Ryder - 10-Q quarterly report FY

Ryder System, Inc. had 62,381,017 shares of common stock ($0.50 par value per share) outstanding as of October 31, 2002.

See accompanying notes to consolidated condensed financial statements.

See accompanying notes to consolidated condensed financial statements.

See accompanying notes to consolidated condensed financial statements.

The accompanying unaudited consolidated condensed financial statements include the accounts of Ryder System, Inc. and subsidiaries (the “Company”) and have been prepared by the Company in accordance with the accounting policies described in the 2001 Annual Report on Form 10-K and should be read in conjunction with the consolidated financial statements and notes which appear in that report. These statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (primarily consisting of normal recurring accruals) considered necessary for a fair presentation have been included and the disclosures herein are adequate. The operating results for interim periods are unaudited and are not necessarily indicative of the results that can be expected for a full year. Certain prior year amounts have been reclassified to conform to current period presentation.

Intangible assets and deferred charges consisted of the following at September 30, 2002 and December 31, 2001:

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but rather, be tested for impairment at least annually. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values. Additionally, a review for impairment is required to be made consistent with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

The Company adopted the provisions of SFAS No. 142 effective January 1, 2002 and has discontinued the amortization of goodwill and intangible assets with indefinite useful lives. SFAS No. 142 also required the Company to perform an assessment of whether there was an indication that the remaining recorded goodwill was impaired as of the date of adoption. 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.

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 of its existing goodwill totaling $168.3 million as of January 1, 2002. As a result of this review, the Company recorded a non-cash charge of $18.9 million on a before and after-tax basis, or $0.30 per diluted share, associated with the Asian operations of the Company’s Supply Chain Solutions business segment. The transitional impairment charge resulted from the application of the new impairment methodology introduced by SFAS No. 142. Prior to the adoption of SFAS No. 142, the Company measured the recoverability of goodwill based upon management’s best estimate of the undiscounted future operating cash flows (excluding interest charges) related to the asset. Under previous requirements, no goodwill impairment would have been recorded on January 1, 2002.

In accordance with SFAS No. 142, the transitional impairment was recognized as the cumulative effect of a change in accounting principle in the Company’s Consolidated Condensed Statements of Earnings effective January 1, 2002. The impact of this accounting change had no effect on the Company’s operating earnings.

The carrying amount of goodwill attributable to each reportable business segment with changes therein was as follows (in millions):

The components of the Company’s other intangible assets include the Ryder trade name with a carrying amount of $8.7 million and an intangible asset related to the Company’s Benefit Restoration Plan with a carrying amount of $1.5 million. The Ryder trade name has been identified as having an indefinite useful life and was tested for impairment consistent with the transitional provisions of SFAS No. 142. The Company completed such testing and determined that there was no impairment of intangible assets. Impairment adjustments recognized after adoption, if any, are generally required to be recognized as operating expenses.

The Company completed its annual impairment test for goodwill and intangible assets with indefinite useful lives as of April 1, 2002 and determined that there was no impairment.

Actual results of operations for the three and nine months ended September 30, 2002 and restated results of operations for the three and nine months ended September 30, 2001, as well as the years ended December 31, 2001, 2000, and 1999, had the Company applied the non-amortization provisions of SFAS No. 142, were as follows:

The Company reviews long-lived assets held and used, excluding indefinite-lived intangible assets (see “Goodwill and Other Intangible Assets”), for impairment when circumstances indicate that the carrying amount of assets may not be recoverable. In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144, among other things, amended accounting guidance on asset impairment. The Company assesses the recoverability of long-lived assets by determining whether the depreciation or amortization of an asset over its remaining life can be recovered based upon management’s best estimate of the undiscounted future operating cash flows (excluding interest charges) related to the long-lived asset or group of assets and liabilities in which the long-lived asset generates cash flows. If the sum of such undiscounted cash flows is less than the carrying value of the asset (group), the asset is considered impaired. The amount of impairment, if any, represents the excess of the carrying value of the asset (group) over fair value. Fair value is determined by quoted market price, if available, or an estimate of projected future operating cash flows discounted using a rate that reflects the related operating segment’s average cost of funds.

