,231 | 421,500 | 359,234 | 466,742 | 284,019 | 404,870 | 2,498,596 | |||||||||||||||||||||
| (a) | The amounts in the previous table are based upon the assumption that revenue earning equipment will remain on lease for the length of time specified by the respective lease agreements. No effect has been given to renewals, cancellations, contingent rentals or future rate changes, except as described below for vehicle securitization transactions. | |
| (b) | Contingent rentals |
Guarantees
In the ordinary course of business, the Company provides certain guarantees or indemnifications to third parties as part of certain lease, financing and sales agreements. Certain guarantees and indemnifications, whereby the Company may be contingently required to make a payment to a third-party, are required to be disclosed even if the likelihood of payment is considered remote. The Company’s financial guarantees as of December 31, 2002 consisted of the following:
| Maximum exposure | Carrying amount | ||||||||
| Guarantee | of guarantee | of liability | |||||||
| (In millions) | |||||||||
| Vehicle residual value guarantees: | |||||||||
Sale and leaseback arrangements — end of term guarantees(a) | $ | 203 | 19 | ||||||
| Finance lease program | 4 | 1 | |||||||
| Used vehicle financing | 7 | 4 | |||||||
| Standby letters of credit | 15 | — | |||||||
| Total | $ | 229 | 24 | ||||||
| (a) | Amounts exclude contingent rentals associated with residual value guarantees on certain vehicles held under operating leases for which the guarantees are conditional upon early termination of the lease agreement as a result of a vehicle disposal. The Company’s maximum exposure for early lease termination guarantees was approximately $184 million, with $9 million recorded as a liability at December 31, 2002. |
32
As more fully described in the “Leases” Note to Consolidated Financial Statements, the Company has assumed that the full monthly payment for each vehicle is received from the
customer exactly when such payment is due, and that there are no defaults,
prepayments or early termination of leases between the Company and its
customers. Contingent rentals in the table above are estimated based upon this
assumption. The actual amount and timing of contingent rentals paid by the
Company may vary from that assumed above.
Certain of the Company's agreementsentered into transactions for the sale and operating leaseback of revenue earning equipment contain purchase and/or renewal options as well as
limited guarantees ofequipment. The transactions resulted in the lessor's residual value ("residual value guarantees").
The Company's reserve forCompany providing the lessors with residual value guarantees at the end of the lease term. Therefore, to the extent that the sales proceeds from the final disposition of the assets are lower than the residual value guarantee, the Company is required to make payment for the remaining amount. The Company’s maximum exposure for such guarantees, including credit enhancements on vehicle securitizations, was $44approximately $203 million, with $19 million recorded as a liability at December 31, 2001. See discussion on depreciation and rental of revenue earning equipment
at "Accounting Matters" for2002.
Under a further discussion onseparate arrangement, the Company also provides vehicle residual value guarantees.guarantees to an independent third-party relating to a customer finance lease program. To the extent that the sales proceeds from the final disposition of the assets are lower than the residual value guarantee, the Company is required to make payment for the remaining amount. At December 31, 2001,2002, the Company’s maximum exposure under this program was approximately $4 million, of which $1 million was recorded.
The Company maintains an agreement with an independent third-party for the financing of used vehicle purchases by its customers. Under the terms of the agreement, the Company finances the customer’s purchase and immediately sells its rights under the finance contract to the financial institution. The Company provides a guarantee on defaulted contracts up to a maximum of 11 percent of the outstanding principal balances. At the end of 2002, the Company’s maximum exposure under the guarantee was approximately $7 million. The recorded liability under this guarantee at December 31, 2002 was $4 million.
At December 31, 2002, the Company had outstanding letters of credit outstanding
totaling $115 million, whichthat primarily guarantee certainvarious 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 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.
claims deductible. No liability has been recorded by the Company for its guarantee of such claims, however, the total assumed liabilities in which the Company guarantees payment was estimated to be approximately $15 million at December 31, 2002.
Pension Information
As of December 31, 2002, the Company recorded a non-cash equity charge of $228 million (after-tax) in connection with the accrual of an additional minimum pension liability. The equity charge reflects the under-funded status of the Company’s qualified pension plans (primarily U.S. qualified plan) resulting from declines in the market value of equity securities and declines in long-term interest rates. Although this non-cash charge impacts reported leverage ratios, it does not affect the Company’s compliance with existing financial debt covenants.
The funded status of the Company’s pension plans is dependent upon many factors, including returns on invested assets and the level of market interest rates. While the Company is not legally required to make a contribution to fund its U.S. pension plan until September 2004, it reviews pension assumptions regularly and may from time to time make contributions to its pension plans. The Company made pension contributions of $26 million to global pension plans in 2002. The Company estimates the present value of its required pension plan contributions over the next 5 years to be approximately $140 million for the U.S. pension plan, its primary plan.
Market Risk
In the normal course of business, the Company is exposed to fluctuations in interest rates, foreign exchange rates and fuel prices. The Company manages such exposures in several ways, including, in certain circumstances, the use of a variety of derivative financial instruments when deemed prudent. The Company does not enter into leveraged derivative financial transactions or use derivative financial instruments for trading purposes.
Exposure to market risk for changes in interest rates relates primarily to debt obligations. The Company'sCompany’s interest rate risk management program objective is to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. The Company manages its exposure to interest rate risk through the proportion of fixed rate and variable rate debt in the total debt portfolio. From time to time, the Company also uses an
33
interest rate swap and cap agreements to manage its fixed rate and variable rate exposure and to better match the repricing of its debt instruments to that of its portfolio of assets. See “Financial Instruments and Risk Management” Note to Consolidated Financial Statements for further discussion on outstanding interest rate swap and cap agreements at December 31, 2002.
At December 31, 2002, the Company had $878 million of fixed rate debt (excluding capital leases) with a weighted-average interest rate of 6.7 percent and a fair value of $964 million, including the effects of interest rate swaps. A hypothetical 10 percent decrease or increase in the December 31, 2002 market interest rates would impact the fair value of the Company’s fixed rate debt by approximately $18 million. At December 31, 2001, anthe Company had $1.2 billion of fixed rate debt (excluding capital leases) with a weighted-average interest rate of 6.4 percent and a fair value of $1.2 billion. A hypothetical 10 percent decrease or increase in the December 31, 2001 market interest rates would impact the fair value of the Company’s fixed rate debt by approximately $17 million. The Company estimates the fair value of derivatives based on dealer quotations.
At December 31, 2002, the Company had $603 million of variable-rate debt, including the effects of interest rate swaps, which effectively changed $322 million of fixed rate debt instruments with a weighted-average interest rate of 6.7 percent to LIBOR based floating rate debt at a current weighted-average interest rate of 3.0 percent. Changes in the fair value of the interest rate swaps are offset by changes in the fair value of the debt instruments and no net gain or loss is recognized in earnings. The fair value of the interest rate swap agreement with a notional
value of $22 million was outstanding, which was accounted for as a cash flow
hedge of fixed rate debt. No interest rate swap or cap agreements were
outstanding at December 31, 2000.
The following tables summarize debt obligations outstanding as2002 totaled $24 million. As of December 31, 2001, and 2000 expressed in U.S. dollar equivalents. The tables show the amountCompany had $459 million of variable-rate debt including current portion, and related weighted averagewith a weighted-average interest rates by contractual maturity dates. Weighted average variable ratesrate of 3.3 percent. Interest expense under the majority of these arrangements are based on implied forward rates in the yield curve at December 31, 2001 and 2000. This
information should be read in conjunction with the "Debt" note to the
consolidated financial statements.
29
Expected Maturity Date
- ------------------------------------------------------------------------------------------------------------------------------
2001 Years ended December 31
In thousands 2002 2003 2004 2005 2006 Thereafter Total Fair Value
- ------------------------------------------------------------------------------------------------------------------------------
Fixed-rate debt:
Dollar denominated $ 166,227 75,591 72,099 199,995 150,317 407,347 1,071,576 1,065,624
Average interest rate 6.93% 7.00% 7.07% 7.12% 7.25% 7.42%
Pound Sterling denominated 50,960 -- -- -- 21,840 -- 72,800 73,907
Average interest rate 7.05% 6.39% 6.39% 6.39% 6.39% --
Canadian Dollar denominated 15,705 40,833 15,705 -- -- -- 72,243 77,156
Average interest rate 6.58% 6.43% 6.51% -- -- --
Other 2,128 2,124 1,550 1,550 9,999 -- 17,351 17,098
Average interest rate 4.90% 4.85% 4.79% 4.84% 4.72% --
Variable-rate debt:
Dollar denominated/(a)/ 25,000 -- 50,000 -- 215,309 -- 290,309 290,309
Average interest rate 2.90% 4.94% 6.18% 6.54% 6.79% --
Pound Sterling denominated 42,952 -- 21,840 -- 36,400 -- 101,192 101,192
Average interest rate 5.32% 6.30% 6.51% 6.38% 6.17% --
Canadian Dollar denominated -- -- -- -- 57,871 -- 57,871 57,871
Average interest rate 2.47% 3.93% 5.29% 5.94% 6.16% --
Other 9,559 146 -- -- -- -- 9,705 9,705
Average interest rate 5.74% 10.00% -- -- -- --
-----------------------
Total Debt (excluding capital leases) $1,693,047 1,692,862
=======================
/(a)/ Includes commercial paper which is assumed to be renewed through May 2006
. As discussed in the "Debt" note to the consolidated financial statements, the
commercial paper program is supported by the Company's $860 million global
credit facility which is composed of $300 million which matures in May 2002 and
is renewable annually, and $560 million which matures in March 2006 .LIBOR. The Company classified commercial paper borrowings as long-term debtcurrently estimates that a hypothetical 10 percent increase in the
consolidated balance sheets at December 31, 2001 and 2000.
30
market interest rates would impact pre-tax income by $2 million.
Expected Maturity Date
- ------------------------------------------------------------------------------------------------------------------------------
2000 Years ended December 31
In thousands 2001 2002 2003 2004 2005 Thereafter Total Fair Value
- ------------------------------------------------------------------------------------------------------------------------------
Fixed-rate debt:
Dollar denominated $264,300 166,324 75,591 72,099 199,962 406,973 1,185,249 1,120,611
Average interest rate 7.00% 6.96% 7.04% 7.13% 7.21% 7.52%
Pound Sterling denominated 22,397 74,655 -- -- -- -- 97,052 98,186
Average interest rate 8.13% 7.91% -- -- -- --
Canadian Dollar denominated 10,008 33,360 30,024 13,344 -- -- 86,736 90,325
Average interest rate 6.64% 6.57% 6.24% 6.25% -- --
Other 4,238 1,363 1,360 723 723 723 9,130 9,070
Average interest rate 6.77% 5.97% 6.11% 6.31% 6.31% 6.31%
Variable-rate debt:
Dollar denominated -- 447,340 5,000 -- -- -- 452,340 452,340
Average interest rate 6.21% 5.61% 6.26% -- -- --
Pound Sterling denominated 8,212 61,217 -- -- -- -- 69,429 69,429
Average interest rate 5.78% 5.64% -- -- -- --
Canadian Dollar denominated 67,387 -- -- -- -- -- 67,387 67,387
Average interest rate 6.22% -- -- -- -- --
Other 27,440 1,596 123 -- -- -- 29,159 29,159
Average interest rate 6.77% 6.64% 9.25% -- -- --
----------------------
Total Debt (excluding capital leases) $1,996,482 1,936,507
======================
Exposure to market risk for changes in foreign exchange rates relates primarily to foreign operations'operations’ buying, selling and financing in currencies other than local currencies and to the carrying value of net investments in foreign subsidiaries. The Company manages its exposure to foreign exchange rate risk related to foreign operations'operations’ buying, selling and financing in currencies other than local currencies by naturally offsetting assets and liabilities not denominated in local currencies. The Company also uses foreign currency option contracts and forward agreements from time to time to hedge foreign currency transactional exposure. No foreign currency option contracts or forward
agreements were outstanding at December 31, 2001 or 2000.
31
The Company does not generally hedge the translation exposure related to its net investment in foreign subsidiaries, since the Company generally has no near-term intent to repatriate funds from such subsidiaries. Based on the overall level of transactions denominated in other than local currencies, the lack of transactions between the Company and its foreign subsidiaries and the level of net investment in foreign subsidiaries, the exposure to market risk for changes in foreign exchange rates is not considered material. At December 31, 2002, the Company had a $78 million cross-currency swap outstanding used to hedge its investment in a foreign subsidiary.
Exposure to market risk for fluctuations in fuel prices relates to a portion of the Company'sCompany’s service contracts for which the cost of fuel is integral to service delivery and the service contract does not have a mechanism to adjust for increases in fuel prices. As of December 31, 2001,2002, the Company had various fuel purchase arrangements in place to ensure delivery of fuel at market rates in the event of fuel shortages. None of the Company'sCompany’s current fuel purchase arrangements fix the price of fuel to be purchased and as such the Company is exposed to fluctuations in fuel prices. Increases and decreases in the price of fuel are generally passed on to customers and have only a minor effect on contribution margins.profitability. The Company believes the exposure to fuel price fluctuations would not materially impact the Company'sCompany’s results of operations, cash flows or financial position.
ENVIRONMENTAL MATTERS
The operations of the Company involve storing and dispensing petroleum products, primarily diesel fuel, regulated under environmental protection laws. These laws require the Company to eliminate or mitigate the effect of such substances on the environment. In response to these requirements, the Company has upgraded operating facilities and implemented various programs to detect and minimize contamination.
34
Capital expenditures related to these programs totaled approximately $1 million, $2 million and $2 million in 2002, 2001 and 2000.2000, respectively. The Company incurred environmental expenses of $10 million, $7 million and $5 million in 2002, 2001 and $10 million in 2001, 2000, and 1999, respectively, which included remediation costs as well as normal recurring expenses, such as licensing, testing and waste disposal fees. The increase in expensesenvironmental expense in 2002 and 2001 reflected the impact of lower claim recoveries compared with 2000. Lowerthe prior year. Based on current circumstances and the present standards imposed by government regulations, environmental expenses in 2000 resultedshould not increase materially from increased claim recoveries and a
decrease2002 levels in the number of projects compared with 1999.near term.
The ultimate cost of the Company'sCompany’s environmental liabilities cannot presently be projected with certainty due to the presence of several unknown factors, primarily the level of contamination, the effectiveness of selected remediation methods, the stage of management'smanagement’s investigation at individual sites and the recoverability of such costs from third parties. Based upon information presently available, management believes that the ultimate disposition of these matters, although potentially material to the results of operations in any single year, will not have a material adverse effect on the Company'sCompany’s financial condition or liquidity. See "Environmental Matters"“Environmental Matters” in the Notes to Consolidated Financial Statements for further discussion.
EURO CONVERSION
On January 1, 1999, the participating countries of the European Union adopted
the Euro as their common legal currency. On January 1, 2002, the Euro began
circulation within the participating countries, with the existing national
currencies continuing as legal tender through February 28, 2002, at which time
the existing national currencies were completely removed from circulation. The
Euro was adopted as functional currency in the operations of the Company's
subsidiaries in Germany and Netherlands. At December 31, 2001, total assets were
$22 million and $2 million in Germany and Netherlands, respectively, and equity
was $16 million and $1 million in Germany and Netherlands, respectively. Due to
the nature and small magnitude of current international operations affected by
the Euro conversion, conversion to the Euro did not have a material impact on
the Company's results of operations, cash flows or financial position.
32
ACCOUNTING MATTERS
Critical Accounting PoliciesEstimates
The Company'spreparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. The Company’s significant accounting policies are described in the footnotesNotes to the Company's financial statements.Consolidated Financial Statements. Certain of these policies are
considered to be "critical." That is, they are bothrequire the most important to the
financial presentationapplication of the Company's financial condition and results, and
they require management'smanagement’s most difficult, subjective or complex judgements,judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. These estimates and assumptions are based on historical experience, changes in the business environment and other factors that management believes to be reasonable under the circumstances. Different estimates that could have been applied in the current period or changes in the accounting estimates that are reasonably likely, can result in a material impact on the Company’s financial condition and operating results in the current and future periods. Management periodically reviews the development, selection and disclosure of these critical accounting estimates with the Company’s Audit Committee.
The following discussion, which should be read in conjunction with the descriptions in the Notes to Consolidated Financial Statements, is furnished for additional insight into certain accounting policiesestimates that management considers to be critical.
Self-Insurance Reserves: Management uses a variety of statistical and actuarial
methods that are widely used and accepted in the insurance industry to estimate
required self-insurance reserves. In applying these methods and assessing their
results, management considers such factors as frequency and severity of claims,
claim development and payment patterns and changes in the nature of the
Company's business, among other factors. On an annual basis, the Company's
self-insurance reserves are reviewed for reasonableness by third-party
actuaries. The Company's estimates may be impacted by such factors as increases
in the market price for medical services, unpredictability of the size of jury
awards and limitations inherent in the estimation process, among other factors.
While management believes that self-insurance reserves are adequate, there can
be no assurance that changes to management's estimates may not occur. At
December 31, 2001, self-insurance reserves were $219 million.
Depreciation and Residual Value Guarantees:The Company periodically reviews and adjusts the residual values and useful lives of revenue earning equipment of its FMS business segment as described in "Revenue“Summary of Significant Accounting Policies — Revenue Earning Equipment, Operating Property and Equipment and Depreciation"Depreciation” and "Residual“Residual Value Guarantees"Guarantees” in the Notes to the Consolidated Financial Statements. Reductions in residual values -— the price at which the Company ultimately expects to dispose of revenue earning equipment -— or useful lives will result in an increase in depreciation expense over the life of the equipment. The Company reviews residual values and useful lives of revenue earning equipment on an annual basis or more often if deemed necessary for specific groups of revenue earning equipment. Reviews are performed based on vehicle class, generally subcategories of trucks, tractors and trailers by weight and usage. The Company considers such factors as current and expected future market price trends on used vehicles, expected life of vehicles included in the fleet and extent of alternative uses for leased vehicles (e.g. rental fleet, SCS and DCC applications). FutureIn its estimates, the Company also makes certain assumptions in establishing residual values with respect to future market price trends and the expected recovery of the existing weak used truck market. As a result, future depreciation expense rates are subject to change based upon changes in these factors. Based on the mix of revenue earning equipment at December 31, 2002, a 10 percent decrease in expected vehicle residual values would increase depreciation expense in 2003 by approximately $52 million.
The Company also leases vehicles under operating lease agreements. Certain of these agreements contain limited guarantees for a portion of the residual values of the equipment. Results of the reviews described above for owned equipment are also applied to equipment under operating lease. The amount of residual value guarantees
35
expected to be paid is recognized as rent expense over the expected remaining term of the lease. At December 31, 2001,2002, total liabilities for residual value guarantees of $44$28 million were included in accrued expenses (for those payable in less than one year) and in other non-current liabilities. While management believes that the amounts are adequate, changes to management'smanagement’s estimates of residual value guarantees may occur due to changes in the market for used vehicles, the condition of the vehicles at the end of the lease and inherent limitations in the estimation process. 33
Pension Plans:The Company applies actuarial methods to determine the annual net periodic pension expense and pension plan liabilities on an annual basis. Each December, the Company reviews actual experience compared with the more significant assumptions used and makes adjustments to the assumptions, if warranted. In determining its annual estimate of net periodic pension cost, the Company is required to make an evaluation of critical factors such as discount rate, expected long-term rate of return and expected increase in compensation levels. Discount rates are based upon an expected benefit payments duration analysis and the equivalent average yield for high quality corporate fixed income investments. Long-term rate of return assumptions are based on actuarial review of the Company’s asset allocation strategy and long-term expected asset returns. The rate of increase in compensation levels is reviewed with the actuaries based upon salary experience.
Accounting guidance applicable to pension plans does not require immediate recognition of the effects of a deviation between actual and assumed experience or the revision of an estimate. This approach allows the favorable and unfavorable effects that fall within an acceptable range to be netted. Although this netting occurs outside the basic financial statements, disclosure of the net amount is presented as an unrecognized gain or loss in the Notes to Consolidated Financial Statements. The Company currently has an unrecognized loss of $404 million, of which a portion will be amortized into earnings in 2003. The effect on years beyond 2003 will depend substantially upon the actual experience of the plans.
Disclosure of the significant assumptions used in arriving at the 2002 net pension expense is presented in the “Employee Benefit Plans” Note to Consolidated Financial Statements. A sensitivity analysis of projected 2003 net periodic pension expense to changes in key underlying assumptions for the Company’s primary plan, the U.S. pension plan, is presented below.
| Impact on 2003 Net | ||||||||||||
| Assumed Rate | Change | Pension Expense | ||||||||||
| Discount rate | 6.50 | % | +/-0.25 | % | -/+$5 million | |||||||
| Expected long-term rate of return on assets | 8.75 | % | +/-0.25 | % | -/+$2 million | |||||||
| Rate of increase in compensation levels | 5.00 | % | +/-0.50 | % | +/-$1 million | |||||||
Self-Insurance Reserves:Management uses a variety of statistical and actuarial methods that are widely used and accepted in the insurance industry to estimate amounts for claims that have been reported but not paid and claims incurred but not reported. In applying these methods and assessing their results, management considers such factors as frequency and severity of claims, claim development and payment patterns and changes in the nature of the Company’s business, among other factors. Such factors are analyzed for each of the Company’s business segments. On an annual basis, third-party actuaries perform a separate analysis of the Company’s self-insurance reserves for reasonableness. The Company’s estimates may be impacted by such factors as increases in the market price for medical services, unpredictability of the size of jury awards and limitations inherent in the estimation process. While management believes that self-insurance reserves are adequate, there can be no assurance that changes to management’s estimates may not occur. Based on self-insurance reserves at December 31, 2002, a 5 percent adverse change in actuarial claim loss estimates would increase operating expense in 2003 by approximately $10 million.
36
Goodwill Impairment:The Company assesses goodwill for impairment, as described in “Summary of Significant Accounting Policies — Goodwill and Other Intangible Assets” Note to Consolidated Financial Statements, on an annual basis or more often if deemed necessary. To determine whether goodwill impairment indicators exist, the Company is required to assess the fair value of the reporting unit and compare it to the carrying value. A reporting unit is a component of an operating segment for which discrete financial information is available and management regularly reviews its operating performance. The Company’s valuation of fair value for each reporting unit is determined based on a discounted future cash flow model. Estimates of future cash flows are dependent on management’s knowledge and experience about past and current events and assumptions about conditions it expects to exist. These assumptions are based on a number of factors including future operating performance, economic conditions and actions management expects to take. While management believes its estimates of future cash flows are reasonable, there can be no assurance that a deterioration in economic conditions or adverse changes to expectations of future performance will not occur, resulting in a goodwill impairment loss. At December 31, 2002, the total amount of goodwill was $151 million.
Income Taxes:The Company records a valuation allowance for deferred income tax assets to reduce such assets to amounts expected to be realized. In determining the required level of suchthe valuation allowance, the Company considers whether it is more likely than not that all or some portion of deferred tax assets will not be realized. This assessment is based on management'smanagement’s expectations as to whether sufficient taxable income of an appropriate character will be realized within tax carryback and carryforward periods. Such assessment, and thusShould the relatedCompany change its estimate of the amount of its deferred tax assets that it would be able to realize, an adjustment to the valuation allowance is subjectwould result in an increase or decrease to change based on changesprovision for income taxes in anticipated future
taxable earnings.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations." SFAS 141 requires the purchase method of accounting for all
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. Adoption of this statement did not have an impact
on the Company's financial position, cash flows or results of operations as no
business combinations were initiated after June 30, 2001.
In June 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible
Assets," which requires, among other things, the discontinuance of goodwill
amortization. SFAS 142 is required to be applied for fiscal years beginning
after December 15, 2001, with certain early adoption permitted. The Company will
adopt SFAS 142 effective January 1, 2002 and is currently assessing its impact
on the Company's financial statements, including whether any transitional
impairment losses will be required to be recognized as the cumulative effect ofperiod such a change in accounting principle. However, at the date of this report, it is not
practicable to reasonably estimate the impact of adopting this statement on the
Company's results of operations, cash flows or financial position.
In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations," which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
retirement costs. The Company is in the process of assessing the impact of
adopting SFAS 143, which will be effective for 2003, on its results of
operations, cash flows or financial position.
In August 2001, the FASB issued SFAS No. 144, which amends existing
accounting guidance on asset impairment and provides a single accounting model
for long-lived assets to be disposed of. Among other provisions, the new rules
change the criteria for classifying an asset as held-for-sale. SFAS 144 also
broadens the scope of businesses to be disposed of that qualify for reporting as
discontinued operations and changes the timing of recognizing losses on such
operations. 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.
For further details regarding the above recent accounting pronouncements,
see "Recent Accounting Pronouncements Affecting Future Periods" in the Notes to
Consolidated Financial Statements.
Other Accounting Matters
In January 2001, the Company revised its vacation policy in the U.S.
Starting January 1, 2001, employees earn vacation based on the calendar year
rather than their anniversary date. Additionally, unused earned vacation may not
be carried forward into the next calendar year.was made. At December 31, 2000,2002, the Company's vacation accrual for U.S. employees was approximately $22 million. As
a result of the policy change, the balance was approximately $3 million at
December 31, 2001 which represents vacation accrual for California employees
where local law did not permit the adoption of the revised policy.
34
FORWARD-LOOKING STATEMENTS
This Annual Report 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 resultsdeferred tax valuation allowance principally attributed to differ materially from the
forward-looking statements. Generally, the words "believe," "expect," "intend,"
"estimate," "anticipate," "will," "may" and similar expressions identify
forward-looking statements.
Important factors that could cause such differences include, among others:
general economic conditionsforeign tax loss carryforwards 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 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'SCS 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.
35
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by ITEM 7A is included in ITEM 7 (pages 29 through 32)
of PART II of this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
Page No.
Independent Auditors' Report.................................. 37
Consolidated Statements of Earnings........................... 38
Consolidated Balance Sheets................................... 39
Consolidated Statements of Cash Flows......................... 40
Consolidated Statements of Shareholders' Equity............... 41
Notes to Consolidated Financial Statements.................... 42
SUPPLEMENTARY DATA
Quarterly Financial and Common Stock Data..................... 74
36
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
RYDER SYSTEM, INC.:
We have audited the accompanying consolidated balance sheets of Ryder System,
Inc. and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ryder
System, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
Miami, Florida
February 7, 2002
37
Consolidated Statements of Earnings
Ryder System, Inc. and Subsidiaries
In thousands, except per share amounts
- ------------------------------------------------------------------------------------
Years ended December 31 2001 2000 1999
Revenue $ 5,006,123 5,336,792 4,952,204
- ------------------------------------------------------------------------------------
Operating expense 2,132,500 2,324,433 2,074,888
Salaries and employee-related costs 1,212,184 1,226,558 1,178,831
Freight under management expense 436,413 506,709 496,248
Depreciation expense 545,485 580,356 622,726
Gains on vehicle sales, net (11,968) (19,307) (55,961)
Equipment rental 427,024 373,157 263,484
Interest expense 118,549 154,009 187,176
Miscellaneous (income) expense, net (1,334) 7,542 (8,825)
Unusual items:
Restructuring and other charges, net 116,564 42,014 52,093
Year 2000 expense -- -- 24,050
- ------------------------------------------------------------------------------------
4,975,417 5,195,471 4,834,710
- ------------------------------------------------------------------------------------
Earnings from continuing operations
before income taxes 30,706 141,321 117,494
Provision for income taxes 12,028 52,289 44,577
- ------------------------------------------------------------------------------------
Earnings from continuing operations 18,678 89,032 72,917
Earnings from discontinued operations,
less income taxes -- -- 11,831
Gain on disposal of discontinued
operations, less income taxes -- -- 339,323
- ------------------------------------------------------------------------------------
Earnings before extraordinary loss 18,678 89,032 424,071
Extraordinary loss on early
extinguishment of debt -- -- (4,393)
- ------------------------------------------------------------------------------------
Net earnings $ 18,678 89,032 419,678
====================================================================================
Earnings per common share - Basic:
Continuing operations $ 0.31 1.49 1.06
Discontinued operations -- -- 0.17
Gain on sale of discontinued operations -- -- 4.95
Extraordinary loss on early
extinguishment of debt -- -- (0.06)
- ------------------------------------------------------------------------------------
Net earnings $ 0.31 1.49 6.12
====================================================================================
Earnings per common share - Diluted:
Continuing operations $ 0.31 1.49 1.06
Discontinued operations -- -- 0.17
Gain on sale of discontinued operations -- -- 4.94
Extraordinary loss on early
extinguishment of debt -- -- (0.06)
- ------------------------------------------------------------------------------------
Net earnings $ 0.31 1.49 6.11
====================================================================================
See accompanying notes to consolidated financial statements.
