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Ryder System 10-K 2005
RYDER SYSTEM, INC. FORM 10-K
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the fiscal year ended December 31, 2004
 
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 LOGO)
RYDER SYSTEM, INC.
(Exact name of registrant as specified in its charter)
     
Florida
  59-0739250
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
 
3600 N.W. 82nd 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 (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes þ         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’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. þ
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes þ         No o
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant computed by reference to the price at which the common equity was sold at June 30, 2004 was $2,527,190,520. The number of shares of Ryder System, Inc. Common Stock ($0.50 par value per share) outstanding at January 31, 2005 was 64,091,863.
     
Documents Incorporated by Reference into this Report   Part of Form 10-K into which Document is Incorporated
Ryder System, Inc. 2005 Proxy Statement
  Part III
Securities registered pursuant to Section 12(b) of the Act:
     
Title of each class   Name of exchange on which registered
Ryder System, Inc. Common Stock ($0.50 par value)
  New York Stock Exchange
 
Ryder System, Inc. 9% Series G Bonds, due May 15, 2016
  New York Stock Exchange
 
Ryder System, Inc. 97/8% Series K Bonds, due May 15, 2017
  New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:         None
 
 


RYDER SYSTEM, INC.
Form 10-K Annual Report
TABLE OF CONTENTS
             
        Page No.
         
 PART I        
 
      1  
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 PART II        
 
      13  
      14  
      15  
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 PART III        
 
      95  
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      96  
      96  
 
 PART IV        
 
      96  
        97  
 SIGNATURES     100  
 Directors Stock Award Plan
 Directors Stock Award Plan as Amended
 EX-10.10
 EX-21.1
 EX-23.1
 EX-24.1
 EX-31.1
 EX-31.2
 EX-32

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PART I
ITEM 1. BUSINESS
OVERVIEW
      Ryder System, Inc., a Florida corporation organized in 1955, is a leader in transportation and supply chain management solutions. Our business is divided into three business segments: Fleet Management Solutions (FMS), which provides leasing, commercial rental and programmed maintenance of commercial trucks, tractors and trailers to customers, principally in the U.S., Canada and the U.K.; Supply Chain Solutions (SCS), which provides comprehensive supply chain consulting and lead logistics management solutions throughout North America and in Latin America, Europe and Asia; and Dedicated Contract Carriage (DCC), which provides vehicles and drivers as part of a dedicated transportation solution in North America.
      Financial information relating to each of our business segments is included in the notes to consolidated financial statements as part of Item 8 of this report.
INDUSTRY AND OPERATIONS
Fleet Management Solutions
      Over the last several years, many key trends have been reshaping the transportation industry, particularly the $56 billion private commercial fleet market and the $25 billion U.S. commercial fleet lease and rental market. Commercial vehicles have become more complicated requiring companies to spend a significant amount of time and money to keep up with new technology, diagnostics, retooling and training. Because of increased demand for convenience, speed and reliability, companies that own and manage their own fleet of vehicles have put greater emphasis on the quality of their preventive maintenance and safety programs. Finally, new regulatory requirements such as regulations covering diesel emissions and the number of off-duty rest hours a driver must take (hours of service regulations) have placed additional administrative burdens on private fleet owners.
      Through our FMS business, we provide our customers with flexible fleet solutions that are designed to improve their competitive position by allowing them to focus on their core business and to redirect their capital to other parts of their business. Our FMS product offering includes a wide-range of full service leasing, commercial rental and programmed maintenance solutions as well as additional value-added fleet support services such as insurance, vehicle administration and fuel services. In addition, we provide our leasing customers with access to a large selection of used trucks, tractors and trailers through our used vehicle sales program.
      For the fiscal year ended December 31, 2004, our global FMS business accounted for 64% of our third-party revenues. Our FMS customers in the U.S. range from small businesses to large national enterprises. These customers operate in a wide variety of industries, the most significant of which include beverage, newspaper, grocery, lumber and wood products, home furnishings and metal. At December 31, 2004, we had a U.S. fleet of approximately 137,800 commercial trucks, tractors and trailers leased or rented through 719 locations in 48 states and Puerto Rico.
      Our domestic FMS business is divided into 7 regions: Northeast, Mid-South, Gulf States, East Central, Midwest, Southwest and West. Each region is divided into 7 to 12 customer business units (CBU) and each CBU contains 7 to 15 branch offices. A branch office typically consists of a maintenance facility or “shop,” offices for sales and other personnel, and in many cases, a commercial rental counter. Our maintenance facilities typically include a service island for refueling, safety inspections and preliminary maintenance checks as well as a shop for preventive maintenance and repairs.
      Full Service Leasing. We target leasing customers that would benefit from outsourcing their fleet management function or upgrading their fleet without having to dedicate a significant amount of their own capital. Under a typical full service lease, we provide the vehicles, programmed maintenance, supplies and related equipment necessary for operation of the vehicles while our customers furnish and supervise their own drivers and dispatch and exercise control over the vehicles. However, our leasing experts will assess a customer’s situation and, after considering the size of the customer, residual risk, balance sheet treatment

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and other factors, will tailor a leasing program that best suits the customer’s needs. Once we have agreed on a leasing program, we acquire vehicles and components that are custom engineered to the customer’s requirements and lease the vehicles to the customers for periods generally ranging from three to seven years. Because we purchase a large number of vehicles from a limited number of manufacturers, we are able to leverage our buying power as well as provide a cost effective alternative to maintaining their own fleet of vehicles. We also offer our leasing customers the additional fleet support services described below. At December 31, 2004, we leased approximately 101,800 vehicles under full service leases in the U.S. At December 31, 2004, we had more than 11,300 full service lease customer accounts in the U.S.
      Commercial Rental. We target rental customers that have a need to supplement their private fleet of vehicles on a short-term basis (typically from less than one month up to one year in length) either because of seasonal increases in their business or discrete projects that require additional transportation resources. Our rental representatives assist our customers in selecting a vehicle that satisfies the customer’s needs and supervise the rental process, which includes execution of a rental agreement and a vehicle inspection. In addition to vehicle rental, we offer our rental customers liability insurance coverage under our existing policies and the benefits of our comprehensive fuel services program. Our commercial rental fleet also provides additional vehicles to our full service lease customers to handle their peak or seasonal business needs. At December 31, 2004 a fleet of approximately 36,000 vehicles, ranging from heavy-duty tractors and trailers to light-duty trucks, was available for commercial short-term rental in the U.S. The rental fleet’s average age was 4.3 years. The utilization rate of the rental fleet during fiscal year 2004 was approximately 77%.
      Programmed Maintenance. Our programmed maintenance customers typically include our full service lease customers as well as customers that want to utilize our extensive network of maintenance facilities and trained technicians to maintain the vehicles they own or lease from third parties, usually a bank or other financial institution. The Ryder Programmed Maintenance service offering is designed to reduce vehicle downtime through preventive/predictive maintenance based on vehicle type and driving habits, vehicle repair including parts and labor, 24-hour emergency roadside service and replacement vehicles for vehicles that are temporarily out of service. These vehicles are typically serviced at our own facilities. However, based on the size and complexity of a customer’s fleet, we may operate an on-site maintenance facility, or captive shop, at the customer’s location. At December 31, 2004, we had 1,400 programmed maintenance customer accounts in the U.S.
      Fleet Support Services. In order to capitalize on our large base of lease customers, we are continuously expanding our fleet support service offerings. Currently we offer the following fleet support services:
     
Service   Description
     
Insurance
  Liability insurance coverage under Ryder’s insurance program which includes monthly invoicing, discounts based on driver performance and vehicle specifications, flexible deductibles and claims administration; gap insurance; fleet risk assessment
 
Safety
  Establishing safety standards; providing safety training, driver certification, prescreening and road tests; safety audits; instituting procedures for transport of hazardous materials; coordinating drug and alcohol testing; loss prevention consulting
 
Fuel
  Fuel purchasing (both in bulk and at the pump) at competitive prices; fuel planning; fuel tax reporting; centralized billing; fuel cards
 
Administrative
  Vehicle use and other tax reporting; permitting and licensing; regulatory compliance (including hours of service administration)
 
Environmental management
  Storage tank monitoring; stormwater management; environmental training; ISO 14001 certification

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      Used Vehicles. We typically sell our used vehicles at one of our 49 sales centers throughout North America, at Ryder branch locations or through our website at www.Usedtrucks.Ryder.com. Before we offer any used vehicle for sale, our technicians assure that it is Road Ready, which means that the vehicle has passed a 43-point performance inspection based on specifications formulated through the Ryder Programmed Maintenance program. Although we typically sell our used vehicles for prices in excess of book value, the extent to which we are able to realize a gain on the sale of used vehicles is dependent upon various factors including the general state of the used vehicle market, the age and condition of the vehicle at the time of its disposal and depreciation rates with respect to the vehicle.
      FMS Business Strategy. Our FMS business strategy revolves around the following interrelated goals and priorities:
  deliver unparalleled maintenance, environmental and safety services to our customers;
 
  offer a wide range of support services that complement our leasing, rental and maintenance businesses;
 
  optimize asset utilization and management; and
 
  offer competitive pricing through cost management initiatives and increased pricing discipline on new business.
      FMS Acquisitions. On March 1, 2004, we completed an asset purchase agreement with Ruan Leasing Company (Ruan) under which we acquired Ruan’s fleet of approximately 6,400 vehicles, 37 of its 111 service locations and more than 500 customers. Ryder also acquired full service contract maintenance agreements covering approximately 1,700 vehicles. Effective December 31, 2003, we also acquired substantially all the assets of Iowa-based General Car and Truck Leasing System (General), a major privately held commercial truck leasing, maintenance and rental company, including General’s fleet of approximately 4,200 vehicles, 15 of its 34 service locations and more than 700 customers. The combined networks operate under Ryder’s name and allow us to leverage our existing U.S. infrastructure in key markets while adding new infrastructure to strengthen our presence in targeted areas of the Midwest, Southeast, Mid-Atlantic and Southwest.
Supply Chain Solutions
      The global supply chain logistics market is estimated to be $200 billion. Several key trends are affecting the market for third party logistics services. Logistics customers are increasingly focused on logistic solutions that leverage information to enhance operating and financial performance demanding more costly IT-based services, including warehouse and transportation management systems, shipment tracking and web-enabled communications systems. Because increased customer expectations, expansion into advanced service offerings and globalization require a more productive and meaningful relationship between logistics providers and their customers, there is an increased emphasis on effective management and relationship processes. Finally, the importance of creating value for logistics customers through operating performance, cost management and service delivery has created a need for innovative broad-based solutions that include a network of service providers.
      Through our SCS business, we offer a complete range of innovative lead logistics management services that are designed to optimize a customer’s global supply chain and address the needs and concerns reflected by the trends previously mentioned. The term supply chain refers to a strategically designed process that directs the movement of materials, funds and related information from the acquisition of raw materials to delivery of finished products to the end-user. Our SCS product offerings are organized into three categories: professional services, distribution operations and transportation solutions. We also offer our SCS customers a variety of information technology solutions, referred to as e-fulfillment, which are an integral part of our other SCS services.
      For the fiscal year ended December 31, 2004, our SCS business accounted for 26% of our revenues. At December 31, 2004, we had 135 SCS customer accounts in the U.S., most of which are large enterprises that maintain large, complex supply chains. These customers operate in a variety of industries

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including automotive, electronics, high-tech, telecommunications, industrial, aerospace, consumer goods, paper and paper products, office equipment, food and beverage, and general retail industries.
      Unlike our FMS operations, which are managed through a network of regional offices, CBUs and branch offices, most of our core SCS business operations in the U.S. revolve around our customers’ supply chain and are strategically located to maximize efficiencies and reduce costs. These SCS facilities are typically leased. Along with those core customer specific locations, we also concentrate certain logistics expertise in locations not associated with specific customer sites. For example, Ryder’s carrier procurement, contract management and freight bill audit and payment services groups operate out of our carrier management center in Ann Arbor, Michigan and our transportation optimization and execution groups operate out of our logistics centers in Farmington Hills, Michigan and Ft. Worth, Texas, respectively.
      We are awarded a significant portion of our SCS business through requests for proposals or RFP processes. Many companies that maintain elaborate supply chain networks, including many of our existing customers, submit an RFP with respect to all or a portion of their supply chain. A team of SCS operations and logistics design specialists as well as representatives from our finance, real estate and information technology departments will formulate a bid that includes a proposed supply chain solution as well as pricing information. The bid may include one or more of the following SCS services.
      Professional Services. Our SCS business offers a variety of consulting services that support every aspect of a customer’s supply chain. Our SCS experts are available to evaluate a customer’s existing supply chain to identify inefficiencies, as well as opportunities for integration and improvement. Once the assessment is complete, we work with the customer to develop a supply chain strategy that will create the most value for the customer and their target clients. Once a customer has adopted a supply chain strategy, a team of SCS logistics experts and representatives from our information technology, real estate, finance and transportation management groups work together to design a strategically focused supply chain solution. The solution may include both a distribution plan that sets forth the number, location and function of each distribution facility and a transportation solution that sets forth the mode or modes of transportation and route selection. In addition to providing the distribution and transportation expertise necessary to implement the supply chain solution, our SCS representatives can coordinate and manage all aspects of the customer’s supply chain provider network to assure consistency, efficiency and flexibility. We also provide transportation consulting services to our SCS customers, which allow us to leverage the expertise and resources of our FMS business.
      Distribution Operations. Our SCS business offers a wide range of services relating to a customer’s distribution operations such as designing a customer’s distribution or warehouse facility, managing the customer’s existing distribution facilities or a facility we acquire in order to provide the agreed-upon services, managing the flow of goods directly from the receiving function to the shipping function (cross-docking), coordinating warehousing and transportation for inbound material flows, handling import/export for international shipments, coordinating just-in-time replenishment of component parts to manufacturing and final assembly, monitoring shipment and inventory status through web-enabled tracking solutions, providing logistics services in connection with the return of products to our customers after delivery to a target client (reverse logistics) and providing additional value-added services such as light assembly of components into defined units (kitting), packaging and refurbishment.
      Transportation Solutions. Our SCS business offers services relating to all aspects of a customer’s transportation network. Our team of transportation experts provides shipment planning and execution, which include shipment consolidation, load scheduling and delivery confirmation through a series of technological and web-based solutions. Our transportation consultants, in conjunction with our Ryder freight brokerage department, focus on carrier procurement of all modes of transportation, rate negotiation and freight bill audit and payment services. In addition, our SCS business provides customers as well as our FMS and DCC businesses with capacity management services that are designed to create load-building opportunities and minimize excess capacity.

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      SCS Business Strategy. Our SCS business strategy revolves around the following interrelated goals and priorities:
  offer strategically-focused comprehensive supply chain solutions to our customers;
 
  leverage the expertise and resources of our FMS business;
 
  achieve strong partnering relationships with our customers;
 
  be a market innovator by continuously improving the effectiveness and efficiency of our solution delivery model;
 
  serve our customer’s global needs as lead manager, integrator and high-value operator; and
 
  create shareholder value for our customers.
Dedicated Contract Carriage
      The U.S. dedicated contract carriage market is estimated to be $8 billion. This market is affected by many of the trends that impact our FMS business such as the increased cost associated with purchasing and maintaining a fleet of vehicles. The administrative burden relating to regulations issued by the Department of Transportation (DOT) regarding driver screening, training and testing as well as record keeping and other costs associated with the new hours of service requirements make our DCC product an attractive alternative to private fleet management. In addition, market demand for just-in-time delivery creates a need for well-defined routing and scheduling plans that are based on comprehensive asset utilization analysis and fleet rationalization studies.
      Through our DCC business segment, we combine the equipment, maintenance and administrative services of a full service lease with additional services to provide a customer with a dedicated transportation solution that is designed to increase their competitive position, improve risk management and integrate their transportation needs with their overall supply chain. Such additional services include driver hiring and training, routing and scheduling, fleet sizing, safety, regulatory compliance, risk management, technology and communication systems support including on-board computers, and other technical support. These additional services allow us to address on behalf of our customers the labor issues associated with maintaining a private fleet of vehicles, such as driver turnover, government regulation, including hours of service regulations, DOT audits and workers compensation.
      Our DCC consultants examine and assess the customer’s transportation needs. In order to customize an appropriate DCC transportation solution for our customers, our DCC logistics specialists perform a transportation analysis using advanced logistics planning and operating tools. Based on this analysis, they formulate a distribution plan that includes the routing and scheduling of vehicles, the efficient use of vehicle capacity and overall asset utilization. The goal of the plan is to create a distribution system that optimizes freight flow while meeting a customer’s service goals. A team of DCC transportation specialists can then implement the plan by leveraging the resources, expertise and technological capabilities of both our FMS and SCS businesses.
      To the extent a distribution plan includes multiple modes of transportation (air, rail, sea and highway), our DCC experts, in conjunction with our SCS transportation specialists, select appropriate transportation modes and carriers, place the freight, monitor carrier performance and audit billing. In addition, through our SCS business, we can reduce costs and add value to a customer’s distribution system by aggregating orders into loads, looking for shipment consolidation opportunities and organizing loads for vehicles that are returning from their destination point back to their point of origin (backhaul).
      Because it is highly customized, our DCC product is particularly attractive to companies that operate in industries that have time-sensitive deliveries or special handling requirements, such as newspapers and refrigerated products, as well as to companies whose distribution system involves multiple stops within a closed loop highway route.