In addition, SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of. Among other provisions, the new rules change the criteria for classifying an asset as held-for-sale. Long-lived assets, including indefinite-lived intangible assets, to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. Fair value is determined based upon quoted market prices, if available, or the results of applicable valuation techniques such as discounted cash flows or independent appraisal. At September 30, 2002 and December 31, 2001, the net carrying value of revenue earning equipment held for sale was $25.5 million and $45.1 million, respectively.

The Company adopted the provisions of SFAS No. 144 effective January 1, 2002. Adoption of SFAS No. 144 did not have any impact on the Company’s financial position, cash flows or results of operations.

From time to time, the Company enters into interest rate swap and cap agreements to manage its fixed and variable interest rate exposure and to better match the repricing of its debt instruments to that of its portfolio of assets. The Company assesses the risk that changes in interest rates will have either on the fair value of its debt obligations or on the amount of its future interest payments by monitoring changes in interest rate exposures and by evaluating hedging opportunities. The Company regularly monitors interest rate risk attributable to both the Company’s outstanding or forecasted debt obligations as well as the Company’s offsetting hedge positions. This risk management process involves the use of analytical techniques, including cash flow sensitivity analysis, to estimate the expected impact of changes in interest rates on the Company’s future cash flows.

The Company also uses foreign currency option contracts and forward agreements from time to time to hedge foreign currency transactional exposure. The Company does not enter into derivative financial instruments for trading purposes.

During March 2002, the Company entered into interest rate swap agreements designated as fair value hedges whereby it receives fixed interest rate payments in exchange for making variable interest rate payments. The differential to be paid or received is accrued and recognized as interest expense. At September 30, 2002, these interest rate swap agreements effectively changed $322.0 million of fixed-rate debt instruments with a weighted-average fixed interest rate of 6.7 percent to LIBOR-based floating rate debt at a current weighted-average rate of 3.7 percent. Changes in the fair value of the interest rate swaps are offset by changes in the fair value of the debt instruments and no net gain or loss is recognized in earnings. During the three months ended September 30, 2002, the increase in the fair value of interest rate swaps totaled $19.5 million. The fair value of the interest rate swap agreements of approximately $26.6 million at September 30, 2002 was classified in “Direct financing leases and other assets.” 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 $160.0 million. These cap agreements mature in October and November of 2005. The interest rate cap agreements serve as an economic hedge against increases in interest rates and have not been designated as hedges for accounting purposes. The fair value of the interest rate cap agreements of approximately $0.8 million at September 30, 2002 was classified in “Direct financing leases and other assets.” During the three and nine months ended September 30, 2002, the decreases in the fair value of interest rate caps totaled approximately $0.8 and $2.2 million, respectively, and were reflected as interest expense.

The Company estimates the fair value of derivatives based on dealer quotations. For the period ended September 30, 2002, there was no measured ineffectiveness in the Company’s designated hedging transactions.

Basic earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding. Diluted earnings per share reflects the dilutive effect of potential common shares from securities such as stock options and unvested restricted stock. The dilutive effect of stock options is computed using the treasury stock method, which assumes the repurchase of common shares by the Company at the average market price for the period.

A reconciliation of the number of shares used in computing basic and diluted earnings per share follows:

Comprehensive income presents a measure of all changes in shareholders’ equity except for changes resulting from transactions with shareholders in their capacity as shareholders. The following table provides a reconciliation of net earnings as reported in the Company’s Consolidated Condensed Statements of Earnings to comprehensive income.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145, among other items, updates and clarifies existing accounting pronouncements related to gains and losses from the extinguishment of debt and certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of SFAS No. 145 are generally effective as of May 15, 2002. The adoption of SFAS No. 145 did not have a material impact on the Company’s results of operations, cash flows or financial position.

In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. When the liability is initially recorded, the Company is required to capitalize a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002 and will be adopted by the Company effective January 1, 2003. The Company is currently evaluating the potential impact, if any, the adoption of SFAS No. 143 will have on its results of operations, cash flows or financial position.

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The standard requires companies to recognize costs associated with exit (including restructuring) or disposal activities at fair value when the related liability is incurred rather than at the date of a commitment to an exit or disposal plan under current practice. Costs covered by the standard include certain contract termination costs, certain employee termination benefits and other costs to consolidate or close facilities and relocate employees that are associated with an exit activity or disposal of long-lived assets. The new requirements are effective prospectively for exit or disposal activities initiated after December 31, 2002 and will be adopted by the Company effective January 1, 2003. The adoption of SFAS No. 146 is expected to impact the timing of recognition of costs associated with future exit and disposal activities.