38
Consolidated Balance Sheets
Ryder System, Inc. and Subsidiaries
In thousands, except per share amounts
- --------------------------------------------------------------------------------------------------
December 31 2001 2000
Assets:
Current assets:
Cash and cash equivalents $ 117,866 121,970
Receivables, net of allowance for doubtful accounts of
$10,286 and $9,236, respectively 556,309 399,623
Inventories 65,366 77,810
Tires in service 131,068 158,854
Prepaid expenses and other current assets 111,884 170,019
- --------------------------------------------------------------------------------------------------
Total current assets 982,493 928,276
Revenue earning equipment, net of accumulated depreciation of
$1,590,860 and $1,416,062, respectively 2,479,114 3,012,806
Operating property and equipment, net of accumulated depreciation
of $684,207 and $632,216, respectively 566,883 612,626
Direct financing leases and other assets 705,958 693,097
Intangible assets and deferred charges 189,163 228,118
- --------------------------------------------------------------------------------------------------
$ 4,923,611 5,474,923
==================================================================================================
Liabilities and Shareholders' Equity:
Current liabilities:
Current portion of long-term debt $ 317,087 412,738
Accounts payable 255,924 379,155
Accrued expenses 440,915 510,411
- --------------------------------------------------------------------------------------------------
Total current liabilities 1,013,926 1,302,304
Long-term debt 1,391,597 1,604,242
Other non-current liabilities 284,274 298,365
Deferred income taxes 1,003,145 1,017,304
- --------------------------------------------------------------------------------------------------
Total liabilities 3,692,942 4,222,215
- --------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock of no par value per share - authorized, 900,000;
none outstanding December 31, 2001 or 2000 -- --
Common stock of $0.50 par value per share -
authorized, 400,000,000; outstanding,
2001 - 60,809,628; 2000 - 60,044,479 537,556 524,432
Retained earnings 750,232 767,802
Deferred compensation (5,304) (3,818)
Accumulated other comprehensive loss (51,815) (35,708)
- --------------------------------------------------------------------------------------------------
Total shareholders' equity 1,230,669 1,252,708
- --------------------------------------------------------------------------------------------------
$ 4,923,611 5,474,923
==================================================================================================
See accompanying notes to consolidated financial statements.
39
Consolidated Statements of Cash Flows
Ryder System, Inc. and Subsidiaries
In thousands
- ----------------------------------------------------------------------------------------------
Years ended December 31 2001 2000 1999
Continuing operations:
Cash flows from operating activities:
Earnings from continuing operations $ 18,678 89,032 72,917
Depreciation expense 545,485 580,356 622,726
Gains on vehicle sales, net (11,968) (19,307) (55,961)
Amortization expense and other
non-cash charges, net 90,913 32,927 26,236
Deferred income tax (benefit) expense (1,889) 73,239 250,041
Changes in operating assets and liabilities,
net of acquisitions:
(Decrease) increase in aggregate balance
of trade receivables sold (235,000) 270,000 (125,000)
Receivables 78,040 57,250 (129,516)
Inventories 12,444 (7,809) (10,380)
Prepaid expenses and other assets 17,186 (73,299) (33,285)
Accounts payable (136,210) 48,064 (56,261)
Accrued expenses and other
non-current liabilities (68,977) (34,920) (291,698)
- ----------------------------------------------------------------------------------------------
308,702 1,015,533 269,819
- ----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in commercial paper
borrowings (261,732) 109,317 147,671
Debt proceeds 381,901 121,027 314,821
Debt repaid, including capital lease
obligations (413,465) (565,424) (682,517)
Dividends on common stock (36,248) (35,774) (40,878)
Common stock issued 9,845 7,255 7,949
Common stock repurchased -- -- (274,894)
- ----------------------------------------------------------------------------------------------
(319,699) (363,599) (527,848)
- ----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and revenue
earning equipment (656,597) (1,288,784) (1,734,219)
Sales of property and revenue
earning equipment 175,134 229,908 401,902
Sale and leaseback of revenue
earning equipment 410,739 372,953 593,680
Acquisitions, net of cash acquired -- (28,127) (12,699)
Collections on direct finance leases 66,204 67,462 78,408
Proceeds from sale of business 14,113 -- 940,000
Other, net (2,700) 3,631 (39,005)
- ----------------------------------------------------------------------------------------------
6,893 (642,957) 228,067
- ----------------------------------------------------------------------------------------------
Net cash flows from continuing operations (4,104) 8,977 (29,962)
Net cash flows from discontinued operations -- -- 4,602
- ----------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash
equivalents (4,104) 8,977 (25,360)
Cash and cash equivalents at January 1 121,970 112,993 138,353
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ 117,866 121,970 112,993
==============================================================================================
See accompanying notes to consolidated financial statements.
40
Consolidated Statements of Shareholders' Equity
Ryder System, Inc. and Subsidiaries
Accumulated Other
Comprehensive Loss
-----------------------
Currency Minimum
Preferred Common Retained Deferred Translation Pension
Stock Stock Earnings Compensation Adjustments Liability Total
--------- -------- -------- ------------ ----------- --------- -----
In thousands, except per share amounts
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1999 $ -- 610,543 504,105 -- (19,034) -- 1,095,614
- ---------------------------------------------------------------------------------------------------------------------------------
Components of comprehensive income:
Net earnings -- -- 419,678 -- -- -- 419,678
Foreign currency translation
adjustments -- -- -- -- (3,688) -- (3,688)
---------
Total comprehensive income 415,990
Common stock dividends declared
- $0.60 per share -- -- (40,878) -- -- -- (40,878)
Common stock issued under
employee stock option and stock
purchase plans (417,410
shares) -- 8,687 -- -- -- -- 8,687
Common stock repurchased
(12,302,607 shares) -- (106,533) (168,361) -- -- -- (274,894)
Tax benefit from employee
stock options -- 386 -- -- -- -- 386
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 -- 513,083 714,544 -- (22,722) -- 1,204,905
- ---------------------------------------------------------------------------------------------------------------------------------
Components of comprehensive income:
Net earnings -- -- 89,032 -- -- -- 89,032
Foreign currency translation
adjustments -- -- -- -- (12,986) -- (12,986)
---------
Total comprehensive income 76,046
Common stock dividends
declared - $0.60 per share -- -- (35,774) -- -- -- (35,774)
Common stock issued under
employee stock option and stock
purchase plans (649,528 shares) -- 10,957 -- (4,315) -- -- 6,642
Tax benefit from employee
stock options -- 392 -- -- -- -- 392
Amortization of restricted stock -- -- -- 497 -- -- 497
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 -- 524,432 767,802 (3,818) (35,708) -- 1,252,708
- ---------------------------------------------------------------------------------------------------------------------------------
Components of comprehensive income:
Net earnings -- -- 18,678 -- -- -- 18,678
Foreign currency translation
adjustments -- -- -- -- (14,862) -- (14,862)
Additional minimum pension
liability adjustment -- -- -- -- -- (1,245) (1,245)
---------
Total comprehensive income 2,571
Common stock dividends
declared - $0.60 per share -- -- (36,248) -- -- -- (36,248)
Common stock issued under
employee stock option and stock
purchase plans (779,919, shares)* -- 12,444 -- (2,825) -- -- 9,619
Tax benefit from employee
stock options -- 680 -- -- -- -- 680
Amortization of restricted stock -- -- -- 1,339 -- -- 1,339
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $ -- 537,556 750,232 (5,304) (50,570) (1,245) 1,230,669
=================================================================================================================================
* Net of common stock purchased from employees exercising stock options.
See accompanying notes to consolidated financial statements.
41
Notes to Consolidated Financial Statements
Ryder System, Inc. and Subsidiaries
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of Ryder System,
Inc. and its subsidiaries (the "Company"). All significant inter-company
accounts and transactions have been eliminated. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Cash Equivalents
All investments in highly liquid debt instruments with maturities of three
months or less at the date of purchase are classified as cash equivalents.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the revenue amount is fixed or determinable and
collectibility is probable. Operating lease and rental revenue is recognized as
vehicles are used over the terms of the related agreements. Direct financing
lease revenue is recognized by the interest method over the terms of the lease
agreements. Fuel revenue is recognized when fuel is delivered to customers.
Revenue from Supply Chain Solutions (SCS) and Dedicated Contract Carriage (DCC)
contracts is recognized as services are provided at billing rates specified in
the underlying contracts.
Inventories
Inventories, which consist primarily of fuel and vehicle parts, are valued
using the lower of cost (specific identification or average cost) or market.
Tires in Service
The Company allocates a portion of the acquisition costs of revenue earning
equipment to tires in service and amortizes such tire costs to expense over the
lives of the vehicles and equipment. The cost of replacement tires and tire
repairs are expensed as incurred.
Revenue Earning Equipment, Operating Property and Equipment and Depreciation
Revenue earning equipment, principally vehicles, and operating property and
equipment are stated at cost. Revenue earning equipment and operating property
and equipment under capital lease is stated at the present value of minimum
payments. Vehicle repairs and maintenance that extend the life or increase the
value of a vehicle are capitalized, whereas ordinary maintenance and repairs are
expensed as incurred. Direct development costs incurred in connection with
developing or obtaining internal use software are capitalized. Costs incurred
during the preliminary project stage, as well as maintenance and training costs
are expensed as incurred.
42
Provision for depreciation is computed using the straight-line method on
substantially all depreciable assets. Annual straight-line depreciation rates
range from 10 to 33 percent for revenue earning equipment, 2.5 to 10 percent for
buildings and improvements and 10 to 33 percent for machinery and equipment. The
Company periodically reviews and adjusts the residual values and useful lives of
revenue earning equipment based on current and expected operating trends and
projected realizable values. Gains on operating property and equipment sales are
reflected in miscellaneous (income) expense, net.
The Company routinely disposes of revenue earning equipment as part of its
business. Revenue earning equipment held for sale is stated at the lower of
carrying amount or fair value less costs to sell. Adjustments to the carrying
value of assets are reported as depreciation expense. The Company stratifies its
revenue earning equipment to be disposed of by vehicle type (tractors, trucks,
trailers), weight class, age and other characteristics, as relevant, and creates
classes of similar assets for analysis purposes. Fair value is determined based
upon recent market prices for sales of each class of similar assets, vehicle
condition, as well as projected trends in market prices up to the anticipated
date of sale. The net carrying value for revenue earning equipment held for salesegment was $45 million and $49 million in 2001 and 2000, respectively.
Intangible Assets
Intangible assets consist principally of goodwill totaling $166 million in
2001 and $206 million in 2000. Goodwill, which represents the excess of purchase
price over fair value of net assets acquired, is amortized on a straight-line
basis over appropriate periods ranging from 10 to 40 years. Accumulated
amortization was approximately $134 million and $121 million at December 31,
2001 and 2000, respectively. Amortization expense was $13 million, $12 million
and $14 million in 2001, 2000 and 1999, respectively.
Impairment of Long-Lived Assets
Long-lived assets, including intangible assets, are reviewed for impairment
when circumstances indicate that the carrying amount of assets may not be
recoverable. The Company assesses the recoverability of long-lived assets by
determining whether the depreciation or amortization of the asset over its
remaining life can be recovered based upon management's best estimate of the
undiscounted future operating cash flows (excluding interest charges) related to
the asset. If the sum of such undiscounted cash flows is less than the carrying
value of the asset, the asset is considered impaired. The amount of impairment,
if any, represents the excess of the carrying value of the asset over fair
value. Fair value is determined by quoted market price, if available, or an
estimate of projected future operating cash flows, discounted using a rate that
reflects the Company's average cost of funds.
Long-lived assets, including intangible assets, to be disposed of are
reported at the lower of carrying amount or fair value less costs to sell. Fair
value is determined based upon quoted market prices, if available, or the
results of applicable valuation techniques such as discounted cash flows and
independent appraisal.
Self-insurance Reserves
The Company retains a portion of the accident risk under vehicle liability,
workers' compensation and other insurance programs. Under the Company's
insurance programs, it retains the risk of loss in various amounts up to $1
million on a per occurrence basis. The Company maintains additional insurance at
certain amounts in excess of its respective underlying retention.
Reserves have been recorded which reflect the undiscounted estimated
liabilities, including claims incurred but not reported. Such liabilities are
necessarily based on estimates. While management believes that the amounts are
adequate, there can be no assurance that changes to management's estimates may
not occur due to limitations inherent in the estimation process. Changes in the
estimates of these reserves are charged or credited to earnings in the period
determined. Amounts estimated to be paid within one year have been classified as
accrued expenses with the remainder included in other non-current liabilities.
43
Residual Value Guarantees
The Company periodically enters into agreements for the sale and operating
leaseback of revenue earning equipment. These leases contain purchase and/or
renewal options as well as limited guarantees of the lessor's residual value
("residual value guarantees").
The Company periodically reviews the residual values of revenue earning
equipment that it leases from third parties and its exposures under residual
value guarantees. The review is conducted in a similar manner to that used to
analyze residual values and fair values of revenue earning equipment that the
Company owns. The amount of residual value guarantees expected to be paid is
recognized as rent expense over the expected remaining term of the lease.
Adjustments in the estimate of residual value guarantees are recognized
prospectively over the expected remaining lease term. While management believes
that the amounts are adequate, changes to management's estimates of residual
value guarantees may occur due to changes in the market for used vehicles, the
condition of the vehicles at the end of the lease and inherent limitations in
the estimation process.
Income Taxes
Deferred taxes are provided using the asset and liability method for
temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Environmental Expenditures
Liabilities are recorded for environmental assessments and/or cleanup when
it is probable a loss has been incurred and the costs can be reasonably
estimated. The liability may include costs such as anticipated site testing,
consulting, remediation, disposal, post-remediation monitoring and legal fees,
as appropriate. Estimates are not discounted. The liability does not reflect
possible recoveries from insurance companies or reimbursement of remediation
costs by state agencies, but does include estimates of cost-sharing with other
potentially responsible parties. Claims for reimbursement of remediation costs
are recorded when recovery is deemed probable.
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133, as amended,
requires all derivatives, including certain derivatives embedded in other
contracts, to be recognized at fair value as either assets or liabilities on the
balance sheet and establishes new accounting rules for hedging activities. The
Company adopted SFAS No. 133 on January 1, 2001. Adoption of this statement did
not have an impact on the Company's financial position, cash flows or results of
operations.
All derivatives are recognized on the balance sheet at their fair value. On
the date a derivative contract is entered into, the Company designates the
derivative as either a hedge of the fair value of a recognized asset or
liability or of an unrecognized firm commitment ("fair value" hedge), a hedge of
a forecasted transaction or the variability of cash flows to be received or paid
related to a recognized asset or liability ("cash flow" hedge), a foreign
currency fair value or cash flow hedge ("foreign currency" hedge) or a hedge of
a net investment in a foreign operation. The Company formally documents all
relationships between hedging instruments and hedged items, as well as its risk
management objective and strategy for undertaking various hedge transactions.
This process includes linking all derivatives that are designated as fair value,
cash flow or foreign currency hedges to specific assets and liabilities on the
balance sheet or to specific firm commitments or forecasted transactions. The
Company also formally assesses, both at the hedge's inception and on an ongoing
basis, whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of hedged items.
When it is determined that a derivative is not highly effective as a hedge or
that it has ceased to be a highly effective hedge, the Company discontinues
hedge accounting prospectively.
44
Changes in the fair value of a derivative that is highly effective and that
is designated and qualifies as a fair value hedge, along with the loss or gain
on the hedged asset or liability or unrecognized firm commitment of the hedged
item that is attributable to the hedged risk are recorded in interest expense.
Changes in the fair value of a derivative that is highly effective and that is
designated and qualifies as a cash flow hedge are recorded in other
comprehensive income until earnings are affected by the variability in cash
flows of the designated hedged item. Changes in the fair value of derivatives
that are highly effective as hedges and that are designated and qualify as
foreign currency hedges are recorded in either earnings or other comprehensive
income, depending on whether the hedge transaction is a fair value hedge or a
cash flow hedge. However, if a derivative is used as a hedge of a net investment
in a foreign operation, its changes in fair value, to the extent effective as a
hedge, are recorded in the cumulative translation adjustments account within
other comprehensive income. Changes in the fair value of derivative instruments
that are not designated as a hedge or do not qualify for hedge accounting are
reported in current-period earnings.
The Company discontinues hedge accounting prospectively when it is
determined that the derivative is no longer effective in offsetting changes in
the fair value or cash flows of the hedged item, the derivative expires or is
sold, terminated or exercised, the derivative is redesignated as a hedging
instrument because it is unlikely that a forecasted transaction will occur, a
hedged firm commitment no longer meets the definition of a firm commitment or
management determines that designation of the derivative as a hedging instrument
is no longer appropriate.
When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair-value hedge, the Company
continues to carry the derivative on the balance sheet at its fair value and no
longer adjusts the hedged asset or liability for changes in fair value. The
adjustment of the carrying amount of the hedged asset or liability is accounted
for in the same manner as other components of the carrying amount of that asset
or liability. When hedge accounting is discontinued because the hedged item no
longer meets the definition of a firm commitment, the Company continues to carry
the derivative on the balance sheet at its fair value, removes any asset or
liability that was recorded pursuant to recognition of the firm commitment from
the balance sheet and recognizes any gain or loss in earnings. In all other
situations in which hedge accounting is discontinued, the Company continues to
carry the derivative at its fair value on the balance sheet and recognizes any
changes in its fair value in earnings.
At December 31, 2001, the only derivative instrument the Company held was
an interest rate swap with a notional value of $22 million. The swap was
accounted for as a cash flow hedge and the fair value was immaterial. No
interest rate swaps were outstanding at December 31, 2000. The Company uses
foreign currency option contracts and forward agreements from time to time to
hedge foreign currency transactional exposure. No foreign currency option
contracts or forward agreements or any other derivative instruments were
outstanding at December 31, 2001 or 2000 or entered into during the three year
period ended December 31, 2001, other than the interest rate swap noted above.
Derivative financial instruments are not leveraged or held for trading purposes.
Foreign Currency Translation
The Company's foreign operations generally use the local currency as their
functional currency. Assets and liabilities of these operations are translated
at the exchange rates in effect on the balance sheet date. If exchangeability
between the functional currency and the U.S. Dollar is temporarily lacking at
the balance sheet date, the first subsequent rate at which exchanges can be made
is used to translate assets and liabilities. Income statement items are
translated at the average exchange rates for the year. The impact of currency
fluctuations is included in accumulated other comprehensive loss as a currency
translation adjustment. For subsidiaries whose economic environment is highly
inflationary, the U.S. Dollar is the functional currency and gains and losses
that result from translation are included in earnings.
45
Stock Repurchases
The cost of stock repurchases is allocated between common stock and
retained earnings based on the amount of capital surplus at the time of the
stock repurchase.
Stock-based Compensation
Stock-based compensation is recognized using the intrinsic value method.
Under this method, compensation cost is recognized based on the excess, if any,
of the quoted market price of the stock at the date of grant (or other
measurement date) and the amount an employee must pay to acquire the stock.
Earnings Per Share
Basic earnings per share are computed by dividing net earnings by the
weighted average number of common shares outstanding. Diluted earnings per share
reflect the dilutive effect of potential common shares from securities such as
stock options and restricted stock grants.
Comprehensive Income
Comprehensive income presents a measure of all changes in shareholders'
equity except for changes resulting from transactions with shareholders in their
capacity as shareholders. The Company's total comprehensive income presently
consists of net earnings, currency translation adjustments associated with
foreign operations that use the local currency as their functional currency and
a minimum pension liability.
Fair Value of Financial Instruments
The fair value of debt is presented in the "Debt" note. The fair values of
all other financial instruments approximate their carrying amounts.
Accounting Changes
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," which
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 in the fiscal year ended December 31,
2000 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 June 2001, the FASB issued SFAS No. 141, "Business Combinations." 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 adopted the provisions of SFAS No. 141 as of July 1, 2001. Adoption of
SFAS 141 did not have any impact on the Company's financial position, cash flows
or results of operations as no business combinations were initiated after June
30, 2001.
46
Recent Accounting Pronouncements Affecting Future Periods
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but rather, be tested for impairment at
least annually. SFAS No. 142 also requires that intangible assets with definite
useful lives be amortized over their respective estimated useful lives to their
estimated residual values. Additionally, a review for impairment is required to
be made consistent with the provisions of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets."
The Company will adopt the provisions of SFAS No. 142 effective January 1,
2002. As part of the 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 is then 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 March 31, 2002. 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 quarter of 2002. Any impairment loss
representing the excess of carrying amount over fair value will be measured as
of January 1, 2002 and recognized as a cumulative effect of a change in
accounting principle in the Company's Consolidated Statements of Earnings for
the first quarter of 2002.
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. The residual fair value after this
allocation is the implicit fair value of the reporting unit's goodwill. 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 for 2002.
At December 31, 2001, intangible assets and deferred charges included
goodwill and intangible assets of $177 million subject to SFAS No. 142.
Amortization expense related to goodwill and intangible assets was $13 million
for the year ended December 31, 2001. The Company is currently assessing the
impact of the adoption of SFAS No. 142, including whether any transitional
impairment losses will be required to be recognized as the cumulative effect of
a change in accounting principle. However, at the date of this report, it is not
practicable to reasonably estimate the impact of adopting this statement on the
Company's results of operations, cash flows or financial position.
47
In June 2001, the FASB issued SFAS No. 143, "Accounting“Accounting for Asset Retirement Obligations,"” which requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. When the liability is initially recorded, the Company is required to capitalize a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002 and will be adopted by the Company effective January 1, 2003. The Company is
currently evaluating the potential impact, if any,believes the adoption of SFAS No. 143 will not have a significant impact on its results of operations, cash flows or financial position.
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The standard requires companies to recognize costs associated with exit (including restructuring) or disposal activities at fair value when they are incurred rather than at the date of a commitment to an exit or disposal plan under current practice. Costs covered by the standard include certain contract termination costs, certain employee termination benefits and other costs to consolidate or close facilities and relocate employees that are associated with an exit activity or disposal of long-lived assets. The new requirements are effective prospectively for exit or disposal activities initiated after December 31, 2002 and will be adopted by the Company effective January 1, 2003. The adoption of SFAS No. 146 is expected to impact the timing of recognition of costs associated with future exit and disposal activities.
In November 2002, the FASB issued Financial Interpretation (“FIN”) No. 45, “Guarantor’s Accounting Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN No. 45 clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN No. 45 are applicable for financial statements of interim or annual periods ending after December 15, 2002, which is included in the “Guarantees” Note to Consolidated Financial Statements.
37
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123.” This Statement amends methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the Notes to Consolidated Financial Statements.
In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities” that establishes accounting guidance for identifying variable interest entities (VIEs), including special-purpose entities, and when to include the assets, liabilities, noncontrolling interests and results of activities of VIEs in an enterprise’s consolidated financial statements. FIN No. 46 requires consolidation of VIEs if the primary beneficiary has a variable interest (or combination of variable interests) that will absorb a majority of the entity’s expected losses if the they occur, receive a majority of the entity’s expected residual returns if they occur, or both. The enterprise consolidating the VIE is the primary beneficiary of that entity. FIN No. 46 will be effective immediately for variable interests in VIEs created after January 31, 2003. For a variable interest in a VIE created before February 1, 2003, the recognition provisions of FIN No. 46 shall apply (other than the required disclosures prior to the effective date) to that entity as of the interim period beginning after June 15, 2003.
The Company expects, as a result of the initial recognition provisions of FIN No. 46, to consolidate three VIEs effective July 1, 2003. These VIEs resulted from sale-leaseback transactions entered into in previous years — see “Off-balance Sheet Arrangements” for further discussion on these transactions. The carrying value of the assets and liabilities as of December 31, 2002, attributed to these unconsolidated VIEs was approximately $519 million and $461 million, respectively. The Company’s maximum exposure to loss, at December 31, 2002, as a result of its involvement in these VIEs is approximately $112 million.
For further details regarding the above recent accounting pronouncements, see “Summary of Significant Accounting Policies — Recent Accounting Pronouncements” in the Notes to Consolidated Financial Statements.
Other Accounting Matters
In January 2001, the Company revised its vacation policy in the U.S. Starting January 1, 2001, employees earn vacation based on the calendar year rather than their anniversary date. Additionally, unused earned vacation may not be carried forward into the next calendar year. At December 31, 2000, the Company’s vacation accrual for U.S. employees was approximately $22 million. As a result of the policy change, the balance was approximately $3 million at December 31, 2001 and represents vacation accrual for California and union employees where local law or contractual terms did not permit the adoption of the revised policy.
FORWARD-LOOKING STATEMENTS
This Annual Report 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,” “intend,” “estimate,” “anticipate,” “will,” “may” 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 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; adverse changes in debt ratings; changes in accounting assumptions; changes in customers’ business environments (or the loss of a significant customer) or changes in government regulations.
38
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.
39
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by ITEM 7A is included in ITEM 7 (pages 33 through 34) of PART II of this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
| Page No. | ||||||
| Independent Auditors’ Report | 41 | |||||
| Consolidated Statements of Earnings | 42 | |||||
| Consolidated Balance Sheets | 43 | |||||
| Consolidated Statements of Cash Flows | 44 | |||||
| Consolidated Statements of Shareholders’ Equity | 45 | |||||
| Notes to Consolidated Financial Statements | 46 | |||||
| Supplementary Data | 80 | |||||
| Consolidated Financial Statement Schedule for the Years Ended December 31, 2002, 2001 and 2000: | ||||||
| II — Valuation and Qualifying Accounts | 81 | |||||
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
40
INDEPENDENT AUDITORS’ REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
RYDER SYSTEM, INC.:
We have audited the consolidated financial statements of Ryder System, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the consolidated financial statement schedule listed in the accompanying index. These consolidated financial statements and the consolidated financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ryder System, Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in the notes to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets in 2002.