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      For the fiscal year ended December 31, 2004, our DCC business accounted for 10% of our revenues. At December 31, 2004, we had 227 DCC customer accounts in the U.S. Although a significant portion of our DCC operations are located at customer facilities, our DCC business utilizes and benefits from our extensive network of FMS facilities.
      DCC Business Strategy. Our DCC business strategy revolves around the following interrelated goals and priorities:
  align our DCC and SCS businesses to create revenue opportunities and improve operating efficiencies in both segments, particularly through increased backhaul utilization;
 
  increase market share for customers that operate closed loop distribution systems that require a more comprehensive transportation solution;
 
  leverage the expertise and resources of our FMS business; and
 
  expand our DCC support services to create customized transportation solutions for new customers and improve the solutions we have created for existing customers.
International
      In addition to our operations in the U.S., we have FMS and SCS operations in Canada, Latin America, Europe and Asia. We have made it a goal to expand our international operations by leveraging our domestic product offerings and customer base.
      Canada. We have been operating in Canada for over 40 years. Our FMS operations in Canada include full service leasing, commercial rental and programmed maintenance. We also offer fleet support services such as insurance, fuel services and compliance services. At December 31, 2004, we had a fleet of approximately 10,700 commercial trucks, tractors and trailers leased or rented through 42 locations throughout 8 Canadian provinces. At December 31, 2004, we leased vehicles to over 1,200 full service lease customer accounts in Canada.
      Our Canadian SCS operations also include a full range of services including lead logistics management services and distribution and transportation solutions. Given the proximity of this market to our U.S. operations, the Canadian operations are highly coordinated with their U.S. counterparts, managing cross-border transportation and freight movements. At December 31, 2004, we had 55 SCS customer accounts in Canada.
      Europe. We began operating in the U.K. in 1971 and since then have expanded into other parts of Europe including Ireland, Germany and Poland by leveraging our operations in the U.S. and the U.K. Our FMS operations in Europe include full service leasing, commercial rental and programmed maintenance. We also offer fleet support services such as insurance, fuel services, compliance services, driver capability and on-board technology.
      At December 31, 2004, we had a fleet of approximately 12,500 commercial trucks, tractors and trailers leased or rented through 36 locations throughout the U.K. and Germany. We also manage a network of over 450 independent maintenance facilities in the U.K. to serve our customers where we are unable to provide service in a Ryder managed location. In addition to our typical FMS operations, we also supply and manage vehicles, equipment and personnel for military organizations in the U.K. and Germany. At December 31, 2004, we leased vehicles to over 1,100 full service lease customer accounts in the U.K. and Germany.
      Our European operations include a complete range of service offerings including lead logistics management services, distribution and transportation solutions, and logistics consulting and design services. In addition, we operate a comprehensive shipment, planning and execution system through our European transportation management services center located in Düsseldorf, Germany. At December 31, 2004, we had 23 SCS customer accounts in Europe.

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      Latin America. We began operating in Mexico, Brazil and Argentina in the mid-1990s. In all of these markets we offer a full range of SCS services, including managing distribution operations and cross-docking terminals, and designing and managing customer specific transportation solutions. In our Argentina and Brazil operations, we also offer international transportation services for freight moving between these markets, including transportation, backhaul and customs procedure management. Our Mexican operations also manage more than 2,700 border crossings each week between Mexico and the U.S., often highly integrated with our domestic distribution and transportation operations. At December 31, 2004, we had 113 SCS customer accounts in Latin America.
      Asia. We began operating in Asia in 2000 through our acquisition of Ascent Logistics. Although our Asian operations are headquartered in Singapore, we also provide logistics and consulting services in China via our Shanghai office and coordinate logistics activities in countries such as Thailand, India, Malaysia, Australia and New Zealand. We offer a wide range of SCS services to customers in the region, including management of distribution operations, domestic transportation management, coordination, scheduling and management of international freight movement, postponement, bundling and other customization activities, and procurement. At December 31, 2004, we had 79 SCS customer accounts in Asia.
E-Commerce Solutions
      As part of the services provided by our FMS, SCS and DCC business segments, we have developed the following e-commerce solutions:
  e-Fulfillment — provides end-to-end management of the fulfillment channel from order entry to final delivery, including web-enabled inventory visibility, transportation planning/management, value-added services and reverse logistics;
 
  Ryder.com — includes a range of web-enabled tools that allow SCS and DCC customers to access information and enhance supply chain performance;
 
  RyderTrac/ RyderShip/ RyderFlow — web-enabled shipment tracking system;
 
  RyderFleetProducts.com — after market distributor of a complete range of truck parts, shop supplies, safety products and automotive products for private fleets;
 
  Usedtrucks.Ryder.com — listing of Road Ready used vehicles for sale from Ryder’s extensive fleet including maintenance histories; and
 
  RyderSafetyServices.com — after market distributor of a complete range of safety products and services related to fleet management.
Administration
      We have consolidated most of our financial administrative functions for the U.S. and Canada, including credit, billing and collections, into our Shared Services Center, a centralized processing center located in Alpharetta, Georgia. This centralization results in more efficient and consistent centralized processing of selected administrative operations. The Shared Services Center’s main objectives are to reduce on-going annual administrative costs, enhance customer service through process standardization, create an organizational structure that will improve market flexibility and allow future reengineering efforts to be more easily attained at lower implementation costs.
Regulation
      Our business is subject to regulation by various federal, state and foreign governmental entities. The DOT and various state agencies exercise broad powers over certain aspects of our business, generally governing such activities as authorization to engage in motor carrier operations, safety and financial reporting. We are also subject to a variety of requirements of national, state/provincial and local governments, including the Environmental Protection Agency and the Occupational Safety and Health Administration, that regulate safety, the management of hazardous materials, water discharges and air emissions, solid waste disposal and the release and cleanup of regulated substances. We may also be

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subject to licensing and other requirements imposed by the U.S. Department of Homeland Security and U.S. Customs Service as a result of increased focus on homeland security and air C-TPAT certification. We may also become subject to new or more restrictive regulations imposed by these agencies, or other authorities relating to engine exhaust emissions, drivers’ hours of service, security and ergonomics.
      The Environmental Protection Agency has issued regulations that require progressive reductions in exhaust emissions from diesel engines from 2007 through 2010. 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.
Safety
      Safety is an integral part of our strategy because preventing injury and decreasing service interruptions increases efficiency and customer satisfaction. In 2002, we were awarded the Green Cross for Safety from the National Safety Council for our commitment to workplace safety and corporate citizenship.
      Our safety department focuses on (i) recruiting and maintaining qualified drivers; (ii) improving driver and management safety training; (iii) implementing periodic reviews of driver records; (iv) creating incentives for drivers with good safety records; and (v) raising awareness of safety-related issues on a company-wide basis.
      In addition, our safety department develops driver safety and training programs such as hours of service, driving ethics, security and hazmat transport in order to promote safety, customer relations, service standards and productivity. All of our drivers must meet or exceed DOT qualifications. Our safety department updates driver qualification files at least annually to maintain compliance with DOT regulations.
Risk Management
      The nature of our business exposes us to risk of liability for damages arising primarily out of cargo loss and damage, customer-managed inventory shrinkage, vehicle liability, property damage and workers compensation. We are responsible for a deductible for auto liability, physical damage, cargo and workers compensation claims. We maintain insurance with independent insurance carriers that provide coverage for claims in excess of deductible amounts. Management believes that our insurance coverage is adequate.
Competition
      As an alternative to using our services, customers may choose to provide these services for themselves, or may choose to obtain similar or alternative services from other third-party vendors.
      Our 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. Competitive factors include price, equipment, maintenance, service and geographical coverage and, with respect to DCC, driver and operations expertise. We compete with other finance lessors and also to an extent, 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 and contract truck maintenance service and DCC offerings has been, and will continue to be, our emphasis.
      In the SCS business segment, we compete 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 our overriding strategy.

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Employees
      At December 31, 2004, we had approximately 26,300 full-time employees worldwide, of which 22,000 were employed in North America, 2,300 in Latin America, 1,650 in Europe and 350 in Asia. We have approximately 19,900 hourly employees in the United States, approximately 3,200 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, and their wages and benefits are governed by 97 labor agreements that are renegotiated periodically. None of the businesses in which we currently engage have experienced a material work stoppage, slowdown or strike and we consider that our relationship with our employees is good.
EXECUTIVE OFFICERS OF THE REGISTRANT
      All of the executive officers of Ryder were elected or re-elected to their present offices either at or subsequent to the meeting of the Board of Directors held on May 7, 2004 in conjunction with Ryder’s 2004 Annual Shareholders’ Meeting. 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
  55   Chairman, President and Chief Executive Officer
Robert D. Fatovic
  39   Executive Vice President, General Counsel and Corporate Secretary
Art A. Garcia
  43   Vice President and Controller
Gregory F. Greene
  45   Senior Vice President, Strategic Planning and Development
Bobby J. Griffin
  56   Executive Vice President, International Operations
Gregory E. Hyland
  54   Executive Vice President, U.S. Fleet Management Solutions
Tracy A. Leinbach
  45   Executive Vice President and Chief Financial Officer
Vicki A. O’Meara
  47   Executive Vice President and Chief of Corporate Operations
Thomas S. Renehan
  42   Senior Vice President, Asset Management, Sales and Marketing
Robert E. Sanchez
  39   Senior Vice President and Chief Information Officer
Anthony G. Tegnelia
  59   Executive Vice President, U.S. Supply Chain Solutions
Jennifer E. Thomas
  42   Senior Vice President and Chief Human Resources Officer
      Gregory T. Swienton has been Chairman since May 2002, President since June 1999 and Chief Executive Officer since November 2000. 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, Coal and Agricultural Commodities Business Unit.
      Robert D. Fatovic has served as Executive Vice President, General Counsel and Corporate Secretary since May 2004. He previously served as Senior Vice President, U.S. Supply Chain Operations, High-Tech and Consumer Industries from December 2002 to May 2004. Mr. Fatovic joined Ryder’s law department in 1994 as assistant division counsel and has held various positions within the law department including Vice President and Deputy General Counsel.
      Art A. Garcia has served as 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.

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      Gregory F. Greene has served as Senior Vice President, Strategic Planning and Development, since April 2003. He previously served as Senior Vice President, Global Talent Management, from March 2002 to April 2003. Mr. Greene joined Ryder in August 1993 as Manager of Executive and International Compensation and has since held various positions. Prior to joining Ryder, Mr. Greene served as Director of Human Resources for Sunglass Hut, Inc.
      Bobby J. Griffin has been Executive Vice President, International Operations 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.
      Gregory E. Hyland has served as Executive Vice President, U.S. Fleet Management Solutions since October 2004. He previously served as President of the Industrial Products Segment for Textron, Inc. from February 2002 to August 2003 and as Chairman and Chief Executive Officer of Textron Golf, Turf and Specialty Products from January 2001 to January 2002. From September 1997 to December 2000, Mr. Hyland served as President of the Engineered Products Group, Flow Control Division of Tyco International.
      Tracy A. Leinbach has been Executive Vice President and Chief Financial Officer since March 2003. Ms. Leinbach served as Executive Vice President, Fleet Management Solutions, from March 2001 to March 2003; 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 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.
      Vicki A. O’Meara has been Executive Vice President and Chief of Corporate Operations since May 2004. Prior to that, Ms. O’Meara served as Executive Vice President and General Counsel from June 1997 and as Corporate Secretary from February 1998. Prior to joining Ryder, Ms. O’Meara was a partner with the Chicago office of the law firm Jones Day. Previously, she held a variety of 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.
      Thomas S. Renehan has served as Senior Vice President, Asset Management, Sales and Marketing since March 2004. He previously served as Senior Vice President, Asset Management from December 2002 to March 2004 and as Vice President, Asset Management from June 2001 to December 2002. Prior to heading Asset Management, Mr. Renehan served as Vice President, Fleet Management Solutions in the Southwest Region from January 2000 to June 2001. Mr. Renehan joined Ryder in October 1985 and has held various positions with Ryder since that time.
      Robert E. Sanchez has served as Senior Vice President and Chief Information Officer since January 2003. He previously served as Senior Vice President of Global Transportation Management from March 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.

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      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 Ryder including Senior Vice President and Chief Financial Officer of Ryder’s integrated logistics business segment and Senior Vice President, Field Finance.
      Jennifer E. Thomas has served as Senior Vice President and Chief Human Resources Officer, since November 2004. She previously served as Senior Vice President of Operations and practice leader for Organizational Counseling with Right Management Consultants. From 2000 to 2002 she served as the Senior Vice President of Human Resources for Burger King Corporation. Prior to Burger King, Ms. Thomas served as Vice President of Human Resources for Republic Industries, Inc. from 1998 to 2000.
FURTHER INFORMATION
      For further discussion concerning our business, see the information included in Items 7 and 8 of this report. Industry and market data used throughout Item 1 was obtained through a compilation of surveys and studies conducted by industry sources, consultants and analysts.
      We make available free of charge through our website at www.ryder.com our 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.
      In addition, our Corporate Governance Guidelines, Principles of Business Conduct (including our Finance Code of Conduct), and Board committee charters are posted on the Corporate Governance page of our website at www.ryder.com.
ITEM 2. PROPERTIES
      Our properties consist primarily of vehicle maintenance and repair facilities, warehouses and other real estate and improvements.
      We maintain 953 FMS locations in the United States, Puerto Rico and Canada; we own approximately 450 of these facilities and lease the remaining facilities. Our FMS locations generally include a repair shop, fuel service island and administrative offices.
      We also maintain 156 locations in the United States and Canada in connection with our domestic SCS and DCC businesses. Almost all of our SCS locations are leased and generally include a warehouse and administrative offices.
      We maintain 72 international locations (locations outside of the United States and Canada) for our international businesses. These locations are in the U.K., Ireland, Germany, Poland, Mexico, Argentina, Brazil, China, Malaysia and Singapore. The majority of these locations are leased and generally include a repair shop, warehouse and administrative offices.
      On May 18, 2004, we sold our 400,000 square-foot corporate headquarters facility located on a 46.5-acre site. Ryder is currently leasing the property from the purchaser until our new headquarters facility is available in April 2005. We will lease our new 250,000 square-foot headquarters building located within a few miles of Ryder’s existing facility in Miami, Florida. Our decision to sell our current headquarters facility and relocate to a smaller headquarters building arose from the need for a more cost-effective and efficient office space that reflects the business requirements of Ryder today and in the future.

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ITEM 3. LEGAL PROCEEDINGS
      Our subsidiaries are involved in various claims, lawsuits and administrative actions arising in the course of our 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 our consolidated financial condition, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
      There were no matters submitted to a vote of our security holders during the quarter ended December 31, 2004.

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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Ryder Common Stock Prices
                         
    Stock Price   Dividends per
        Common
    High   Low   Share
             
2004
                       
First quarter
  $ 38.99       33.61       0.15  
Second quarter
    40.93       35.13       0.15  
Third quarter
    47.14       37.92       0.15  
Fourth quarter
    55.55       46.21       0.15  
                         
Full year
  $ 55.55       33.61       0.60  
                         
2003
                       
First quarter
  $ 23.94       20.26       0.15  
Second quarter
    27.34       20.00       0.15  
Third quarter
    31.26       23.10       0.15  
Fourth quarter
    34.65       28.14       0.15  
                         
Full year
  $ 34.65       20.00       0.60  
                         
      Our common shares are listed on the New York Stock Exchange. At January  31, 2005, there were 11,906 common stockholders of record and our stock price on the New York Stock Exchange was $45.55.
Purchases of Equity Securities
      The following table provides information with respect to purchases we made of our common stock during the three months ended December 31, 2004 and total repurchases:
                                 
            Total Number of    
            Shares Purchased   Maximum Number of
    Total Number   Average Price   as Part of Publicly   Shares That May Yet
    of Shares   Paid per   Announced   Be Purchased Under
    Purchased(1),(2)   Share   Program(1)   the Program(1)
                 
        (Shares in thousands)    
October 1 through October 31, 2004
    175,755     $ 47.88       170,214       2,467,786  
November 1 through November 30, 2004
    156,138       51.31       154,000       2,313,786  
December 1 through December 31, 2004
    262,917       51.60       168,000       2,145,786  
                                 
Total
    594,810     $ 50.43       492,214       2,145,786  
                                 
 
(1) In July 2004, we announced a two-year share repurchase program providing for the repurchase of up to 3.5 million shares of our common stock. Under the program, we have purchased in open-market transactions a total of 1,354,214 shares of our common stock at December 31, 2004, a portion of which was purchased through a 10b5-1 trading plan.
 
(2) During the three months ended December 31, 2004, we purchased an aggregate of 492,214 shares of our common stock as part of our share repurchase program and an aggregate of 102,596 shares of our common stock in employee-related transactions outside of the share repurchase program. Employee-related transactions include: (i) shares of common stock delivered as payment for the exercise price of options exercised or to satisfy the option holders’ withholding tax liability associated with our stock-based compensation programs and (ii) open-market purchases by the trustee of Ryder’s deferred compensation plan relating to investments by employees in our common stock, one of the investment options available under the plan.