The components of restructuring and other unusual (recoveries) charges for the three and nine months ended September 30, 2002 and 2001 were as follows:

Allocation of restructuring and other unusual (recoveries) charges across reportable business segments for the three and nine months ended September 30, 2002 and 2001 was as follows:

During the first and third quarters of 2002, severance and employee-related costs that had been recorded in the 2001 and 1999 restructurings were reversed due to refinements in estimates.

Other unusual (recoveries) charges during the third quarter represent the additional write-down to the estimated fair value of owned facilities identified for closure in prior restructurings and the reversal of contract termination costs recognized in 2001 resulting from refinements in estimates.

During the nine months ended September 30, 2002, other unusual (recoveries) charges include the final settlement of insurance reserves attributed to a previously sold business.

In late 2000, the Company communicated to its employees its planned strategic initiatives to reduce Company expenses. As part of such initiatives, the Company reviewed employee functions and staffing levels to eliminate redundant work or otherwise restructure work in a manner that led to a workforce reduction. The process resulted in terminations of over 1,400 employees during 2001. Approximately 200 of these terminations occurred during the three months ended September 30, 2001 resulting in total terminations of 1,000 during the nine months ended September 30, 2001. As of September 30, 2002, 1,350 terminations, or 96.4 percent, were finalized. Severance and employee-related costs of $5.9 million and $24.0 million for the three and nine months ended September 30, 2001, respectively, represent termination benefits related to employees whose jobs were eliminated as part of this review. Additional severance and employee-related costs of $2.6 million for the three and nine months ended September 30, 2002 relate to the shutdown of Systemcare, Ryder’s shared user home delivery network in the U.K., discussed below.

During the third quarter of 2001, the Company initiated the shutdown of Systemcare. 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. 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 $15.5 million and included severance and employee-related costs of $2.6 million. Due to the decision to shutdown the Systemcare operations, the Company assessed the recoverability of Systemcare’s long-lived assets as described in “Summary of Significant Accounting Policies—Impairment of Long-Lived Assets” in the Notes to Consolidated Financial Statements in the 2001 Annual Report on Form 10-K. As a result of the Company’s recoverability analysis, goodwill of $10.6 million, which represents the majority of total goodwill impairment for the nine months ended September 30, 2001 of $10.7 million, was considered impaired and written down. In addition, assets of $2.3 million, consisting primarily of specialized vehicles to be disposed of after the shutdown of Systemcare’s operations, were considered

During the first nine months of 2001, the Company identified more than 40 facilities in the U.S. and other countries to be closed in order to improve profitability. Facilities and related costs of $2.0 million and $4.0 million for the three and nine months ended September 30, 2001, respectively, represent contractual lease obligations for closed leased facilities.

Asset write-downs of $30.5 million and $32.5 million were recorded during the three and nine months ended September 30, 2001, respectively. In the third quarter of 2001, the Company cancelled an information technology project in its Fleet Management Solutions business segment. The non-cash charge of $21.7 million represents the write-down of software licenses, development costs and assets related to the project that had no future benefit. Also, in the third quarter of 2001, an investment of $5.5 million in certain license agreements for supply chain management software was written down because the software no longer had a viable business or customer application in light of the Company’s restructuring initiatives. The remaining asset write-downs relate to the aforementioned Systemcare asset impairment charges of $2.3 million and the write-down of owned real estate, operating property and equipment and technology totaling $3.0 million that would no longer be used in the business.

Strategic consulting fees of $2.0 million and $8.5 million were incurred during the three and nine months ended September 30, 2001, respectively, in relation to the aforementioned strategic initiatives.

During the first quarter ended March 31, 2001, the Company sold the contracts and related net assets associated with the disposal of the outbound auto carriage portion of its Brazilian Supply Chain Solutions operation (“Vehiculos”). The Company sold Vehiculos for $14.1 million and incurred a loss of $3.5 million on the sale of the business.

As a direct result of the Company’s 2001 restructuring and cost reduction initiatives, the Company made a decision to sell its corporate jet. A gain of $2.1 million was realized on the sale of the corporate jet in 2001.