/s/ KPMG LLP
Miami, Florida
February 6, 2003
41
Ryder System, Inc. and Subsidiaries
| Years ended December 31 | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
| (In thousands, except per share amounts) | |||||||||||||
| Revenue | $ | 4,776,265 | 5,006,123 | 5,336,792 | |||||||||
| Operating expense | 1,949,384 | 2,132,500 | 2,324,433 | ||||||||||
| Salaries and employee-related costs | 1,268,704 | 1,212,184 | 1,226,558 | ||||||||||
| Freight under management expense | 414,369 | 436,413 | 506,709 | ||||||||||
| Depreciation expense | 552,491 | 545,485 | 580,356 | ||||||||||
| Gains on vehicle sales, net | (14,223 | ) | (11,968 | ) | (19,307 | ) | |||||||
| Equipment rental | 343,531 | 427,024 | 373,157 | ||||||||||
| Interest expense | 91,718 | 118,549 | 154,009 | ||||||||||
| Miscellaneous (income) expense, net | (9,808 | ) | (1,334 | ) | 7,542 | ||||||||
| Restructuring and other charges, net | 4,216 | 116,564 | 42,014 | ||||||||||
| 4,600,382 | 4,975,417 | 5,195,471 | |||||||||||
| Earnings before income taxes and cumulative effect of change in accounting principle | 175,883 | 30,706 | 141,321 | ||||||||||
| Provision for income taxes | 63,318 | 12,028 | 52,289 | ||||||||||
| Earnings before cumulative effect of change in accounting principle | 112,565 | 18,678 | 89,032 | ||||||||||
| Cumulative effect of change in accounting principle | (18,899 | ) | — | — | |||||||||
| Net earnings | $ | 93,666 | 18,678 | 89,032 | |||||||||
| Earnings per common share — Basic: | |||||||||||||
| Before cumulative effect of change in accounting principle | $ | 1.83 | 0.31 | 1.49 | |||||||||
| Cumulative effect of change in accounting principle | (0.31 | ) | — | — | |||||||||
| Net earnings | $ | 1.52 | 0.31 | 1.49 | |||||||||
| Earnings per common share — Diluted: | |||||||||||||
| Before cumulative effect of change in accounting principle | $ | 1.80 | 0.31 | 1.49 | |||||||||
| Cumulative effect of change in accounting principle | (0.30 | ) | — | — | |||||||||
| Net earnings | $ | 1.50 | 0.31 | 1.49 | |||||||||
See accompanying notes to consolidated financial statements.
42
Ryder System, Inc. and Subsidiaries
| December 31 | ||||||||||
| 2002 | 2001 | |||||||||
| (In thousands, except share amounts) | ||||||||||
| Assets: | ||||||||||
| Current assets: | ||||||||||
| Cash and cash equivalents | $ | 104,237 | 117,866 | |||||||
| Receivables, net | 640,309 | 557,731 | ||||||||
| Inventories | 59,104 | 65,366 | ||||||||
| Tires in service | 131,569 | 131,068 | ||||||||
| Prepaid expenses and other current assets | 88,952 | 111,884 | ||||||||
| Total current assets | 1,024,171 | 983,915 | ||||||||
| Revenue earning equipment, net | 2,497,614 | 2,479,114 | ||||||||
| Operating property and equipment, net | 530,877 | 566,883 | ||||||||
| Direct financing leases and other assets | 531,760 | 705,958 | ||||||||
| Intangible assets and deferred charges | 182,560 | 191,291 | ||||||||
| Total assets | $ | 4,766,982 | 4,927,161 | |||||||
| �� | ||||||||||
| Liabilities and Shareholders’ Equity: | ||||||||||
| Current liabilities: | ||||||||||
| Current portion of long-term debt | $ | 162,369 | 317,087 | |||||||
| Accounts payable | 277,001 | 255,924 | ||||||||
| Accrued expenses | 422,706 | 445,392 | ||||||||
| Total current liabilities | 862,076 | 1,018,403 | ||||||||
| Long-term debt | 1,389,099 | 1,391,597 | ||||||||
| Other non-current liabilities | 473,879 | 283,347 | ||||||||
| Deferred income taxes | 933,713 | 1,003,145 | ||||||||
| Total liabilities | 3,658,767 | 3,696,492 | ||||||||
| Shareholders’ equity: | ||||||||||
| Preferred stock of no par value per share — authorized, 3,800,917; none outstanding December 31, 2002 or 2001 | — | — | ||||||||
| Common stock of $0.50 par value per share — authorized, 400,000,000; outstanding, 2002 — 62,440,937; 2001 — 60,809,628 | 575,503 | 537,556 | ||||||||
| Retained earnings | 806,761 | 750,232 | ||||||||
| Deferred compensation | (3,423 | ) | (5,304 | ) | ||||||
| Accumulated other comprehensive loss | (270,626 | ) | (51,815 | ) | ||||||
| Total shareholders’ equity | 1,108,215 | 1,230,669 | ||||||||
| Total liabilities and shareholders’ equity | $ | 4,766,982 | 4,927,161 | |||||||
See accompanying notes to consolidated financial statements.
43
Ryder System, Inc. and Subsidiaries
| Years ended December 31 | |||||||||||||||
| 2002 | 2001 | 2000 | |||||||||||||
| (In thousands) | |||||||||||||||
| Cash flows from operating activities: | |||||||||||||||
| Net earnings | $ | 93,666 | 18,678 | 89,032 | |||||||||||
| Cumulative effect of change in accounting principle | 18,899 | — | — | ||||||||||||
| Depreciation expense | 552,491 | 545,485 | 580,356 | ||||||||||||
| Gains on vehicle sales, net | (14,223 | ) | (11,968 | ) | (19,307 | ) | |||||||||
| Amortization expense and other non-cash charges, net | 8,713 | 90,913 | 32,927 | ||||||||||||
| Deferred income tax expense (benefit) | 52,615 | (1,889 | ) | 73,239 | |||||||||||
| Changes in operating assets and liabilities, net of acquisitions and dispositions: | |||||||||||||||
| (Decrease) increase in aggregate balance of trade receivables sold | (110,000 | ) | (235,000 | ) | 270,000 | ||||||||||
| Receivables | 35,048 | 78,040 | 57,250 | ||||||||||||
| Inventories | 6,262 | 12,444 | (7,809 | ) | |||||||||||
| Prepaid expenses and other assets | 5,797 | 17,186 | (73,299 | ) | |||||||||||
| Accounts payable | 22,788 | (136,210 | ) | 48,064 | |||||||||||
| Accrued expenses and other non-current liabilities | (39,269 | ) | (68,977 | ) | (34,920 | ) | |||||||||
| Net cash provided by operating activities | 632,787 | 308,702 | 1,015,533 | ||||||||||||
| Cash flows from financing activities: | |||||||||||||||
| Net change in commercial paper borrowings | (92,500 | ) | (261,732 | ) | 109,317 | ||||||||||
| Debt proceeds | 185,316 | 381,901 | 121,027 | ||||||||||||
| Debt repaid, including capital lease obligations | (360,359 | ) | (413,465 | ) | (565,424 | ) | |||||||||
| Dividends on common stock | (37,137 | ) | (36,248 | ) | (35,774 | ) | |||||||||
| Common stock issued | 35,172 | 9,845 | 7,255 | ||||||||||||
| Net cash used in financing activities | (269,508 | ) | (319,699 | ) | (363,599 | ) | |||||||||
| Cash flows from investing activities: | |||||||||||||||
| Purchases of property and revenue earning equipment | (600,301 | ) | (656,597 | ) | (1,288,784 | ) | |||||||||
| Sales of property and revenue earning equipment | 152,685 | 175,134 | 229,908 | ||||||||||||
| Sale and leaseback of revenue earning equipment | — | 410,739 | 372,953 | ||||||||||||
| Acquisitions, net of cash acquired | — | — | (28,127 | ) | |||||||||||
| Collections on direct finance leases | 66,489 | 66,204 | 67,462 | ||||||||||||
| Proceeds from sale of business | — | 14,113 | — | ||||||||||||
| Other, net | 4,219 | (2,700 | ) | 3,631 | |||||||||||
| Net cash (used in) provided by investing activities | (376,908 | ) | 6,893 | (642,957 | ) | ||||||||||
| (Decrease) increase in cash and cash equivalents | (13,629 | ) | (4,104 | ) | 8,977 | ||||||||||
| Cash and cash equivalents at January 1 | 117,866 | 121,970 | 112,993 | ||||||||||||
| Cash and cash equivalents at December 31 | $ | 104,237 | 117,866 | 121,970 | |||||||||||
See accompanying notes to consolidated financial statements.
44
Ryder System, Inc. and Subsidiaries
| Accumulated Other | |||||||||||||||||||||||||||||||||||||||
| Comprehensive Loss | |||||||||||||||||||||||||||||||||||||||
| Currency | Minimum | ||||||||||||||||||||||||||||||||||||||
| Preferred | Common | Retained | Deferred | Translation | Pension | Unrealized | |||||||||||||||||||||||||||||||||
| Stock | Stock | Earnings | Compensation | Adjustments | Liability | Loss | Total | ||||||||||||||||||||||||||||||||
| (Dollars in thousands, except share amounts) | |||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2000 | $ | — | 513,083 | 714,544 | — | (22,722 | ) | — | — | 1,204,905 | |||||||||||||||||||||||||||||
| Components of comprehensive income: | |||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | 89,032 | — | — | — | — | 89,032 | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | (12,986 | ) | — | — | (12,986 | ) | |||||||||||||||||||||||||||||
| Total comprehensive income | 76,046 | ||||||||||||||||||||||||||||||||||||||
| Common stock dividends declared — $0.60 per share | — | — | (35,774 | ) | — | — | — | — | (35,774 | ) | |||||||||||||||||||||||||||||
| Common stock issued under employee stock option and stock purchase plans (649,528 shares) | — | 10,957 | — | (4,315 | ) | — | — | — | 6,642 | ||||||||||||||||||||||||||||||
| Tax benefit from employee stock options | — | 392 | — | — | — | — | — | 392 | |||||||||||||||||||||||||||||||
| Amortization of restricted stock | — | — | — | 497 | — | — | — | 497 | |||||||||||||||||||||||||||||||
| Balance at December 31, 2000 | — | 524,432 | 767,802 | (3,818 | ) | (35,708 | ) | — | — | 1,252,708 | |||||||||||||||||||||||||||||
| Components of comprehensive income: | |||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | 18,678 | — | — | — | — | 18,678 | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | (14,862 | ) | — | — | (14,862 | ) | |||||||||||||||||||||||||||||
| Additional minimum pension liability adjustment, net of tax | — | — | — | — | — | (1,245 | ) | — | (1,245 | ) | |||||||||||||||||||||||||||||
| Total comprehensive income | 2,571 | ||||||||||||||||||||||||||||||||||||||
| Common stock dividends declared — $0.60 per share | — | — | (36,248 | ) | — | — | — | — | (36,248 | ) | |||||||||||||||||||||||||||||
| Common stock issued under employee stock option and stock purchase plans (779,919 shares)* | — | 12,444 | — | (2,825 | ) | — | — | — | 9,619 | ||||||||||||||||||||||||||||||
| Tax benefit from employee stock options | — | 680 | — | — | — | — | — | 680 | |||||||||||||||||||||||||||||||
| Amortization of restricted stock | — | — | — | 1,339 | — | — | — | 1,339 | |||||||||||||||||||||||||||||||
| Balance at December 31, 2001 | — | 537,556 | 750,232 | (5,304 | ) | (50,570 | ) | (1,245 | ) | — | 1,230,669 | ||||||||||||||||||||||||||||
| Components of comprehensive loss: | |||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | 93,666 | — | — | — | — | 93,666 | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | 9,255 | — | — | 9,255 | |||||||||||||||||||||||||||||||
| Additional minimum pension liability adjustment, net of tax | — | — | — | — | — | (227,573 | ) | — | (227,573 | ) | |||||||||||||||||||||||||||||
| Unrealized loss related to derivatives accounted for as hedges | — | — | — | — | — | — | (493 | ) | (493 | ) | |||||||||||||||||||||||||||||
| Total comprehensive loss | (125,145 | ) | |||||||||||||||||||||||||||||||||||||
| Common stock dividends declared — $0.60 per share | — | — | (37,137 | ) | — | — | — | — | (37,137 | ) | |||||||||||||||||||||||||||||
| Common stock issued under employee stock option and stock purchase plans (1,667,127 shares)* | — | 34,675 | — | 497 | — | — | — | 35,172 | |||||||||||||||||||||||||||||||
| Tax benefit from employee stock options | — | 3,272 | — | — | — | — | — | 3,272 | |||||||||||||||||||||||||||||||
| Amortization of restricted stock | — | — | — | 1,384 | — | — | — | 1,384 | |||||||||||||||||||||||||||||||
| Balance at December 31, 2002 | $ | — | 575,503 | 806,761 | (3,423 | ) | (41,315 | ) | (228,818 | ) | (493 | ) | 1,108,215 | ||||||||||||||||||||||||||
| * | Net of common stock purchased from employees exercising stock options and forfeitures of restricted stock grants. |
See accompanying notes to consolidated financial statements.
45
Ryder System, Inc. and Subsidiaries
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of Ryder System, Inc. and its subsidiaries (the “Company”). All significant intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
All investments in highly liquid debt instruments with maturities of three months or less at the date of purchase are classified as cash equivalents.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the revenue amount is fixed or determinable and collectibility is probable. Operating lease and rental revenue is recognized on a straight-line basis as vehicles are used over the terms of the related agreements. Lease and rental agreements do not provide for scheduled rent increases or escalations over the lease term. However, these lease agreements allow for rate changes based upon changes in the Consumer Price Index (CPI). Lease and rental agreements also provide for a fixed time charge plus a fixed per-mile charge. The fixed time charge, the fixed per-mile charge and the changes in rates attributed to changes in the CPI are considered contingent rentals and recognized in earnings as accruable. Direct financing lease revenue is recognized using the interest method over the terms of the lease agreements. Fuel services revenue is recognized when fuel is delivered to customers. Revenue from Supply Chain Solutions (SCS) and Dedicated Contract Carriage (DCC) contracts is recognized as services are provided at billing rates specified in the underlying contracts.
Allowance for Doubtful Accounts
Provisions for losses on customer receivables are generally determined according to the age of the receivables. The allowance is maintained at a level deemed appropriate based on loss experience and other factors affecting collectibility. Accounts are charged against the allowance for doubtful accounts when determined to be uncollectible.
Inventories
Inventories, which consist primarily of fuel, tires and vehicle parts, are valued using the lower of cost (specific identification or average cost) or market.
Tires in Service
The Company allocates a portion of the acquisition costs of revenue earning equipment to tires in service and amortizes such tire costs to expense over the lives of the vehicles and equipment. The cost of replacement tires and tire repairs are expensed as incurred.
Revenue Earning Equipment, Operating Property and Equipment and Depreciation
Revenue earning equipment, principally vehicles, and operating property and equipment are stated at cost. Revenue earning equipment and operating property and equipment under capital lease are stated at the lower of the present value of minimum lease payments or fair value. Vehicle repairs and maintenance that extend the life or increase the value of a vehicle are capitalized, whereas ordinary maintenance and repairs are expensed as incurred. Direct development costs incurred in connection with developing or obtaining internal use software are capitalized. Costs incurred during the preliminary project stage, as well as maintenance and training costs are expensed as incurred.
46
Provision for depreciation is computed using the straight-line method on all depreciable assets. Annual straight-line depreciation rates range from 10 to 33 percent for revenue earning equipment, 2.5 to 10 percent for buildings and improvements and 10 to 33 percent for machinery and equipment. The Company periodically reviews and adjusts the residual values and useful lives of revenue earning equipment based on current and expected operating trends and projected realizable values. Gains on operating property and equipment sales are reflected in miscellaneous (income) expense, net.
The Company routinely disposes of revenue earning equipment as part of its business. Revenue earning equipment held for sale is stated at the lower of carrying amount or fair value less costs to sell. Adjustments to the carrying value of assets are reported as depreciation expense. The Company stratifies its revenue earning equipment to be disposed of by vehicle type (tractors, trucks, trailers), weight class, age and other characteristics, as relevant, and creates classes of similar assets for analysis purposes. Fair value is determined based upon recent market prices for sales of each class of similar assets and vehicle condition. The net carrying value for revenue earning equipment held for sale attributed to the Fleet Management Solutions (FMS) business segment was $31 million and $45 million in 2002 and 2001, respectively.
Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but rather, be tested for impairment at least annually. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values. The Company adopted the provisions of SFAS No. 142 effective January 1, 2002 and discontinued the amortization of goodwill and intangible assets with indefinite useful lives. Actual results of operations for 2002 and restated results of operations for 2001 and 2000, had the Company applied the non-amortization provisions of SFAS No. 142, were as follows:
| December 31 | ||||||||||||
| 2002 | 2001 | 2000 | ||||||||||
| (In thousands) | ||||||||||||
| Net earnings, as reported | $ | 93,666 | 18,678 | 89,032 | ||||||||
| Add: Goodwill and intangible amortization, net of tax | — | 11,618 | 10,429 | |||||||||
| Adjusted net earnings | $ | 93,666 | 30,296 | 99,461 | ||||||||
Basic earnings per share: | ||||||||||||
| Net earnings, as reported | $ | 1.52 | 0.31 | 1.49 | ||||||||
| Add: Goodwill and intangible amortization, net of tax | — | 0.19 | 0.18 | |||||||||
| Adjusted net earnings | $ | 1.52 | 0.50 | 1.67 | ||||||||
Diluted earnings per share: | ||||||||||||
| Net earnings, as reported | $ | 1.50 | 0.31 | 1.49 | ||||||||
| Add: Goodwill and intangible amortization, net of tax | — | 0.19 | 0.17 | |||||||||
| Adjusted net earnings | $ | 1.50 | 0.50 | 1.66 | ||||||||
SFAS No. 142 also required the Company to perform an assessment of whether there was an indication that the remaining recorded goodwill was impaired as of January 1, 2002. This involved a two-step transitional impairment test. The first step of the transitional impairment test required the Company, within the first six months of 2002, to determine the fair value of each reporting unit, as defined, and compare it to the reporting unit’s carrying amount. The Company estimated the fair value of its reporting units using discounted cash flows. To the extent that a reporting unit’s carrying amount exceeded its fair value, this indicated that the reporting unit’s goodwill could be impaired and the Company would be required to perform the second step of the transitional impairment test.
47
The second step of the transitional impairment test required the Company to compare the implied fair value of the reporting unit’s goodwill, determined by allocating the reporting unit’s fair value to all of its recognized and unrecognized assets and liabilities in a manner similar to a purchase price allocation consistent with SFAS No. 141, “Business Combinations,” to its carrying amount, both of which would be measured as of January 1, 2002. The residual fair value after this allocation was the implicit fair value of the reporting unit’s goodwill.
In June 2002, the Company completed the assessment of all existing goodwill totaling $168 million as of January 1, 2002. As a result of this review, the Company recorded a non-cash charge of $19 million on a before and after-tax basis, or $0.30 per diluted share, associated with the Asian operations of the Company’s Supply Chain Solutions (SCS) business segment. The transitional impairment charge resulted from the application of the new impairment methodology introduced by SFAS No. 142. Prior to the adoption of SFAS No. 142, the Company measured the recoverability of goodwill based upon management’s best estimate of the undiscounted future operating cash flows (excluding interest charges) related to the asset. Under previous requirements, no goodwill impairment would have been recorded on January 1, 2002. In accordance with SFAS No. 142, the transitional impairment was recognized as the cumulative effect of a change in accounting principle in the Company’s Consolidated Statements of Earnings effective January 1, 2002. The impact of this accounting change had no effect on the Company’s operating earnings. The Company completed its annual impairment test for goodwill and intangible assets with indefinite useful lives as of April 1, 2002 and determined that there was no additional impairment. Impairment adjustments recognized after adoption are recognized as operating expenses.
Prior to the adoption of SFAS No. 142, goodwill, which represents the excess of purchase price over fair value of net assets acquired, was amortized on a straight-line basis over appropriate periods ranging from 10 to 40 years. Accumulated amortization was approximately $134 million at December 31, 2002 and 2001. Intangible assets were reviewed for impairment when circumstances indicated the carrying amount of assets may not have been recoverable. The amount of goodwill and other intangible asset impairment, if any, was measured based on projected future operating cash flows, discounted using a rate that reflects the Company’s average cost of funds.
Impairment of Long-Lived Assets
In August 2001, the FASB issued SFAS No. 144, which amends existing
accounting guidance on asset impairment and“Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of. Among other provisions, the new rules
changeSFAS No. 144 also changes the criteria for classifying an asset as held-for-sale. SFAS 144 alsoheld for sale; and broadens the scope of businesses to be disposed of that qualify for reporting as discontinued operations and changes the timing of recognizing losses on such operations. The Company adopted the provisions of SFAS No. 144 effective January 1, 2002. Adoption of SFAS No. 144 did not have any impact on the Company’s financial position, cash flows or results of operations.
The Company reviews long-lived assets held and used, excluding indefinite-lived intangible assets (see “Goodwill and Other Intangible Assets”), for impairment when circumstances indicate that the carrying amount of assets may not be recoverable. In accordance with SFAS No. 144, the Company assesses the recoverability of long-lived assets by determining whether the depreciation or amortization of an asset over its remaining life can be recovered based upon management’s best estimate of the undiscounted future operating cash flows (excluding interest charges) related to the long-lived asset or group of assets and liabilities in which the long-lived asset generates cash flows. If the sum of such undiscounted cash flows is less than the carrying value of the asset (group), there is an indicator of impairment. The amount of impairment, if any, represents the excess of the carrying value of the asset (group) over fair value. Fair value is determined by quoted market price, if available, or an estimate of projected future operating cash flows, discounted using a rate that reflects the related operating segment’s average cost of funds. Long-lived assets, including indefinite-lived intangible assets, to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
48
Self-Insurance Reserves
The Company retains a portion of the accident risk under vehicle liability, workers’ compensation and other insurance programs. Under the Company’s insurance programs, it retains the risk of loss in various amounts up to $1 million on a per occurrence basis. The Company maintains additional insurance at certain amounts in excess of its respective underlying retention.
Reserves have been recorded which reflect the undiscounted estimated liabilities, including claims incurred but not reported. Such liabilities are necessarily based on estimates. While management believes that the amounts are adequate, there can be no assurance that changes to management’s estimates may not occur due to limitations inherent in the estimation process. Changes in the estimates of these reserves are charged or credited to earnings in the period determined. Amounts estimated to be paid within one year have been classified as accrued expenses with the remainder included in other non-current liabilities.
Residual Value Guarantees
The Company periodically enters into agreements for the sale and operating leaseback of revenue earning equipment. These leases contain purchase and/or renewal options as well as limited guarantees of the lessor’s residual value (“residual value guarantees”).
The Company periodically reviews the residual values of revenue earning equipment that it leases from third parties and its exposures under residual value guarantees. The review is conducted in a similar manner to that used to analyze residual values and fair values of revenue earning equipment that the Company owns. The amount of residual value guarantees expected to be paid is recognized as rent expense over the expected remaining term of the lease. Adjustments in the estimate of residual value guarantees are recognized prospectively over the expected remaining lease term. While management believes that the amounts are adequate, changes to management’s estimates of residual value guarantees may occur due to changes in the market for used vehicles, the condition of the vehicles at the end of the lease and inherent limitations in the estimation process.
Income Taxes
Deferred taxes are provided using the asset and liability method for temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Environmental Expenditures
Liabilities are recorded for environmental assessments and/or cleanup when it is probable a loss has been incurred and the costs can be reasonably estimated. The liability may include costs such as anticipated site testing, consulting, remediation, disposal, post-remediation monitoring and legal fees, as appropriate. Estimates are not discounted. The liability does not reflect possible recoveries from insurance companies or reimbursement of remediation costs by state agencies, but does include estimates of cost-sharing with other potentially responsible parties. Claims for reimbursement of remediation costs are recorded when recovery is deemed probable.
Derivative Instruments and Hedging Activities
On January 1, 2001, the Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 133, as amended, requires all derivatives, including certain derivatives embedded in other contracts, to be recognized at fair value as either assets or liabilities on the balance sheet and establishes new accounting rules for hedging activities. Adoption of this statement did not have an impact on the Company’s financial position, cash flows or results of operations.
The Company uses financial instruments, including forward exchange contracts, futures, swaps and cap agreements to manage its exposures to movements in interest rates and foreign exchange rates. The use of these financial instruments modifies the exposure of these risks with the intent to reduce the risk or cost to the Company. The Company does not enter into derivative financial instruments for trading purposes. On the date a derivative contract is entered into, the Company formally documents, among other items, the intended hedging designation and relationship, along with the risk management objectives and strategies for entering into the derivative contract. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged
49
items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively. Consistent with the provisions of SFAS No. 133, the hedging designation may be classified as follows:
No Hedging Designation:The gain or loss on a derivative instrument not designated as an accounting hedging instrument is recognized currently in earnings.
Fair Value Hedge:A hedge of a recognized asset or liability or an unrecognized firm commitment is considered as a fair value hedge. For fair value hedges, both the effective and ineffective portions of the changes in the fair value of the derivative, along with the gain or loss on the hedged item that is attributable to the hedged risk are recorded in earnings and reported in the Consolidated Statements of Earnings on the same line as the hedged item.
Cash Flow Hedge:A hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability is considered as a cash flow hedge. The effective portion of the change in the fair value of a derivative that is declared as a cash flow hedge is recorded in accumulated other comprehensive loss until earnings are affected by the variability in cash flows of the designated hedged item.
Net Investment Hedge: A hedge of a net investment in a foreign operation is considered as a net investment hedge. The effective portion of the change in the fair value of the derivative used as a net investment hedge of a foreign operation is recorded in the cumulative translation adjustment account within accumulated other comprehensive loss. The ineffective portion on the hedged item that is attributable to the hedged risk are recorded in earnings and reported in the Consolidated Statements of Earnings as miscellaneous (income) expense.
Foreign Currency Translation
The Company’s foreign operations generally use the local currency as their functional currency. Assets and liabilities of these operations are translated at the exchange rates in effect on the balance sheet date. If exchangeability between the functional currency and the U.S. Dollar is temporarily lacking at the balance sheet date, the first subsequent rate at which exchanges can be made is used to translate assets and liabilities. Income statement items are translated at the average exchange rates for the year. The impact of currency fluctuations is included in accumulated other comprehensive income (loss) as a currency translation adjustment. For subsidiaries whose economic environment is highly inflationary, the U.S. Dollar is the functional currency and gains and losses that result from translation are included in earnings.
Stock-based Compensation
At December 31, 2002, the Company had various stock-based employee compensation plans, which are described more fully in the “Employee Stock Option and Stock Purchase Plans” Note. Stock-based compensation is recognized using the intrinsic value method. Under this method, compensation cost is recognized based on the excess, if any, of the quoted market price of the stock at the date of grant (or other measurement date) and the amount an employee must pay to acquire the stock.