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ITEM 6. SELECTED FINANCIAL DATA
                                           
    Years ended December 31
     
    2004   2003   2002   2001   2000
                     
    (Dollars in thousands, except per share amounts)
Operating Data:
                                       
 
Revenue
  $ 5,150,278       4,802,294       4,776,265       5,006,123       5,336,792  
 
Earnings before accounting changes(1)
  $ 215,609       135,559       112,565       18,678       89,032  
 
Net earnings(1),(2)
  $ 215,609       131,436       93,666       18,678       89,032  
 
Per Common Share Data:
                                       
 
Earnings before accounting changes — Diluted(1)
  $ 3.28       2.12       1.80       0.31       1.49  
 
Net earnings — Diluted(1),(2)
  $ 3.28       2.06       1.50       0.31       1.49  
 
Cash dividends
  $ 0.60       0.60       0.60       0.60       0.60  
 
Book value(3)
  $ 23.48       20.85       17.75       20.24       20.86  
 
Financial Data:
                                       
 
Total asset
  $ 5,637,933       5,287,664       4,766,982       4,927,161       5,474,923  
 
Average assets
  $ 5,459,600       4,964,880       4,845,689       5,156,489       5,691,121  
 
Return on average assets(%)
    3.9       2.6       1.9       0.4       1.6  
 
Average asset turnover(%)
    94.3       96.7       98.6       97.1       93.8  
 
Total debt
  $ 1,783,216       1,815,900       1,551,468       1,708,684       2,016,980  
 
Long-term debt
  $ 1,393,666       1,449,489       1,389,099       1,391,597       1,604,242  
 
Shareholders’ equity(3)
  $ 1,510,188       1,344,385       1,108,215       1,230,669       1,252,708  
 
Debt to equity(%)(3)
    118       135       140       139       161  
 
Average shareholders’ equity(3)
  $ 1,412,039       1,193,850       1,246,068       1,242,543       1,225,910  
 
Return on average shareholders’ equity(%) (3)
    15.3       11.0       7.5       1.5       7.3  
 
Net cash provided by operating activities
  $ 883,034       811,302       614,703       356,671       1,022,967  
 
Capital expenditures
  $ 1,091,582       733,577       582,217       704,566       1,296,218  
 
Other Data:
                                       
 
Average common shares — Diluted (in thousands)
    65,671       63,871       62,587       60,665       59,759  
 
Number of vehicles — Owned and leased
    164,400       160,200       161,400       170,100       176,300  
 
Number of employees
    26,300       26,700       27,800       29,500       33,100  
 
Note: Certain prior year amounts have been reclassified to conform to the current year presentation.
(1) Earnings include restructuring and other (recoveries) charges, net of $(11) million after-tax, or $(0.17) per diluted common share in 2004, $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. Earnings also include goodwill and intangible amortization totaling $12 million after-tax, or $0.19 per diluted common share in 2001 and $10 million after-tax, or $0.17 per diluted common share in 2000. In addition, earnings include net income tax benefits of $9 million, or $0.14 per diluted common share in 2004, associated with developments in various tax matters and $7 million, or $0.11 per diluted common share in 2001, as a result of a change in Canadian tax law that reduced deferred taxes of our Canadian operations.
 
(2) Net earnings for 2003 include the cumulative effect of a change in accounting principle for (i) variable interest entities resulting in an after-tax charge of $3 million, or $0.05 per diluted common share and (ii) costs associated with eventual retirement of long-lived assets primarily relating to components of revenue earning equipment resulting in an after-tax charge of $1 million, or $0.02 per diluted common share. 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.
 
(3) Shareholders’ equity at December 31, 2004, 2003 and 2002 reflects after-tax equity charges of $189 million, $187 million and $229 million, respectively, related to the accrual of additional minimum pension liability.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
      The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with our consolidated financial statements and related notes contained in Item 8 of this report on Form 10-K.
OVERVIEW
      Our business is divided into three business segments: our Fleet Management Solutions (FMS) business segment provides leasing, commercial rental and programmed maintenance of commercial trucks, tractors and trailers to customers, principally in the U.S., Canada and the U.K.; our Supply Chain Solutions (SCS) business segment provides comprehensive supply chain consulting and lead logistics management solutions throughout North America and in Latin America, Europe and Asia; and our Dedicated Contract Carriage (DCC) business segment provides vehicles and drivers as part of a dedicated transportation solution in North America. We operate in extremely competitive markets. Our customers select us based on numerous factors including service quality, price, technology and service offerings. As an alternative to using our services, customers may also choose to provide these services for themselves, or may choose to obtain similar or alternative services from other third-party vendors. Our customer base includes governments and enterprises operating in a variety of industries including automotive, electronics, high-tech, telecommunications, manufacturing, aerospace, consumer goods, paper and paper products, office equipment, food and beverage, and general retail industries.
      Over the past several years we have made significant transformations in our business, addressing many of the fundamental business processes throughout the organization. From 2000 to 2003, we reduced our cost structure and strengthened our balance sheet in order to deliver long-term results to our shareholders and also to make Ryder more competitive in the marketplace. In 2004, we continued this transformation by demonstrating earnings leverage through profitable growth. During 2004, we were successful in growing revenue in our transaction businesses and through strategic acquisitions in our FMS business.
      As discussed in more detail throughout our MD&A, during 2004:
  Net earnings increased 64% to $216 million compared with $131 million in 2003. After-tax earnings in 2004 benefited from gains on the sale of our headquarters complex of $15 million and net income tax benefits of $9 million associated with developments in various tax matters. Excluding these items, the earnings improvement was driven by the positive impact of FMS acquisitions, improved FMS commercial rental performance, higher gains on FMS used vehicle sales, lower pension costs, and reductions in operating expenses stemming from cost management and process improvement actions.
 
  Total revenue increased 7% to $5.2 billion compared with 2003 due to the growth in FMS. During 2004, FMS revenue was positively impacted by acquisitions and higher rental revenue resulting from better pricing and increased activity. Revenue comparisons for 2004 were also favorably impacted by increased FMS fuel services revenue primarily as a result of higher average fuel prices, and foreign currency exchange rate changes related to our international operations.
 
  We continued to target strategic opportunities in FMS. In March, Ryder completed the acquisition of Ruan Leasing Company for $148 million. This acquisition enabled us to leverage our existing infrastructure within FMS and drive profitable growth. We also completed two acquisitions related to FMS at the end of 2003.
 
  Capital expenditures increased to $1.1 billion compared with $734 million in 2003. The increase in capital expenditures was due primarily to increased activity in our full service lease business for both new and replacement vehicles.
 
  Our debt to equity ratio declined to 118% from 135% in 2003. Total obligations to equity ratio declined to 129% from 146% in 2003. The decline in our leverage ratios was driven by our reduced

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  funding needs as a result of improved operating performance and higher proceeds from sales of property and revenue earning equipment.
  The IRS proposed adjustments related to our 1998 to 2000 tax period which were resolved in February 2005. See Note 11, “Income Taxes,” in the Notes to Consolidated Financial Statements.
ITEMS AFFECTING COMPARABILITY BETWEEN PERIODS
FMS Acquisitions
      On March 1, 2004, we completed an asset purchase agreement with Ruan Leasing Company (Ruan) under which we acquired Ruan’s fleet of approximately 6,400 vehicles, 37 of its 111 service locations and more than 500 customers. Ryder also acquired full service contract maintenance agreements covering approximately 1,700 vehicles. Effective December 31, 2003, we also acquired substantially all the assets of General Car and Truck Leasing System (General), a major privately held commercial truck leasing, maintenance and rental company, including General’s fleet of approximately 4,200 vehicles, 15 of its 34 service locations and more than 700 customers. The combined networks operate under Ryder’s name and allow us to leverage our existing U.S. infrastructure in key markets while adding new infrastructure to strengthen our presence in targeted areas of the Midwest, Southeast, Mid-Atlantic and Southwest. The results of these acquisitions have been included in the consolidated results of Ryder since the dates of acquisitions.
Accounting Changes
      As discussed in Note 1, “Summary of Significant Accounting Policies — Consolidation of Variable Interest Entities,” in the Notes to Consolidated Financial Statements, effective July 1, 2003, Ryder consolidated three variable interest entities (VIEs) in connection with the adoption of the Financial Accounting Standards Board’s Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities” (as revised by FIN 46-R issued December 2003). The consolidated VIEs were established as part of previous sale-leaseback transactions of revenue earning equipment in which Ryder sold revenue earning equipment to special-purpose entities and then leased the revenue earning equipment back as lessee under operating lease arrangements. In connection with the sale-leaseback transactions executed in the form of vehicle securitizations and a synthetic leasing arrangement, we provided credit enhancements and residual value guarantees that obligated Ryder to absorb the majority of the expected losses from such entities, if any are realized. Therefore, FIN 46 required that these entities be consolidated. The consolidation of the VIEs did not have a significant impact on our consolidated net earnings; however, reported depreciation expense, equipment rental and interest expense were impacted by the consolidation of the VIEs. In addition, both net cash provided by operating activities and our free cash flow measure increased in 2004 and 2003 due to the add-back of depreciation expense on the VIEs’ revenue earning equipment and net cash used in financing activities also increased due to principal payments on VIEs’ debt.

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CONSOLIDATED RESULTS
                         
    Years ended December 31
     
    2004   2003   2002
             
    (In thousands, except per share
    amounts)
Earnings before income taxes and cumulative effect of changes in accounting principles(1)
  $ 331,122       212,475       175,883  
Provision for income taxes(2)
    115,513       76,916       63,318  
                         
Earnings before cumulative effect of changes in accounting principles(1),(2)
  $ 215,609       135,559       112,565  
                         
Per diluted common share
  $ 3.28       2.12       1.80  
Net earnings(1),(2),(3)
  $ 215,609       131,436       93,666  
Per diluted common share
  $ 3.28       2.06       1.50  
Weighted-average shares outstanding — Diluted
    65,671       63,871       62,587  
 
(1) Results include restructuring and other (recoveries) charges, net of $(11) million after-tax, or $(0.17) per diluted common share, in 2004 and $2 million after-tax, or $0.04 per diluted common share, in 2002. See Note 4, “Restructuring and Other (Recoveries) Charges, Net,” in the Notes to Consolidated Financial Statements for additional discussion.
 
(2) 2004 includes a net income tax benefit of $9 million, or $0.14 per diluted common share, associated with developments in various tax matters. See Note 11, “Income Taxes,” in the Notes to Consolidated Financial Statements for additional discussion.
 
(3) Net earnings for 2003 include the cumulative effect of a change in accounting principle for (i) variable interest entities resulting in an after-tax charge of $3 million, or $0.05 per diluted common share, and (ii) costs associated with eventual retirement of long-lived assets primarily relating to components of revenue earning equipment resulting in an after-tax charge of $1 million, or $0.02 per diluted common share. 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 income taxes and the cumulative effect of changes in accounting principles increased 56% to $331 million in 2004 compared with 2003. Earnings before income taxes in 2004 benefited from gains on the sale of our headquarters complex of $24 million. Net earnings in 2004 benefited from after-tax gains on the sale of our headquarters complex of $15 million, or $0.23 per diluted common share, and a net income tax benefit of $9 million, or $0.14 per diluted common share, associated with developments in various tax matters. Excluding these items, the earnings improvement in 2004 was driven by the positive impact of FMS acquisitions, increased FMS rental pricing and utilization, higher gains on FMS used vehicle sales, lower pension costs, and reductions in operating expenses stemming from cost management and process improvement actions. The earnings growth rate in 2004 exceeded the related earnings per share growth rate because the average number of shares outstanding increased 3% over prior year reflecting the impact of stock issuances under employee stock option and stock purchase plans.
      Earnings before income taxes and the cumulative effect of changes in accounting principles increased 21% to $212 million in 2003 compared with 2002. The increase in earnings was due to reductions in operating expenses stemming from cost management and process improving actions, improved SCS operating performance, better FMS rental pricing, and the impact of favorable exchange rate fluctuations. These earnings increases were partially offset by an increase in annual pension expense that principally impacted our FMS business segment, which employs the majority of the employees that participate in our

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primary U.S. pension plan. See “Operating Results by Business Segment” for further discussion of operating results for the past three years.
                             
    Years ended December 31
     
    2004   2003   2002
             
    (In thousands)
Revenue:
                       
 
Fleet Management Solutions
  $ 3,602,839       3,231,675       3,183,022  
 
Supply Chain Solutions
    1,354,003       1,362,428       1,388,299  
 
Dedicated Contract Carriage
    506,100       514,731       517,961  
 
Eliminations
    (312,664 )     (306,540 )     (313,017 )
                         
   
Total
  $ 5,150,278       4,802,294       4,776,265  
                         
      Total revenue increased 7% to $5.2 billion in 2004 compared with 2003. During 2004, FMS revenue was positively impacted by acquisitions and higher rental revenue resulting from a larger fleet, better pricing and increased activity. FMS acquisitions contributed approximately $177 million for the year ended December 31, 2004. Revenue comparisons were also impacted by increased FMS fuel services revenue primarily as a result of higher average fuel prices, and favorable movements in foreign currency exchange rates related to our international operations. Our businesses realize minimal changes in profitability as a result of higher fuel services revenue as these generally reflect costs that are passed through to our customers. Total revenue included a favorable foreign currency exchange impact of 1.6% due to the strengthening of the British pound and the Canadian dollar. These increases were partially offset by reduced FMS full service lease revenue on our U.S. base business (excluding acquisitions) and the non-renewal of certain customer contracts in our SCS and DCC business segments.
      Total revenue increased 1% to $4.8 billion in 2003 compared with 2002. Comparisons were impacted by increased FMS fuel services revenue as a result of higher average fuel prices. During 2003, FMS was negatively impacted by continued softness in the U.S. economy resulting in reduced full service lease and programmed maintenance demand, as well as the impact of some ancillary business not renewed. These decreases were partially offset by improved commercial rental revenue due to higher pricing. SCS revenue decreased in 2003 compared with 2002 as a result of volume reductions combined with the non-renewal of certain customer contracts. Revenue comparisons were favorably impacted by changes in foreign currency exchange rates and expanded business in Canada, Latin America and Asia. Total revenue included a favorable foreign currency exchange impact of 1.1% due to the strengthening of the British pound and the Canadian dollar offset partially by the weakness of certain Latin American currencies.
                         
    Years ended December 31
     
    2004   2003   2002
             
    (In thousands)
Operating expense
  $ 2,305,703       2,039,156       1,949,384  
Percentage of revenue
    45%       42%       41%  
      Operating expense increased 13% to $2.3 billion in 2004 compared with 2003. The increase was principally a result of increases in fuel costs due to higher average fuel prices in 2004. Operating expense was also impacted by higher maintenance costs resulting from a larger and older vehicle fleet and added operating costs attributed to the FMS acquisitions. Operating expense increased 5% to $2.0 billion in 2003 compared with 2002. The increase was principally a result of increases in fuel costs due to higher average fuel prices in 2003. Operating expense was also impacted by higher maintenance costs as a result of an older fleet, offset by a reduction in overhead spending from ongoing cost management actions.

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    Years ended December 31
     
    2004   2003   2002
             
    (In thousands)
Salaries and employee-related costs
  $ 1,233,038       1,242,930       1,268,704  
Percentage of revenue
    24%       26%       27%  
      Salaries and employee-related costs decreased 1% to $1.2 billion in 2004 compared with 2003. The decrease was primarily a result of lower pension expense and lower headcount in our SCS and DCC business segments caused by the non-renewal of certain contracts, offset in part by higher performance-based incentive compensation. Average headcount decreased 3% in 2004 compared with 2003. The number of employees at December 31, 2004 decreased 1% to approximately 26,300, compared with 26,700 at December 31, 2003.
      Pension expense decreased $19 million in 2004 to $63 million compared with 2003 and principally impacted FMS. The decrease in pension expense is primarily attributable to the U.S. pension plan and reflects the positive impact of higher actual pension asset returns in 2003. We expect pension expense on a pre-tax basis to decrease to approximately $58 million in 2005. Our 2005 pension expense estimates are subject to change based upon the completion of actuarial analysis for all pension plans. See “Critical Accounting Estimates” for further discussion on pension accounting estimates. The anticipated decrease in pension expense would primarily impact our FMS business segment.
      Salaries and employee-related costs decreased 2% to $1.2 billion in 2003 compared with 2002. The decrease was a result of headcount reductions, which offset higher pension expense. Average headcount decreased 6% in 2003 compared with 2002 reflecting the non-renewal of certain customer contracts, the impact of cost management actions and reduced volumes across all business segments.
                         
    Years ended December 31
     
    2004   2003   2002
             
    (In thousands)
Freight under management expense
  $ 426,739       414,284       414,369  
Percentage of revenue
    8%       9%       9%  
      Freight under management (FUM) expense represents subcontracted freight costs on logistics contracts for which Ryder purchases transportation. FUM expense increased 3% to $427 million in 2004 compared with 2003. During 2004, FUM expense in our SCS business segment increased due to the impact of added transportation management-based business and higher average pricing on subcontracted freight costs resulting from increased fuel costs. The volume declines experienced in our SCS business during 2004 were principally attributed to non-transportation based activities. FUM expense was flat in 2003 compared with 2002 as the net volume declines experienced in our SCS business during 2003 was principally attributed to non-transportation management activity.
                         