Activity related to restructuring reserves for the nine months ended September 30, 2002 was as follows:

Deductions include cash payments of $10.1 million and prior year charge reversals of $1.5 million. At September 30, 2002, employee severance and benefits obligations are required to be paid approximately over the next two years and three months. At September 30, 2002, lease obligations recorded in facilities and related costs are non-cancelable and contractually required to be paid principally over the next two years and three months.

The Company participates in an agreement, as amended from time to time, to sell, with limited recourse, trade receivables on a revolving and uncommitted basis. This agreement expires in July 2004. In June 2002, the Company reduced the amount available for sale under its trade receivables facility from $375.0 million to $275.0 million as a result of a reduction in overall capital needs. At September 30, 2002 and December 31, 2001, the outstanding balance of receivables sold pursuant to this agreement was $10.0 million and $110.0 million, respectively. The total amount of available recourse as of September 30, 2002 and December 31, 2001 was $0.7 million and $13.7 million, respectively. Receivables are sold with limited recourse for uncollectible accounts.

The Company’s effective income tax rate on earnings was 36.0 percent and 36.2 percent for the three and nine months ended September 30, 2002, respectively, compared with a 20.3 percent benefit and a 9.2 percent expense for the three and nine months ended September 30, 2001, respectively. For the three months ended September 30, 2001, the Company’s effective tax rate was reduced due to the impact of certain items included in restructuring and other unusual charges, principally goodwill impairment charges, for which the Company receives no income tax deduction. In June 2001, legislation was enacted in Canada that prospectively reduced income tax rates applicable to the Company’s Canadian operations. This resulted in a one-time reduction in the Company’s related deferred taxes of $6.8 million, and lowered the Company’s income tax provision for the nine months ended September 30, 2001.

The audits of the consolidated federal income tax returns for 1995, 1996 and 1997 are in the appeals process with the IRS. Years prior to 1995 are closed and no longer subject to audit. Management believes that taxes accrued on the balance sheet fairly represent the amount of future tax liability due by the Company.

The Company’s outstanding debt balances were as follows:

The Company can borrow up to $860.0 million through a global credit facility. The facility is composed of $300.0 million, which matures in May 2003 and is renewable annually, and $560.0 million, which matures in May 2006. The primary purposes of the credit facility are to finance working capital and provide support for the issuance of commercial paper. At the Company’s option, the interest rate on borrowings under the credit facility is based on LIBOR, prime, federal funds or local equivalent rates. At September 30, 2002, $671.0 million was available under this global credit facility. Of such amount, $300.0 million was available at a maturity of less than one year. In order to maintain availability of funding, the global revolving credit facility requires the Company to maintain a ratio of debt to consolidated adjusted tangible net worth, as defined, of less than or equal to 300.0 percent. The ratio at September 30, 2002 was 99.0 percent.

During 2002, the Company added capital lease obligations of $20.7 million in connection with the extension of existing operating leases of revenue earning equipment.

In 1998, the Company filed an $800.0 million shelf registration statement with the Securities and Exchange Commission. Proceeds from debt issued under the shelf registration have been and are expected to be used for capital expenditures, debt refinancing and general corporate purposes. At September 30, 2002, the Company had $237.0 million of debt securities available for issuance under this shelf registration statement.

At September 30, 2002 and December 31, 2001, the Company had letters of credit outstanding totaling $150.0 million and $115.0 million, respectively, which primarily guarantee various insurance activities. Certain of these letters of credit guarantee insurance activities associated with insurance claim liabilities transferred in conjunction with the sale of certain businesses reported as discontinued operations in previous years. To date, such insurance claims, representing per claim deductibles payable under third-party insurance policies, have been paid by the companies that assumed such liabilities. However, if all or a portion of such assumed claims of approximately $16.0 million are unable to be paid, the third-party insurers may have recourse against certain of the outstanding letters of credit provided by the Company in order to satisfy the unpaid claim deductibles.

The Company’s operating segments are aggregated into reportable business segments based primarily upon similar economic characteristics, services and delivery methods. The Company operates in three reportable business segments: (1) Fleet Management Solutions (FMS), which provides full service leasing, commercial rental and programmed maintenance of trucks, tractors and trailers to customers, principally in the U.S., Canada and the United Kingdom; (2) Supply Chain Solutions (SCS), which provides comprehensive supply chain consulting and lead logistics management solutions that support customers’ entire supply chains, from inbound raw materials through distribution of finished goods throughout North America, in Latin America, Europe and Asia; and (3) Dedicated Contract Carriage (DCC), which provides vehicles and drivers as part of a dedicated transportation solution, principally in North America.