50
The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value method of accounting to stock-based employee compensation.
| Years ended December 31 | ||||||||||||||
| 2002 | 2001 | 2000 | ||||||||||||
| (In thousands) | ||||||||||||||
| Net earnings, as reported | $ | 93,666 | 18,678 | 89,032 | ||||||||||
| Add: Stock-based employee compensation expense included in reported net income, net of related tax effects | 886 | 847 | 313 | |||||||||||
| Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects | (8,201 | ) | (8,568 | ) | (7,995 | ) | ||||||||
| Pro forma net earnings | $ | 86,351 | 10,957 | 81,350 | ||||||||||
| Earnings per share: | ||||||||||||||
| Basic: | ||||||||||||||
| As reported | $ | 1.52 | 0.31 | 1.49 | ||||||||||
| Pro forma | $ | 1.40 | 0.18 | 1.37 | ||||||||||
| Diluted: | ||||||||||||||
| As reported | $ | 1.50 | 0.31 | 1.49 | ||||||||||
| Pro forma | $ | 1.38 | 0.18 | 1.37 | ||||||||||
The fair values of options granted were estimated as of the dates of grant using the Black-Sholes option pricing model. See “Employee Stock Options and Stock Purchase Plans” Note for a description of option pricing assumptions.
Earnings Per Share
Basic earnings per share are computed by dividing net earnings by the weighted-average number of common shares outstanding. Diluted earnings per share reflect the dilutive effect of potential common shares from securities such as stock options and restricted stock grants.
Comprehensive (Loss) Income
Comprehensive (loss) 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 (loss) income presently consists of net earnings, currency translation adjustments associated with foreign operations that use the local currency as their functional currency, adjustments for derivative instruments accounted for as cash flow hedges and minimum pension liability adjustments.
Other Accounting Changes
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145, among other items, updates and clarifies existing accounting pronouncements related to gains and losses from the extinguishment of debt and certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of SFAS No. 145 are generally effective as of May 15, 2002. The adoption of SFAS No. 145 did not have a material impact on the Company’s results of operations, cash flows or financial position.
Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition,
51
construction, development and/or normal use of the assets. When the liability is initially recorded, the Company is required to capitalize a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. SFAS No. 143 is effective for fiscal years beginning after DecemberJune 15, 20012002 and will be adopted by the Company effective January 1, 2002.2003. The Company is currently evaluating the potential impact, if any,believes the adoption of SFAS No. 144143 will not have a significant impact on its results of operations, cash flows or financial position.
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The standard requires companies to recognize costs associated with exit (including restructuring) or disposal activities at fair value when they are incurred rather than at the date of a commitment to an exit or disposal plan under current practice. Costs covered by the standard include certain contract termination costs, certain employee termination benefits and other costs to consolidate or close facilities and relocate employees that are associated with an exit activity or disposal of long-lived assets. The new requirements are effective prospectively for exit or disposal activities initiated after December 31, 2002 and will be adopted by the Company effective January 1, 2003. The adoption of SFAS No. 146 is expected to impact the timing of recognition of costs associated with future exit and disposal activities.
In November 2002, the FASB issued Financial Interpretation (“FIN”) No. 45, “Guarantor’s Accounting Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN No. 45 clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN No. 45 are applicable for financial statements of interim or annual periods ending after December 15, 2002, which is included in the “Guarantees” Note.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123.” This Statement amends methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the accompanying Notes.
In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities” that establishes accounting guidance for identifying variable interest entities (VIEs), including special-purpose entities, and when to include the assets, liabilities, noncontrolling interests and results of activities of VIEs in an enterprise’s consolidated financial statements. FIN No. 46 requires consolidation of VIEs if the primary beneficiary has a variable interest (or combination of variable interests) that will absorb a majority of the entity’s expected losses if they occur, receive a majority of the entity’s expected residual returns if they occur, or both. The enterprise consolidating the VIE is the primary beneficiary of that entity. FIN No. 46 will be effective immediately for variable interests in VIEs created after January 31, 2003. For a variable interest in a VIE created before February 1, 2003, the recognition provisions of FIN No. 46 shall apply (other than the required disclosures prior to the effective date) to that entity as of the interim period beginning after June 15, 2003.
The Company expects, as a result of the initial recognition provisions of FIN No. 46, to consolidate three VIEs effective July 1, 2003. These VIEs resulted from sale-leaseback transactions entered into in previous years. The carrying value of the assets and liabilities as of December 31, 2002, attributed to these unconsolidated VIEs was approximately $519 million and $461 million, respectively. The Company’s maximum exposure to loss, at December 31, 2002, as a result of its involvement in these VIEs is approximately $112 million.
52
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
ACQUISITIONS
No acquisitions were completed in 2002 and 2001. In 2000, and 1999, the Company completed a few immaterial acquisitions, all of which have been accounted for using the purchase method of accounting. The consolidated financial statements reflect the results of operations of the acquired businesses from the acquisition dates. Pro
forma results of operations have not been presented because the effects of these
acquisitions were not significant. The fair value of assets acquired and liabilities assumed in connection with these acquisitions, and related purchase prices, were as follows:
In thousands
- --------------------------------------------------------------------------------
Years ended December 31 2000 1999
Net assets acquired $ 9,024 10,413
Goodwill 19,103 2,286
- --------------------------------------------------------------------------------
Purchase price $28,127 12,699
================================================================================
48
DIVESTITURES
On September 13, 1999, the Company completed the sale of its public
transportation services business (RPTS) for $940 million in cash and realized a
$339 million after-tax gain ($4.94 per diluted common share). The RPTS disposal
has been accounted for as discontinued operations and accordingly, its operating
results and cash flows are segregated and reported as discontinued operations in
the accompanying consolidated financial statements.
Summarized results of discontinued operations in 1999 were as follows:
In thousands
- --------------------------------------------------------------------------------
Revenue $ 411,743
================================================================================
Earnings before income taxes $ 20,050
Provision for income taxes 8,219
- --------------------------------------------------------------------------------
Earnings from discontinued operations $ 11,831
================================================================================
Gain on disposal $ 573,178
Income taxes 233,855
- --------------------------------------------------------------------------------
Net gain on disposal $ 339,323
================================================================================
Interest expense was allocated to discontinued operations based upon an assumed
debt-to-equity ratio consistent with the Company's historical interest
allocation method for segment reporting. Interest expense of $8 million was
included in the operating results of discontinued operations in 1999. The
results of discontinued operations exclude management fees and branch overhead
charges allocated by the Company and previously included in segment reporting.
The gain on disposal of discontinued operations is net of direct transaction
costs, gains on the settlement and curtailment of certain employee benefit plans
and exit costs to separate the discontinued business.
49
| (In thousands) | ||||
| Net assets acquired | $ | 9,024 | ||
| Goodwill | 19,103 | |||
| Purchase price | $ | 28,127 | ||
RESTRUCTURING AND OTHER CHARGES, NET
The components of restructuring and other charges, and the allocation across
business segments werenet are as follows:
In thousands
- --------------------------------------------------------------------------------
Years ended December 31 2001 2000 1999
Restructuring charges (recoveries):
Severance and employee-
related costs:
Shutdown of U.K. home
delivery network $ 2,593 -- --
Other 27,845 (1,077) 16,500
- --------------------------------------------------------------------------------
Total severance and
employee-related costs 30,438 (1,077) 16,500
Facilities and related costs 6,261 (2,009) 4,478
- --------------------------------------------------------------------------------
36,699 (3,086) 20,978
Other charges (recoveries):
Cancellation of IT project 21,727 -- --
Goodwill impairment 13,823 -- --
Shutdown of U.K. home
delivery network 12,862 -- --
Contract termination costs 11,204 -- --
Strategic consulting fees 8,586 958 3,935
Asset write-downs 7,273 41,100 14,215
Write-down of
software licenses 5,311 -- --
Loss on the sale of business 3,512 -- --
Start-up costs -- -- 7,970
Other (recoveries) charges, net (4,433) 3,042 4,995
- --------------------------------------------------------------------------------
$ 116,564 42,014 52,093
================================================================================
| Years ended December 31 | ||||||||||||||
| 2002 | 2001 | 2000 | ||||||||||||
| (In thousands) | ||||||||||||||
| Restructuring charges (recoveries), net: | ||||||||||||||
| Severance and employee-related costs | $ | 5,198 | 30,438 | (1,077 | ) | |||||||||
| Facilities and related costs | 106 | 6,261 | (2,009 | ) | ||||||||||
| 5,304 | 36,699 | (3,086 | ) | |||||||||||
| Other (recoveries) charges: | ||||||||||||||
| Asset write-downs | (285 | ) | 40,046 | 44,487 | ||||||||||
| Goodwill impairment | — | 24,425 | — | |||||||||||
| Strategic consulting fees | (64 | ) | 8,586 | 958 | ||||||||||
| Loss on sale of business | — | 3,512 | — | |||||||||||
| Contract termination costs | (219 | ) | 8,345 | — | ||||||||||
| Insurance reserves — sold business | (520 | ) | (2,920 | ) | 700 | |||||||||
| Gain on sale of corporate aircraft | — | (2,129 | ) | — | ||||||||||
| Other | — | — | (1,045 | ) | ||||||||||
| Total | $ | 4,216 | 116,564 | 42,014 | ||||||||||
53
Allocation of restructuring and other charges, net across business segments in 2002, 2001 2000 and 19992000 is as follows:
In thousands
- --------------------------------------------------------------------------------
Years ended December 31 2001 2000 1999
Fleet Management Solutions $ 38,268 38,992 24,403
Supply Chain Solutions 56,221 2,422 5,773
Dedicated Contract Carriage 964 -- --
Central Support Services 21,111 600 21,917
- --------------------------------------------------------------------------------
$116,564 42,014 52,093
================================================================================
50
2001
| Years ended December 31 | ||||||||||||
| 2002 | 2001 | 2000 | ||||||||||
| (In thousands) | ||||||||||||
| Fleet Management Solutions | $ | (1,042 | ) | 38,268 | 38,992 | |||||||
| Supply Chain Solutions | 4,082 | 56,221 | 2,422 | |||||||||
| Dedicated Contract Carriage | 14 | 964 | — | |||||||||
| Central Support Services | 1,162 | 21,111 | 600 | |||||||||
| Total | $ | 4,216 | 116,564 | 42,014 | ||||||||
2002 Charges
During the thirdfourth quarter of 2001,2002, the Company initiated the shutdown of
Systemcare, Ryder's shared-user home delivery network in the U.K. The shutdown
was initiatedeliminated approximately 140 positions as a result of management's reviewcost management actions principally in the Company’s SCS business segment and Central Support Services, which were substantially finalized as of future prospects for the
operation in light of historical and anticipated operating losses. Such review
was performed in conjunction with its restructuring initiatives. The shutdown
will be completed after meeting contractual obligations to current customers,
which extend to December 31, 2002. The charge related to the Systemcare shutdown
totaled $15 million andthese actions included severance and employee-related costs totaling $7 million. During 2002, severance and employee-related costs totaling $2 million that had been recorded in prior restructuring charges were reversed due to refinements in the estimates.
Other recoveries during 2002 include net gains (recoveries) on sale of $3
million. The remainderowned facilities identified for closure in prior restructuring charges, and the reversal of contract termination costs recognized in 2001 resulting from refinements in estimates and the charge, reported in other charges (recoveries),
includesfinal settlement of insurance reserves attributed to a goodwill impairment of $11 million and asset impairment charges,
primarily for specialized vehicles to be disposed of within 12 months after the
shutdown of Systemcare's operations, of $2 million.previously sold business.
2001 Charges
In late 2000, the Company communicated to its employees its planned strategic initiatives to reduce Company expenses. As part of such initiatives, the Company reviewed employee functions and staffing levels to eliminate redundant work or otherwise restructure work in a manner that led to a workforce reduction. The process resulted in terminations of over 1,400 employees during 2001. Other severance2001, which were substantially finalized as of December 31, 2002. Severance and employee-related costs of $28$30 million included(net of $2 million in recoveries of prior year charges) in 2001 representincluded termination benefits to employees whose jobs were eliminated as part of this review. During the third quarter of 2001, the Company initiated the shutdown of Systemcare, Ryder’s shared user home delivery network in the U.K. The shutdown was initiated as a result of management’s review of future prospects for the operation in light of historical and anticipated operating losses. The shutdown was completed after meeting contractual obligations to current customers, which extended to December 31, 2002. The severance and employee-related charge included $3 million incurred as part of the Systemcare shutdown.
During 2001, the Company identified more than 55 facilities in the U.S. and in other countries to be closed in order to improve profitability. Facilities and related costs of $6 million in 2001 represent contractual lease obligations for closed facilities.
Other charges (recoveries) represent asset impairments and other unusual
costs associated with the Company's strategic restructuring initiatives.
The Company's strategic initiatives
Additionally, during 2001 resulted in the cancellationCompany recorded various other charges which are summarized as follows:
Asset write-downs: Asset write-downs of certain information technology projects, incurred strategic
consulting fees, planned shutdown$40 million were recorded during 2001 and sale of certain operating units, contract
terminations and abandonment of certain assets, primarily technology, that will
no longer be used.
During the fourth quarter ofare described below:
| • | In 2001, the Company cancelled an information technology project in its FMS business segment. In connection with the cancellation, the Company recorded a non-cash charge of $22 million for the write-down of software licenses acquired for the project that could not be resold or redeployed and software development costs and assets related to the project that had no future economic benefit. | ||
| • | In 1997, the Company entered into an Information Technology Services Agreement (“ITSA”) with Accenture LLP (“Accenture”) under which the Company outsourced many of its information technology needs that were previously provided by Ryder employees. Under the terms of the ITSA, the Company prepaid for a number of services to be provided over the 10-year term of the agreement |
54
| expiring in 2007. Under the terms of the agreement, the Company was also obligated to pay certain termination costs to Accenture in the event the ITSA was terminated by the Company prior to the expiration date. | |||
| As part of its restructuring initiatives in 2001, management approved and committed the Company to in-source services provided by Accenture under the ITSA. In December 2001, Ryder and Accenture entered into a written agreement to transition certain IT services previously delivered by Accenture under contract to Ryder. Under this agreement, Ryder agreed to waive any right to reimbursement of approximately $3 million in unamortized prepaid expenses related to the ITSA. | |||
| • | The Company’s strategic initiatives during 2001 resulted in asset write-downs to fair value less cost to sell of approximately $4 million for facilities that were identified for closure and held for sale pursuant to the initiatives. At such time, the Company had the ability to remove the facilities from operations upon identification of a buyer or receipt of an acceptable bid. Fair value was determined based on appraisals of these properties. Also as part of the strategic initiatives the Company wrote down investments in e-commerce assets of $3 million, including specialized property and equipment and software, that were terminated or abandoned during 2001 and for which the fair value of such investments was zero. | ||
| • | Additionally, during 2001, an investment of $6 million in certain license agreements for supply chain management software was written down. The write-down consisted of the unamortized cost of licenses and related software development costs previously capitalized for which development was abandoned as a result of the Company’s restructuring initiatives. Since the software licenses would no longer be used in the business nor could the licenses be resold by the Company, such licenses were valued at zero. | ||
| • | Due to the decision to shut down the aforementioned Systemcare operations, the Company assessed the recoverability of Systemcare’s long-lived assets held for use as described in “Summary of Significant Accounting Policies — Impairment of Long-Lived Assets” Note. Assets of $2 million, consisting primarily of specialized vehicles to be disposed of after the shutdown of Systemcare’s operations, were considered impaired and written down because estimated fair values were less than the carrying values of the assets. Fair values were determined based on internal valuations of similar assets. |
Goodwill Impairment: The Company also identified certain operating units for which current circumstances indicated that the carrying amount of long-lived assets, in particular, goodwill, may not be recoverable. The Company assessed the recoverability of these long-lived assets and determined that the goodwill related to these operating units was not recoverable. See "Summary“Summary of Significant Accounting Policies"Policies — Goodwill and Other Intangible Assets” Note for the Company'sCompany’s policy on impairment of long-livedgoodwill and other intangible assets. In addition to the aforementioned goodwill impairment in the
Systemcare operations, goodwill impairmentImpairment charges in 2001, all of which related to SCS operating units, are summarized as follows:
In thousands
- --------------------------------------------------------------------------------
Ryder Argentina $ 9,130
Ryder Brazil 3,706
Other 987
- --------------------------------------------------------------------------------
$ 13,823
================================================================================
| (In thousands) | ||||
| Systemcare -UK home delivery network | $ | 10,602 | ||
| Ryder Argentina | 9,130 | |||
| Ryder Brazil | 3,706 | |||
| Other | 987 | |||
| Total | $ | 24,425 | ||
As part of the decision to shut down the aforementioned Systemcare operations, goodwill of $11 million was considered impaired and written down during 2001.
55
Goodwill impairment in Ryder Argentina was triggered by the significant adverse change in the business climate in Argentina in the fourth quarter of 2001 that led to a devaluation of the Argentine Peso, breakdowns in the Argentine banking system and repeated turnover in the country'scountry’s leadership. These factors, combined with a history of operating losses and anticipated future operating losses, led to goodwill impairment. Goodwill of $9 million was considered impaired and was written-downwritten down in December 2001. At December 31, 2001, Ryder
Argentina had total assets of $8 million and total equity of $4 million. The
Company is currently committed to continuing to operate in Argentina in order to
serve its global accounts, which it believes are profitable when considered on a
worldwide basis.
51
During the fourth quarter of 2001, the Company reviewed goodwill associated with its remaining investment in Ryder Brazil for impairment. Subsequent to the sale of the contracts and related net assets associated with the disposal of the Company'sCompany’s outbound auto carriage business (“Vehiculos”) in Ryder Brazil discussed below, the Company made a significant effort to restructure the operations of Ryder Brazil. However, such restructuring was not sufficient to offset the impact of lost business, the side-effectsimpact of the Argentine economic crisis and the marginal historical and anticipated cash flows related to the remaining business. At December 31, 2001,
Ryder Brazil had total assets of $18 million and total equity of $6 million.
Like Argentina, the Company is currently committed to operate in Brazil in order
to serve its global accounts, which it believes are profitable when considered
on a worldwide basis. As a result of the Company'sCompany’s analysis, goodwill of $4 million was considered impaired and was written-downwritten down in December 2001.
Strategic consulting fees:Strategic consulting fees of $9 million were incurred during 2001 in relation to the aforementioned strategic initiatives. Such consulting fees represented one-time costs of engaging consultants to assist the Company in its restructuring initiatives in 2001.
Loss on sale of business: During March 2001, the Company sold Vehiculos in Ryder Brazil for $14 million and incurred a loss of $4 million on the sale of the business.
Contract termination costs: In connection with the agreement to in-source information technology services provided by Accenture, the Company agreed to pay termination fees and certain demobilization costs of approximately $8 million. Also during 2001, the Company made a decision to terminate a long-term marketing arrangement to reduce marketing costs.
Insurance reserves — sold business: During 2001, the Company recognized $3 million in recoveries from an insurance settlement attributed to a business sold in 1989. The insurance recovery represents an adjustment to the Company’s indemnification reserve for favorable actuarial developments since the time of the sale.
Gain on sale of corporate aircraft:As a direct result of the Company’s 2001 restructuring and cost reduction initiatives, the Company decided to sell its corporate aircraft. The Company sold the aircraft during the first quarter of 2001 and recorded a $2 million gain on the sale.
2000 Charges
In 2000, severance and employee-related costs of $1 million that had been recorded in the 1999 restructuring were reversed due to refinements in estimates. Facilities and related costs reflect $2 million of recoveries in 2000net gains (recoveries) on sale of owned facilities identified for charges recordedclosure in the 1999 and 1996 restructuring.
A charge of $958,000 for consulting fees was incurred during 2000 related
to the completion of the Company's 1999 profitability improvement study.
In 2000, an asset write-down of $41 million resulted from the rapid industry-wide downturn in the market for new and used "Class 8"“Class 8” vehicles (the largest heavy-duty tractors and straight trucks)tractors) which led to a decrease in the market value of used tractors during the second half of 2000. The Company'sCompany’s unsold Class 8 inventory consists of units previously used by customers of the Fleet Management Solutions (FMS)FMS segment. Approximately $15 million of the charge related to Class 8 tractors held for sale and identified in 2000 as increasingly undesirable and unmarketable due to lower-powered engines or a potential lack of future support for parts and service. The remainder of the charge related to other owned and leased tractors held for sale 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 2000. These charges were slightly offset with gains of $570,000$1 million on vehicles sold in the U.K. during 2000, for which an impairment charge had been recorded in the 1999 restructuring.
During 2000, the Company settled long-standing litigation with a former customer, OfficeMax, relating to a logistics services agreement that was terminated in 1997. In 2000, other net charges includesasset write-downs include $4 million in impairment
charges related to the write-down net of recoveries, of certain assets related to the OfficeMax contract offset bycontract.
56
A charge of $1 million infor consulting fees was incurred during 2000 related to the completion of the Company’s 1999 profitability improvement study. Also during 2000, the Company recorded a $1 million charge for an adjustment to the Company’s indemnification reserve associated with the aforementioned insurance settlement and a $1 million reversal of certain other charges recorded in the 1999 restructuring.
1999 Charges
During 1999, the Company implemented several restructuring initiatives
designed to improve profitability and align the organizational structure with
the strategic direction of the Company. The restructuring initiatives resulted
in identification of approximately 250 employees whose jobs were terminated.
Contractual lease obligations associated with facilities to be closed as a
result of the restructuring amounted to $4 million. Strategic consulting fees of
$4 million were incurred during 1999 in relation to that year's restructuring
initiatives.
The Company also recorded asset impairments of $14 million in 1999 for
certain classes of specialized used vehicles, real estate and other assets held
for sale and software development projects that would not be implemented or
further utilized in the future. The Company also identified certain assets that
would be sold or for which development would be abandoned as a result of the
restructuring. During 1999, the Company also restructured its FMS operations in
the U.K. following the 1998 decision to retain the business.
52
In conjunction with the 1999 restructuring, the Company formed a captive
insurance subsidiary under which the Company's various self-insurance programs
are administered. Costs incurred related to the start-up of this entity totaled
$8 million. The Company also recorded $5 million for other costs incurred in
connection with the restructuring initiatives.
The following tables present a rollforwardroll-forward of the activity and balances of the restructuring reserve account for the years ended December 31, 20012002 and 2000:
In thousands
- --------------------------------------------------------------------------------
Dec. 31 Dec. 31
2000 2001 2001
- --------------------------------------------------------------------------------
Balance Additions Deductions Balance
Employee severance
and benefits $ 3,908 30,438 20,296 14,050
Facilities and related costs 2,012 6,261 2,506 5,767
- --------------------------------------------------------------------------------
$ 5,920 36,699 22,802 19,817
================================================================================
In thousands
- --------------------------------------------------------------------------------
Dec. 31 Dec. 31
1999 2000 2000
- --------------------------------------------------------------------------------
Balance Additions Deductions Balance
Employee severance
and benefits $13,017 -- 9,109 3,908
Facilities and related costs 7,182 -- 5,170 2,012
- --------------------------------------------------------------------------------
$20,199 -- 14,279 5,920
================================================================================
Additions2001:
| Dec. 31 | Dec. 31 | |||||||||||||||
| 2001 | 2002 | 2002 | ||||||||||||||
| Balance | Additions | Deductions | Balance | |||||||||||||
| (In thousands) | ||||||||||||||||
| Employee severance and benefits | $ | 14,050 | 7,198 | 11,879 | 9,369 | |||||||||||
| Facilities and related costs | 5,767 | 336 | 2,828 | 3,275 | ||||||||||||
| Total | $ | 19,817 | 7,534 | 14,707 | 12,644 | |||||||||||
| Dec. 31 | Dec. 31 | |||||||||||||||
| 2000 | 2001 | 2001 | ||||||||||||||
| Balance | Additions | Deductions | Balance | |||||||||||||
| (In thousands) | ||||||||||||||||
| Employee severance and benefits | $ | 3,908 | 32,272 | 22,130 | 14,050 | |||||||||||
| Facilities and related costs | 2,012 | 6,555 | 2,800 | 5,767 | ||||||||||||
| Total | $ | 5,920 | 38,827 | 24,930 | 19,817 | |||||||||||
2002 additions relate to liabilities for employee severance and benefits, and lease
obligations on facility closures, all incurred in 2001.2002. Deductions include cash payments of $21$13 million and $11$23 million and prior year charge reversals of $2 million and $3$2 million in 20012002 and 2000,2001, respectively. At December 31, 2001,2002, employee severance and benefits obligations are required to be paid over the next threetwo years. At December 31, 2001,2002, lease obligations are noncancelable and contractually required to be paid principally over the next threetwo years.
RECEIVABLES
In thousands
- --------------------------------------------------------------------------------
December 31 2001 2000
Trade
| December 31 | ||||||||
| 2002 | 2001 | |||||||
| (In thousands) | ||||||||
| Trade receivables, prior to sale | $ | 586,803 | 614,306 | |||||
| Receivables sold | — | (110,000 | ) | |||||
| Trade receivables | 586,803 | 504,306 | ||||||
| Financing lease | 61,459 | 62,211 | ||||||
| Other | 50 | 78 | ||||||
| 648,312 | 566,595 | |||||||
| Allowance | (8,003 | ) | (8,864 | ) | ||||
| Total | $ | 640,309 | 557,731 | |||||
The Company is a party to a trade receivables prioragreement pursuant to sale $ 614,306 667,953
Receivable sold (110,000) (345,000)
- --------------------------------------------------------------------------------
Tradewhich Ryder Receivables Funding LLC (“RRF LLC”), a bankruptcy-remote special-purpose entity, can sell receivables 504,306 322,953
Financing lease 62,211 60,534
Other 78 25,372
- --------------------------------------------------------------------------------
566,595 408,859
Allowance (10,286) (9,236)
- --------------------------------------------------------------------------------
$ 556,309 399,623
================================================================================
53
"Receivables"“Receivables”) in order to fund the Company'sCompany’s operations, particularly when the cost of such sales is cost effective compared with other means of funding, notably, commercial paper. The
Receivables are sold by the Company to a special purpose entity, Ryder
Receivables Funding LLC ("RRF LLC"). RRF
57
LLC, a bankruptcy remote, consolidated subsidiary of the Company, is a single-member limited liability corporation established in the state of Florida and represents a separate corporate entity whose separate existence is relied upon by third parties choosing to enter into transactions with RRF LLC.
Under the terms of a trade receivables purchase and sales agreement (the
"Trade Receivables Agreement") entered into between RRF LLC and certain unrelated commercial entities, RRF LLC may sell up to a maximum of $375$275 million of the Receivables, on a revolving basis, to these entities (the "Purchasers"“Purchasers”). In June 2002, the Company reduced the amount available for sale under its trade receivables facility from $375 million to $275 million as a result of decreased overall capital needs. Upon a sale, the Purchasers receive undivided percentage ownership interests in the Receivables sold. The Receivables are sold at a loss, which approximates the Purchaser'sPurchaser’s financing cost of issuing its own commercial paper. The Purchaser'slosses on the sale of the Receivables were $2 million in 2002, $9 million in 2001 and $17 million in 2000 and are included in miscellaneous (income) expense, net. The Purchaser’s commercial paper is backed by its collective investment in pooled receivables purchased from multiple entities, including RRF LLC. The Company is responsible for servicing the Receivables but has no retained interests in the Receivables.