    Years ended December 31
     
    2004   2003   2002
             
    (In thousands)
Depreciation expense
  $ 706,028       624,580       552,491  
Gains on vehicle sales, net
    (34,504 )     (15,780 )     (14,223 )
Equipment rental
    108,468       200,868       343,531  
      Depreciation expense relates primarily to FMS revenue earning equipment. Depreciation expense increased 13% to $706 million in 2004 compared with 2003. The growth in depreciation expense during 2004 reflected the consolidation of VIEs effective July 1, 2003 (approximately $40 million), the impact of vehicles added as part of the recent FMS acquisitions, the conversion of leased units to owned status as a result of lease extensions and the replacement of expiring leased units with owned units. See discussion on FMS in “Operating Results by Business Segment” for further detail on vehicle counts. Depreciation expense increased 13% to $625 million in 2003 compared with 2002. Although the overall fleet size (owned and leased) declined 3% during 2003, depreciation expense grew because of an increase in the average number of owned (compared with leased) revenue earning equipment units as a result of the

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consolidation of VIEs effective July 1, 2003 (approximately $40 million), the conversion of leased units to owned status on lease extensions and the replacement of expiring leased units with owned units.
      Gains on vehicle sales, net increased 119% to $35 million in 2004 compared with 2003 and 11% to $16 million in 2003 compared with 2002. The increases in gains on vehicle sales were due to increases in the number of FMS unit sales of owned vehicles and improvements in the average pricing on vehicles sold over the preceding periods.
      We periodically review and adjust 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 “Critical Accounting Estimates” for further discussion on depreciation and residual value guarantees. While we believe that the carrying values and estimated sales proceeds for revenue earning equipment are appropriate, there can be no assurance that a deterioration in economic conditions or adverse changes to expectations of future sales proceeds will not occur, resulting in losses on disposal.
      Equipment rental primarily consists of rental costs on revenue earning equipment in FMS. Equipment rental costs decreased 46% to $108 million in 2004 compared with 2003. The significant decrease in 2004 was due to a reduction in the average number of leased vehicles (compared with owned) resulting from the consolidation of VIEs effective July 1, 2003 (approximately $50 million), the conversion of leased units to owned status as a result of lease extensions and the replacement of expiring lease units with owned units. Equipment rental costs decreased 42% to $201 million in 2003 compared with 2002. The decrease was due to a reduction in the average number of leased vehicles (compared with owned) resulting from the consolidation of VIEs effective July 1, 2003 (approximately $50 million), term extensions and an overall decline in fleet size, which principally impacted equipment under lease.
                         
    Years ended December 31
     
    2004   2003   2002
             
    (In thousands)
Interest expense
  $ 100,114       96,169       91,718  
Percentage of revenue
    2%       2%       2%  
      Interest expense increased 4% to $100 million in 2004 compared with 2003. The increase in interest expense reflects higher average debt levels, including debt of consolidated VIEs. Excluding interest expense from consolidated VIEs, comparisons for 2004 were favorably impacted by overall lower market interest rates and reduced effective interest rates as a result of hedging transactions, which principally benefited FMS. Interest expense increased 5% to $96 million in 2003 compared with 2002. The increase in interest expense reflects the impact of interest expense of approximately $10 million on debt of VIEs consolidated effective July 1, 2003, partially offset by overall lower market interest rates and reduced effective interest rates as a result of hedging transactions, which principally benefited FMS.
                         
    Years ended December 31
     
    2004   2003   2002
             
    (In thousands)
Miscellaneous income, net
  $ (8,754 )     (12,158 )     (9,808 )
      Miscellaneous income, net decreased to $9 million in 2004 compared with 2003. Miscellaneous income, net decreased because of the elimination of servicing fee income related to certain VIEs. Prior to the consolidation of VIEs effective July 1, 2003, miscellaneous income, net included fee income related to administrative services provided to vehicle lease trusts in connection with vehicle securitization transactions. As a result of consolidating the vehicle securitization trusts, we no longer recognize service fee income.
      Miscellaneous income, net increased to $12 million in 2003 compared with 2002. During 2003, miscellaneous income, net was favorably impacted from a $2 million gain on sale of a facility in our European FMS operations, better market performance of investments classified as trading securities used to fund certain benefit plans and lower losses on the sale of trade receivables related to the decreased use

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of our revolving receivables financing program. These positive factors were partially offset by the elimination of servicing fee income related to the vehicle lease trusts.
                         
    Years ended December 31
     
    2004   2003   2002
             
    (In thousands)
Restructuring and other (recoveries) charges, net
  $ (17,676 )     (230 )     4,216  
      Restructuring and other (recoveries) charges, net in 2004 relate primarily to $24 million in gains from properties sold in connection with the relocation of our headquarters complex. During 2004 we also recorded other charges related to the termination of certain services covered by an information technology contract. In accordance with the terms of the services agreement, Ryder notified the information technology services provider of its intent to terminate certain services and recorded charges totaling $8 million for contract termination ($6 million) and transition costs incurred since termination ($2 million). By December 31, 2004, all transition activities were completed and we expect future cost reductions associated with the termination of these services to benefit our results starting in 2005.
      Restructuring and other (recoveries) charges, net were $(0.2) million in 2003. During 2003, Ryder approved a plan to eliminate approximately 140 positions as a result of on-going cost management and process improvement actions in Ryder’s FMS and SCS business segments and Central Support Services (CSS). The charge related to these actions included severance and employee-related costs totaling $6 million. These charges were offset by the settlement of a commercial dispute pertaining to prior billings with an information technology vendor, gains on sales of owned facilities identified for closure in prior restructuring charges, and reversals of severance and employee-related costs associated with prior restructuring charges.
      Restructuring and other (recoveries) charges, net were $4 million in 2002. During the fourth quarter of 2002, Ryder approved a plan to eliminate approximately 140 positions as a result of cost management actions principally in our SCS business segment and CSS, which were substantially finalized at December 31, 2002. The charge related to these actions included severance and employee-related costs totaling $7 million. These charges were offset by net gains on sales of owned facilities identified for closure in prior restructuring charges, reversals of severance and employee-related costs associated with prior restructuring charges and the final settlement of insurance reserves attributed to a previously sold business.
      See Note 4, “Restructuring and Other (Recoveries) Charges,” in Notes to Consolidated Financial Statements for further discussion.
                         
    Years ended December 31
     
    2004   2003   2002
             
    (In thousands)
Provision for income taxes
  $ 115,513       76,916       63,318  
Effective tax rate
    34.9%       36.2%       36.0%  
      The 2004 effective tax rate reflects the completion of the audit of our federal income tax returns for the 1995 to 1997 period, partially offset by provisions made for loss contingencies related to recent developments in the audit of our federal income tax returns for the 1998 through 2000 period. The net effect of these items was an increase in net earnings of $9 million.

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OPERATING RESULTS BY BUSINESS SEGMENT
                             
    Years ended December 31
     
    2004   2003   2002
             
    (In thousands)
Revenue:
                       
 
Fleet Management Solutions
  $ 3,602,839       3,231,675       3,183,022  
 
Supply Chain Solutions
    1,354,003       1,362,428       1,388,299  
 
Dedicated Contract Carriage
    506,100       514,731       517,961  
 
Eliminations
    (312,664 )     (306,540 )     (313,017 )
                         
   
Total
  $ 5,150,278       4,802,294       4,776,265  
                         
NBT:
                       
 
Fleet Management Solutions
  $ 312,706       194,940       214,692  
 
Supply Chain Solutions
    37,079       40,064       (7,485 )
 
Dedicated Contract Carriage
    29,450       35,259       32,113  
 
Eliminations
    (32,728 )     (33,586 )     (34,636 )
                         
      346,507       236,677       204,684  
Unallocated Central Support Services
    (33,061 )     (24,432 )     (24,585 )
Restructuring and other recoveries (charges), net
    17,676       230       (4,216 )
                         
Earnings before income taxes and cumulative effect of changes in accounting principles
  $ 331,122       212,475       175,883  
                         
      We define the primary measurement of our segment financial performance as “Net Before Tax” (NBT) which includes an allocation of CSS and excludes restructuring and other recoveries (charges), net. CSS represents those costs incurred to support all of our 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 of our business segments 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. In 2004, we changed our methodology of allocating sales support costs between FMS and DCC segments and allocating insurance related costs between FMS, SCS and DCC segments. Accordingly, 2003 and 2002 segment NBT measures have been adjusted to provide the retroactive effect of these changes.
      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. See Note 22, “Segment Reporting,” in the Notes to Consolidated Financial Statements for a description of how the remainder of CSS costs is allocated to the business segments.
      Our FMS segment leases revenue earning equipment and provides fuel, maintenance and other ancillary services to our SCS and DCC segments. Inter-segment revenue 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”).

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      The following table sets forth equipment contribution included in NBT for our SCS and DCC segments:
                             
    Years ended December 31
     
    2004   2003   2002
             
    (In thousands)
Equipment Contribution:
                       
 
Supply Chain Solutions
  $ 14,971       15,319       15,454  
 
Dedicated Contract Carriage
    17,757       18,267       19,182  
                         
   
Total
  $ 32,728       33,586       34,636  
                         
      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
                           
    Years ended December 31
     
    2004   2003   2002
             
    (In thousands)
Full service lease and programmed maintenance
  $ 1,896,041       1,791,478       1,795,254  
Commercial rental
    590,984       490,864       458,355  
Other
    313,616       308,606       346,770  
                         
Dry revenue(1)
    2,800,641       2,590,948       2,600,379  
Fuel services revenue
    802,198       640,727       582,643  
                         
 
Total revenue
  $ 3,602,839       3,231,675       3,183,022  
                         
Segment NBT
  $ 312,706       194,940       214,692  
                         
Segment NBT as a % of total revenue
    8.7%       6.0%       6.7%  
                         
Segment NBT as a % of dry revenue(1)
    11.2%       7.5%       8.3%  
                         
 
(1) We use dry revenue, a non – GAAP financial measure, to evaluate the operating performance of our FMS business segment and as a measure of sales activity. Fuel services revenue, which is directly impacted by fluctuations in market fuel prices, is excluded from our dry revenue computation, as fuel is largely a pass-through to customers for which we realize minimal changes in profitability as a result of fluctuations in fuel services revenue.
2004 versus 2003
      FMS total revenue increased 11% to $3.6 billion in 2004 compared with 2003. Fuel services revenue increased 25% to $802 million primarily as a result of higher average fuel prices and higher volumes attributed to recent acquisitions. Dry revenue (revenue excluding fuel) increased 8% to $2.8 billion in 2004 compared with 2003. FMS acquisitions contributed approximately $177 million of revenue in 2004. FMS total revenue and dry revenue comparisons for 2004 also benefited from favorable foreign currency exchange rates. FMS total revenue included a favorable foreign currency exchange impact of 1.6%.
      Full service lease and programmed maintenance revenue increased 6% to $1.9 billion in 2004 compared with 2003 primarily from acquisitions that added approximately 7,000 vehicles to our lease fleet. Comparisons were also favorably impacted by higher revenue in Canada and the U.K. as a result of favorable foreign currency exchange rates and higher volumes. These increases were partially offset by reduced full service lease revenue on our base U.S. business (excluding acquisitions) as a result of weak leasing demand in 2003 and flat net sales in 2004. In 2005, we expect growth in full service lease and programmed maintenance revenue due to recent sales activity and continued emphasis on initiatives aimed at generating new sales.
      Commercial rental revenue increased 20% to $591 million in 2004 compared with 2003. Commercial rental revenue increased as a result of higher rental pricing and utilization in each of our markets and a

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larger fleet size. Commercial rental revenue in 2004 also benefited from revenue contributions attributed to the recent acquisitions. U.S. rental fleet utilization increased to 77% in 2004 compared with 72% in 2003. In the U.S., pure rental revenue (total revenue less rental revenue related to units provided to full service lease customers), which accounts for over half of the U.S. commercial rental business, increased 14% to $269 million in 2004 compared with $235 million in 2003 due to stronger pricing and increased rental activity. Lease customer revenue primarily represents rental vehicles provided to our existing full service lease customers, generally during peak periods in their operations. In the U.S., lease customer revenue increased 29% to $224 million in 2004 compared with the prior year. Rental statistics presented are for the U.S. fleet, which generates more than 80% of total commercial rental revenue. We expect commercial rental revenue comparisons to continue to improve in 2005 based on the increases in rental transactions, improved pricing discipline and an overall larger commercial rental fleet.
      Other FMS revenue, which consists of trailer rentals, other maintenance and repairs services and ancillary revenue to support product lines, increased 2% to $314 million in 2004 compared with 2003. Other revenue increased due primarily to higher trailer utilization and higher overall volumes. We expect modest improvements in 2005 due to recent increases in U.S. activity.
      FMS NBT increased 60% to $313 million in 2004 compared with 2003. The increase was driven by the acquisitions that allowed us to leverage our existing infrastructure, improved commercial rental results from higher rental pricing and utilization, higher gains on disposal of used revenue earning equipment from stronger pricing and volume, and lower pension costs. The impact of these items was partially offset by lower full service lease and programmed maintenance revenue on our base business (excluding acquired contracts).
2003 versus 2002
      FMS total revenue increased 2% to $3.2 billion in 2003 compared with 2002. Revenue in 2003 was impacted by increases in fuel services revenue as a result of higher average fuel prices, particularly during the first half of 2003. Dry revenue totaling $2.6 billion remained unchanged in 2003 compared with 2002. In 2003, FMS total revenue and dry revenue also benefited from favorable foreign currency exchange rates. FMS total revenue included a favorable foreign currency exchange impact of 1.4%.
      Full service lease and programmed maintenance revenue remained unchanged in 2003 as compared to 2002 due to the effects of weak leasing demand in the U.S., a reduction in fleet size and fewer total miles run by leased vehicles, which resulted in decreased variable billings. The impact of these negative factors was partially offset by higher revenue in Canada and the U.K. as a result of favorable exchange rates and higher volumes.
      Commercial rental revenue increased 7% to $491 million in 2003 compared with 2002 primarily as a result of stronger pricing throughout 2003. U.S. rental fleet utilization for 2003 of 72% was unchanged from 2002. Other FMS revenue decreased 11% to $309 million in 2003 compared with 2002 due primarily to the non-renewal of a customer contract to provide ancillary fleet services that expired at the end of the first quarter of 2003.
      FMS NBT decreased 9% to $195 million in 2003 compared with 2002. The decrease was due primarily to higher pension expense of $48 million in 2003 as compared with 2002. NBT comparisons were also adversely impacted by lower lease revenue and the non-renewal of a contract to provide ancillary fleet services. The impact of these items was partially offset by higher commercial rental pricing, improved asset management performance resulting from lower vehicle counts and carrying costs, reduced operating expenses as a result of our cost management and process improvement actions and the impact of favorable exchange rate fluctuations.

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      Our fleet of owned and leased revenue earning equipment is summarized as follows (number of units rounded to the nearest hundred):
                     
    December 31
     
Number of Units   2004   2003
         
By type:
               
 
Trucks
    63,700       62,400  
 
Tractors
    51,700       48,900  
 
Trailers
    43,100       43,200  
 
Other
    5,900       5,700  
                 
   
Total
    164,400       160,200  
                 
By product line:
               
 
Full service lease
    119,700       118,900  
 
Commercial rental
    41,700       38,500  
 
Service and other vehicles
    3,000       2,800  
                 
   
Total
    164,400       160,200  
                 
 
Owned(1)
    157,000       150,200  
Leased
    7,400       10,000  
                 
   
Total
    164,400       160,200  
                 
Full year average
    164,300       160,000  
                 
 
(1) Effective March 1, 2004, approximately 6,400 units were added to the fleet as part of the Ruan acquisition.
     The totals in the table above include the following non-revenue earning equipment (number of units rounded to the nearest hundred):
                     
    December 31
     
Number of Units   2004   2003
         
Not yet earning revenue (NYE)
    1,900       1,100  
No longer earning revenue (NLE):
               
 
Units held for sale
    4,800       5,000  
 
Other NLE units
    1,600       2,000  
                 
   
Total(1)
    8,300       8,100  
                 
 
(1) Non-revenue earning equipment for FMS operations outside the U.S. totaled approximately 1,500 vehicles in 2004 and 1,000 vehicles in 2003, which are not included above.
     NYE units represent new vehicles 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 equipment. NLE units represent vehicles held for sale, as well as vehicles 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 awaiting redeployment. The number of NYE units increased during the year consistent with the anticipated higher level of new vehicles coming into the fleet for replacement lease equipment and new lease sales. We would expect this number to grow in 2005 as the volume of lease activity increases. In 2004, the number of other NLE units declined as a result of improved rental utilization.