Beginning in the first quarter of 2002, the primary measurement of segment financial performance, defined as “Net Before Taxes” (NBT), includes an allocation of Central Support Services (CSS) and excludes goodwill impairment, goodwill amortization and restructuring and other unusual recoveries (charges). CSS represents those costs incurred to support all business segments, including sales and marketing, human resources, finance, shared management information systems, customer solutions, health and safety, legal and communications. The objective of the NBT measurement is to provide clarity on the profitability of each business segment and, ultimately, to hold leadership of each business segment and each operating segment within each business segment accountable for their allocated share of CSS costs. To facilitate the comparison of 2002 business segment NBT to prior periods, prior-year goodwill amortization (see “Goodwill and Other Intangible Assets”) is now treated as a corporate, rather than segment, cost and is segregated as such. Prior year segment results have been restated to conform to the new measurement of segment financial performance.

Certain costs are considered to be overhead not attributable to any segment and as such, remain unallocated in CSS. Included among the unallocated overhead remaining within CSS are the costs for investor relations, corporate communications, public affairs and certain executive compensation.

CSS costs attributable to the business segments are generally allocated to FMS, SCS and DCC as follows:

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 of third parties. NBT related to inter-segment equipment and services billed to customers (equipment contribution) is included in both FMS and the business segment, which served the customer, then eliminated.

The following table sets forth equipment contribution included in NBT for the Company’s SCS and DCC segments for the three and nine months ended September 30, 2002 and 2001.

Interest expense is primarily allocated to the FMS business segment; however, with the availability of segment balance sheet information in 2002 (including targeted segment leverage ratios), interest expense (income) is also reflected in SCS and DCC.

The following table sets forth revenue for each of the Company’s business segments for the three and nine months ended September 30, 2002 and 2001. These results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented.

The following table sets forth NBT for each of the Company’s reportable business segments for the three and nine months ended September 30, 2002 and 2001.

The Company is a party to various claims, legal actions and complaints arising in the ordinary course of business. While any proceeding or litigation has an element of uncertainty, management believes that the disposition of these matters will not have a material impact on the consolidated financial position, liquidity or results of operations of the Company.

The Board of Directors and Shareholders

Ryder System, Inc.:

We have reviewed the accompanying consolidated condensed balance sheet of Ryder System, Inc. and subsidiaries as of September 30, 2002, and the related consolidated condensed statements of earnings for the three and nine months ended September 30, 2002 and 2001 and the consolidated condensed statements of cash flows for the nine months ended September 30, 2002 and 2001. These consolidated condensed financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the consolidated condensed financial statements referred to above in order for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Ryder System, Inc. and subsidiaries as of December 31, 2001, and the related consolidated statements of earnings, shareholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated February 7, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 31, 2001, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

As discussed in the notes to the consolidated condensed financial statements, the Company changed its method of accounting for goodwill and other intangible assets in 2002.

Miami, Florida

October 23, 2002

The following discussion should be read in conjunction with the unaudited consolidated condensed financial statements and notes thereto included under ITEM 1. In addition, reference should be made to the Company’s audited consolidated financial statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s most recent Annual Report on Form 10-K.

The Company’s operating segments are aggregated into reportable business segments based primarily upon similar economic characteristics, services and delivery methods. The Company operates in three reportable business segments: (1) Fleet Management Solutions (FMS), which provides full service leasing, commercial rental and programmed maintenance of trucks, tractors and trailers to customers, principally in the U.S., Canada and the United Kingdom; (2) Supply Chain Solutions (SCS), which provides comprehensive supply chain consulting and lead logistics management solutions that support customers’ entire supply chains, from inbound raw materials through distribution of finished goods throughout North America, in Latin America, Europe and Asia; and (3) Dedicated Contract Carriage (DCC), which provides vehicles and drivers as part of a dedicated transportation solution, principally in North America.