The Trade Receivables Agreementtrade receivables agreement contains certain defined events, including a specified downgrade in any of the Company'sCompany’s unsecured long-term public senior debt securities, which in the event of occurrence, would terminate any future sales under the Trade Receivables Agreement.trade receivables agreement. The Receivables are sold to the Purchasers with limited recourse for uncollectible receivables. RRF LLC records estimates of losses under the recourse provision, the amount of which is included in the allowance for doubtful accounts. The total amount of available
recourse as of December 31, 2001 was approximately $14 million.accrued expenses. At December 31, 20012002 and 2000,2001, the outstanding balance of receivables sold pursuant to this agreement was $0 and $110 million, and $345 million, respectively. The losses onSince no receivables were sold at the saleend of the
Receivables were $9 million in 2001, $17 million in 2000 and $10 million in 1999
and are included in miscellaneous (income) expense, net.
REVENUE EARNING EQUIPMENT
In thousands
- --------------------------------------------------------------------------------2002, no amount of available recourse or recognized recourse obligation existed as of December 31, 2002. At December 31, 2001, 2000
Fullthe amount of available recourse was $14 million and the estimated losses under the recourse obligation attributed to receivables sold was $1 million.
REVENUE EARNING EQUIPMENT
| December 31 | ||||||||
| 2002 | 2001 | |||||||
| (In thousands) | ||||||||
| Full service lease | $ | 3,406,453 | 3,014,049 | |||||
| Commercial rental | 1,204,697 | 1,191,409 | ||||||
| 4,611,150 | 4,205,458 | |||||||
| Accumulated depreciation | (2,113,536 | ) | (1,726,344 | ) | ||||
| Total | $ | 2,497,614 | 2,479,114 | |||||
Revenue earning equipment leased under “full service lease” and “commercial rental” is differentiated exclusively by the service line in which the equipment is employed. Two core service offerings of the Company’s Fleet Management Solutions are full service leasing and short-term commercial rental. Under a full service lease, $ 2,901,623 3,227,830
Commercial rental 1,168,351 1,201,038
- --------------------------------------------------------------------------------
4,069,974 4,428,868
Accumulated depreciation (1,590,860) (1,416,062)
- --------------------------------------------------------------------------------
$ 2,479,114 3,012,806
================================================================================
54
58
OPERATING PROPERTY AND EQUIPMENT
In thousands
- --------------------------------------------------------------------------------
December 31 2001 2000
Land $ 106,441 107,853
Buildings and improvements 574,539 559,707
Machinery and equipment 494,388 462,631
Other 75,722 114,651
- --------------------------------------------------------------------------------
1,251,090 1,244,842
Accumulated depreciation (684,207) (632,216)
- --------------------------------------------------------------------------------
$ 566,883 612,626
================================================================================
| December 31 | ||||||||
| 2002 | 2001 | |||||||
| (In thousands) | ||||||||
| Land | $ | 106,367 | 106,441 | |||||
| Buildings and improvements | 588,283 | 574,539 | ||||||
| Machinery and equipment | 488,650 | 494,388 | ||||||
| Other | 74,752 | 75,722 | ||||||
| 1,258,052 | 1,251,090 | |||||||
| Accumulated depreciation | (727,175 | ) | (684,207 | ) | ||||
| Total | $ | 530,877 | 566,883 | |||||
DIRECT FINANCING LEASES AND OTHER ASSETS
In thousands
- --------------------------------------------------------------------------------
December 31 2001 2000
Direct financing leases $413,075 427,862
Prepaid pension
| December 31 | ||||||||
| 2002 | 2001 | |||||||
| (In thousands) | ||||||||
| Direct financing leases | $ | 373,252 | 413,075 | |||||
| Prepaid pension benefit cost | — | 159,214 | ||||||
| Vehicle securitization credit enhancement | 59,938 | 60,477 | ||||||
| Investments held in Rabbi Trust | 29,816 | 37,133 | ||||||
| Swap and cap agreements | 24,789 | — | ||||||
| Other | 43,965 | 36,059 | ||||||
| Total | $ | 531,760 | 705,958 | |||||
INTANGIBLE ASSETS AND DEFERRED CHARGES
| December 31 | ||||||||
| 2002 | 2001 | |||||||
| (In thousands) | ||||||||
| Goodwill | $ | 151,470 | 168,312 | |||||
| Other intangible assets | 21,842 | 10,600 | ||||||
| Deferred charges | 9,248 | 12,379 | ||||||
| Total | $ | 182,560 | 191,291 | |||||
The carrying amount of goodwill attributable to each reportable business segment with changes therein was as follows:
| Fleet | Supply | Dedicated | ||||||||||||||
| Management | Chain | Contract | ||||||||||||||
| Solutions | Solutions | Carriage | Total | |||||||||||||
| (In thousands) | ||||||||||||||||
| Balance as of December 31, 2001 | $ | 118,800 | 44,612 | 4,900 | 168,312 | |||||||||||
| Transitional impairment adjustment | — | (18,899 | ) | — | (18,899 | ) | ||||||||||
| Currency translation adjustment | 748 | 1,309 | — | 2,057 | ||||||||||||
| Balance as of December 31, 2002 | $ | 119,548 | 27,022 | 4,900 | 151,470 | |||||||||||
The Company’s other intangible assets include the Ryder trade name with a carrying amount of $9 million and intangible assets related to the Company’s defined benefit cost 159,214 145,546
Vehicle securitization credit
enhancement 60,477 27,741
Investments held in Rabbi Trust 37,133 37,661
Other 36,059 54,287
- --------------------------------------------------------------------------------
$705,958 693,097
================================================================================
plans with a carrying amount of $13 million. The Ryder trade name has been identified as having an indefinite useful life and was tested for impairment consistent
59
with the transitional provisions of SFAS No. 142. The Company completed such testing and determined that there was no impairment of intangible assets.
ACCRUED EXPENSES AND OTHER NON-CURRENT LIABILITIES
In thousands
- --------------------------------------------------------------------------------
December 31 2001 2000
Salaries and wages $ 84,815 104,166
Employee benefits 31,000 22,397
Interest 17,403 19,682
Operating taxes 79,110 75,595
Income taxes 2,124 --
Self-insurance reserves 218,786 228,452
Postretirement benefits
other than pensions 37,916 38,274
Vehicle rent and related accruals 105,813 160,579
Environmental liabilities 12,182 14,174
Restructuring 19,817 5,920
Other 116,223 139,537
- --------------------------------------------------------------------------------
725,189 808,776
Non-current portion (284,274) (298,365)
- --------------------------------------------------------------------------------
Accrued expenses $ 440,915 510,411
================================================================================
55
| December 31 | ||||||||
| 2002 | 2001 | |||||||
| (In thousands) | ||||||||
| Salaries and wages | $ | 96,981 | 84,815 | |||||
| Pension benefits | 217,942 | 18,854 | ||||||
| Postretirement benefits other than pensions | 36,672 | 37,916 | ||||||
| Employee benefits | 15,845 | 12,146 | ||||||
| Self-insurance reserves | 241,350 | 218,786 | ||||||
| Lease termination reserves | 27,770 | 44,095 | ||||||
| Vehicle rent and related accruals | 50,876 | 61,718 | ||||||
| Environmental liabilities | 12,439 | 12,182 | ||||||
| Operating taxes | 73,461 | 79,110 | ||||||
| Income taxes | 6,702 | 2,124 | ||||||
| Restructuring | 12,644 | 19,817 | ||||||
| Interest | 15,329 | 17,403 | ||||||
| Other | 88,574 | 119,773 | ||||||
| 896,585 | 728,739 | |||||||
| Non-current portion | (473,879 | ) | (283,347 | ) | ||||
| Accrued expenses | $ | 422,706 | 445,392 | |||||
LEASES
Operating Leases as Lessor
One of the Company'sCompany’s major product lines is full service leasing of commercial trucks, tractors and trailers. These lease agreements provide for a fixed time charge plus a fixed per-mile charge. A portion of these charges is often adjusted in accordance with changes in the Consumer Price Index.
Contingent rentals included in income during 2001, 2000 and 1999 were $259
million, $268 million and $263 million, respectively.
Direct Financing Leases
The Company also leases revenue earning equipment to customers as direct financing leases. The net investment in direct financing leases consisted of:
In thousands
- --------------------------------------------------------------------------------
December 31 2001 2000
Minimum lease payments receivable $ 868,373 915,914
Executory costs and unearned income (476,722) (506,880)
Unguaranteed residuals 83,635 79,362
- --------------------------------------------------------------------------------
Net investment in direct financing leases 475,286 488,396
Current portion (62,211) (60,534)
- --------------------------------------------------------------------------------
Non-current portion $ 413,075 427,862
================================================================================
Contingent rentals included in income were $29 million in 2001, $30 million in
2000 and $26 million in 1999.
| December 31 | ||||||||
| 2002 | 2001 | |||||||
| (In thousands) | ||||||||
| Minimum lease payments receivable | $ | 745,327 | 868,373 | |||||
| Executory costs and unearned income | (392,975 | ) | (476,722 | ) | ||||
| Unguaranteed residuals | 82,359 | 83,635 | ||||||
| Net investment in direct financing leases | 434,711 | 475,286 | ||||||
| Current portion | (61,459 | ) | (62,211 | ) | ||||
| Non-current portion | $ | 373,252 | 413,075 | |||||
Operating LeaseLeases as Lessee
The Company leases vehicles, facilities and office equipment under operating lease agreements. The majority of these agreements are vehicle leases which specify that rental payments be adjusted periodically based on changes in interest rates and provide for early termination at stipulated values.
60
During 2001 2000 and 1999,2000, the Company entered into several agreements for the sale and operating leaseback of revenue earning equipment. Proceeds from these transactions totaled, $411 million in 2001 and $373 million in 2000 and $594
million in 1999. The leases contain purchase and/or renewal options, as well as
limited guarantees of2000. Under the lessor's residualtransactions, the vehicles were sold for approximately their carrying value. The reserve for residual
value guarantees was $44 million and $55 million at December 31, 2001 and 2000,
respectively. Such amounts are included in accrued expenses (for those payable
in less than one year) and in other non-current liabilities. Included in the sale-leaseback transactionstransaction in 2001 and 1999 werewas a vehicle securitization transactionstransaction in which the Company sold a beneficial interest in certain leased vehicles subject to leases to a separately rated and unconsolidated vehicle lease trusts. Such securitizations generated cash proceeds of $411 million and $294
million in 2001 and 1999, respectively (which are included in the proceeds from
sale-leasebacktrust. The Company has executed other similar vehicle securitization transactions in the previous paragraph). The vehicles were sold
for approximately their carrying value.years. The Company is obligated to make lease payments only to the extent of collections on the related vehicle leases and vehicle sales.
56
20012002 and 2000,2001, credit enhancements maintained by the Company totaled $60 million and $28 million,
respectively, and are included in direct financing leases and other assets. The trusts rely on collections from the leases on the vehicles in which the trusts have beneficial ownership, sales proceeds from the disposition of such vehicles and cash reserve fundscredit enhancements to make payments to investors. The trusts are solely liable for such payments to investors, who are all independent of the Company. Other than the credit enhancements noted above, the Company does not guarantee investors'investors’ interests in the securitization trusts.
Certain leases contain purchase and/or renewal options, as well as limited guarantees for a portion of the lessor’s residual value. The amount of residual value guarantees expected to be paid is recognized as rent expense over the expected remaining term of the lease. Facts and circumstances that impact management’s estimates of residual value guarantees include the market for used equipment, the condition of the equipment at the end of the lease and inherent limitations in the estimation process. The Company’s maximum exposure to guarantees for revenue earning equipment held under operating leases, excluding early lease terminations, was approximately $134 million as of December 31, 2002.
The following table presents the activity of the reserve for residual value guarantees for the years ended December 31, 2002, 2001 and 2000:
| Beginning | Ending | |||||||||||||||
| Balance | Additions | Deductions | Balance | |||||||||||||
| (In thousands) | ||||||||||||||||
2002 | $ | 44,095 | 22,060 | (38,385 | ) | 27,770 | ||||||||||
| 2001 | $ | 55,098 | 41,415 | (52,418 | ) | 44,095 | ||||||||||
| 2000 | $ | 18,920 | 47,176 | (10,998 | ) | 55,098 | ||||||||||
2002 Activity:
The overall decline in the reserve activity reflects the decrease in the number of vehicles held under operating leases during 2002 as compared with earlier years. Additionally, improved vehicle market prices in 2002 resulted in higher estimates of vehicle residual values than previously anticipated. During 2002, the number of vehicles held under lease declined 30 percent in comparison to 2001.
2001 Activity:
Vehicle market prices declined further in 2001 which resulted in additional reductions to the Company’s estimates of residual values. The significant amount of reserve deductions was directly attributed to the increased activity of vehicle sales and lease terminations during the year as a result of the increase in the number of vehicles held under operating leases in 2000.
2000 Activity:
The significant build-up during 2000 was in part attributed to the increase in the number of vehicles held under operating leases as a result of leases entered into in late 1999 and 1999,2000. The increase was also attributed to a
61
rapid industry-wide downturn on the market for new and used “Class 8” vehicles (the largest heavy-duty tractors) which led to a decrease in the market value of used tractors. Leases on most of the units impacted by the market value change were set to expire beginning in 2001.
During 2002, 2001 and 2000, rent expense (including rent of facilities included in operating expense, but excluding contingent rentals) was $235 million, $304 million $328 million and $279$328 million, respectively. Contingent rentals on securitized vehicles were $114 million in 2002, $124 million in 2001 and $65 million in 2000 and $28
million in 1999.2000. Contingent rentals on all other leased vehicles were $22 million in 2002, $41 million in 2001 and $16 million in 2000 and $6 million in 1999.
2000.
Lease Payments
Future minimum payments for leases in effect at December 31, 20012002 were as follows:
In thousands
- --------------------------------------------------------------------------------
As Lessor As Lessee
- --------------------------------------------------------------------------------
Direct
Operating Financing Operating
Leases Leases Leases
2002 $1,004,847 157,003 364,419
2003 814,042 146,365 280,123
2004 637,572 134,324 120,765
2005 449,081 118,275 66,990
2006 241,374 97,921 47,831
Thereafter 107,574 214,262 97,227
- --------------------------------------------------------------------------------
$3,254,490 868,150 977,355
================================================================================
| As Lessor* | As Lessee | ||||||||||||
| Direct | |||||||||||||
| Operating | Financing | Operating | |||||||||||
| Leases | Leases | Leases | |||||||||||
| (In thousands) | |||||||||||||
| 2003 | $ | 974,493 | 145,748 | 297,964 | |||||||||
| 2004 | 778,066 | 133,743 | 128,679 | ||||||||||
| 2005 | 569,877 | 119,729 | 75,079 | ||||||||||
| 2006 | 344,142 | 102,055 | 53,914 | ||||||||||
| 2007 | 178,997 | 86,300 | 41,650 | ||||||||||
| Thereafter | 84,735 | 157,752 | 56,393 | ||||||||||
| Total | $ | 2,930,310 | 745,327 | 653,679 | |||||||||
| * | Amounts do not include contingent rentals, which may be received under certain leases on the basis of miles of use or changes in the Consumer Price Index. Contingent rentals from operating leases included in income during 2002, 2001 and 2000 were $267 million, $259 million and $268 million, respectively. Contingent rentals from direct financing leases included in income during 2002, 2001 and 2000 were $30 million, $29 million and $30 million, respectively. |
The amounts in the previous table are based upon the assumption that revenue earning equipment will remain on lease for the length of time specified by the respective lease agreements. This isThe future minimum payments presented above are not a projection of future lease revenue or expense; no effect has been given to renewals, new business, cancellations, contingent rentals or future rate changes. 57
62
INCOME TAXES
The components of earnings before income taxes and the provision for income taxes attributable to continuing operations were as follows:
In thousands
- --------------------------------------------------------------------------------
Years ended December 31 2001 2000 1999
Earnings before income taxes:
United States $ 27,332 101,727 92,003
Foreign 3,374 39,594 25,491
- --------------------------------------------------------------------------------
$ 30,706 141,321 117,494
================================================================================
Current tax expense (benefit):
Federal $ -- (40,204) (183,470)
State 132 4,652 (24,392)
Foreign 13,785 14,602 2,398
- --------------------------------------------------------------------------------
13,917 (20,950) (205,464)
- --------------------------------------------------------------------------------
Deferred tax (benefit) expense:
Federal 3,737 66,062 210,542
State 5,849 3,351 31,596
Foreign (11,475) 3,826 7,903
- --------------------------------------------------------------------------------
(1,889) 73,239 250,041
- --------------------------------------------------------------------------------
Provision for income taxes $ 12,028 52,289 44,577
================================================================================
| Years ended December 31 | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
| (In thousands) | |||||||||||||
| Earnings before income taxes: | |||||||||||||
| United States | $ | 125,616 | 27,332 | 101,727 | |||||||||
| Foreign | 50,267 | 3,374 | 39,594 | ||||||||||
| Total | $ | 175,883 | 30,706 | 141,321 | |||||||||
| Current tax expense (benefit): | |||||||||||||
| Federal | $ | (2,614 | ) | — | (40,204 | ) | |||||||
| State | 321 | 132 | 4,652 | ||||||||||
| Foreign | 12,996 | 13,785 | 14,602 | ||||||||||
| 10,703 | 13,917 | (20,950 | ) | ||||||||||
| Deferred tax expense (benefit): | |||||||||||||
| Federal | 37,017 | 3,737 | 66,062 | ||||||||||
| State | 13,796 | 5,849 | 3,351 | ||||||||||
| Foreign | 1,802 | (11,475 | ) | 3,826 | |||||||||
| 52,615 | (1,889 | ) | 73,239 | ||||||||||
| Provision for income taxes | $ | 63,318 | 12,028 | 52,289 | |||||||||
A reconciliation of the Federal statutory tax rate with the effective tax rate follows:
| Years ended December 31 | ||||||||||||||
| 2002 | 2001 | 2000 | ||||||||||||
| (Percentage of pre-tax income) | ||||||||||||||
| | ||||||||||||||
| Federal statutory tax rate | 35.0 | 35.0 | 35.0 | |||||||||||
| Impact on deferred taxes for changes in tax rates | — | (34.8 | ) | — | ||||||||||
| State income taxes, net of federal income tax benefit | 5.2 | 12.7 | 3.7 | |||||||||||
| Amortization of goodwill | — | 10.6 | 2.0 | |||||||||||
| Restructuring and other charges, net | (0.1 | ) | 28.1 | — | ||||||||||
| Miscellaneous items, net | (4.1 | ) | (12.4 | ) | (3.7 | ) | ||||||||
| Effective tax rate | 36.0 | 39.2 | 37.0 | |||||||||||
The Company’s effective income tax rate on earnings was 36.0 percent for continuing operations follows:
Percentage of Pre-tax Income
- --------------------------------------------------------------------------------
Yearsthe year ended December 31, 2001 2000 1999
Federal statutory tax rate 35.0 35.0 35.0
Impact on deferred taxes
for changes in tax rates (34.8) -- --
State income taxes, net of
federal income tax benefit 12.7 3.7 4.0
Amortization of goodwill 10.6 2.0 0.1
Restructuring and
other charges, net 28.1 -- --
Miscellaneous items, net (12.4) (3.7) (1.2)
- --------------------------------------------------------------------------------
Effective tax rate 39.2 37.0 37.9
================================================================================
58
towith such items. The increaseIn June 2001, legislation was enacted in the Company's effective tax rate was partially offset by a permanent reduction
in corporateCanada that prospectively reduced income tax rates in Canada thatapplicable to the Company’s Canadian operations. This resulted in a one-time reduction in the Company'sCompany’s related deferred taxes of $7 million.million, which partially offset the increase in the effective tax rate in 2001.
63
The components of the net deferred income tax liability were as follows:
In thousands
- --------------------------------------------------------------------------------
| December 31 | |||||||||||||
| 2002 | 2001 | ||||||||||||
| (In thousands) | |||||||||||||
| Deferred income tax assets: | |||||||||||||
| Self-insurance reserves | $ | 72,575 | 77,592 | ||||||||||
| Net operating loss carryforwards | 208,251 | 195,050 | |||||||||||
| Alternative minimum taxes | 30,905 | 31,109 | |||||||||||
| Accrued compensation and benefits | 30,110 | 27,782 | |||||||||||
| Lease accruals and reserves | 18,342 | 31,335 | |||||||||||
| Pension benefits | 79,589 | — | |||||||||||
| Miscellaneous other accruals | 46,340 | 57,327 | |||||||||||
| 486,112 | 420,195 | ||||||||||||
| Valuation allowance | (14,392 | ) | (16,093 | ) | |||||||||
| 471,720 | 404,102 | ||||||||||||
| Deferred income tax liabilities: | |||||||||||||
| Property and equipment bases difference | (1,343,375 | ) | (1,256,520 | ) | |||||||||
| Pension benefits | — | (54,680 | ) | ||||||||||
| Other items | (51,214 | ) | (74,072 | ) | |||||||||
| (1,394,589 | ) | (1,385,272 | ) | ||||||||||
| Net deferred income tax liability* | $ | (922,869 | ) | (981,170 | ) | ||||||||
| * | Deferred tax assets of $11 million and $22 million have been included in prepaid expenses and other current assets at December 31, 2002 and 2001, |
Deferred taxes have not been provided on temporary differences related to investments in foreign subsidiaries that are considered permanent in duration. These temporary differences consist primarily of undistributed foreign earnings of $119$170 million at December 31, 2001.2002. A full foreign tax provision has been made on these undistributed foreign earnings. Determination of the amount of deferred taxes on these temporary differences is not practicable due to foreign tax credits and exclusions.
The Company had net operating loss carryforwards (tax effected) for federal and state income tax purposes of $195$208 million at December 31, 2001,2002, expiring through 2016.2023. The Company expects to utilize these carryforwards before their expiration dates.
The Company had unused alternative minimum tax credits, for tax purposes, of $31 million at December 31, 20012002 available to reduce future income tax liabilities. The alternative minimum tax credits may be carried forward indefinitely.
59
A valuation allowance has been established to reduce deferred income tax assets, principally foreign tax loss carryforwards to amounts expected to be realized.
Income taxes paid (refunded) paid totaled $15 million in 2002, $(12) million in 2001 and $(7) million in 2000 and $72 million in 1999, and includeincluded amounts related to both continuing and discontinued operations.
The audit of the consolidated federal income tax returns for 1995, 1996 and 1997 are
being audited byis in the IRS.appeals process with the Internal Revenue Service. The Company believes that the ultimate outcome of the audit will not result in a material impact on the Company’s consolidated results of operations or financial position. Years prior to 1995 are closed and no longer subject to audit. Management believes that taxes accrued on the balance sheetConsolidated Balance Sheets fairly represent the amount of future tax liability due by the Company.
64
DEBT
In thousands
- --------------------------------------------------------------------------------
December 31 2001 2000
U.S. commercial paper $ 210,000 441,106
Canadian commercial paper -- 31,692
Unsecured U.S. notes:
Debentures, 6.50% to 9.88%,
due 2005 to 2017 325,687 425,610
Medium-term notes,
5.00% to 8.10%,
due 2002 to 2025 742,527 755,863
Unsecured foreign obligations
(principally pound sterling),
4.50% to 13.50%,
due 2002 to 2006 331,306 332,680
Other debt, including capital leases 99,164 30,029
- --------------------------------------------------------------------------------
Total debt 1,708,684 2,016,980
Current portion (317,087) (412,738)
- --------------------------------------------------------------------------------
Long-term debt $ 1,391,597 1,604,242
================================================================================
| December 31 | |||||||||
| 2002 | 2001 | ||||||||
| (In thousands) | |||||||||
| | |||||||||
| U.S. commercial paper | $ | 117,500 | 210,000 | ||||||
| Unsecured U.S. notes: | |||||||||
| Debentures, 6.50% to 9.88%, due 2005 to 2017 | 332,432 | 325,687 | |||||||
| Medium-term notes, 4.50% to 8.10%, due 2003 to 2025 | 744,606 | 742,527 | |||||||
| Unsecured foreign obligations (principally pound sterling), 4.50% to 10.00%, due 2003 to 2007 | 229,032 | 331,306 | |||||||
| Other debt, including capital leases | 127,898 | 99,164 | |||||||
| Total debt | 1,551,468 | 1,708,684 | |||||||
| Current portion | (162,369 | ) | (317,087 | ) | |||||
| Long-term debt | $ | 1,389,099 | 1,391,597 | ||||||
Debt maturities (including sinking fund requirements) during the five years subsequent to December 31, 20012002 are as follows:
In thousands
- --------------------------------------------------------------------------------
Debt Maturities
2002 $ 317,087
2003 122,303
2004 165,269
2005 204,660
2006 492,018
60
During 2001, the
| Debt Maturities | ||||
| (In thousands) | ||||
| | ||||
| 2003 | $ | 162,369 | ||
| 2004 | 203,450 | |||
| 2005 | 218,350 | |||
| 2006 | 383,751 | |||
| 2007 | 235,761 | |||
The Company replaced its $720 million global revolving credit
facility with a newhas established an $860 million global revolving credit facility. The new facility is composed of $300 million which matures in May 20022003 and is renewable annually and $560 million which matures in May 2006. The primary purposes of the credit facility are to finance working capital and provide support for the issuance of commercial paper. At the Company'sCompany’s option, the interest rate on borrowings under the credit facility is based on libor,LIBOR, prime, federal funds or local equivalent rates. The credit facility'sfacility’s annual facility fee ranges from 12.5 to 15.0 basis points applied to the total facility of $860 million based on the Company'sCompany’s current credit ratings. At December 31, 2001, $5502002, $674 million was available under this global revolving credit facility. Of suchthis amount, $300 million was available at a maturity of less than one year. Foreign borrowings of $100$68 million were outstanding under the facility at December 31, 2001.2002. In order to maintain availability of funding, the global revolving credit facility requires the Company to maintain a ratio of debt to consolidated tangible net worth, as defined, of less than or equal to 300 percent. The ratio at December 31, 20012002 was 117119 percent.
The weighted averageweighted-average interest rates for outstanding U.S. commercial paper at December 31, 2002 and 2001 were 1.69 percent and 2000 were 2.83 percent, and 7.38 percent, respectively.
The weighted average interest rates for outstanding Canadian commercial paper at
December 31, 2000 was 5.91 percent; none was outstanding as of December 31,
2001. U.S. commercial paper is classified as long-term debt since it is backed by the long-term revolving credit facility previously discussed.
During 2002, the Company added capital lease obligations of $67 million in connection with the extension of existing operating leases of revenue earning equipment and other additions.
65
The Company has issued unsecured medium-term notes under various shelf registration statements filed with the Securities and Exchange Commission. In 1998, the Company registered an additional $800 million for future debt issues. As of December 31, 2001,2002, the Company had $337$187 million of debt securities available for issuance under the latest registration statement. The Company had unamortized original issue discounts of $17$16 million and $17 million for the medium-term notes and debentures at December 31, 2002 and 2001, and 2000, respectively.
During the fourth quarter of 1999, the Company recorded an extraordinary
loss of $4 million (net of income tax benefit of $3 million) in connection with
the early retirement of $156 million of debentures. The loss represents the
payment of redemption premiums and the write-down of deferred finance costs.
At December 31, 20012002 and 2000,2001, the Company had letters of credit outstanding totaling $115$152 million and $133$115 million, respectively, which primarily guarantee various insurance activities. See “Guarantees” Note for further discussion on outstanding letters of credit.