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Supply Chain Solutions
                             
    Years ended December 31
     
    2004   2003   2002
             
    (In thousands)
U.S. operating revenue:
                       
 
Automotive, aerospace and industrial
  $ 425,103       419,655       439,489  
 
High-tech and consumer industries
    230,030       247,475       295,428  
 
Transportation management
    20,331       15,076       14,649  
                         
U.S. operating revenue
    675,464       682,206       749,566  
International operating revenue
    261,479       270,316       228,206  
                         
   
Total operating revenue(1)
    936,943       952,522       977,772  
Freight under management (FUM) expense
    417,060       409,906       410,527  
                         
   
Total revenue
  $ 1,354,003       1,362,428       1,388,299  
                         
 
Segment NBT
  $ 37,079       40,064       (7,485 )
                         
Segment NBT as a % of total revenue
    2.7%       2.9%       (0.5% )
                         
Segment NBT as a % of operating revenue(1)
    4.0%       4.2%       (0.8% )
                         
 
(1) We use operating revenue, a non – GAAP financial measure, to evaluate the operating performance of our SCS business segment and as a measure of sales activity. FUM expense is deducted from total revenue to arrive at our operating revenue computation as FUM expense is largely a pass-through to customers. Ryder realizes minimal changes in profitability as a result of fluctuations in FUM expense.
2004 versus 2003
      SCS total revenue remained flat at $1.4 billion in 2004 compared with 2003. SCS total revenue included a favorable foreign currency exchange impact of 2%. Operating revenue (which excludes FUM) decreased 2% to $937 million in 2004 compared with 2003. U.S. and international operating revenue comparisons were negatively impacted by the non-renewal of certain customer contracts. Additionally, international operating revenue in 2003 included $21 million associated with an inventory procurement contract, the terms of which were favorably renegotiated in the first quarter of 2004 to eliminate inventory risk and required net revenue reporting on a prospective basis. The unfavorable operating revenue comparisons were partially offset by new contract start-ups and expansions in the U.S., Canada and Latin America and favorable foreign currency exchange rates. SCS operating revenue included a favorable foreign currency exchange impact of 1.6%. We are encouraged by recent sales activity and expect to convert more sales proposals into new contracts in 2005 by expanding sales efforts. As we enter 2005, we are watchful of economic indicators in the U.S. automotive sector, which currently suggest weaker volumes in the first half of 2005.
      SCS NBT decreased 7% to $37 million in 2004 compared with 2003. The decrease in SCS NBT for 2004 was due primarily to lower operating revenue. The impact of revenue declines during 2004 was partially offset by reduced overhead spending through continued profit improvement actions.
2003 versus 2002
      SCS total revenue decreased 2% to $1.4 billion in 2003 compared with 2002. Operating revenue decreased 3% to $953 million in 2003 compared with 2002. U.S. operating revenue decreased 9% in 2003 compared with 2002 as a result of reduced volume levels in some of our customer segments and the non-renewal of certain contracts. The revenue reductions in the U.S. were partially offset by increased volumes and expanded business in Canada, Latin America and Asia, as well as the favorable impact of exchange rates. SCS total and operating revenue included a favorable foreign currency exchange impact of 0.6% due

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to the strengthening of the British pound and the Canadian dollar offset partially by the weakness of certain Latin American currencies. International revenue comparisons were also favorably impacted by revenue from an inventory procurement contract that generated $21 million in revenue in 2003. In the first quarter of 2004, the terms of this contract were favorably renegotiated to eliminate inventory risk and required net revenue reporting on a prospective basis.
      SCS NBT improved to $40 million in 2003 compared with a deficit of $7 million in 2002. Despite lower operating revenue in 2003, SCS improved results were driven by numerous profit improvement actions implemented by management, which reduced overhead costs and improved global operating performance.
Dedicated Contract Carriage
                           
    Years ended December 31
     
    2004   2003   2002
             
    (In thousands)
Operating revenue(1)
  $ 496,421       510,353       514,119  
Freight under management (FUM) expense
    9,679       4,378       3,842  
                         
 
Total revenue
  $ 506,100       514,731       517,961  
                         
 
Segment NBT
  $ 29,450       35,259       32,113  
                         
Segment NBT as a % of total revenue
    5.8%       6.8%       6.2%  
                         
Segment NBT as a % of operating revenue(1)
    5.9%       6.9%       6.2%  
                         
 
(1) We use operating revenue, a non – GAAP financial measure, to evaluate the operating performance of our DCC business segment and as a measure of sales activity. FUM expense is deducted from total revenue to arrive at our operating revenue computation as FUM expense is largely a pass-through to customers. Ryder realizes minimal changes in profitability as a result of fluctuations in FUM expense.
2004 versus 2003
      DCC revenue decreased 2% to $506 million in 2004 compared with 2003. DCC operating revenue decreased 3% to $496 million in 2004 compared with 2003. The revenue decrease was due to the non-renewal of certain customer contracts, partially offset by the pass-through of higher average fuel prices. NBT decreased 16% to $29 million in 2004 compared with 2003. The decrease in NBT for 2004 reflects the impact of lower revenue, increased driver costs and higher safety and insurance expenses partially offset by lower overhead spending. In 2005, we expect to complete the operational integration of our DCC business with our SCS organization. We expect this action along with the projected expansion of our SCS/ DCC sales organizations to accelerate revenue growth in 2005.
2003 versus 2002
      DCC total revenue decreased 1% to $515 million in 2003 compared with 2002. DCC operating revenue decreased 1% to $510 million in 2003 compared with 2002. Reduced volumes associated with customer contracts not renewed were partially offset by the pass-through of higher average fuel prices in 2003. NBT increased 10% to $35 million in 2003 compared with 2002. The increase in NBT for 2003 reflects decreased overhead spending and improved operating performance. These improvements were partially offset by the impact of customer contracts not renewed. Lower salaries and employee-related costs, sales and marketing costs, and insurance costs contributed to the lower overhead spending.

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Central Support Services
      CSS expenses were as follows:
                           
    Years ended December 31
     
    2004   2003   2002
             
    (In thousands)
Sales and marketing
  $ 7,057       8,964       12,636  
Human resources
    13,982       18,000       21,151  
Finance
    56,136       55,180       58,498  
Corporate services/public affairs
    9,196       7,314       7,672  
Information technology
    69,457       78,084       89,092  
Health and safety
    8,303       8,199       9,192  
Other
    50,480       37,275       35,191  
                         
 
Total CSS
    214,611       213,016       233,432  
Allocation of CSS to business segments
    (181,550 )     (188,584 )     (208,847 )
                         
 
Unallocated CSS
  $ 33,061       24,432       24,585  
                         
2004 versus 2003
      Total CSS increased 1% to $215 million in 2004 compared with 2003. The increase in total CSS expenses during 2004 compared with 2003 was due to higher performance-based incentive compensation costs attributed to the improved overall performance. This increase was partially offset by on-going cost containment and process improvement actions, most notably in information technology (IT). Technology costs were lower in 2004 due primarily to reduced pricing on purchased IT services. Unallocated CSS expenses for 2004 were up largely due to Sarbanes-Oxley compliance costs that were not allocated to the business segments and higher performance-based incentive compensation. We expect reductions in CSS spending levels over the near term based on continuing cost containment and process improvement actions.
2003 versus 2002
      Total CSS decreased 9% to $213 million in 2003 compared with 2002. The decrease in total CSS expense was due to cost reductions across substantially all functional areas as a result of our continued cost management and process improvement actions, most notably in IT. Technology costs were lower in 2003 as a result of reduced pricing on purchased IT services and the impact of insourcing certain IT services during the first quarter of 2002.
FINANCIAL RESOURCES AND LIQUIDITY
Cash Flows
      The following is a summary of our cash flows from operating, financing and investing activities:
                             
    Years ended December 31
     
    2004   2003   2002
             
    (In thousands)
Net cash provided by (used in):
                       
 
Operating activities
  $ 883,034       811,302       614,703  
 
Financing activities
    (195,760 )     (232,796 )     (269,508 )
 
Investing activities
    (726,930 )     (542,116 )     (358,824 )
                         
   
Net cash flows from operations
  $ (39,656 )     36,390       (13,629 )
                         
      A detail of the individual items contributing to the cash flow changes is included in the Consolidated Statements of Cash Flows.
      Cash provided by operating activities increased in 2004 compared with 2003 due primarily to improved operating performance and the add-back of depreciation expense attributed to VIEs that were

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consolidated effective July 1, 2003. The increase in cash from operating activities in 2003 compared with 2002 was primarily attributable to changes in the aggregate balance of trade receivables sold, improved operating performance and reduced working capital needs. This increase was partially offset by higher discretionary cash contributions to our defined benefit pension plans.
      Cash used in financing activities decreased in 2004 compared with 2003 as higher debt borrowings and proceeds from stock option exercises were partially offset by increased stock repurchases. Cash used in financing activities decreased in 2003 compared to 2002 due to lower debt payments and increased proceeds from stock option exercises. Debt levels in 2003 compared with 2002 were also impacted by the conversion of off-balance sheet obligations to debt attributed to VIEs consolidated effective July 1, 2003. Principal payments on consolidated VIE debt totaled $119 million in 2003.
      Cash used in investing activities increased in 2004 compared with 2003 due to higher capital expenditures and payments made in connection with FMS acquisitions. Capital expenditures increased in 2004 due to planned higher levels of vehicle replacements for equipment under lease to our customers and new lease sales. The increase in capital spending was partially offset by higher proceeds from the sale of used vehicles, the sale of our corporate headquarters complex and sale-leaseback transactions completed during the third quarter of 2004. Cash used in investing activities increased in 2003 compared with 2002 due to higher capital expenditures, primarily to refresh our commercial rental fleet. Additionally, 2003 investing activities reflect payments made in connection with FMS acquisitions.
      We manage our business to maximize operating cash flows and proceeds from the sale of revenue earning equipment as the principal sources of liquidity. We refer to the net amount of cash generated from operating activities (excluding changes in the aggregate balance of trade receivables sold) and investing activities as “free cash flow.” Although free cash flow is a non-GAAP financial measure, we consider it to be an important measure of comparative operating performance. We believe free cash flow provides investors with an important perspective on the cash available for debt service and for shareholders after making capital investments required to support ongoing business operations. Our calculation of free cash flow may be different from the calculation used by other companies and therefore comparability may be limited.
      The following table shows the sources of our free cash flow computation:
                         
    Years ended December 31
     
    2004   2003   2002
             
    (In thousands)
Net cash provided by operating activities
  $ 883,034       811,302       614,703  
Changes in the aggregate balance of trade receivables sold
                110,000  
Collections on direct finance leases
    63,795       61,368       66,489  
Sales of property and revenue earning equipment
    352,335       222,888       152,685  
Sale and leaseback of revenue earning equipment
    96,801              
Purchases of property and revenue earning equipment
    (1,091,582 )     (733,577 )     (582,217 )
Acquisitions
    (148,791 )     (96,518 )      
Other, net
    512       3,723       4,219  
                         
Free cash flow
  $ 156,104       269,186       365,879  
                         
      Free cash flow decreased in 2004 compared with 2003 as higher capital spending and payments made in connection with FMS acquisitions offset better operating performance, higher proceeds from sales of used vehicles, the sale of our corporate headquarters complex and sale-leaseback transactions. Net cash provided by operating activities and free cash flow comparisons in the first half of 2004 were also positively impacted by the add-back of depreciation expense of approximately $40 million attributed to VIEs that were consolidated as a result of the adoption of FIN 46 on July 1, 2003. Free cash flow decreased in 2003 compared with 2002 as higher capital spending, including acquisitions, offset better operating performance and higher proceeds from sale of used vehicles. We expect free cash flow levels to decline in 2005 as a result of the increased capital spending requirements and increased income tax payments, including the

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payment made in connection with the audit of our federal income tax returns for the 1998 to 2000 tax period.
      Our FMS operations are capital intensive, characterized by significant investments primarily in vehicles (revenue earning equipment). Operating property and equipment expenditures primarily relate to FMS and SCS spending on items such as vehicle maintenance facilities and equipment, computer and telecommunications equipment, and warehouse facilities and equipment. The following is a summary of capital expenditures:
                             
    Years ended December 31
     
    2004   2003   2002
             
    (In thousands)
Revenue earning equipment:(1)
                       
 
Full service lease
  $ 862,994       459,239       536,151  
 
Commercial rental
    241,858       219,880       20,177  
                         
      1,104,852       679,119       556,328  
Operating property and equipment
    59,767       46,011       43,973  
                         
   
Total capital expenditures
    1,164,619       725,130       600,301  
Changes in accounts payable related to purchases of revenue earning equipment
    (73,037 )     8,447       (18,084 )
                         
Cash paid for purchases of property and revenue earning
equipment
  $ 1,091,582       733,577       582,217  
                         
 
(1) Capital expenditures exclude non-cash additions of approximately $54 million, $67 million and $67 million in 2004, 2003 and 2002, respectively, in assets held under capital leases resulting from the extension of existing operating leases and other additions.
     Capital expenditures increased in 2004 compared with 2003 due primarily to increased activity in our full service lease business for both new and replacement vehicles. Capital expenditures increased in 2003 compared with 2002 due to higher levels of vehicle replacements, primarily for the commercial rental fleet. Vehicle capital spending levels were relatively low in 2003 and 2002 as we focused efforts on extending leases with existing customers, redeploying surplus assets and right-sizing our fleet. As a result of our fleet age and anticipated higher levels of new sales activity, total capital expenditures are anticipated to increase to approximately $1.4 billion in 2005, including vehicle replacements of approximately $1.0 billion and spending for anticipated incremental growth of approximately $300 million. We expect to fund 2005 capital expenditures with both internally generated funds and additional financing.
      In March 2004, Ryder completed one acquisition related to the FMS segment. In the fourth quarter of 2003, Ryder completed two acquisitions related to the FMS segment. Total consideration paid for these acquisitions was $149 million in 2004 and $97 million in 2003. Approximately $13 million is due to the sellers at December 31, 2004 and will be paid, subject to holdback provisions set forth in the purchase agreements. No acquisitions were completed in 2002. We will continue to evaluate selective acquisitions in FMS, SCS and DCC in 2005.
Financing and Other Funding Transactions
      We utilize external capital to support growth in our asset-based product lines. The variety of financing alternatives available to fund our capital needs include long-term and medium-term public and private debt, asset-backed securities, bank term loans, leasing arrangements, bank credit facilities and commercial paper.

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      The following table shows the movements in our debt balance:
                     
    Years ended December 31
     
    2004   2003
         
    (In thousands)
Debt balance at January 1
  $ 1,815,900       1,551,468  
                 
Cash-related changes in debt:
               
 
Net change in commercial paper borrowings
    79,033       (2,500 )
 
Proceeds from issuance of medium-term notes
    135,000       80,000  
 
Proceeds from issuance of other debt instruments
    147,153       25,115  
 
Retirement of medium-term notes
    (72,000 )     (75,500 )
 
Other debt repaid, including capital lease obligations
    (384,932 )     (264,933 )
                 
      (95,746 )     (237,818 )
                 
Non-cash changes in debt:
               
 
Fair market value adjustment on notes subject to hedging
    (9,380 )     (9,997 )
 
Addition of capital lease obligations
    54,094       66,861  
 
Addition of variable interest entity debt
          413,983  
 
Changes in foreign currency exchange rates and other non-cash items
    18,348       31,403  
                 
   
Total changes in debt
    (32,684 )     264,432  
                 
Debt balance at December 31
  $ 1,783,216       1,815,900  
                 
      Our funding philosophy generally attempts to match the average remaining repricing life of our debt with the average remaining life of our assets. We utilize both fixed and variable rate debt to achieve this match and generally target a mix of 25-45% variable rate debt. The variable rate portion of our total obligations (including notional value of swap agreements) was 37% at December 31, 2004, compared with 32% at December 31, 2003.
      Ryder’s leverage ratios and a reconciliation of balance sheet debt to total obligations were as follows:
                                   
    December 31,   % to   December 31,   % to
    2004   Equity   2003   Equity
                 
    (Dollars in thousands)
On-balance sheet debt
  $ 1,783,216       118%     $ 1,815,900       135%  
PV of minimum lease payments and guaranteed residual values under operating leases for equipment(1)
    161,138               153,222          
                             
 
Total obligations
  $ 1,944,354       129%     $ 1,969,122       146%  
                             
 
(1) Present value does not reflect payments Ryder would be required to make if we terminated the related leases prior to the scheduled expiration dates.
     Debt to equity consists of balance sheet debt for the period divided by total equity. Total obligations to equity represents debt plus the present value of minimum lease payments and guaranteed residual values under operating leases for vehicles, discounted based on our incremental borrowing rate at lease inception, all divided by total equity. Although total obligations is a non-GAAP financial measure, we believe that total obligations is useful as it is a more complete measure of our existing financial obligations and helps better assess Ryder’s overall leverage position.
      The decrease in total obligations to equity ratio in 2004 was driven by our reduced funding needs as a result of improved operating performance and higher proceeds from sales of property and revenue earning equipment. Leverage ratios in 2004 were also impacted by the net increase in shareholders’ equity of $166 million resulting primarily from earnings net of common stock repurchases. We anticipate these ratios will increase in 2005 as a result of the expected increase in capital expenditures and higher income tax payments.
      Our ability to access unsecured debt in the capital markets is linked to both our short and long-term debt ratings. These ratings are intended to provide guidance to investors in determining the credit risk

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associated with particular Ryder securities based on current information obtained by the rating agencies from us or from 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. A downgrade of Ryder’s debt rating below investment grade level would limit our ability to issue commercial paper. As a result, we would have to rely on other established funding sources described below.
      Our debt ratings at December 31, 2004 were as follows:
                         
    Short-term   Long-term   Outlook
             
Moody’s Investors Service
    P2       Baa1       Stable (June 2004)  
Standard & Poor’s Ratings Services
    A2       BBB       Positive (July 2003)  
Fitch Ratings
    F2       BBB+       Positive (January 2004)  
      During May 2004, Ryder refinanced its $860 million credit facility with a new five-year $870 million global revolving credit agreement with a syndicate of lenders. The credit facility is used to finance working capital and provide support for the issuance of commercial paper. The credit facility can also be used to issue up to $75 million in letters of credit (there were no letters of credit outstanding against the facility at December 31, 2004). Foreign borrowings of $24 million were outstanding under the facility at December 31, 2004. At Ryder’s option, the interest rate on borrowings under the credit facility is based on LIBOR, prime, federal funds or local equivalent rates. The credit facility’s current annual facility fee is 15.0 basis points, which applies to the total facility of $870 million, and is based on Ryder’s current credit ratings. The credit facility contains no provisions restricting its availability in the event of a material adverse change to Ryder’s business operations; however, the credit facility does contain standard representations and warranties, events of default, cross-default provisions, and certain affirmative and negative covenants. In order to maintain availability of funding, Ryder must maintain a ratio of debt to consolidated tangible net worth, as defined in the agreement, of less than or equal to 300%. The ratio at December 31, 2004 was 99%.
      During 2003, Ryder filed a universal shelf registration statement with the Securities and Exchange Commission to issue up to $800 million of available securities. Proceeds from debt issuances under the universal shelf registration statement are expected to be used for capital expenditures, debt refinancing and general corporate purposes.
      At December 31, 2004 Ryder had the following amounts available to fund operations under the aforementioned facilities:
         