Earnings before cumulative effect of change in accounting principle totaled $33.8 million in the third quarter of 2002 compared with a loss of $5.5 million in the same period last year. Earnings before cumulative effect of change in accounting principle increased 334.0 percent to $80.2 million in the nine months ended September 30, 2002 compared with the nine months ended September 30, 2001. The increases in earnings were due primarily to restructuring and other unusual charges of $35.3 million after-tax and $54.1 million after-tax in the three and nine months ended September 30, 2001, respectively, compared with a recovery of $0.5 million after-tax and $1.4 million after-tax in the three and nine months ended September 30, 2002, respectively.

The increases in earnings were 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 “Goodwill and Other Intangible Assets” in the Notes to Consolidated Condensed Financial Statements). Such earnings increases were partially offset by a one-time reduction in deferred taxes of $6.8 million in the second quarter of 2001 as a result of a change in Canadian tax law and higher benefit costs (primarily pension) in the three and nine months ended September 30, 2002, compared with the same periods last year. See “Operating Results by Segment” for a further discussion of operating results for the three and nine months ended September 30, 2002 and 2001.

Revenue decreased 2.4 percent to $1.21 billion in the third quarter of 2002 compared with the same period in 2001. In the nine months ended September 30, 2002, revenue decreased 6.5 percent to $3.57 billion compared with the same period last year. The decreases were primarily a result of the continued slow economic conditions in some industry sectors in the U.S. and in other countries where the Company operates and lower fuel services revenue as a result of lower fuel prices and volumes. During the three and nine months ended September 30, 2002, FMS experienced revenue reductions in full service lease and program maintenance and commercial rental due primarily to reduced variable billings caused by a decrease in transportation miles run by lease and rental vehicles and a smaller overall fleet (primarily rental). SCS revenue increased 0.8 percent in the third quarter of 2002 compared with the same period last year due primarily to increased volumes in the automotive sector, which was offset by reduced volumes in the electronics, high tech and telecommunications, and consumer products industries and certain international SCS operations. SCS revenue declined in the nine months ended September 30, 2002 compared with the same period in 2001 as a result of volume reductions primarily in the electronics, high tech and communications and consumer products sectors, combined with the termination of certain unprofitable business.

Operating expense decreased 5.7 percent to $494.7 million in the third quarter of 2002 compared with the same period in 2001. Operating expense decreased 11.1 percent to $1,457.9 million in the nine months ended September 30, 2002 compared with the nine months ended September 30, 2001. The decreases were due to a reduction in fuel costs as a result of lower prices and volumes in 2002, a reduction in overhead costs due to the Company’s continuing cost containment actions, including the shut-down of certain facilities in 2001, and the cancellation of an information technology outsourcing contract.

Salaries and employee-related costs increased 8.8 percent to $320.3 million in the third quarter of 2002 compared with the same period in 2001. In the nine months ended September 30, 2002, salaries and employee-related costs increased by 3.7 percent to $951.2 million compared with the same period in 2001. The increase in salary and employee-related costs during the three and nine months ended September 30, 2002 was due to higher pension and medical benefit costs, higher salary expense resulting from the in-sourcing of the Company’s IT department finalized in the first quarter of 2002 and higher incentive compensation accruals as compared to the prior year. The increase in pension expense for the first nine months of 2002 was partially offset by decreased salaries and other employee-related costs as a result of strategic initiatives in 2001, which principally impacted first half comparisons. The process resulted in terminations of over 1,400 employees during 2001; approximately 1,000 of which had occurred through the third quarter of 2001.

Pension costs for the full-year 2002 are expected to total approximately $28 million compared with pension income of $0.8 million in 2001. The increase in net pension costs is attributable primarily to the U.S. pension plan and reflects the adverse effect of negative pension asset returns in 2001 as well as a declining interest rate environment resulting in a lower discount rate used to measure benefit obligations. If actual investment returns remain at current levels and interest rates remain unchanged through the remainder of 2002, the Company expects total pension expense for 2003 to increase by $48 to $57 million on a pre-tax basis.

Freight under management (FUM) expense represents subcontracted freight costs on logistics contracts for which the Company purchases transportation. FUM expense increased 0.4 percent to $102.4 million in the third quarter of 2002 compared with the same period in 2001 as a result of increased freight volumes in the automotive sector during the third quarter of 2002. FUM expense decreased 10.8 percent to $302.6 million in the nine months ended September 30, 2002 compared with the nine months ended September 30, 2001. The decrease was due to year-to-date revenue declines principally in the SCS business segment as a result of reduced freight volumes in the U.S. and in South America and the termination of unprofitable business.