Interest paid totaled $94 million in 2002, $121 million in 2001 and $163 million in 2000.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Interest Rate Risk
From time to time, the Company enters into interest rate swap and cap agreements to manage its fixed and variable interest rate exposure and to better match the repricing of its debt instruments to that of its portfolio of assets. The Company assesses the risk that changes in interest rates will have either on the fair value of its debt obligations or on the amount of its future interest payments by monitoring changes in interest rate exposures and by evaluating hedging opportunities. The Company regularly monitors interest rate risk attributable to both the Company’s outstanding or forecasted debt obligations as well as the Company’s offsetting hedge positions. This risk management process involves the use of analytical techniques, including cash flow sensitivity analysis, to estimate the expected impact of changes in interest rates on the Company’s future cash flows.
During March 2002, the Company entered into interest rate swap agreements designated as fair value hedges whereby it receives fixed interest rate payments in exchange for making variable interest rate payments. The differential to be paid or received is accrued and recognized as interest expense. At December 31, 2002, these interest rate swap agreements effectively changed $322 million of fixed-rate debt instruments with a weighted-average fixed interest rate of 6.7 percent to LIBOR-based floating rate debt at a current weighted-average rate of 3.0 percent. The fair value of the interest rate swap agreements was classified in direct financing leases and other assets. Changes in the fair value of the interest rate swaps are offset by changes in the fair value of the debt instruments and no net gain or loss is recognized in earnings. During 2002, the increase in the fair value of interest rate swaps totaled $24 million. These contracts mature from July 2004 to October 2007.
During March 2002, the Company also entered into two interest rate cap agreements covering a total notional amount of $160 million. These cap agreements mature in October and November of 2005. The interest rate cap agreements serve as an economic hedge against increases in interest rates and have not been designated as hedges for accounting purposes. The fair value of the interest rate cap agreements was classified in direct financing leases and other assets. During 2002, the decrease in the fair value of interest rate caps totaled approximately $2 million and was reflected as interest expense.
In late 2001, the Company entered into an interest rate swap with a notional value of $22 million. The swap was accounted for as a cash flow hedge whereby it receives foreign variable interest payments in exchange for making fixed interest payments. The swap agreement matures in 2004. The fair value of the swap is recognized as an adjustment to accumulated other comprehensive loss. The Company expects that any amounts which will be reclassified to earnings from accumulated other comprehensive loss will be immaterial.
The Company estimates the fair value of derivatives based on dealer quotations. For the years ended December 31, 2002 and 2001, there was no measured ineffectiveness in the Company’s designated hedging transactions.
Currency Risk
From time to time, the Company uses forward exchange contracts and cross-currency swaps to manage its exposure to movements in foreign exchange rates. In November 2002, the Company entered into a five year $78 million cross-currency swap to hedge its investment in a foreign subsidiary. The hedge is effective in eliminating
66
the risk of foreign currency movements on the investment and as such, it is accounted for under the net investment hedging rules. For the year ended December 31, 2002, losses of $2.3 million attributed to the cross-currency swap have been reflected in the currency translation adjustment account within accumulated other comprehensive loss.
Fair Value
The following table represents the carrying amounts and estimated fair values of certain of the Company’s financial instruments at December 31, 2002 and 2001. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties (fair values were based on dealer quotations that represent the discounted future cash flows through maturity or expiration using current rates):
| December 31 | ||||||||||||||||
| 2002 | 2001 | |||||||||||||||
| Carrying | Fair | Carrying | Fair | |||||||||||||
| Amount | Value | Amount | Value | |||||||||||||
| (In thousands) | ||||||||||||||||
Total debt(a) | $ | 1,480,703 | 1,565,663 | 1,693,047 | 1,692,862 | |||||||||||
| Interest rate swaps | 23,796 | 23,796 | — | — | ||||||||||||
| Interest rate caps | 500 | 500 | — | — | ||||||||||||
| Cross-currency swap | (2,340 | ) | (2,340 | ) | — | — | ||||||||||
| (a) | The carrying amount of total debt excludes capital leases of $71 million and $16 million as of December 31, 2002 and 2001, respectively. |
The carrying amounts of all other instruments approximated fair value as of December 31, 2002 and 2001.
GUARANTEES
In the ordinary course of business, the Company provides certain guarantees or indemnifications to third parties as part of certain lease, financing and sales agreements. Certain guarantees and indemnifications, whereby the Company may be contingently required to make a payment to a third-party, are required to be disclosed even if the likelihood of payment is considered remote. The Company’s financial guarantees as of December 31, 2002 consisted of the following:
| Maximum exposure | Carrying amount | ||||||||
| Guarantee | of guarantee | of liability | |||||||
| (In millions) | |||||||||
| Vehicle residual value guarantees: | |||||||||
Sale and leaseback arrangements — end of term guarantees(a) | $ | 203 | 19 | ||||||
| Finance lease program | 4 | 1 | |||||||
| Used vehicle financing | 7 | 4 | |||||||
| Standby letters of credit | 15 | — | |||||||
| Total | $ | 229 | 24 | ||||||
| (a) | Amounts exclude contingent rentals associated with residual value guarantees on certain vehicles held under operating leases for which the guarantees are conditional upon early termination of the lease agreement as a result of a vehicle disposal. The Company’s maximum exposure for early lease termination guarantees was approximately $184 million, with $9 million recorded as a liability at December 31, 2002. |
As more fully described in the “Leases” Note, the Company has entered into transactions for the sale and operating leaseback of revenue earning equipment. The transactions resulted in the Company providing the lessors with residual value guarantees at the end of the lease term. Therefore, to the extent that the sales proceeds from the
67
final disposition of the assets are lower than the residual value guarantee, the Company is required to make payment for the remaining amount. The Company’s maximum exposure for such guarantees, including credit enhancements on vehicle securitizations, was approximately $203 million, with $19 million recorded as a liability at December 31, 2002.
Under a separate arrangement, the Company also provides vehicle residual value guarantees to an independent third-party relating to a customer finance lease program. To the extent that the sales proceeds from the final disposition of the assets are lower than the residual value guarantee, the Company is required to make payment for the remaining amount. At December 31, 2002, the Company’s maximum exposure under this program was approximately $4 million, of which $1 million was recorded.
The Company maintains an agreement with an independent third-party for the financing of used vehicle purchases by its customers. Under the terms of the agreement, the Company finances the customer’s purchase and immediately sells its rights under the finance contract to the financial institution. The Company provides a guarantee on defaulted contracts up to a maximum of 11 percent of the outstanding principal balances. At the end of 2002, the Company’s maximum exposure under the guarantee was approximately $7 million. The recorded liability under this guarantee at December 31, 2002 was $4 million.
At December 31, 2002, the Company had outstanding letters of credit that primarily guarantee various insurance activities. Certain of these letters of credit guarantee insurance activities associated with insurance claim liabilities transferred in conjunction with the sale of certain businesses reported as discontinued operations in previous years. To date, such insurance claims, representing per claim deductibles payable under third-party insurance policies, have been paid by the companies that assumed such liabilities. However, if all or a portion of such assumed claims of approximately $20 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.
Interest paid totaled $121claims deductible. No liability has been recorded by the Company for its guarantee of such claims, however, the total assumed liabilities in which the Company guarantees payment was estimated to be approximately $15 million in 2001 and $163 million in 2000.
Interest paid for both continuing and discontinued operations totaled $206
million in 1999.
The carrying amount of debt (excluding capital leases) was $1.7 billion and
$2.0 billion as of December 31, 2001 and 2000, respectively. Based on dealer
quotations that represent the discounted future cash flows through maturity or
expiration using current rates, the fair value of this debt at December 31, 2001
and 2000 was estimated at $1.7 billion and $1.9 billion, respectively.
SHAREHOLDERS'2002.
SHAREHOLDERS’ EQUITY
In December 1999, the Company completed a $200 million stock repurchase program
announced in September 1999 in conjunction with the RPTS sale. In September
1999, the Company also completed a three million-share repurchase program
announced in December 1998.
61
At December 31, 2001,2002, the Company had 60,527,42362,209,277 Preferred Stock Purchase Rights (Rights) outstanding, which expire in March 2006. The Rights contain provisions to protect shareholders in the event of an unsolicited attempt to acquire the Company that is not believed by the Board of Directors to be in the best interest of shareholders. The Rights, evidenced by common stock certificates, are subject to anti-dilution provisions and are not exercisable, transferable or exchangeable apart from the common stock until 10 days after a person, or a group of affiliated or associated persons, acquires beneficial ownership of 10 percent or more or, in the case of exercise or transfer, makes a tender offer for 10 percent or more of the Company'sCompany’s common stock. The Rights entitle the holder, except such an acquiring person, to purchase at the current exercise price of $100 that number of the Company'sCompany’s common shares that at the time would have a market value of $200. In the event the Company is acquired in a merger or other business combination (including one in which the Company is the surviving corporation), each Right entitles its holder to purchase at the current exercise price of $100 that number of common shares of the surviving corporation which would then have a market value of $200. In lieu of common shares, Rights holders can purchase 1/100 of a share of Series cC Preferred Stock for each Right. The Series cC Preferred Stock would be entitled to quarterly dividends equal to the greater of $10 per share or 100 times the common stock dividend per share and have 100 votes per share, voting together with the common stock. By action of the Board of Directors, the Rights may also be exchanged in whole or in part, at an exchange ratio of one share of common stock per Right. The Rights have no voting rights and are redeemable, at the option of the Company, at a price of $0.01 per Right prior to the acquisition by a person or a group of persons affiliated or associated persons of beneficial ownership of 10 percent or more of the common stock.
EMPLOYEE STOCK OPTION AND STOCK PURCHASE PLANS
Option Plans
The Company sponsors various stock option and incentive plans which provide for the granting of options to employees and directors for purchase of common stock at prices equal to fair market value at the time of grant.
68
Options granted under all plans are for terms not exceeding 10 years and are exercisable cumulatively 20 to 50 percent each year based on the terms of the grant.
Key employee plans also provide for the issuance of stock appreciation rights, limited stock appreciation rights, restricted stock or stock units at no cost to the employee. The value of the restricted stock, equal to the fair market value at the time of grant, is recorded in shareholders'shareholders’ equity as deferred compensation and recognized as compensation expense as the restricted stock vests over the periods established for each grant. In 2002, 2001 2000 and 1999,2000, the Company granted 7,000, 167,575 194,400 and 45,650194,400 shares of restricted stock at a weighted averageweighted-average grant date fair value of $26.83, $20.62 $18.19 and $26.33,$18.19, respectively. Amortization of restricted stock totaled approximately $1 million in 2002 and 2001 and approximately $500,000 in 2000. Awards under a non-employee director plan may also be granted in tandem with restricted stock units at no cost to the grantee; 4,491 units, 3,502 units 3,975 units and 4,0133,975 units were granted in 2002, 2001 2000 and 1999,2000, respectively. This compensation expense was not significant in 2002, 2001 2000 or 1999.
62
The following table summarizes the status of the Company'sCompany’s stock option plans:
Shares in thousands
- ------------------------------------------------------------------------------
2001 2000 1999
- ------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Beginning of year 8,772 $24.76 6,762 $27.77 5,253 $28.06
Granted 849 20.45 2,969 18.61 2,200 26.76
Exercised (233) 17.32 (73) 14.11 (92) 22.44
Forfeited (474) 26.80 (886) 27.97 (599) 27.47
- -------------------------------------------------------------------------------
End of year 8,914 $24.43 8,772 $24.76 6,762 $27.77
===============================================================================
Exercisable at
end of year 5,007 $27.01 4,123 $28.25 4,099 $27.59
===============================================================================
Available for
future grant 5,151 N/A 2,477 N/A 2,258 N/A
===============================================================================
| 2002 | 2001 | 2000 | ||||||||||||||||||||||||||
| Weighted- | Weighted- | Weighted- | ||||||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||||||
| Exercise | Exercise | Exercise | ||||||||||||||||||||||||||
| Shares | Price | Shares | Price | Shares | Price | |||||||||||||||||||||||
| (Shares in thousands) | ||||||||||||||||||||||||||||
| Beginning of year | 8,914 | $ | 24.43 | 8,772 | $ | 24.76 | 6,762 | $ | 27.77 | |||||||||||||||||||
| Granted | 1,292 | 26.91 | 849 | 20.45 | 2,969 | 18.61 | ||||||||||||||||||||||
| Exercised | (1,342 | ) | 21.92 | (233 | ) | 17.32 | (73 | ) | 14.11 | |||||||||||||||||||
| Forfeited | (245 | ) | 24.88 | (474 | ) | 26.80 | (886 | ) | 27.97 | |||||||||||||||||||
| End of year | 8,619 | $ | 25.18 | 8,914 | $ | 24.43 | 8,772 | $ | 24.76 | |||||||||||||||||||
| Exercisable at end of year | 5,576 | $ | 26.55 | 5,007 | $ | 27.01 | 4,123 | $ | 28.25 | |||||||||||||||||||
| Available for future grant | 4,160 | N/A | 5,151 | N/A | 2,477 | N/A | ||||||||||||||||||||||
Information about options in various price ranges at December 31, 20012002 follows:
Shares in thousands
- ---------------------------------------------------------------------------
Options Options
Outstanding Exercisable
- ---------------------------------------------------------------------------
Remaining Weighted Weighted
Price Life Average Average
Ranges Shares (in years) Price Shares Price
$ 10-20 2,160 7.9 $ 17.81 663 $ 17.77
20-25 2,143 6.5 21.53 573 22.46
25-30 3,555 4.5 26.98 2,735 27.08
30-38 1,056 5.0 35.28 1,036 35.25
- ---------------------------------------------------------------------------
8,914 5.8 $ 24.43 5,007 $ 27.01
===========================================================================
| Options | Options | |||||||||||||||||||||
| Outstanding | Exercisable | |||||||||||||||||||||
| Remaining | Weighted- | Weighted- | ||||||||||||||||||||
| Price | Life | Average | Average | |||||||||||||||||||
| Ranges | Shares | (in years) | Price | Shares | Price | |||||||||||||||||
| (Shares in thousands) | ||||||||||||||||||||||
| $ | 10.00-20.00 | 1,597 | 6.7 | $ | 17.71 | 883 | $ | 17.60 | ||||||||||||||
| 20.00-25.00 | 1,657 | 6.0 | 21.49 | 575 | 22.47 | |||||||||||||||||
| 25.00-30.00 | 4,346 | 4.4 | 26.98 | 3,100 | 27.00 | |||||||||||||||||
| 30.00-38.00 | 1,019 | 4.0 | 35.25 | 1,018 | 35.25 | |||||||||||||||||
| Total | 8,619 | 5.1 | $ | 25.18 | 5,576 | $ | 26.55 | |||||||||||||||
Purchase Plans
The Employee Stock Purchase Plan provides for periodic offerings to substantially all U.S. and Canadian employees to subscribe to shares of the Company'sCompany’s common stock at 85 percent of the fair market value on either the date of offering or the last day of the purchase period, whichever is less. The stock purchase plan currently in effect provides for quarterly purchase periods. The U.K. Stock Purchase Scheme provides for periodic offerings to
69
substantially all U.K. employees to subscribe to shares of the Company'sCompany’s common stock at 85 percent of the fair market value on the date of the offering.
63
The following table summarizes the status of the Company'sCompany’s stock purchase plans:
Shares
| 2002 | 2001 | 2000 | ||||||||||||||||||||||
| Weighted- | Weighted- | Weighted- | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Exercise | Exercise | Exercise | ||||||||||||||||||||||
| Shares | Price | Shares | Price | Shares | Price | |||||||||||||||||||
| (Shares in thousands) | ||||||||||||||||||||||||
| Beginning of year | 40 | $ | 30.28 | 63 | $ | 26.81 | 72 | $ | 27.00 | |||||||||||||||
| Granted | 436 | 20.53 | 413 | 15.44 | 379 | 16.03 | ||||||||||||||||||
| Exercised | (436 | ) | 20.53 | (413 | ) | 15.44 | (379 | ) | 16.03 | |||||||||||||||
| Forfeited | (40 | ) | 30.28 | (23 | ) | 20.66 | (9 | ) | 28.34 | |||||||||||||||
| End of year | — | $ | — | 40 | $ | 30.28 | 63 | $ | 26.81 | |||||||||||||||
| Exercisable at end of year | — | N/A | — | N/A | 22 | $ | 20.66 | |||||||||||||||||
| Available for future grant | 1,280 | N/A | 1,676 | N/A | 2,066 | N/A | ||||||||||||||||||
The following table sets forth the assumptions used in thousands
- ------------------------------------------------------------------------------
2001 2000 1999
- ------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Beginningthe Company’s valuation of year 63 $26.81 72 $27.00 82 $27.05
Granted 413 15.44 379 16.03 300 18.43
Exercised (413) 15.44 (379) 16.03 (300) 19.71
Forfeited (23) 20.66 (9) 28.34 (10) 27.66
- ------------------------------------------------------------------------------
Endstock option grants for pro forma disclosures of year 40 $30.28 63 $26.81 72 $27.00
==============================================================================
Exercisable at
end of year -- N/A 22 $20.66 -- N/A
==============================================================================
Available for
future grant 1,676 N/A 2,066 N/A 2,436 N/A
==============================================================================
Pro Forma Information
The Company accounts for stock-based compensation using the intrinsic value
method. Stock options are issued at fair market value at the date of grant.
Accordingly, no compensation expense has been recognized for stock options
granted. Haddetermined under the fair value method of accounting been applied to the Company's
plans, which requires recognition of compensation expense over the vesting
periods of the awards, pro forma net earnings and earnings per share would have
been:
In thousands, except per share amounts
- ----------------------------------------------------------------------------
Years ended December 31 2001 2000 1999
Net earnings:
As reported $18,678 89,032 419,678
Pro forma 10,957 81,350 412,789
Earnings per share:
Basic:
As reported 0.31 1.49 6.12
Pro forma 0.18 1.37 6.02
Diluted:
As reported 0.31 1.49 6.11
Pro forma 0.18 1.37 6.02
- ----------------------------------------------------------------------------
The fair values of options granted were estimated as of the dates of grant using
the Black-Scholes option pricing model.
64
The option pricing assumptions were as follows:
- ------------------------------------------------------------------------------
Years ended December 31 2001 2000 1999
Dividend yield 2.7% 3.5% 2.5%
Expected volatility 27.0% 26.9% 25.7%
Option plans:
Risk-free interest rate 4.9% 6.3% 5.4%
Weighted average
expected life 7 years 7 years 7 years
Weighted average grant-date
fair value per option $5.69 $5.01 $ 7.77
Purchase plans:
Risk-free interest rate 3.3% 5.8% 4.9%
Weighted average
expected life .25 year .25 year .25 year
Weighted average grant-date
fair value per option $3.65 $4.08 $ 4.99
- ------------------------------------------------------------------------------
accounting:
| Years ended December 31 | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
| Dividend yield | 2.7 | % | 2.7 | % | 3.5 | % | |||||||
| Expected volatility | 29.6 | % | 27.0 | % | 26.9 | % | |||||||
| Option plans: | |||||||||||||
| Risk-free interest rate | 4.7 | % | 4.9 | % | 6.3 | % | |||||||
| Weighted-average expected life | 6 years | 7 years | 7 years | ||||||||||
| Weighted-average grant-date fair value per option | $ | 7.52 | $ | 5.69 | $ | 5.01 | |||||||
| Purchase plans: | |||||||||||||
| Risk-free interest rate | 2.0 | % | 3.3 | % | 5.8 | % | |||||||
| Weighted-average expected life | .25 year | .25 year | .25 year | ||||||||||
| Weighted-average grant-date fair value per option | $ | 5.09 | $ | 3.65 | $ | 4.08 | |||||||
70
EARNINGS PER SHARE INFORMATION
A reconciliation of the number of shares used in computing basic and diluted EPS follows:
In thousands
- ---------------------------------------------------------------------------
Years ended December 31 2001 2000 1999
Weighted average shares
outstanding - Basic 60,083 59,567 68,536
Effect of dilutive options and
unvested restricted stock 582 192 196
- ---------------------------------------------------------------------------
Weighted average shares
outstanding - Diluted 60,665 59,759 68,732
===========================================================================
Anti-dilutive options not
included above 6,793 6,446 5,750
===========================================================================
65
| Years ended December 31 | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
| (In thousands) | |||||||||||||
| Weighted-average shares outstanding — Basic | 61,571 | 60,083 | 59,567 | ||||||||||
| Effect of dilutive options and unvested restricted stock | 1,016 | 582 | 192 | ||||||||||
| Weighted-average shares outstanding — Diluted | 62,587 | 60,665 | 59,759 | ||||||||||
| Anti-dilutive options not included above | 4,368 | 6,793 | 6,446 | ||||||||||
EMPLOYEE BENEFIT PLANS
Pension Plans
The Company sponsors several defined benefit pension plans covering substantially all employees not covered by union-administered plans, including certain employees in foreign countries. These plans generally provide participants with benefits based on years of service and career-average compensation levels. The funding policy for these plans is to make contributions based on normalannual service costs plus amortization of unfunded past service liability but not greater than the maximum allowable contribution deductible for Federal income tax purposes. The majority of the plans'plans’ assets are invested in a master trust which, in turn, is primarily invested in listed stocks and bonds. The Company also contributed to various defined benefit, union-administered, multi-employer plans for employees under collective bargaining agreements.
Pension (expense) income was as follows:
In thousands
- --------------------------------------------------------------------------------
Years ended December 31 2001 2000 1999
Company-administered plans:
Service cost $(26,248) (23,836) (32,649)
Interest cost (58,306) (54,047) (50,087)
Expected return on
| Years ended December 31 | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
| (In thousands) | |||||||||||||
| Company-administered plans: | |||||||||||||
| Service cost | $ | (29,196 | ) | (26,248 | ) | (23,836 | ) | ||||||
| Interest cost | (60,330 | ) | (58,306 | ) | (54,047 | ) | |||||||
| Expected return on plan assets | 75,731 | 91,248 | 97,064 | ||||||||||
| Amortization of transition asset | 24 | 23 | 3,746 | ||||||||||
| Recognized net actuarial (loss) gain | (9,508 | ) | (514 | ) | 23,890 | ||||||||
| Amortization of prior service cost | (2,276 | ) | (2,508 | ) | (2,501 | ) | |||||||
| (25,555 | ) | 3,695 | 44,316 | ||||||||||
| Union-administered plans | (3,384 | ) | (2,912 | ) | (2,610 | ) | |||||||
| Net pension (expense) income | $ | (28,939 | ) | 783 | 41,706 | ||||||||
71
The following table sets forth the actuarial assumptions used for the Company’s dominant plan assets 91,248 97,064 85,422
Amortization of transition asset 23 3,746 3,818
Recognize net actuarial (loss) gain (514) 23,890 2,323
Amortization of prior service cost (2,508) (2,501) (2,382)
- --------------------------------------------------------------------------------
3,695 44,316 6,445
Union-administered plans (2,912) (2,610) (2,591)
- --------------------------------------------------------------------------------
Netin determining annual pension income $ 783 41,706 3,854
================================================================================
The Company recorded settlement and curtailment gains of $4 million in 1999 as
part of the gain on disposal of discontinued operations.
66
| January 1 | ||||||||||||||||||
| 2002 | 2001 | 2000 | ||||||||||||||||
| Discount rate | 7.00 | % | 7.50 | % | 7.75 | % | ||||||||||||
| Rate of increase in compensation levels | 5.00 | % | 5.00 | % | 5.00 | % | ||||||||||||
| Expected long-term rate of return on plan assets | 8.75 | % | 9.25 | % | 9.50 | % | ||||||||||||
| Transition amortization in years | 6 | 6 | 6 | |||||||||||||||
| Gain and loss amortization in years | 6 | 6 | 6 | |||||||||||||||
The following table sets forth the balance sheet impact, as well as the benefit obligations, assets and funded status associated with the Company'sCompany’s pension plans:
In thousands
- ------------------------------------------------------------------------------
December 31 2001 2000
Change in benefit obligations:
Benefit obligations at January 1, $ 820,169 701,776
Service cost 26,248 23,836
Interest cost 58,306 54,047
Amendments -- 7,747
Actuarial loss 8,820 37,444
Benefits paid (37,585) (36,229)
Change in discount rate assumption 49,249 22,502
Plan transfers -- 15,627
Foreign currency exchange rate changes (3,197) (6,581)
- ------------------------------------------------------------------------------
Benefit obligations at December 31, 922,010 820,169
- ------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at January 1, 993,493 1,054,123
Actual return on plan assets (79,472) (41,672)
Employer contribution 6,141 2,293
Plan participants' contributions 2,631 2,692
Benefits paid (37,585) (36,229)
Plan transfers -- 20,110
Foreign currency exchange rate changes (3,405) (7,824)
- ------------------------------------------------------------------------------
Fair value of plan assets at December 31, 881,803 993,493
- ------------------------------------------------------------------------------
Funded status (40,207) 173,324
Unrecognized transition asset (237) (267)
Unrecognized prior service cost 15,412 17,950
Unrecognized net actuarial loss (gain) 168,494 (59,933)
- ------------------------------------------------------------------------------
Prepaid benefit cost $ 143,462 131,074
==============================================================================
Plan transfers relate to obligations assumed and assets received in 2000 related
to a customer's employees who were hired by the Company as a result of a new
contract in the U.K. Additionally, in 2000, the Company's dominant plan was
amended to increase certain benefit levels and resulted in an additional benefit
obligation of $7 million.
| December 31 | |||||||||
| 2002 | 2001 | ||||||||
| (In thousands) | |||||||||
| Change in benefit obligations: | |||||||||
| Benefit obligations at January 1, | $ | 922,010 | 820,169 | ||||||
| Service cost | 29,196 | 26,248 | |||||||
| Interest cost | 60,330 | 58,306 | |||||||
| Amendments | (55 | ) | — | ||||||
| Actuarial (gain) loss | (17,061 | ) | 8,820 | ||||||
| Benefits paid | (39,450 | ) | (37,585 | ) | |||||
| Change in discount rate assumption | 55,667 | 49,249 | |||||||
| Foreign currency exchange rate changes | 12,945 | (3,197 | ) | ||||||
| Benefit obligations at December 31, | 1,023,582 | 922,010 | |||||||
| Change in plan assets: | |||||||||
| Fair value of plan assets at January 1, | 881,803 | 993,493 | |||||||
| Actual return on plan assets | (124,560 | ) | (79,472 | ) | |||||
| Employer contribution | 26,471 | 6,141 | |||||||
| Plan participants’ contributions | 2,889 | 2,631 | |||||||
| Benefits paid | (39,450 | ) | (37,585 | ) | |||||
| Foreign currency exchange rate changes | 9,311 | (3,405 | ) | ||||||
| Fair value of plan assets at December 31, | 756,464 | 881,803 | |||||||
| Funded status | (267,118 | ) | (40,207 | ) | |||||
| Unrecognized transition asset | (237 | ) | (237 | ) | |||||
| Unrecognized prior service cost | 13,156 | 15,412 | |||||||
| Unrecognized net actuarial loss | 403,750 | 168,494 | |||||||
| Net amount recognized | $ | 149,551 | 143,462 | ||||||
72
Amounts recognized in the balance sheet consist of:
In thousands
- ------------------------------------------------------------------------------
December 31 2001 2000
Prepaid pension benefit cost (other assets) $ 159,214 145,546
Accrued benefit liability (accrued expenses) (15,752) (14,472)
Additional minimum liability (accrued expenses) (3,102) --
Intangible assets 1,857 --
Accumulated other comprehensive loss 1,245 --
- ------------------------------------------------------------------------------
$ 143,462 131,074
==============================================================================
67
| December 31 | ||||||||
| 2002 | 2001 | |||||||
| (In thousands) | ||||||||
| Prepaid pension benefit cost (other assets) | $ | — | 159,214 | |||||
| Accrued benefit liability (accrued expenses) | (217,942 | ) | (18,854 | ) | ||||
| Intangible assets | 13,156 | 1,857 | ||||||
| Accumulated other comprehensive loss (pre-tax) | 354,337 | 1,245 | ||||||
| Net amount recognized | $ | 149,551 | 143,462 | |||||
The following table sets forth the actuarial assumptions used for the Company'sCompany’s dominant plan:
- ------------------------------------------------------------------------------
December 31 2001 2000
Discount rate 7.00% 7.50%
Rateplan in determining funded status:
| December 31 | ||||||||
| 2002 | 2001 | |||||||
| Discount rate | 6.50 | % | 7.00 | % | ||||
| Rate of increase in compensation levels | 5.00 | % | 5.00 | % | ||||
Information related to the Company’s pension plans with accumulated benefit obligations in excess of increase in compensation levels 5.00% 5.00%
Expected long-term ratethe fair value of return on plan assets 9.25% 9.50%
Transition amortization in years 6 6
Gain and loss amortization in years 6 6
- ------------------------------------------------------------------------------
is as follows:
| December 31 | ||||||||
| 2002 | 2001 | |||||||
| (In thousands) | ||||||||
| Projected benefit obligation | $ | 1,023,582 | 21,401 | |||||
| Accumulated benefit obligation | 973,996 | 19,946 | ||||||
| Fair value of plan assets | 756,464 | — | ||||||
Savings Plans
The Company also has defined contribution savings plans that cover substantially all eligible employees. Company contributions to the plans, which are based on employee contributions and the level of Company match, totaled approximately $13 million in 2002, $14 million in 2001 and $14 million in 2000 and $11 million in 1999.