    (In millions)
Global revolving credit facility
  $ 646  
Shelf registration statement
    665  
      As of February 22, 2005, the amount available under the global revolving credit facility decreased to $408 million, primarily as a result of the payment made in connection with the resolution of our federal income tax audit for the 1998 to 2000 period. See Note 11, “Income Taxes” in the Notes to Consolidated Financial Statements for further discussion. We believe such facilities, along with other funding sources, will be sufficient to fund operations in 2005.
Off-Balance Sheet Arrangements
      We periodically enter into sale and leaseback transactions in order to lower the total cost of funding our operations, to diversify our funding among different classes of investors (e.g., regional banks, pension plans and insurance companies) and to diversify our funding among different types of funding instruments. These sale-leaseback transactions are often executed with third-party financial institutions that are not deemed to be VIEs. In general, these 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.
      During 2004, we completed two sale-leaseback transactions of revenue earning equipment with third-party financial institutions not deemed to be VIEs. Proceeds from the sale-leaseback transactions totaled $97 million. These leases contain limited guarantees by us of the residual values of the leased vehicles

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(residual value guarantees) that are conditioned upon disposal of the leased vehicles prior to the end of their lease term. We did not enter into any sale-leaseback or vehicle securitization transactions during the years ended December 31, 2003 and 2002. See Note 12, “Leases,” in the Notes to Consolidated Financial Statements for additional information.
      Ryder participated in an agreement to sell with limited recourse trade receivables on a revolving and uncommitted basis. This agreement expired in December 2004. Under the program, Ryder sold receivables from time to time in order to fund operations, particularly when the cost of such sales was cost effective compared with other means of funding, notably, commercial paper. Losses on receivable sales and related costs associated with this program were $0.5 million, $0.5 million and $2 million in 2004, 2003 and 2002, respectively, and were included in “Miscellaneous income, net.”
Contractual Obligations and Commitments
      As part of our ongoing operations, we enter into arrangements that obligate us to make future payments under contracts such as debt agreements, lease agreements and unconditional purchase obligations. The following table summarizes our expected future contractual cash obligations and commitments at December 31, 2004:
                                             
    2005   2006 - 2007   2008 - 2009   Thereafter   Total
                     
    (In thousands)
Debt
  $ 354,482       571,778       542,108       261,451       1,729,819  
Capital lease obligations
    35,068       18,181       148             53,397  
                                         
 
Total debt
    389,550       589,959       542,256       261,451       1,783,216  
                                         
Interest on debt(1)
    93,062       125,201       67,991       197,890       484,144  
Operating leases(2)
    106,326       145,434       63,246       77,494       392,500  
Purchase obligations(3)
    81,685       48,494       43,014       6,960       180,153  
                                         
 
Total contractual cash obligations
    281,073       319,129       174,251       282,344       1,056,797  
                                         
Self-insurance obligations
    97,822       90,777       33,664       43,443       265,706  
Other long-term liabilities(4),(5)
          18,855       1,454       16,859       37,168  
                                         
   
Total
  $ 768,445       1,018,720       751,625       604,097       3,142,887  
                                         
 
(1) Total debt matures at various dates through fiscal year 2025 and bears interest principally at fixed rates. Interest on variable rate debt is calculated based on the applicable rate at December 31, 2004. Amounts are based on existing debt obligations and do not consider potential refinancings of expiring debt obligations.
 
(2) Represents future lease payments associated with vehicles, equipment and properties under operating leases. Amounts are based upon the assumption that the leased asset 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.
 
(3) The majority of our purchase obligations are pay-as-you-go transactions made in the ordinary course of business. Purchase obligations include agreements to purchase goods or services that are legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed minimum or variable price provisions; and the approximate timing of the transaction. The most significant items included in the above table are purchase obligations related to information technology services and vehicles. Purchase orders made in the ordinary course of business are excluded from the above table. Any amounts for which we are liable under purchase orders are reflected in our consolidated balance sheet as “Accounts payable” and “Accrued expenses.”
 
(4) Represents other long-term liability amounts reflected in our consolidated balance sheets that have known payment streams. The most significant items included were derivative contracts, deferred compensation obligations and legal contractual obligations.
 
(5) The amounts exclude our minimum funding requirements as set forth by ERISA and international regulatory bodies, which are $4 million in 2006. Our minimum funding requirements after 2006 are dependent on several factors. However, we estimate that the present value of required contributions over the next 5 years is approximately $80 million for the U.S. plan (assuming expected long-term rate of return realized and other assumptions remain unchanged). We also have payments due under our other postretirement benefit (OPEB) plans. These plans are not required to be funded in advance, but are pay-as-you-go. See further discussion in Note 19, “Employee Benefit Plans,” in the Notes to Consolidated Financial Statements.

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Guarantees
      In the ordinary course of business, Ryder provides certain guarantees or indemnifications to third parties as part of certain lease, financing and sales agreements. Certain guarantees and indemnifications, whereby Ryder 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. At December 31, 2004, our maximum exposure under these guarantees was $26 million of which $3 million was recognized as a liability. See Note 15, “Guarantees,” in the Notes to Consolidated Financial Statements for additional information.
Pension Information
      At December 31, 2004, we have an accumulated net pension equity charge of $189 million (after-tax) in connection with the accrual of an additional minimum pension liability, up slightly as compared with $187 million (after-tax) at December 31, 2003 as discount rates and updates to our mortality estimates offset the appreciation in value of pension plan assets during the year. Total asset returns for our U.S. qualified pension plan (our primary plan) were 11% in 2004.
      The funded status of our pension plans is dependent upon many factors, including returns on invested assets and the level of certain market interest rates. While we are not legally required to make a contribution to fund our U.S. pension plan until September 2006, we review pension assumptions regularly and we may from time to time make voluntary contributions to our pension plans. During 2004, total pension contributions, including our international plans, were approximately $70 million. After considering the 2004 contributions, the projected present value of estimated contributions for our U.S. plan that would be required over the next 5 years totals approximately $80 million (pre-tax). Changes in interest rates and the market value of the securities held by the plans during 2005 could materially change, positively or negatively, the underfunded status of the plans and affect the level of pension expense and required contributions in 2006 and beyond.
Share Repurchases and Cash Dividends
      In 2003, our Board of Directors authorized a two-year share repurchase program intended to mitigate, in part, the dilutive impact of shares issued under our various employee stock option and employee stock purchase plans. Under the program, shares of common stock were purchased in a dollar amount not to exceed the proceeds generated from the issuance of common stock to employees since January 1, 2003, up to $90 million. During the second quarter of 2004, we completed the share repurchase program. In 2004, we purchased and retired approximately 2.4 million shares at an aggregate cost of $87 million. In 2003, we purchased and retired 117,500 shares at an aggregate cost of $3 million.
      In July 2004, our Board of Directors authorized a new two-year share repurchase program intended to mitigate the dilutive impact of shares issued under our various employee stock option and stock purchase plans. Under this program, shares of common stock are purchased in an amount not to exceed the number of shares issued to employees since May 1, 2004, which totaled approximately 1.6 million shares at December 31, 2004. The program limits aggregate share repurchases to no more than 3.5 million shares of Ryder common stock. At December 31, 2004, we repurchased and retired approximately 1.4 million shares at an aggregate cost of $62 million. Management was granted the authority to establish a trading plan under Rule 10b5-1 of the Securities Exchange Act of 1934 as part of the repurchase program.
      Cash dividend payments to shareholders of common stock were $39 million in 2004, $38 million in 2003 and $37 million in 2002. In February 2005, our Board of Directors declared a quarterly cash dividend of $0.16 per share of common stock. The dividend reflects a $0.01 increase from the $0.15 quarterly cash dividend Ryder has paid since 1989.
Market Risk
      In the normal course of business, Ryder is exposed to fluctuations in interest rates, foreign currency exchange rates and fuel prices. We manage these exposures in several ways, including, in certain circumstances, the use of a variety of derivative financial instruments when deemed prudent. We do not

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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. Our 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. We manage our exposure to interest rate risk through the proportion of fixed-rate and variable-rate debt in the total debt portfolio. From time to time, we also use interest rate swap and cap agreements to manage our fixed rate and variable rate exposure and to better match the repricing of debt instruments to that of our portfolio of assets. See Note 14, “Financial Instruments and Risk Management,” in the Notes to Consolidated Financial Statements for further discussion on outstanding interest rate swap and cap agreements at December 31, 2004.
      At December 31, 2004, we had $1.1 billion of fixed-rate debt (excluding capital leases) with a weighted-average interest rate of 6.3% and a fair value of $1.2 billion, including the effects of interest rate swaps. A hypothetical 10% decrease or increase in the December 31, 2004 market interest rates would impact the fair value of our fixed-rate debt by approximately $37 million. At December 31, 2003, we had $1.1 billion of fixed-rate debt (excluding capital leases) with a weighted-average interest rate of 6.6% and a fair value of $1.2 billion, including the effects of interest rate swaps. A hypothetical 10% decrease or increase in the December 31, 2003 market interest rates would impact the fair value of our fixed-rate debt by approximately $48 million. We estimated the fair value of derivatives based on dealer quotations.
      At December 31, 2004, we had $607 million of variable-rate debt, including the effects of interest rate swaps, which effectively changed $285 million of fixed-rate debt instruments with a weighted-average interest rate of 6.7% to LIBOR-based floating rate debt at a current weighted-average interest rate of 4.6%. 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. At December 31, 2004, the fair value of our interest rate swap agreements totaled $5 million. At December 31, 2003, we had $588 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% to LIBOR-based floating rate debt at a current weighted-average interest rate of 3.0%. The fair value of our interest rate swap agreements at December 31, 2003 totaled $14 million. A hypothetical 10% increase in market interest rates would impact 2005 pre-tax earnings by approximately $2 million.
      Exposure to market risk for changes in foreign currency exchange rates relates primarily to foreign operations’ buying, selling and financing in currencies other than local currencies and to the carrying value of net investments in foreign subsidiaries. We manage our exposure to foreign currency exchange rate risk related to our foreign operations’ buying, selling and financing in currencies other than local currencies by naturally offsetting assets and liabilities not denominated in local currencies. We also use foreign currency option contracts and forward agreements from time to time to hedge foreign currency transactional exposure. We generally do not hedge the translation exposure related to our net investment in foreign subsidiaries, since we generally have no near-term intent to repatriate funds from such subsidiaries. At December 31, 2004 and 2003, we had a $78 million cross-currency swap used to hedge our net investment in a foreign subsidiary and for which we recognized a liability equal to its fair value of $16 million and $9 million, respectively. At December 31, 2004, we also had forward foreign currency exchange contracts with an aggregate fair value of $0.1 million. The potential loss in fair value for such instruments from a hypothetical 10% adverse change in quoted foreign currency exchange rates would be approximately $9 million and $7 million at December 31, 2004 and 2003, respectively. We estimated the fair values of derivatives based on dealer quotations.
      Exposure to market risk for fluctuations in fuel prices relates to a small portion of our 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. At December 31, 2004, we had various fuel purchase arrangements in place to ensure delivery of fuel at market rates in the event of fuel shortages. We are exposed to fluctuations in fuel prices in these arrangements since none of the arrangements fix the price of fuel to be purchased. Increases and decreases in the price of fuel are generally passed on to our customers

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and have only a minor effect on profitability. We believe the exposure to fuel price fluctuations would not materially impact Ryder’s results of operations, cash flows or financial position.
ENVIRONMENTAL MATTERS
      The operations of Ryder involve storing and dispensing petroleum products, primarily diesel fuel, regulated under environmental protection laws. These laws require us to eliminate or mitigate the effect of such substances on the environment. In response to these requirements, we continually upgrade our operating facilities and implement various programs to detect and minimize contamination.
      Capital expenditures related to these programs totaled approximately $2 million in 2004, $1 million in 2003 and $1 million in 2002. We incurred environmental expenses of $10 million, $12 million and $10 million in 2004, 2003 and 2002, respectively, which included remediation costs as well as normal recurring expenses, such as licensing, testing and waste disposal fees. Based on current circumstances and the present standards imposed by government regulations, environmental expenses and related capitalized costs should not increase materially from 2004 levels in the near term.
      The ultimate cost of our 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’s investigation at individual sites and the recoverability of such costs from third parties. Based upon information presently available, we believe 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 Ryder’s financial condition or liquidity. See Note 20, “Environmental Matters” in the Notes to Consolidated Financial Statements for further discussion.
CRITICAL ACCOUNTING ESTIMATES
      The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions. Our significant accounting policies are described in the Notes to Consolidated Financial Statements. Certain of these policies require the application of subjective or complex 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 we believe 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 Ryder’s financial condition and operating results in the current and future periods. We periodically review the development, selection and disclosure of these critical accounting estimates with Ryder’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 estimates that we consider to be critical.
      Depreciation and Residual Value Guarantees: We periodically review and adjust the residual values and useful lives of revenue earning equipment of our FMS business segment as described in Note 1, “Summary of Significant Accounting Policies — Revenue Earning Equipment, Operating Property and Equipment and Depreciation,” and “Summary of Significant Accounting Policies — Residual Value Guarantees” in the Notes to Consolidated Financial Statements. Reductions in residual values (i.e., the price at which we ultimately expect to dispose of revenue earning equipment) or useful lives will result in an increase in depreciation expense over the life of the equipment. We review residual values and useful lives of revenue earning equipment on an annual basis or more often if deemed necessary for specific groups of our revenue earning equipment. Reviews are performed based on vehicle class, generally subcategories of trucks, tractors and trailers by weight and usage. We consider factors such 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, and SCS and DCC applications). As a result, future depreciation expense rates are subject to change based upon changes in these factors. Based

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on the mix of revenue earning equipment at December 31, 2004, a 10% decrease in expected vehicle residual values would increase depreciation expense in 2005 by approximately $85 million.
      Ryder 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 expected to be paid is recognized as rent expense over the expected remaining term of the lease. At December 31, 2004, total liabilities for residual value guarantees of $6 million were included in “Accrued expenses” (for those payable in less than one year) and in “Other non-current liabilities.” While we believe 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. Based on the existing mix of vehicles under operating lease agreements at December 31, 2004, a 10% decrease in expected vehicle residual values would increase rent expense in 2005 by approximately $3 million.
      Pension Plans: We apply actuarial methods to determine the annual net periodic pension expense and pension plan liabilities on an annual basis. Each December, we review actual experience compared with the more significant assumptions used and make adjustments to our assumptions, if warranted. In determining our annual estimate of periodic pension cost, we are required to make an evaluation of critical factors such as discount rate, expected long-term rate of return, expected increase in compensation levels, retirement rate and mortality. Discount rates are based upon a duration analysis of expected benefit payments and the equivalent average yield for high quality corporate fixed income investments as of our December 31 annual measurement date. For 2004, in order to provide a more accurate estimate of the discount rate relevant to our plan, we used models that match projected benefits payments of our primary U.S. plan to coupons and maturities from a hypothetical portfolio of high quality corporate bonds. This method resulted in a discount rate about 0.15% higher than our prior year method. Long-term rate of return assumptions are based on actuarial review of our asset allocation strategy and long-term expected asset returns. Investment management and other fees paid out of plan assets are factored into the determination of asset return assumptions. The rate of increase in compensation levels is reviewed with the actuaries based upon actual experience. Retirement rates are based primarily on actual plan experience, while standard actuarial tables are used to estimate mortality.
      Accounting guidance applicable to pension plans does not require immediate recognition of the effects of a deviation between these assumptions and actual 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 net actuarial gain or loss in Note 19, “Employee Benefit Plans,” in the Notes to Consolidated Financial Statements. We have an unrecognized loss of $371 million at the end of 2004 compared with a loss of $369 million at the end of 2003. The increase in the net actuarial loss in 2004 results from actuarial losses associated with a reduction in discount rates and updates to our mortality estimates, offset in part by assets earning a rate of return above the assumed rates and the amortization of the opening balance. A portion of the unrecognized actuarial loss will be amortized into earnings in 2005. The effect on years beyond 2005 will depend substantially upon the actual experience of our plans.
      Disclosure of the significant assumptions used in arriving at the 2004 net pension expense is presented in Note 19, “Employee Benefit Plans,” in the Notes to Consolidated Financial Statements. A sensitivity analysis of projected 2005 net pension expense to changes in key underlying assumptions for our primary plan, the U.S. pension plan, is presented below.
                         