2000.
Supplemental Pension and Deferred Compensation Plans
The Company has a non-qualified supplemental pension plan covering certain employees, which provides for incremental pension payments from the Company'sCompany’s funds so that total pension payments equal amounts that would have been payable from the Company'sCompany’s principal pension plans if it were not for limitations imposed by income tax regulations. The benefit obligation under this plan
totaled $21 million and $19 million at December 31, 2001 and 2000, respectively.
The accrued pension expense liability related to this plan was $16$17 million and $14$16 million at December 31, 2002 and 2001, and 2000, respectively. Pension expense for
this plan totaled $2 million in 2001, 2000 and 1999.
The Company also has deferred compensation plans that permit eligible employees, officers and directors to defer a portion of their compensation. The deferred compensation liability, including Company matching amounts and accumulated earnings, on notional investments, totaled $22$19 million and $23$22 million at December 31, 2002 and 2001, and 2000, respectively.
The Company has established a grantor trusttrusts (Rabbi Trust)Trusts) to provide funding for benefits payable under the supplemental pension plan and deferred compensation plans. The assets held in trustthe trusts at December 31, 20012002 and 20002001 amounted to $30 million and $37 million, respectively. The Rabbi Trusts’ assets consist of short-term cash investments and $38 million, respectively.a managed portfolio of equity securities, including the Company’s common stock. These assets, except for the investment in the Company’s common stock, are included in direct financing leases and other assets in the accompanying balance sheets because they are available to the general creditors of the Company in the event of the Company'sCompany’s insolvency. Rabbi Trust assets consist of a managed portfolio
of equity securities and corporate-owned life insurance policies. The equity securities are classified as trading assets and stated at fair value. Both realized and unrealized gains and losses are included in miscellaneous (income) expense, net. The Rabbi
73
Trusts’ investment of $2 million in the Company’s common stock as of December 31, 2002 is reflected at historical cost and included in shareholders’ equity in the accompanying balance sheet.
Postretirement Benefits Other than Pensions
The Company sponsors plans that provide retired employees with certain healthcare and life insurance benefits. Substantially all employees not covered by union-administered health and welfare plans are eligible for the healthcare benefits. Healthcare benefits for the Company'sCompany’s principal plans are generally provided to qualified retirees under age 65 and eligible dependents. Generally these plans require employee contributions which vary based on years of service and include provisions which cap Company contributions. During 2000, the Company amended its postretirement benefit plan to eliminate the retiree life insurance benefit for active employees as of December 31, 2000.
68
Total periodic postretirement benefit expense was as follows:
In thousands
- --------------------------------------------------------------------------------
Years ended December 31 2001 2000 1999
Service cost $ 999 975 1,360
Interest cost 2,247 2,233 2,210
Curtailment gain -- (1,148) --
Recognized net actuarial loss (gain) 2,007 (801) (94)
Amortization of prior service cost (1,157) (1,166) (1,043)
- --------------------------------------------------------------------------------
Postretirement benefit expense $ 4,096 93 2,433
===============================================================================
| Years ended December 31 | ||||||||||||
| 2002 | 2001 | 2000 | ||||||||||
| (In thousands) | ||||||||||||
| Service cost | $ | 911 | 999 | 975 | ||||||||
| Interest cost | 2,564 | 2,247 | 2,233 | |||||||||
| Curtailment gain | — | — | (1,148 | ) | ||||||||
| Recognized net actuarial (gain) loss | (68 | ) | 2,007 | (801 | ) | |||||||
| Amortization of prior service cost | (1,157 | ) | (1,157 | ) | (1,166 | ) | ||||||
| Postretirement benefit expense | $ | 2,250 | 4,096 | 93 | ||||||||
The curtailment gain of $1 million in 2000 related to the retiree life insurance amendment previously discussed.
The Company also recorded settlement and
curtailment gains of $1 million in 1999 as part of the gain on disposal of
discontinued operations.
The Company'sCompany’s postretirement benefit plans are not funded. The following table sets forth the balance sheet impact, as well as the benefit obligations and rate assumptions associated with the Company'sCompany’s postretirement benefit plans:
In thousands
- -------------------------------------------------------------------------------
December 31 2001 2000
Benefit obligations at January 1, $ 26,932 29,639
Service cost 999 975
Interest 2,247 2,233
Amendment -- (4,318)
Actuarial loss 5,102 2,699
Benefits paid (4,431) (3,585)
Curtailment and settlement -- (1,148)
Change in discount rate assumption 1,042 437
Change in healthcare trend assumption 366 --
Foreign currency exchange rate changes (23) --
- -------------------------------------------------------------------------------
Benefit obligations at December 31, 32,234 26,932
Unrecognized prior service credit 7,551 8,708
Unrecognized net actuarial (loss) gain (1,869) 2,634
- -------------------------------------------------------------------------------
Accrued postretirement benefit obligation $ 37,916 38,274
===============================================================================
Discount rate 7.00% 7.50%
- -------------------------------------------------------------------------------
| December 31 | ||||||||||
| 2002 | 2001 | |||||||||
| (In thousands) | ||||||||||
| Benefit obligations at January 1, | $ | 32,234 | 26,932 | |||||||
| Service cost | 911 | 999 | ||||||||
| Interest | 2,564 | 2,247 | ||||||||
| Actuarial loss | 6,699 | 5,102 | ||||||||
| Benefits paid | (3,934 | ) | (4,431 | ) | ||||||
| Change in discount rate assumption | 1,399 | 1,042 | ||||||||
| Change in healthcare trend assumption | — | 366 | ||||||||
| Foreign currency exchange rate changes | 10 | (23 | ) | |||||||
| Benefit obligations at December 31, | 39,883 | 32,234 | ||||||||
| Unrecognized prior service credit | 6,394 | 7,551 | ||||||||
| Unrecognized net actuarial loss | (9,605 | ) | (1,869 | ) | ||||||
| Accrued postretirement benefit obligation | $ | 36,672 | 37,916 | |||||||
| Discount rate | 6.50 | % | 7.00 | % | ||||||
| Rate of increase in compensation levels | 5.00 | % | 5.00 | % | ||||||
The actuarial assumptions include healthcare cost trend rates projected at 13 percent for 2002,2003, graded down to 6 percent for 2010 and thereafter. Changing the assumed healthcare cost trend rates by 1 percent in each year would not have had a material effect on the accumulated postretirement benefit obligation as of December 31, 20012002 or postretirement benefit expense for 2001.
69
74
ENVIRONMENTAL MATTERS
The Company'sCompany’s operations involve storing and dispensing petroleum products, primarily diesel fuel. In 1988, the Environmental Protection Agency (EPA) issued regulations that established requirements for testing and replacing underground storage tanks. During 1998, the Company completed its tank replacement program to comply with the regulations. In addition, the Company has received notices from the EPA and others that it has been identified as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act, the Superfund Amendments and Reauthorization Act and similar state statutes and may be required to share in the cost of cleanup of 3026 identified disposal sites.
The Company'sCompany’s environmental expenses, which included remediation costs as well as normal recurring expenses such as licensing, testing and waste disposal fees, were $10 million in 2002, $7 million in 2001 and $5 million in 20002000. The carrying amount of the Company’s environmental liabilities was $12 million at December 31, 2002 and $10 million in 1999.2001.
The ultimate costscost of the Company'sCompany’s environmental liabilities cannot presently be projected with certainty due to the presence of several unknown factors, primarily the level of contamination, the effectiveness of selected remediation methods, the stage of investigation at individual sites, the determination of the Company'sCompany’s liability in proportion to other responsible parties and the recoverability of such costs from third parties. Based on information presently available, management believes that the ultimate disposition of these matters, although potentially material to the results of operations in any one year, will not have a material adverse effect on the Company'sCompany’s financial condition or liquidity.
OTHER MATTERS
The
In 2000, the Company settled long-standing litigation with a former customer, OfficeMax, relating to a logistics services agreement that was terminated in 1997. In the final settlement, OfficeMax is paying the Company a total of $5 million over the five years following the settlement. The Company will not pay anything to OfficeMax. Further, the settlement is backed by a $5 million letter of credit, obtained by OfficeMax, naming the Company as the beneficiary.
The Company is also a party to various other 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.
SEGMENT REPORTING
The Company'sCompany’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 U.K.; (2) SCS, which provides comprehensive supply chain consulting and lead logistics management solutions that support customers'customers’ entire supply chains, from inbound raw materials through distribution of finished goods throughout North America, in Latin America, Europe and Asia; and (3) DCC, which provides vehicles and drivers as part of a dedicated transportation solution, principally in North America.
70
Management evaluates business
Beginning in the first quarter of 2002, the primary measurement of segment financial performance, based upon
several factors,defined as “Net Before Taxes” (NBT), includes an allocation of which the primary measure 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 Central Support Services (CSS) expensesand excludes goodwill impairment, goodwill amortization and restructuring and other charges, is equal to
earnings from continuing operations before income taxes.net. CSS arerepresents those costs incurred to support all business segments, including sales and marketing, human resources, finance, corporate services, shared management information systems, customer solutions, health and safety, legal and communications. The objective of the NBT measurement is to provide clarity on the profitability of each business segment and, ultimately, to hold leadership of
75
each business segment and each operating segment within each business segment accountable for their allocated share of CSS costs. To facilitate the comparison of 2002 business segment NBT to prior periods, prior-year goodwill amortization (see “Summary of Significant Accounting Policies — Goodwill and Other Intangible Assets”) is now treated as a corporate, rather than segment, cost and is segregated as such. Prior year segment results have been restated to conform to the new measurement of segment financial performance.
Certain costs are considered to be overhead not attributable to any segment and as such, remain unallocated in CSS. Included among the unallocated overhead remaining within CSS are the costs for investor relations, corporate communications, public affairs and certain executive compensation.
CSS costs attributable to the business segments are generally allocated to FMS, SCS and DCC as follows:
| • | Sales and marketing, finance, corporate services and health and safety— allocated based upon estimated and planned resource utilization. | ||
| • | Human resources— individual costs within this category are allocated in several ways, including allocation based on estimated utilization and number of personnel supported. | ||
| • | Information Technology— 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 customers during the period. Expenses are allocated to the business segment responsible for the project. | ||
| • | Other— represents purchasing, legal, and other centralized costs and expenses including certain incentive compensation costs. Expenses, where allocated, are based primarily on the number of personnel supported. |
The FMS segment leases revenue earning equipment sells fuel and provides fuel, maintenance and other ancillary services to the SCS and DCC segments. Inter-segment revenues and contribution marginNBT are accounted for at approximate fair value as if the transactions were made with independent third parties. Contribution marginNBT 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"“Eliminations”). Equipment contribution included in SCS contribution marginNBT was $16 million in 2002, $17 million in 2001 and $20 million in 2000 and $19 million in 1999.2000. Equipment contribution included in DCC contribution marginNBT was $19 million in 2002, $20 million in 2001 and $22 million in 2000 and $21 million in 1999.2000. Interest expense is primarily allocated to the FMS business segment.segment since such borrowings are used principally to fund the purchase of revenue earning equipment used in FMS; however, with the availability of segment balance sheet information in 2002 (including targeted segment leverage ratios), interest expense (income) is also reflected in SCS and DCC.
76
Business segment revenue and contribution margin areNBT is presented below:
In thousands
- --------------------------------------------------------------------------------
Years ended December 31 2001 2000 1999
Revenue:
Fleet Management Solutions:
Full service lease and
program maintenance $ 1,855,865 1,865,345 1,816,599
Commercial rental 468,438 523,776 540,734
Fuel 658,325 773,320 587,193
Other 369,912 393,549 362,718
- --------------------------------------------------------------------------------
3,352,540 3,555,990 3,307,244
Supply Chain Solutions 1,453,881 1,595,252 1,441,029
Dedicated Contract Carriage 534,962 551,706 531,642
Eliminations (335,260) (366,156) (327,711)
- --------------------------------------------------------------------------------
Total revenue $ 5,006,123 5,336,792 4,952,204
================================================================================
Contribution margin:
Fleet Management Solutions $ 339,326 382,851 372,164
Supply Chain Solutions 51,236 65,484 54,832
Dedicated Contract Carriage 57,679 60,828 59,633
Eliminations (36,989) (41,888) (40,280)
- --------------------------------------------------------------------------------
411,252 467,275 446,349
Central Support Services (263,982) (283,940) (252,712)
Restructuring and other charges, net (116,564) (42,014) (52,093)
Year 2000 expense -- -- (24,050)
- --------------------------------------------------------------------------------
Earnings from continuing operations
before income taxes $ 30,706 141,321 117,494
================================================================================
71
| Years ended December 31 | |||||||||||||||
| 2002 | 2001 | 2000 | |||||||||||||
| (In thousands) | |||||||||||||||
| Revenue: | |||||||||||||||
| Fleet Management Solutions: | |||||||||||||||
| Full service lease and program maintenance | $ | 1,795,254 | 1,855,865 | 1,865,345 | |||||||||||
| �� | Commercial rental | 458,355 | 468,438 | 523,776 | |||||||||||
| Fuel | 582,643 | 658,325 | 773,320 | ||||||||||||
| Other | 346,770 | 369,912 | 393,549 | ||||||||||||
| 3,183,022 | 3,352,540 | 3,555,990 | |||||||||||||
| Supply Chain Solutions | 1,388,299 | 1,453,881 | 1,595,252 | ||||||||||||
| Dedicated Contract Carriage | 517,961 | 534,962 | 551,706 | ||||||||||||
| Eliminations | (313,017 | ) | (335,260 | ) | (366,156 | ) | |||||||||
| Total | $ | 4,776,265 | 5,006,123 | 5,336,792 | |||||||||||
| NBT: | |||||||||||||||
| Fleet Management Solutions | $ | 214,384 | 194,398 | 225,088 | |||||||||||
| Supply Chain Solutions | (6,221 | ) | (6,760 | ) | 10,035 | ||||||||||
| Dedicated Contract Carriage | 31,157 | 34,755 | 37,282 | ||||||||||||
| Eliminations | (34,636 | ) | (36,989 | ) | (41,888 | ) | |||||||||
| 204,684 | 185,404 | 230,517 | |||||||||||||
| Unallocated Central Support Services | (24,585 | ) | (25,396 | ) | (35,522 | ) | |||||||||
| Goodwill Amortization | — | (12,738 | ) | (11,660 | ) | ||||||||||
| Earnings before restructuring and other charges, taxes and cumulative effect of change in accounting principle | 180,099 | 147,270 | 183,335 | ||||||||||||
| Restructuring and other charges, net | (4,216 | ) | (116,564 | ) | (42,014 | ) | |||||||||
| Earnings before income taxes and cumulative effect of change in accounting principle | $ | 175,883 | 30,706 | 141,321 | |||||||||||
Each business segment follows the same accounting policies as described in the Summary of Significant Accounting Policies. 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.
In thousands
- -------------------------------------------------------------------------------
Years ended December 31 2001 2000 1999
Depreciation expense:
Fleet Management Solutions $ 501,365 534,758 572,784
Supply Chain Solutions 24,277 25,080 24,835
Dedicated Contract Carriage 1,438 1,809 2,259
Central Support Services 18,405 18,709 22,848
- -------------------------------------------------------------------------------
Total depreciation expense $ 545,485 580,356 622,726
===============================================================================
| Years ended December 31 | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
| (In thousands) | |||||||||||||
| Depreciation expense*: | |||||||||||||
| Fleet Management Solutions | $ | 517,302 | 509,652 | 543,261 | |||||||||
| Supply Chain Solutions | 32,623 | 32,373 | 31,571 | ||||||||||
| Dedicated Contract Carriage | 2,067 | 2,744 | 3,272 | ||||||||||
| Central Support Services | 499 | 716 | 2,252 | ||||||||||
| Total | $ | 552,491 | 545,485 | 580,356 | |||||||||
| * | Depreciation expense associated with CSS assets are allocated to business segments based upon estimated and planned asset utilization. Depreciation expense totaling $19 million, $18 million and $16 million during 2002, 2001 and 2000, respectively, associated with CSS assets was allocated to other business segments. |
77
Gains on sales of revenue earning equipment, net of selling and equipment preparation cost reflected in FMS, totaled $14 million, $12 million and $19 million in 2002, 2001 and $56
million in 2001, 2000, and 1999, respectively.
In thousands
- -------------------------------------------------------------------------------
Years ended December 31 2001 2000 1999
Amortization
| Years ended December 31 | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
| (In thousands) | |||||||||||||
| Amortization expense and other non-cash charges, net: | |||||||||||||
| Fleet Management Solutions | $ | 4,884 | 35,653 | 15,973 | |||||||||
| Supply Chain Solutions | 482 | 47,543 | 14,624 | ||||||||||
| Dedicated Contract Carriage | (7 | ) | 431 | — | |||||||||
| Central Support Services | 3,354 | 7,286 | 2,330 | ||||||||||
| Total | $ | 8,713 | 90,913 | 32,927 | |||||||||
Interest expense and other
non-cash charges, net:
Fleet Management Solutions $ 35,653 15,973 17,147
Supply Chain Solutions 47,543 14,624 11,072
Dedicated Contract Carriage 431 -- --
Central Support Services 7,286 2,330 (1,983)
- -------------------------------------------------------------------------------
Total amortization expense and
other non-cash charges, net $ 90,913 32,927 26,236
===============================================================================
In thousands
- -------------------------------------------------------------------------------
Years ended December 31 2001 2000
Interest expense:
Fleet Management Solutions $ 111,032 152,596
Supply Chain Solutions 5,321 5,196
Dedicated Contract Carriage 19 3
Central Support Services 2,177 (3,786)
- -------------------------------------------------------------------------------
Totalis primarily allocated to the FMS segment; however, with the availability of segment balance sheet information for 2002 (including targeted segment leverage ratios), interest expense $ 118,549 154,009
===============================================================================
72
As a result of the change(income) is also reflected in reportable business segments in 2000, 1999
disclosure of interest expense included in contribution margin under the new
reportable segments is impracticable.SCS and DCC. Interest expense (income) for the previously
reportable business segments is presented below:
In thousands
- -------------------------------------------------------------------------------
Years ended December 31 2001 2000 1999
Interest expense:
Transportation Services $ 102,900 141,487 169,082
Integrated Logistics 3,017 2,289 2,368
International 14,643 16,914 22,187
- -------------------------------------------------------------------------------
Total
| Years ended December 31 | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
| (In thousands) | |||||||||||||
| Interest expense: | |||||||||||||
| Fleet Management Solutions | $ | 88,185 | 111,032 | 152,596 | |||||||||
| Supply Chain Solutions | 6,416 | 5,321 | 5,196 | ||||||||||
| Dedicated Contract Carriage | (3,087 | ) | 19 | 3 | |||||||||
| Central Support Services | 204 | 2,177 | (3,786 | ) | |||||||||
| Total | $ | 91,718 | 118,549 | 154,009 | |||||||||
The following table sets forth total assets as provided to the chief operating decision-maker for each of the Company’s reportable segments 120,560 160,690 193,637
Other, primarily corporate (2,011) (6,681) (6,461)
- -------------------------------------------------------------------------------
Total interest expense $ 118,549 154,009 187,176
===============================================================================business segments:
| December 31 | |||||||||
| 2002 | 2001 | ||||||||
| (In thousands) | |||||||||
| Assets: | |||||||||
| Fleet Management Solutions | $ | 4,241,095 | 4,413,352 | ||||||
| Supply Chain Solutions | 366,954 | 414,441 | |||||||
| Dedicated Contract Carriage | 113,479 | 113,290 | |||||||
| Central Support Services | 185,773 | 222,133 | |||||||
| Receivables Sold | — | (110,000 | ) | ||||||
| Inter-segment Eliminations | (140,319 | ) | (126,055 | ) | |||||
| Total | $ | 4,766,982 | 4,927,161 | ||||||
78
Asset information, including capital expenditures, iswas not maintained in 2000 on the new segment basis nor provided to the chief operating decision maker and as such is
not presented.
decision-maker. The following table sets forth total capital expenditures for each of the Company’s reportable business segments:
| Years ended December 31 | |||||||||
| 2002 | 2001 | ||||||||
| (In thousands) | |||||||||
| Capital expenditures: | |||||||||
| Fleet Management Solutions* | $ | 576,067 | 597,698 | ||||||
| Supply Chain Solutions | 17,625 | 35,684 | |||||||
| Dedicated Contract Carriage | 344 | 1,218 | |||||||
| Central Support Services | 6,265 | 21,997 | |||||||
| Total | $ | 600,301 | 656,597 | ||||||
| * | 2002 excludes non-cash additions of $67 million in assets held under capital leases resulting from the extension of existing operating leases and other additions. |
Geographic Information
In thousands
- -------------------------------------------------------------------------------
Years ended December 31 2001 2000 1999
Revenue:
United States $4,218,163 4,445,842 4,078,087
Foreign 787,960 890,950 874,117
- -------------------------------------------------------------------------------
Total $5,006,123 5,336,792 4,952,204
===============================================================================
In thousands
- -------------------------------------------------------------------------------
December 31 2001 2000 1999
Long-lived assets:
United States $2,489,338 3,026,644 3,072,892
Foreign 556,659 598,788 603,664
- -------------------------------------------------------------------------------
Total $3,045,997 3,625,432 3,676,556
===============================================================================
| Years ended December 31 | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
| (In thousands) | |||||||||||||
| Revenue: | |||||||||||||
| United States | $ | 3,993,368 | 4,218,163 | 4,445,842 | |||||||||
| Foreign | 782,897 | 787,960 | 890,950 | ||||||||||
| Total | $ | 4,776,265 | 5,006,123 | 5,336,792 | |||||||||
| Long-lived assets: | |||||||||||||
| United States | $ | 2,439,436 | 2,489,338 | 3,026,644 | |||||||||
| Foreign | 589,055 | 556,659 | 598,788 | ||||||||||
| Total | $ | 3,028,491 | 3,045,997 | 3,625,432 | |||||||||
The Company believes that its diversified portfolio of customers across a full array of transportation and logistics solutions 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'sCompany’s portfolio of full service lease and commercial rental customers is not concentrated in any one particular industry or geographic region, withhowever, the largest concentration beingis in non-cyclical industries such as food, groceries and beverages. While the Company derives a significant portion of its SCS revenue (over 40 percent in 2001) and DCC revenue2002) from the automotive industry, the business is derived from numerous manufacturers and suppliers of original equipment parts. None of these companiesthe customers constitute more than 10 percent of the Company'sCompany’s total revenue.
73
79
SUPPLEMENTARY DATA
Quarterly Financial and Common Stock Data
Ryder System, Inc. and Subsidiaries
In thousands, except share data Per Common Share
- -------------------------------------------------------------------------------------------
Dividends
Net Net Earnings/(Loss) Stock Price Per
Earnings ----------------------------------- Common
Revenue /(Loss) Basic Diluted High Low Share
2001
First quarter $1,281,509 4,119 0.07 0.07 22.11 16.06 0.15
Second quarter 1,294,069 19,854 0.33 0.33 23.19 17.30 0.15
Third quarter 1,242,806 (5,506) (0.09) (0.09) 23.10 17.02 0.15
Fourth quarter 1,187,739 211 0.00 0.00 22.57 18.67 0.15
- -------------------------------------------------------------------------------------------
Total $5,006,123 18,678 0.31 0.31 23.19 16.06 0.60
===========================================================================================
2000
First quarter $1,308,608 19,824 0.33 0.33 25.13 17.44 0.15
Second quarter 1,332,190 29,640 0.50 0.50 24.88 17.94 0.15
Third quarter 1,338,817 12,144 0.20 0.20 23.00 18.31 0.15
Fourth quarter 1,357,177 27,424 0.46 0.46 20.31 14.81 0.15
- -------------------------------------------------------------------------------------------
Total $5,336,792 89,032 1.49 1.49 25.13 14.81 0.60
===========================================================================================
(Unaudited)
| Earnings/(Loss) | ||||||||||||||||||||||||||||||
| Before | Earnings/(Loss) per Common Share | |||||||||||||||||||||||||||||
| Cumulative | Before Cumulative Effect | |||||||||||||||||||||||||||||
| Effect of | of Change in Accounting | Net Earnings/(Loss) | ||||||||||||||||||||||||||||
| Change in | Net | Principle | per Common Share | |||||||||||||||||||||||||||
| Accounting | Earnings/ | |||||||||||||||||||||||||||||
| Revenue | Principle | (Loss) | Basic | Diluted | Basic | Diluted | ||||||||||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||||||||||||
2002 | ||||||||||||||||||||||||||||||
First quarter | $ | 1,149,917 | 16,853 | (2,046 | ) | 0.28 | 0.27 | (0.03 | ) | (0.03 | ) | |||||||||||||||||||
Second quarter | 1,209,318 | 29,512 | 29,512 | 0.48 | 0.47 | 0.48 | 0.47 | |||||||||||||||||||||||
Third quarter | 1,212,363 | 33,784 | 33,784 | 0.55 | 0.54 | 0.55 | 0.54 | |||||||||||||||||||||||
Fourth quarter | 1,204,667 | 32,416 | 32,416 | 0.52 | 0.52 | 0.52 | 0.52 | |||||||||||||||||||||||
Total | $ | 4,776,265 | 112,565 | 93,666 | 1.83 | 1.80 | 1.52 | 1.50 | ||||||||||||||||||||||
| 2001 | ||||||||||||||||||||||||||||||
| First quarter | $ | 1,281,509 | 4,119 | 4,119 | 0.07 | 0.07 | 0.07 | 0.07 | ||||||||||||||||||||||
| Second quarter | 1,294,069 | 19,854 | 19,854 | 0.33 | 0.33 | 0.33 | 0.33 | |||||||||||||||||||||||
| Third quarter | 1,242,806 | (5,506 | ) | (5,506 | ) | (0.09 | ) | (0.09 | ) | (0.09 | ) | (0.09 | ) | |||||||||||||||||
| Fourth quarter | 1,187,739 | 211 | 211 | 0.00 | 0.00 | 0.00 | 0.00 | |||||||||||||||||||||||
| Total | $ | 5,006,123 | 18,678 | 18,678 | 0.31 | 0.31 | 0.31 | 0.31 | ||||||||||||||||||||||
Quarterly and year-to-date computations of per share amounts are made independently; therefore, the sum of per share amounts for the quarters may not equal per share amounts for the year.
In June 2002, the Company completed its transitional impairment test of all of its existing goodwill in connection with the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets.” In accordance with the transition provisions of SFAS No. 142, the Company recorded an after-tax cumulative effect of change in accounting principle of $19 million effective January 1, 2002. Earnings from continuing operationsin 2002 were also impacted, in part, by after-tax restructuring and other recoveries of $1 million and $0.5 million in the first and third quarter of 2002, respectively, and a charge of $4 million in the fourth quarter. Earnings in 2001 were impacted, in part, by after-tax restructuring and other charges of $7 million in the first quarter, $12 million in the second quarter, $35 million in the third quarter and $27 million in the fourth quarter. Earnings from continuing operations inIn the third
and fourth quarterssecond quarter of 20002001, earnings were impacted by a $7 million reduction in part, by after-tax restructuringdeferred taxes as a result of a change in Canadian tax law.
80
Ryder System, Inc. and other charges of $23 millionSubsidiaries
Schedule II — Valuation and $3 million, respectively.
The Company's common shares are traded on the New York Stock Exchange, the
Chicago Stock Exchange, the Pacific Stock Exchange and the Berlin Stock
Exchange. As of January 31, 2002, there were 13,844 common stockholders of
record.
74
(Dollars in thousands)
| Column A | Column B | Column C | Column D | Column E | ||||||||||||||||
| Additions | ||||||||||||||||||||
| Balance at | Charged to | Transferred | Balance | |||||||||||||||||
| beginning | costs & | to other | at end | |||||||||||||||||
| Description | of period | expenses | accounts(a) | Deductions(b) | of period | |||||||||||||||
2002 | ||||||||||||||||||||
Allowance for doubtful accounts | $ | 8,864 | 8,457 | — | 9,318 | 8,003 | ||||||||||||||
Allowance for recourse provision | $ | 1,422 | (1,422 | ) | — | — | — | |||||||||||||
Reserve for residual value lease agreements | $ | 44,095 | 22,060 | — | 38,385 | 27,770 | ||||||||||||||
Self-insurance reserves | $ | 218,786 | 143,858 | 14,198 | 107,096 | 241,350 | ||||||||||||||
| 2001 | ||||||||||||||||||||
| Allowance for doubtful accounts | $ | 5,409 | 18,121 | — | 14,666 | 8,864 | ||||||||||||||
| Allowance for recourse provision | $ | 3,827 | (2,405 | ) | — | — | 1,422 | |||||||||||||
| Reserve for residual value lease agreements | $ | 55,098 | 41,415 | — | 52,418 | 44,095 | ||||||||||||||
| Self-insurance reserves | $ | 228,452 | 126,206 | — | 135,872 | 218,786 | ||||||||||||||
| 2000 | ||||||||||||||||||||
| Allowance for doubtful accounts | $ | 9,746 | 10,779 | — | 15,116 | 5,409 | ||||||||||||||
| Allowance for recourse provision | $ | 508 | 3,319 | — | — | 3,827 | ||||||||||||||
| Reserve for residual value lease agreements | $ | 18,920 | 47,176 | — | 10,998 | 55,098 | ||||||||||||||
| Self-insurance reserves | $ | 227,456 | 124,686 | — | 123,690 | 228,452 | ||||||||||||||
| (a) | Transferred to other accounts includes reclassification of reinsurance amounts to other assets. | |
| (b) | Deductions represent receivables written-off, lease termination payments and insurance claim payments during the period. |
81
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 regarding executive officers is set out in Item 1 of Part I of this Form 10-K Annual Report.
Other information required by Item 10 is incorporated herein by reference to the Company'sCompany’s definitive proxy statement, which will be filed with the Commission within 120 days after the close of the fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Information required by Item 11 is incorporated herein by reference to the Company'sCompany’s definitive proxy statement, which will be filed with the Commission within 120 days after the close of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT InformationAND
RELATED STOCKHOLDER MATTERS
Certain information required by Item 12 is incorporated herein by reference to the Company'sCompany’s definitive proxy statement, which will be filed with the Commission within 120 days after the close of the fiscal year.
Securities Authorized for Issuance under Equity Compensation Plans
The following table includes information about certain plans, which provide for the issuance of common stock in connection with the exercise of stock options and other stock-based awards:
| Number of securities | |||||||||||||
| remaining available | |||||||||||||
| Number of securities | for future issuance | ||||||||||||
| to be issued upon | Weighted-average | under equity | |||||||||||
| exercise of | exercise price of | compensation plans | |||||||||||
| outstanding options, | outstanding options, | excluding securities | |||||||||||
| Plan | warrants and rights | warrants and rights | reflected in column (a) | ||||||||||
| (a) | (b) | (c) | |||||||||||
| (Shares in thousands) | |||||||||||||
| Equity compensation plans approved by security holders: | |||||||||||||
| Broad based employee stock option plans | 8,784 | $ | 24.35 | 4,093 | |||||||||
| Employee Stock Purchase Plan | — | — | 1,280 | ||||||||||
| Non-Employee Directors’ Stock Plans | 151 | $ | 20.89 | 67 | |||||||||
| Equity compensation plans not approved by security holders | — | — | — | ||||||||||
| Total | 8,935 | $ | 24.29 | 5,440 | |||||||||
82
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Item 13 is incorporated herein by reference to the Company'sCompany’s definitive proxy statement, which will be filed with the Commission within 120 days after the close of the fiscal year.
75
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this Annual Report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed in the reports the Company files and submits under the Exchange Act are recorded, processed, summarized and reported as and when required.
There were no significant changes in the Company’s internal controls or in other factors that could significantly affect such internal controls subsequent to the date of the evaluation described in the paragraph above, including any corrective actions with regard to significant deficiencies and material weaknesses.
83
PART IV
ITEM 14.15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) 1. Financial Statements for Ryder System, Inc. and Consolidated
Subsidiaries: Items A through F and Schedule II are presented on the following pages of this Form 10-K Annual Report:
1. Financial Statements for Ryder System, Inc. and Consolidated Subsidiaries:
| Page No. | ||||||
| A) | Independent | 41 | ||||
| B) | Consolidated Statements of Earnings for years ended December 31, 2002, 2001 | 42 | ||||
| C) | Consolidated Balance Sheets as of December 31, | 43 | ||||
| D) | Consolidated Statements of Cash Flows for years ended December 31, 2002, 2001 | 44 | ||||
| E) | Consolidated Statements of | 45 | ||||
| F) | Notes to Consolidated Financial | 46 | ||||
| 2. Consolidated Financial Statement Schedules for years ended December 31, 2002, 2001 and 2000: | ||||||
| II — Valuation and Qualifying Accounts | 81 | |||||
All other schedules and statements are omitted because they are not applicable or not required or because the required information is includedshown in the consolidated financial statements or notes thereto.
Supplementary Financial Information consisting of selected quarterly financial data is included in Item 58 of this report.
3. Exhibits:
The following exhibits are filed with this report or, where indicated, incorporated by reference (Forms 10-K, 10-Q and 8-K referenced herein have been filed under the Commission'sCommission’s file No. 1-4364). The Company will provide a copy of the exhibits filed with this report at a nominal charge to those parties requesting them.
84
EXHIBIT INDEX
Exhibit
Number 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.
76
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.
4.1 The Company hereby agrees, pursuant to paragraph (b)(4)(iii of
Item 601 of Regulation S-K, to furnish the Commission ) with a
copy of any instrument defining the rights of holders of long-term
debt of the Company, where such instrument has not been filed as
an exhibit hereto and the total amount of securities authorized
thereunder does not exceed 10% of the total assets of the Company
and its subsidiaries on a consolidated basis.
4.2(a) The Form of Indenture between Ryder System, Inc. and The Chase
Manhattan Bank (National Association) dated as of June 1, 1984,
filed with the on November 19, 1985 as an exhibit to the
Company's Registration Statement on Form S-3 (No. 33- 1632), is
incorporated by reference into this report.
4.2(b) The First Supplemental Indenture between Ryder System, Inc. and
The Chase Manhattan Bank (National Association) dated October 1,
1987, previously filed with the Commission as an exhibit to the
Company's Annual Report on Form 10-K for the year ended December
31, 1994, is incorporated by reference into this report.
4.3 The Form of Indenture between Ryder System, Inc. and The Chase
Manhattan Bank (National Association) dated as of May 1, 1987,
and supplemented as of November 15, 1990 and June 24, 1992, filed
with the Commission on July 30, 1992 as an exhibit to the
Company's Registration Statement on Form S-3 (No. 33-50232), is
incorporated by reference into this report.
4.4 The Rights Agreement between Ryder System, Inc. and Boston
Equiserve, L.P., dated as of March 8, 1996, filed with the
Commission on April 3, 1996 as an exhibit to the Company's
Registration Statement on Form 8-A is incorporated by reference
into this report.
10.1 The form of change of control severance agreement for executive
officers effective as of May 1, 1996, previously filed with the
Commission as an exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1996, is incorporated by
reference to this report.
10.2 The form of severance agreement for executive officers effective
as of May 1, 1996, previously filed with the Commission as an
exhibit to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996, is incorporated by reference to this
report.
10.3(a) The Ryder System, Inc. 1997 Incentive Compensation Plan for
Headquarters Executive Management Levels MS 11 and Higher,
previously filed with the Commission as an exhibit to the
Company's Annual Report on Form 10-K for the year ended December
31, 1996, is incorporated by reference to this report.
10.3(b) The Ryder System, Inc. 1998 Incentive Compensation Plan for
Headquarters Executive Management Level MS 11 and Higher,
previously filed with the Commission as an exhibit to the
Company's Annual Report on Form 10-K for the year ended December
31, 1997, is incorporated by reference into this report.
10.3(c) The Ryder System, Inc. 1999 Incentive Compensation Plan for
Headquarters Executive Management Levels MS 11 and Higher,
previously filed with the Commission as an exhibit to the
Company's Annual Report on Form 10-K for the year ended December
31, 1998, is incorporated by reference into this report.
10.3(d) The Ryder System, Inc. 2000 Incentive Compensation Plan for
Headquarters Executive Management Levels MS 11 and Higher,
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, is incorporated by referencce into this report.
77
10.4(a) The Ryder System, Inc. 1980 Stock Incentive Plan, as amended and
restated as of August 15, 1996, previously filed with the
Commission as an exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1997, is incorporated by
reference into this report.
10.4(b) The form of Ryder System, Inc. 1980 Stock Incentive Plan, United
Kingdom Section, dated May 4, 1995, previously filed with the
Commission as an exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1995, is incorporated by
reference into this report.
10.4(c) The form of Ryder System, Inc. 1980 Stock Incentive Plan, United
Kingdom Section, dated October 3, 1995, previously filed with
the Commission as an exhibit to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995, is incorporated
by reference into this report.
10.4(d) The Ryder System, Inc. 1995 Stock Incentive Plan, as amended and
restated as of August 15, 1996, previously filed with the
Commission as an exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1997, is incorporated by
reference into this report.
10.4(e) The Ryder System, Inc. 1995 Stock Incentive Plan, as amended and
restated as of May 5, 2000, previously filed with the Commission
as an exhibit to the Company's Annual Report or Form 10-K for
the year ended 2000, is 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, previously filed with the Commission as
an exhibit to the Company's report on Form 10-Q for the quarter
ended September 30, 2001, is incorporated by reference into this
report.
10.5(a) The Ryder System, Inc. Directors Stock Plan, as amended and
restated as of December 17, 1993, previously filed with the
Commission as an exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1993, is incorporated by
reference into this report.
10.5(b) The Ryder System, Inc. Directors Stock Award Plan dated as of
May 2, 1997, as amended and restated as of December 17, 1998,
previously filed with the Commission as an exhibit to the
Company's Annual Report on Form 10-K for the year ended December
31, 1997, is incorporated by reference into this report.
10.5(c) The Ryder System, Inc. Directors Stock Plan, as amended and
restated at May 4, 2001, previously filed with the Commission as
an Exhibit to the Company's Report on Form 10-Q for the quarter
ended September 30, 2001, is incorporated by reference into this
report.
10.6(a) The Ryder System Benefit Restoration Plan, effective January 1,
1985, previously filed with the Commission as an exhibit to the
Company's Annual Report on Form 10-K for the year ended December
31, 1992, is incorporated by reference into this report.
10.6(b) The First Amendment to the Ryder System Benefit Restoration
Plan, effective as of December 16, 1988, previously filed with
the Commission as an exhibit to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994, is incorporated
by reference into this report.
10.9(a) The Ryder System, Inc. Stock for Merit Increase Replacement
Plan, as amended and restated as of August 15, 1996, previously
filed with the commission as an exhibit to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, is
incorporated by reference into this report.
10.9(b) The form of Ryder System, Inc. Non-Qualified Stock Option
Agreement, dated as of February 21, 1998, previously filed with
the Commission as an exhibit to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995, is incorporated
by reference into this report.
10.9(c) The form of Combined Non-Qualified Stock Option and Limited
Stock Appreciation Right Agreement, dated October 1, 1997,
previously filed with the Commission as an exhibit to the
Company's Annual Report on Form 10-K for the year ended December
31, 1997, is incorporated by reference into this report.
78
10.10 The Ryder System, Inc. Deferred Compensation Plan effective
January 1, 1997, as amended and restated as of November 3, 1997,
previously filed with the Commission as an exhibit to the
Company's Annual Report on Form 10-K for the year ended December
31, 1997, is incorporated by reference into this report.
10.11 Severance Agreement, dated as of March 15, 2000, between Ryder
System, Inc. and James B. Griffin, as previously filed with the
Commission as an exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1999, is incorporated by
reference into this report.
10.12 The Asset and Stock Purchase Agreement by and between Ryder
System, Inc. and FirstGroup Plc dated as of July 21, 1999, filed
with the Commission on September 24, 1999 as an exhibit to the
Company's report on Form 8K, is incorporated by reference into
this report.
21.1 List of subsidiaries of the registrant, with the state or other
jurisdiction of incorporation or organization of each, and the
name under which each subsidiary does business.
23.1 Auditors' consent to incorporation by reference in certain
Registration Statements on Forms S-3 and S-8 of their reports on
consolidated financial statements and schedules of Ryder System,
Inc. and its subsidiaries.
24.1 Manually executed powers of attorney for each of:
M. Anthony Burns
Joseph L. Dionne
Edward T. Foote II
David I. Fuente
John A. Georges
David T. Kearns
Lynn M. Martin
| Exhibit | ||||
| Number | 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. | |||
| 4.1 | The Company hereby agrees, pursuant to paragraph (b)(4)(iii) of Item 601 of Regulation S-K, to furnish the Commission with a copy of any instrument defining the rights of holders of long-term debt of the Company, where such instrument has not been filed as an exhibit hereto and the total amount of securities authorized thereunder does not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. | |||
| 4.2(a) | The Form of Indenture between Ryder System, Inc. and The Chase Manhattan Bank (National Association) dated as of June 1, 1984, filed with the Commission on November 19, 1985 as an exhibit to the Company’s Registration Statement on Form S-3 (No. 33-1632), is incorporated by reference into this report. | |||
| 4.2(b) | The First Supplemental Indenture between Ryder System, Inc. and The Chase Manhattan Bank (National Association) dated October 1, 1987, previously filed with the Commission as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated by reference into this report. | |||
| 4.3 | The Form of Indenture between Ryder System, Inc. and The Chase Manhattan Bank (National Association) dated as of May 1, 1987, and supplemented as of November 15, 1990 and June 24, 1992, filed with the Commission on July 30, 1992 as an exhibit to the Company’s Registration Statement on Form S-3 (No. 33-50232), is incorporated by reference into this report. | |||
| 4.4 | The Rights Agreement between Ryder System, Inc. and Boston Equiserve, L.P., dated as of March 8, 1996, filed with the Commission on April 3, 1996 as an exhibit to the Company’s Registration Statement on Form 8-A is incorporated by reference into this report. | |||
| 10.1 | The form of change of control severance agreement for executive officers effective as of May 1, 1996, previously filed with the Commission as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1996, is incorporated by reference to this report. | |||
| 10.2 | The form of severance agreement for executive officers effective as of May 1, 1996, previously filed with the Commission as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1996, is incorporated by reference to this report. | |||
| 10.3(a) | The Ryder System, Inc. 1997 Incentive Compensation Plan for Headquarters Executive Management Levels MS 11 and Higher, previously filed with the Commission as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1996, is incorporated by reference to this report. | |||
| 10.3(b) | The Ryder System, Inc. 1998 Incentive Compensation Plan for Headquarters Executive Management Level MS 11 and Higher, previously filed with the Commission as an exhibit to the Company’s Annual |
85
| Exhibit | ||||
| Number | Description | |||
| Report on Form 10-K for the year ended December 31, 1997, is incorporated by reference into this report. | ||||
| 10.3(c) | The Ryder System, Inc. 1999 Incentive Compensation Plan for Headquarters Executive Management Levels MS 11 and Higher, previously filed with the Commission as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998, is incorporated by reference into this report. | |||
| 10.3(d) | The Ryder System, Inc. 2000 Incentive Compensation Plan for Headquarters Executive Management Levels MS 11 and Higher, 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, is incorporated by reference into this report. | |||
| 10.4(a) | The Ryder System, Inc. 1980 Stock Incentive Plan, as amended and restated as of August 15, 1996, previously filed with the Commission as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997, is incorporated by reference into this report. | |||
| 10.4(b) | The form of Ryder System, Inc. 1980 Stock Incentive Plan, United Kingdom Section, dated May 4, 1995, previously filed with the Commission as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated by reference into this report. | |||
| 10.4(c) | The form of Ryder System, Inc. 1980 Stock Incentive Plan, United Kingdom Section, dated October 3, 1995, previously filed with the Commission as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated by reference into this report. | |||
| 10.4(d) | The Ryder System, Inc. 1995 Stock Incentive Plan, as amended and restated as of August 15, 1996, previously filed with the Commission as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997, is incorporated by reference into this report. | |||
| 10.4(e) | The Ryder System, Inc. 1995 Stock Incentive Plan, as amended and restated as of May 5, 2000, previously filed with the Commission as an exhibit to the Company’s Annual Report or Form 10-K for the year ended 2000, is 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, previously filed with the Commission as an exhibit to the Company’s report on Form 10-Q for the quarter ended September 30, 2001, is incorporated by reference into this report. | |||
| 10.5(a) | The Ryder System, Inc. Directors Stock Plan, as amended and restated as of December 17, 1993, previously filed with the Commission as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1993, is incorporated by reference into this report. | |||
| 10.5(b) | The Ryder System, Inc. Directors Stock Award Plan dated as of May 2, 1997, as amended and restated as of December 17, 1998, previously filed with the Commission as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997, is incorporated by reference into this report. | |||
| 10.5(c) | The Ryder System, Inc. Directors Stock Plan, as amended and restated at May 4, 2001, previously filed with the Commission as an Exhibit to the Company’s Report on Form 10-Q for the quarter ended September 30, 2001, is incorporated by reference into this report. | |||
| 10.6(a) | The Ryder System Benefit Restoration Plan, effective January 1, 1985, previously filed with the Commission as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1992, is incorporated by reference into this report. |
86
| Exhibit | ||||
| Number | Description | |||
| 10.6(b) | The First Amendment to the Ryder System Benefit Restoration Plan, effective as of December 16, 1988, previously filed with the Commission as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated by reference into this report. | |||
| 10.9(a) | The Ryder System, Inc. Stock for Merit Increase Replacement Plan, as amended and restated as of August 15, 1996, previously filed with the commission as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997, is incorporated by reference into this report. | |||
| 10.9(b) | The form of Ryder System, Inc. Non-Qualified Stock Option Agreement, dated as of February 21, 1998, previously filed with the Commission as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated by reference into this report. | |||
| 10.9(c) | The form of Combined Non-Qualified Stock Option and Limited Stock Appreciation Right Agreement, dated October 1, 1997, previously filed with the Commission as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997, is incorporated by reference into this report. | |||
| 10.10 | The Ryder System, Inc. Deferred Compensation Plan effective January 1, 1997, as amended and restated as of November 3, 1997, previously filed with the Commission as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997, is incorporated by reference into this report. | |||
| 10.11 | Severance Agreement, dated as of March 15, 2000, between Ryder System, Inc. and James B. Griffin, as previously filed with the Commission as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999, is incorporated by reference into this report. | |||
| 10.12 | The Asset and Stock Purchase Agreement by and between Ryder System, Inc. and FirstGroup Plc. dated as of July 21, 1999, filed with the Commission on September 24, 1999 as an exhibit to the Company’s report on Form 8-K, is incorporated by reference into this report. | |||
| 21.1 | List of subsidiaries of the registrant, with the state or other jurisdiction of incorporation or organization of each, and the name under which each subsidiary does business. | |||
| 23.1 | Auditors’ consent to incorporation by reference in certain Registration Statements on Forms S-3 and S-8 of their reports on consolidated financial statements and schedules of Ryder System, Inc. and its subsidiaries. | |||
| 24.1 | Manually executed powers of attorney for each of: | |||
| John H. Dasburg Joseph L. Dionne Edward T. Foote II David I. Fuente John A. Georges Lynn M. Martin Daniel H. Mudd Eugene A. Renna Hansel E. Tookes II Christine A. Varney | ||||
| 99.1 | Certification of Gregory T. Swienton pursuant to 18 U.S.C. Section 1350. | |||
| 99.2 | Certification of Corliss J. Nelson pursuant to 18 U.S.C. Section 1350. | |||
(b) Reports on Form 8-K:
During the fourth quarter of 2001, the Company filed a report on Form 8-K
on November 21, 2001.
Item 9. Regulation FD Disclosure
The Company made the 8-K filing to furnish earnings guidance for the fourth
quarter of 2001 and to announce expected additions to restructuring and
other changes during the fourth quarter of 2001.
87
| (i) | The Company filed a report on Form 8-K on November 19, 2002 relating to a presentation on its pension plans and certain related information. | |
| (ii) | The Company filed a report on Form 8-K on December 20, 2002 relating to its 2003 earnings forecast and a presentation made by the Company in connection therewith. |
(c) Executive Compensation Plans and Arrangements:
Please refer to the description of Exhibits 10.1 through 10.12 set forth under Item 14(a)15(a)3 of this report for a listing of all management contracts and compensation plans and arrangements filed with this report pursuant to Item 601(b)(10) of Regulation S-K.
79
88
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 25, 2002 RYDER SYSTEM, INC.
| Date: March 3, 2003 | RYDER SYSTEM, INC. | |
| By: /S/ | ||
| Gregory T. Swienton Chairman, President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: March 25, 2002 By: /S/ GREGORY T. SWIENTON
-------------------------------------
| Date: March 3, 2003 | By: /S/ Gregory T. Swienton | |
| Gregory T. Swienton Chairman, President and Chief Executive Officer (Principal Executive Officer) | ||
| Date: March 3, 2003 | By: /S/ Corliss J. Nelson | |
| Corliss J. Nelson Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer) | ||
| Date: March 3, 2003 | By: /S/ Art A. Garcia | |
| Art A. Garcia Vice President and Controller (Principal Accounting Officer) | ||
| Date: March 3, 2003 | By: /S/ John H. Dasburg * | |
| John H. Dasburg Director | ||
| Date: March 3, 2003 | By: /S/ Joseph L. Dionne * | |
| Joseph L. Dionne Director | ||
| Date: March 3, 2003 | By: /S/ Edward T. Foote II * | |
| Edward T. Foote II Director | ||
| Date: March 3, 2003 | By: /S/ David I. Fuente * | |
| David I. Fuente Director | ||
| Date: March 3, 2003 | By: /S/ John A. Georges * | |
| John A. Georges Director |
89
| Date: March 3, 2003 | By: /S/ Lynn M. Martin * | |
| Lynn M. Martin Director | ||
| Date: March 3, 2003 | By: /S/ Daniel H. Mudd * | |
| Daniel H. Mudd Director | ||
| Date: March 3, 2003 | By: /S/ Eugene A. Renna * | |
| Eugene A. Renna Director | ||
| Date: March 3, 2003 | By: /S/ Hansel E. Tookes II * | |
| Hansel E. Tookes II Director | ||
| Date: March 3, 2003 | By: /S/ Christine A. Varney * | |
| Christine A. Varney Director | ||
| Date: March 3, 2003 | *By: /S/ Richard H. Siegel | |
| Richard H. Siegel Attorney-in-Fact |
90
CERTIFICATION
I, Gregory T. Swienton, President and Chief Executive Officer
(Principal Executive Officer)
Date: March 25, 2002 By: /S/ CORLISS J. NELSON
-------------------------------------certify that:
| 1. | I have reviewed this annual report on Form 10-K of Ryder System, Inc.; | |
| 2. | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; | |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: |
| a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; | |||
| b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and | |||
| c) | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and | |||
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
| Date: March 3, 2003 | /S/ Gregory T. Swienton | |
| Gregory T. Swienton Chairman, President and Chief Executive Officer |
91
CERTIFICATION
I, Corliss J. Nelson, Senior Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: March 25, 2002 By: /S/ KATHLEEN S. PARTRIDGE
-------------------------------------
Kathleen S. Partridge
Senior Vice President, Business
and Accounting Services
(Principal Accounting Officer)
Date: March 25, 2002 By: /S/ M. ANTHONY BURNS *
-------------------------------------
M. Anthony Burns
Chairman
Date: March 25, 2002 By: /S/ JOSEPH L. DIONNE *
-------------------------------------
Joseph L. Dionne
Director
Date: March 25, 2002 By: /S/ EDWARD T. FOOTE II *
-------------------------------------
Edward T. Foote II
Director
Date: March 25, 2002 By: /S/ DAVID I. FUENTE *
-------------------------------------
David I. Fuente
Director
Date: March 25, 2002 By: /S/ JOHN A. GEORGES *
-------------------------------------
John A. Georges
Director
80
Date: March 25, 2002 By: /S/ DAVID T. KEARNS *
-------------------------------------
David T. Kearns
Director
Date: March 25 , 2002 By: /S/ LYNN M. MARTIN *
-------------------------------------
Lynn M. Martin
Director
Date: March 25, 2002 By: /S/ CHRISTINE A. VARNEY *
--------------------------------------
Christine A. Varney
Director
Date: March 25, 2002 By: /S/ CARLOS J. ABARCA
--------------------------------------
Carlos J. Abarca Attorney-in-Fact
81