            Impact on 2005 Net
    Assumed Rate   Change   Pension Expense
             
Discount rate
    5.90%       +/- 0.25%     -/+ $ 4 million  
Expected long-term rate of return on assets
    8.50%       +/- 0.25%     -/+ $ 2 million  
Rate of increase in compensation levels
    4.00%       +/- 0.50%     +/- $ 1 million  

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      Self-Insurance Accruals: We use 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, we consider such factors as frequency and severity of claims, claim development and payment patterns and changes in the nature of our business, among other factors. Such factors are analyzed for each of our business segments. On an annual basis, third-party actuaries perform a separate analysis of our self-insurance accruals for reasonableness. Our 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 we believe that self-insurance accruals are adequate, there can be no assurance that changes to our estimates may not occur. Based on self-insurance accruals at December 31, 2004, a 5% adverse change in actuarial claim loss estimates would increase operating expense in 2005 by approximately $12 million.
      Goodwill Impairment: We assess goodwill for impairment, as described in Note 1, “Summary of Significant Accounting Policies — Goodwill and Other Intangible Assets,” in the Notes to Consolidated Financial Statements, on an annual basis or more often if deemed necessary. To determine whether goodwill impairment indicators exist, we are 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. Our 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 our knowledge and experience about past and current events and assumptions about conditions we expect to exist. These assumptions are based on a number of factors including future operating performance, economic conditions and actions we expect to take. In addition to these factors, our SCS reporting units are dependent on several key customers or industry sectors. While we believe our estimates of future cash flows are reasonable, there can be no assurance that a deterioration in economic conditions, customer relationships or adverse changes to expectations of future performance will not occur, resulting in a goodwill impairment loss.
      In late 2003, a key customer contract of our SCS-U.K. reporting unit was not renewed which caused us to assess whether this event resulted in an impairment indicator. In light of the profitability of the customer account relative to the entire reporting unit, we did not consider it more likely than not that this event would result in a reduction of our SCS-U.K. reporting unit fair value below its carrying amount. Since that time, we have performed our annual impairment test for the SCS-U.K. reporting unit resulting in no goodwill impairment. There can be no assurance that a deterioration in the economic conditions, customer relationships or adverse changes to expectations of future performance of our SCS-U.K. reporting unit or any other reporting unit will not result in a goodwill impairment loss. At December 31, 2004, goodwill totaled $158 million, of which $14 million related to our SCS-U.K. reporting unit.
      Income Taxes: Ryder’s overall tax position is complex and requires careful analysis by management to estimate the expected realization of income tax assets and liabilities.
      Tax regulations require items to be included in the tax return at different times than the items are reflected in the financial statements. As a result, the effective tax rate reflected in the financial statements is different than that reported in the tax return. Some of these differences are permanent, such as expenses that are not deductible on the tax return, and some are timing differences, such as depreciation expense. Timing differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in the tax return in future years for which we have already recorded the tax benefit in the financial statements. We record a valuation allowance for deferred tax assets to reduce such assets to amounts expected to be realized. At December 31, 2004 and 2003, the deferred tax valuation allowance principally attributed to foreign tax loss carryforwards in the SCS business segment was $12 million and $10 million, respectively. In determining the required level of valuation allowance, we consider 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’s expectations as to whether sufficient taxable income of an appropriate character will be realized within tax carryback and carryforward periods. Our assessment involves estimates and assumptions about matters that are inherently uncertain, and

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unanticipated events or circumstances could cause actual results to differ from these estimates. Should we change our estimate of the amount of deferred tax assets that we would be able to realize, an adjustment to the valuation allowance would result in an increase or decrease to the provision for income taxes in the period such a change in estimate was made.
      We are subject to tax audits in numerous jurisdictions in the U.S. and around the world. Tax audits by their very nature are often complex and can require several years to complete. In the normal course of business, we are subject to challenges from the Internal Revenue Service (IRS) and other tax authorities regarding amounts of taxes due. These challenges may alter the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions. As part of our calculation of the provision for income taxes on earnings, we record the amount we expect to incur as a result of audits. Such accruals require management to make estimates and judgments with respect to the ultimate outcome of a tax audit. Actual results could vary materially from these estimates.
      In 2003, the IRS began auditing our federal income tax returns for the 1998 to 2000 tax period. Since November 2004, the IRS proposed adjustments that challenged certain of our tax positions taken in the years under audit and proposed penalties for the underpayment of tax. In February 2005, we resolved all issues with the IRS related to the 1998 to 2000 tax period, including interest and proposed penalties. In connection with the resolution of this audit, on February 22, 2005, we paid $176 million (after utilization of all available federal net operating losses and alternative minimum tax credit carry-forwards), including interest through the date of payment. The payment was funded through the issuance of commercial paper. The amount we paid is consistent with our accrual as of December 31, 2004, and is included in “Accrued expenses.”
      In 2005, the IRS began auditing our federal income tax returns for 2001 and 2002. We believe that Ryder has not entered into any other transactions since 2000 that raise the same type of issues identified by the IRS in its most recent audit.
NON-GAAP FINANCIAL MEASURES
      This Annual Report on Form 10-K includes information extracted from consolidated financial information but not required by generally accepted accounting principles (GAAP) to be presented in the financial statements. Certain of this information is considered “non-GAAP financial measures” as defined by SEC rules. Specifically, we refer to FMS dry revenue, FMS NBT as a % of dry revenue, SCS operating revenue, SCS NBT as a % of operating revenue, DCC operating revenue, DCC NBT as a % of operating revenue, total obligations and total obligations to equity. As required by SEC rules, we provide a reconciliation of each non-GAAP financial measure to the most comparable GAAP measure and an explanation why management believes that presentation of the non-GAAP financial measure provides useful information to investors. Non-GAAP financial measures should be considered in addition to, but not as a substitute for or superior to, other measures of financial performance prepared in accordance with GAAP.

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FORWARD-LOOKING STATEMENTS AND FACTORS AFFECTING OUR BUSINESS
      Forward-looking statements (within the meaning of the Federal Private Securities Litigation Reform Act of 1995) are statements that relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends concerning matters that are not historical facts. These statements are often preceded by or include the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will,” “may,” “could,” “should” or similar expressions. This Annual Report contains forward-looking statements including, but not limited to, statements regarding:
  our expectations as to growth opportunities and anticipated revenue growth across all business segments;
 
  our ability to improve our competitive advantage by leveraging our vehicle buying power, reducing vehicle downtime, providing innovative broad-based supply chain solutions and increasing our customers’ competitive position;
 
  anticipated gains on the sale of used vehicles;
 
  our ability to successfully achieve the operational goals that are the basis of our business strategies, including offering competitive pricing, optimizing asset utilization, leveraging the expertise of our various business segments, serving our customers’ global needs and expanding our support services;
 
  our ability to successfully identify, consummate and integrate future acquisitions;
 
  our belief as to the adequacy of our insurance coverage and funding sources and the effectiveness of our interest and foreign currency exchange rate risk management programs;
 
  our relationship with our employees;
 
  our belief that we can continue to realize significant savings from our cost management initiatives and process improvement actions, including those associated with the recent termination of an information technology infrastructure contract;
 
  the adequacy of our accounting estimates and reserves for pension expense, depreciation and residual value guarantees, self-insurance reserves; goodwill impairment and income taxes;
 
  our belief that we have not entered into any other transactions since 2000 that raise the same type of issues identified by the IRS in their audit of the 1998 to 2000 tax period;
 
  our ability to fund all of our operations in 2005 through internally generated funds and outside funding sources; and
 
  the anticipated cost of environmental liabilities.
      These statements, as well as other forward-looking statements contained in this Annual Report, are based on our current plans and expectations and are subject to risks, uncertainties and assumptions. We caution readers that certain important factors could cause actual results and events to differ significantly from those expressed in any forward-looking statements. These risk factors include, but are not limited to, the following:
  Market Conditions:
  o Changes in general economic conditions in the U.S. and worldwide leading to decreased demand for our services, lower profit margins and increased levels of bad debt
 
  o Changes in our customers’ operations, financial condition or business environment that may limit their need for, or ability to purchase, our services
 
  o Changes in market conditions affecting the commercial rental market or the sale of used vehicles

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  o Less than anticipated growth rates in the markets in which we operate
  Competition:
  o Competition from other service providers, some of which have greater capital resources or lower capital costs
 
  o Continued consolidation in the markets in which we operate which may create large competitors with greater financial resources
 
  o Competition from vehicle manufacturers in our foreign FMS business operations
 
  o Our inability to maintain current pricing levels due to customer acceptance or competition
  Profitability:
  o Our inability to obtain adequate profit margins for our services
 
  o Lower than expected customer retention levels
 
  o Loss of a large customer or customer base
 
  o Our inability to adapt our product offerings to meet changing consumer preferences on a cost-effective basis
 
  o The inability of our business segments to create operating efficiencies
 
  o Availability of heavy- and medium-duty vehicles
 
  o Increases in fuel prices
 
  o Our inability to successfully implement our asset management initiatives
 
  o An increase in the cost of, or shortages in the availability of, qualified drivers
 
  o Labor strikes and work stoppages
 
  o Our ability to successfully integrate and realize the expected benefits of recent and future acquisitions
 
  o Our inability to manage our cost structure
 
  o Our inability to limit our exposure for customer claims
  Government Regulation:
  o Cost of compliance with new or changing government regulations, including regulations regarding vehicle emissions, drivers, hours of service and anti-terrorism and security regulations issued by the Department of Homeland Security and the U.S. Customs Service
  Financing Concerns:
  o Higher borrowing costs and possible decreases in available funding sources caused by an adverse change in our debt ratings
 
  o Unanticipated interest rate and currency exchange rate fluctuations
 
  o Negative funding status of our pension plans caused by lower than expected returns on invested assets and unanticipated changes in interest rates
  Accounting Matters:
  o Impact of unusual items resulting from on-going evaluations of business strategies, asset valuations, acquisitions, divestitures and organizational structure
 
  o Reductions in residual values or useful lives of revenue earning equipment

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  o Increases in compensation levels, retirement rate and mortality resulting in higher pension expense
 
  o Increases in healthcare costs resulting in higher insurance reserves
 
  o Changes in accounting rules, assumptions and accruals
  Other risks detailed from time to time in our SEC filings
      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 our business. As a result, no assurance can be given as to our future results or achievements. You should not place undue reliance on the forward-looking statements contained herein, which speak only as of the date of this Annual Report. We do not intend, or assume any obligation, to update or revise any forward-looking statements contained in this Annual Report, whether as a result of new information, future events or otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
      The information required by ITEM 7A is included in ITEM 7 (pages 34 through 36) of PART II of this report.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
               
        Page No.
         
 Management’s Report on Internal Control Over Financial Reporting     44  
 Reports of Independent Registered Public Accounting Firm     45  
 Consolidated Statements of Earnings     48  
 Consolidated Balance Sheets     49  
 Consolidated Statements of Cash Flows     50  
 Consolidated Statements of Shareholders’ Equity     51  
 Notes to Consolidated Financial Statements:        
    Summary of Significant Accounting Policies     52  
    Accounting Changes     60  
    Acquisitions     61  
    Restructuring and Other (Recoveries) Charges     63  
    Receivables     65  
    Revenue Earning Equipment     65  
    Operating Property and Equipment     66  
    Direct Financing Leases and Other Assets     66  
    Goodwill and Other Intangible Assets     66  
    Accrued Expenses and Other Non-Current Liabilities     67  
    Income Taxes     68  
    Leases     70  
    Debt     73  
    Financial Instruments and Risk Management     75  
    Guarantees     77  
    Shareholders’ Equity     78  
    Stock-Based Compensation Plans     79  
    Earnings Per Share Information     81  
    Employee Benefit Plans     81  
    Environmental Matters     88  
    Other Matters     88  
    Segment Reporting     88  
    Quarterly Information (unaudited)     93  
 
 Consolidated Financial Statement Schedule for the Years Ended December 31, 2004, 2003 and 2002:        
 
 
           
II — Valuation and Qualifying Accounts     94  
      All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.

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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
TO THE SHAREHOLDERS OF RYDER SYSTEM, INC.:
      Management of Ryder System, Inc., together with its consolidated subsidiaries (Ryder), is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Ryder’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
      Ryder’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Ryder; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of Ryder’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Ryder’s assets that could have a material effect on the consolidated financial statements.
      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
      Management assessed the effectiveness of Ryder’s internal control over financial reporting as of December 31, 2004. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control-Integrated Framework.”
      Based on our assessment and those criteria, management believes that Ryder maintained effective internal control over financial reporting as of December 31, 2004.
      Ryder’s independent registered public accounting firm has issued their report on management’s assessment of Ryder’s internal control over financial reporting, which appears on page 45.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
RYDER SYSTEM, INC.:
      We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Ryder System, Inc. maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Ryder System, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
      A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
      In our opinion, management’s assessment that Ryder System, Inc. maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Ryder System, Inc., maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

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      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Ryder System, Inc. and subsidiaries as of December 31, 2004 and 2003, 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, 2004, and our report dated February 22, 2005 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Miami, Florida
February 22, 2005

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003, 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, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. 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.
      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Ryder System, Inc.’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 22, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
      As discussed in the notes to the consolidated financial statements, the Company changed its method of accounting for variable interest entities and its method of accounting for asset retirement obligations in 2003 and its method of accounting for goodwill and other intangible assets in 2002.
/s/ KPMG LLP
Miami, Florida
February 22, 2005

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RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
                           
    Years ended December 31
     
    2004   2003   2002
             
    (In thousands, except per share amounts)
Revenue
  $ 5,150,278       4,802,294       4,776,265  
                         
Operating expense
    2,305,703       2,039,156       1,949,384  
Salaries and employee-related costs
    1,233,038       1,242,930       1,268,704  
Freight under management expense
    426,739       414,284       414,369  
Depreciation expense
    706,028       624,580       552,491  
Gains on vehicle sales, net
    (34,504 )     (15,780 )     (14,223 )
Equipment rental
    108,468       200,868       343,531  
Interest expense
    100,114       96,169       91,718  
Miscellaneous income, net
    (8,754 )     (12,158 )     (9,808 )
Restructuring and other (recoveries) charges, net
    (17,676 )     (230 )     4,216  
                         
      4,819,156       4,589,819       4,600,382  
                         
 
Earnings before income taxes and cumulative effect of changes in accounting principles
    331,122       212,475       175,883  
Provision for income taxes
    115,513       76,916       63,318  
                         
 
Earnings before cumulative effect of changes in accounting principles
    215,609       135,559       112,565  
Cumulative effect of changes in accounting principles
          (4,123 )     (18,899 )
                         
 
Net earnings
  $ 215,609       131,436       93,666  
                         
Earnings per common share — Basic:
                       
 
Before cumulative effect of changes in accounting principles
  $ 3.35       2.15       1.83  
 
Cumulative effect of changes in accounting principles
          (0.06 )     (0.31 )
                         
 
Net earnings
  $ 3.35       2.09       1.52  
                         
Earnings per common share — Diluted:
                       
 
Before cumulative effect of changes in accounting principles
  $ 3.28       2.12       1.80  
 
Cumulative effect of changes in accounting principles
          (0.06 )     (0.30 )
                         
 
Net earnings
  $ 3.28       2.06       1.50  
                         
See accompanying notes to consolidated financial statements.

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RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
                       
    December 31
     
    2004   2003
         
    (Dollars in thousands,
    except per share amount)
Assets:
               
 
Current assets:
               
   
Cash and cash equivalents
  $ 100,971       140,627  
   
Receivables, net
    732,835       640,769  
   
Inventories
    59,284       54,806  
   
Tires in service
    175,715       160,020  
   
Prepaid expenses and other current assets
    158,864       119,939  
                 
     
Total current assets
    1,227,669       1,116,161  
 
Revenue earning equipment, net
    3,331,711       3,046,040  
 
Operating property and equipment, net
    479,598       506,898  
 
Direct financing leases and other assets
    416,531       440,971  
 
Goodwill and other intangible assets
    182,424       177,594  
                 
     
Total assets
  $ 5,637,933       5,287,664  
                 
 
Liabilities and shareholders’ equity:
               
 
Current liabilities:
               
   
Current portion of long-term debt
  $ 389,550       366,411  
   
Accounts payable
    384,016       299,725  
   
Accrued expenses
    681,290       434,941  
                 
     
Total current liabilities
    1,454,856       1,101,077  
 
Long-term debt
    1,393,666       1,449,489  
 
Other non-current liabilities
    408,554       564,948  
 
Deferred income taxes
    870,669       827,765  
                 
     
Total liabilities
    4,127,745       3,943,279  
                 
Shareholders’ equity:
               
 
Preferred stock of no par value per share — authorized, 3,800,917; none outstanding, December 31, 2004 or 2003
           
 
Common stock of $0.50 par value per share — authorized, 400,000,000; outstanding, 2004 — 64,310,852; 2003 — 64,487,486
    32,155       32,244  
 
Additional paid-in capital
    668,152       593,843  
 
Retained earnings
    963,482       897,841  
 
Deferred compensation
    (4,180 )     (2,887 )
 
Accumulated other comprehensive loss
    (149,421 )     (176,656 )
                 
     
Total shareholders’ equity
    1,510,188       1,344,385  
                 
     
Total liabilities and shareholders’ equity
  $ 5,637,933       5,287,664  
                 
See accompanying notes to consolidated financial statements.

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RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
                               
    Years ended December 31
     
    2004   2003   2002
             
    (In thousands)
Cash flows from operating activities:
                       
 
Net earnings
  $ 215,609       131,436       93,666  
 
Cumulative effect of changes in accounting principles
          4,123       18,899  
 
Depreciation expense
    706,028       624,580       552,491  
 
Gains on vehicle sales, net
    (34,504 )     (15,780 )     (14,223 )
 
Amortization expense and other non-cash (gains) charges, net
    (17,262 )     3,263       8,713  
 
Deferred income tax expense
    9,815       51,467       52,615  
 
Changes in operating assets and liabilities, net of acquisitions:
                       
   
Decrease in aggregate balance of trade receivables sold
                (110,000 )
   
Receivables
    (81,832 )     (4,191 )     35,048  
   
Inventories
    (4,583 )     5,398       6,262  
   
Prepaid expenses and other assets
    (10,077 )     6,029       5,797  
   
Accounts payable
    11,254       29,141       4,704  
   
Accrued expenses and other non-current liabilities
    88,586       (24,164 )     (39,269 )
                         
     
Net cash provided by operating activities
    883,034       811,302       614,703  
                         
 
Cash flows from financing activities:
                       
 
Net change in commercial paper borrowings
    79,033       (2,500 )     (92,500 )
 
Debt proceeds
    282,153       105,115       185,316  
 
Debt repaid, including capital lease obligations
    (456,932 )     (340,433 )     (360,359 )
 
Dividends on common stock
    (38,731 )     (37,984 )     (37,137 )
 
Common stock issued
    87,743       46,576       37,083  
 
Common stock repurchased
    (149,026 )     (3,570 )     (1,911 )
                         
     
Net cash used in financing activities
    (195,760 )     (232,796 )     (269,508 )
                         
 
Cash flows from investing activities:
                       
 
Purchases of property and revenue earning equipment
    (1,091,582 )     (733,577 )     (582,217 )
 
Sales of property and revenue earning equipment
    352,335       222,888       152,685  
 
Sale and leaseback of revenue earning equipment
    96,801              
 
Acquisitions
    (148,791 )     (96,518 )      
 
Collections on direct finance leases
    63,795       61,368       66,489  
 
Other, net
    512       3,723       4,219  
                         
     
Net cash used in investing activities
    (726,930 )     (542,116 )     (358,824 )
                         
 
(Decrease) increase in cash and cash equivalents
    (39,656 )     36,390       (13,629 )
Cash and cash equivalents at January 1
    140,627       104,237       117,866  
                         
Cash and cash equivalents at December 31
  $ 100,971       140,627       104,237  
                         
 
Supplemental disclosures of non-cash investing activities:
                       
 
Changes in accounts payable related to purchases of revenue earning equipment
  $ 73,037       (8,447 )     18,084  
 
Revenue earning equipment acquired under capital leases
    54,094       66,681       67,036  
See accompanying notes to consolidated financial statements.

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RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
                                                                                     
                            Accumulated Other    
                            Comprehensive Loss    
    Preferred                        
    Stock   Common Stock   Additional           Currency   Minimum   Unrealized    
            Paid-In   Retained   Deferred   Translation   Pension   Gain/(Loss)    
    Amount   Shares   Par   Capital   Earnings   Compensation   Adjustments   Liability   on Derivative   Total
                                         
    (Dollars in thousands, except per share amounts)
Balance at January 1, 2002
  $       60,809,628     $ 30,405       507,151       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 of $(125,083)
                                              (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)
          1,761,289       880       36,396             (193 )                       37,083  
Benefit plan stock purchases(2)
          (73,992 )     (37 )     (1,874 )                                   (1,911 )
Tax benefit from employee stock options
                      3,272                                     3,272  
Amortization and forfeiture of restricted stock
          (55,988 )     (28 )     (662 )           2,074                         1,384  
                                                                                 
Balance at December 31, 2002
          62,440,937       31,220       544,283       806,761       (3,423 )     (41,315 )     (228,818 )     (493 )     1,108,215  
                                                               
 
Components of comprehensive income:
                                                                               
 
Net earnings
                            131,436                               131,436  
 
Foreign currency translation adjustments
                                        52,308                   52,308  
 
Additional minimum pension liability adjustment, net of tax of $22,589
                                              41,376             41,376  
 
Unrealized gain related to derivatives accounted for as hedges
                                                    286       286  
                                                               
   
Total comprehensive income
                                                                            225,406  
Common stock dividends declared — $0.60 per share
                            (37,984 )                             (37,984 )
Common stock issued under employee stock option and stock purchase plans(1)
          2,233,900       1,117       47,243             (1,784 )                       46,576  
Benefit plan stock purchases(2)
          (2,953 )     (1 )     (74 )                                   (75 )
Common stock repurchases
          (117,500 )     (59 )     (1,064 )     (2,372 )                             (3,495 )
Tax benefit from employee stock options
                      4,852                                     4,852  
Amortization and forfeiture of restricted stock
          (66,898 )     (33 )     (1,397 )           2,320                         890  
                                                                                 
Balance at December 31, 2003
          64,487,486       32,244       593,843       897,841       (2,887 )     10,993       (187,442 )     (207 )     1,344,385  
                                                               
Components of comprehensive income:
                                                                               
 
Net earnings
                            215,609                               215,609  
 
Foreign currency translation adjustments
                                        27,983                   27,983  
 
Additional minimum pension liability adjustment, net of tax of $(2,186)
                                              (1,072 )           (1,072 )
 
Unrealized gain related to derivatives accounted for as hedges
                                                    324       324  
                                                               
   
Total comprehensive income
                                                                            242,844  
Common stock dividends declared — $0.60 per share
                            (38,731 )                             (38,731 )
Common stock issued under employee stock option and stock purchase plans(1)
          3,538,235       1,769       88,693             (3,613 )                       86,849  
Benefit plan stock sales(2)
          20,945       10       884                                     894  
Common stock repurchases
          (3,714,559 )     (1,857 )     (35,932 )     (111,237 )                             (149,026 )
Tax benefit from employee stock options
                      21,071                                     21,071  
Amortization and forfeiture of restricted stock
          (21,255 )     (11 )     (407 )           2,320                         1,902  
                                                                                 
Balance at December 31, 2004
  $       64,310,852     $ 32,155       668,152       963,482       (4,180 )     38,976       (188,514 )     117       1,510,188  
                                                                                 
 
(1) Net of common shares delivered as payment for the exercise price or to satisfy the option holders’ withholding tax liability upon exercise of options.
(2) Represents open-market transactions of common shares by the trustee of Ryder’s deferred compensation plan.
See accompanying notes to consolidated financial statements.

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RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
      The consolidated financial statements include the accounts of Ryder System, Inc. and subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Consolidation of Variable Interest Entities
      In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities,” (as revised by FIN 46-R issued December 2003) that established 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. Prior to FIN 46, which clarified the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” a partially owned entity was only consolidated if we controlled it through ownership of a majority voting interest in the entity. FIN 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 a VIE is the primary beneficiary of that entity. FIN 46 applied immediately to VIEs created after January 31, 2003. For VIEs in existence before February 1, 2003, FIN 46 as amended, applies to the first fiscal period ending after December 15, 2003, although the FASB encouraged earlier application.
      Effective July 1, 2003, we adopted FIN 46 and, as a result of adopting FIN 46, we consolidated three VIEs that were established in connection with sale-leaseback transactions of revenue earning equipment in which we sold revenue earning equipment to a special-purpose entity and then leased the revenue earning equipment back as lessee under operating lease arrangements. As part of these transactions, we provided credit enhancements and residual value guarantees that obligated us to absorb the majority of the expected losses from such entities, if any are realized. Therefore, FIN 46 required that these entities be consolidated. The credit enhancements, in the form of cash reserve deposits (included in “Direct financing leases and other assets”), as well as the revenue earning equipment under lease serve as collateral for the VIEs’ long-term borrowings. The creditors of the VIEs do not have recourse to the general assets of Ryder.
      The assets and liabilities of consolidated VIEs are measured in the amounts at which they would have been recorded in the consolidated financial statements if FIN 46 had been effective at the inception of the transactions. Accordingly, effective July 1, 2003, we recorded additional revenue earning equipment of $421 million and additional debt of $414 million, in addition to recognizing a non-cash cumulative effect charge of $3 million on an after-tax basis, or $0.05 per diluted common share. Concurrent with the consolidation of the VIEs, we began recognizing depreciation expense attributed to the revenue earning equipment of the VIEs and interest expense on the additional debt of the VIEs in lieu of rent expense. The cumulative effect charge primarily represented depreciation and interest expense of the VIEs that would have been recorded had FIN 46 been in effect since lease inception, in excess of rent expense recorded under operating leases. The charge is expected to reverse in operating earnings through 2006. The consolidation of the VIEs did not have a significant impact on our consolidated net earnings. Net earnings for 2002 would not have been materially different if this standard had been adopted effective January 1, 2002. However, both net cash provided by operating activities and used in financing activities presented on our Consolidated Statements of Cash Flows increased due to the add-back of depreciation expense on the VIEs’ revenue earning equipment and principal payments on the VIEs’ debt, respectively.

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RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Use of Estimates
      The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates are based on management’s best knowledge of historical trends, actions that we may take in the future, and other information available when the financial statements are prepared. Changes in estimates are recognized in accordance with the accounting rules for the estimate, which is typically in the period when new information becomes available. Areas where the nature of the estimate make it reasonably possible that actual results could materially differ from the amounts estimated include: depreciation and residual value guarantees, employee retirement plan obligations, self-insurance accruals, impairment assessments on long-lived assets (including goodwill and indefinite-lived intangible assets), income tax liabilities, and contingent liabilities.
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
      We recognize revenue when persuasive evidence of an arrangement exists, the services have been rendered to customers or delivery has occurred, the pricing is fixed or determinable and collectibility is reasonably assured. We are required to make judgments about whether pricing is fixed or determinable and whether or not collectibility is reasonably assured. Revenue is recorded on a “gross” or “net” basis depending on whether we are acting as “principal” or “agent.” We serve as the principal in those arrangements in which we have substantial risks and rewards of ownership and, accordingly, record revenue on a gross basis, without deducting third party services costs. For those arrangements in which we do not have substantial risks and rewards of ownership, we are considered an agent in the contract and, accordingly, record revenue net of third party services costs.
      In addition to the aforementioned general policy, the following are the specific revenue recognition policies for our reportable business segments by major revenue arrangement:
Fleet Management Solutions (FMS)
  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. However, 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 as earned.
 
  Programmed maintenance revenue is recognized on a straight-line basis as maintenance services are rendered over the terms of the related agreements. Programmed maintenance agreements allow for rate changes based upon changes in the CPI. Maintenance agreements also provide for a fixed per-mile charge. The fixed per-mile charge and the changes in rates attributed to changes in the CPI are recognized as earned.
 
  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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Supply Chain Solutions (SCS) and Dedicated Contract Carriage (DCC)
  Revenue from service contracts is recognized as services are rendered in accordance with contract terms, which typically include discrete billing rates for the services.
Accounts Receivable Allowance
      An allowance for uncollectible customer receivables is determined based on a combination of bad debt experience and aging analysis. We recognize billing adjustments to revenue and accounts receivable for certain discounts and billing corrections. Estimates for credit losses and billing adjustments are regularly updated based on historical experience of bad debts, adjustments processed and current collection trends. Accounts are charged against the allowance when determined to be uncollectible. The allowance is maintained at a level deemed appropriate based on loss experience and other factors affecting collectibility.
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
      We allocate a portion of the acquisition costs of revenue earning equipment to tires in service and amortize 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 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.
      Provision for depreciation is computed using the straight-line method on all depreciable assets. Ryder 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 and losses on operating property and equipment sales are reflected in “Miscellaneous income, net.”
      We routinely dispose of revenue earning equipment as part of our 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. We stratify our revenue earning equipment to be disposed of by vehicle type (tractors, trucks, trailers), weight class, age and other characteristics, as relevant, and create 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 FMS business segment was $76 million and $64 million at December 31, 2004 and 2003, respectively.
      While we believe our estimates of residual values and fair values of revenue earning equipment are reasonable, changes to our estimates of values may occur due to changes in the market for used vehicles, the condition of the vehicles, and inherent limitations in the estimation process.

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Goodwill and Other Intangible Assets
      Goodwill and intangible assets with indefinite useful lives are not amortized, but rather, are tested for impairment at least annually (April 1st). Recoverability of goodwill is evaluated using a two-step process. The first step involves a comparison of the fair value of each of our reporting units with its carrying amount. If a reporting unit’s carrying amount exceeds its fair value, the second step is performed. The second step involves a comparison of the implied fair value and carrying value of that reporting unit’s goodwill. To the extent that a reporting unit’s carrying amount exceeds the implied fair value of its goodwill, an impairment loss is recognized. Identifiable intangible assets not subject to amortization are assessed for impairment by comparing the fair value of the intangible asset to its carrying amount. An impairment loss is recognized for the amount by which the carrying value exceeds fair value.
      In making our assessments of fair value we rely on our knowledge and experience about past and current events and assumptions about conditions we expect to exist. These assumptions are based on a number of factors including future operating performance, economic conditions, actions we expect to take, and present value techniques. Rates used to discount cash flows are dependent upon interest rates and the cost of capital at a point in time. There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of goodwill impairment. It is possible that assumptions underlying the impairment analysis will change in such a manner that impairment in value may occur in the future.
      Intangible assets with finite lives are amortized over their respective estimated useful lives to their estimated residual values. Identifiable intangible assets that are subject to amortization are evaluated for impairment using a process similar to that used to evaluate long-lived assets described below.
Impairment of Long-Lived Assets Other than Goodwill
      Long-lived assets held and used, including amortizable intangible assets, are tested for recoverability when circumstances indicate that the carrying amount of assets may not be recoverable. Recoverability of long-lived assets is evaluated by comparing the carrying amount of an asset or asset group to management’s best estimate of the undiscounted future operating cash flows (excluding interest charges) expected to be generated by the asset or asset group. If these comparisons indicate that the asset or asset group is not recoverable, an impairment loss is recognized for the amount by which the carrying value of the asset or asset group exceeds 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.
Self-Insurance Accruals
      Ryder retains a portion of the accident risk under vehicle liability, workers’ compensation and other insurance programs. Under our insurance programs, we retain the risk of loss in various amounts up to $1 million on a per occurrence basis. We also maintain additional insurance at certain amounts in excess of our respective underlying retention. Accruals are based primarily on the actuarially estimated, undiscounted cost of claims, which includes claims incurred but not reported. Such liabilities are based on estimates. While we believe that the amounts are adequate, there can be no assurance that changes to our estimates may not occur due to limitations inherent in the estimation process. Changes in the estimates of these accruals are charged or credited to earnings in the period determined. Amounts estimated to be paid within the next year have been classified as “Accrued expenses” with the remainder included in “Other non-current liabilities.”

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RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Residual Value Guarantees
      Ryder 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”). We periodically review the residual values of revenue earning equipment that we lease from third parties and our exposures under residual value guarantees. The review is conducted in a manner similar to that used to analyze residual values and fair values of owned revenue earning equipment. 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 we believe that the amounts are adequate, changes to our 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
      Our provision for income taxes is based on reported earnings before income taxes. Deferred taxes are recognized for the future tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using tax rates in effect for the years in which the differences are expected to reverse. Valuation allowances are recognized to reduce deferred tax assets to the amount that is more likely than not to be realized. In assessing the likelihood of realization, management considers estimates of future taxable income.
      We are subject to tax audits in numerous jurisdictions in the U.S. and around the world. Tax audits by their very nature are often complex and can require several years to complete. In the normal course of business, we are subject to challenges from the IRS and other tax authorities regarding amounts of taxes due. These challenges may alter the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions. As part of our calculation of the provision for income taxes on earnings, we record the amount we expect to incur as a result of tax audits as part of accrued income taxes. Such accruals require management to make estimates and judgments with respect to the ultimate outcome of a tax audit. Accruals for income tax exposures expected to be settled within the next year are included in “Accrued expenses.”
Environmental Expenditures
      We record liabilities for environmental assessments and/or cleanup when it is probable a loss has been incurred and the costs can be reasonably estimated. Management works with independent third-party specialists in order to effectively assess our environmental liabilities. Environmental liability estimates may include costs such as anticipated site testing, consulting, remediation, disposal, post-remediation monitoring and legal fees, as appropriate. 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. Estimates are not discounted as the timing of the anticipated cash payments is not fixed or readily determinable. Claims for reimbursement of remediation costs are recorded when recovery is deemed probable.
Derivative Instruments and Hedging Activities
      We use financial instruments, including forward exchange contracts, futures, swaps and cap agreements to manage our exposures to movements in interest rates and foreign currency exchange rates. The use of these financial instruments modifies the exposure of these risks with the intent to reduce the risk or cost to Ryder. We do not enter into derivative financial instruments for trading purposes. We limit our risk that counterparties to the derivative contracts will default and not make payments by entering into

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
derivative contracts only with counterparties comprised of large banks and financial institutions that meet established credit criteria. We do not expect to incur any losses as a result of counterparty default.
      On the date a derivative contract is entered into, we formally document, among other items, the intended hedging designation and relationship, along with the risk management objectives and strategies for entering into the derivative contract. We also formally assess, both at the hedge’s inception and on an ongoing basis, whether the derivatives we 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, we discontinue hedge accounting prospectively.
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 currency translation adjustment account within accumulated other comprehensive loss. The ineffective portion on the hedged item that is attributable to the hedged risk is recorded in earnings and reported in the Consolidated Statements of Earnings as miscellaneous income, net.
Foreign Currency Translation
      Our 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.
Stock-based Compensation
      At December 31, 2004, Ryder had various stock-based employee compensation plans, which are described more fully in Note 17, “Stock-Based Compensation Plans.” We recognize stock-based compensation using the intrinsic value method. Under this method, we recognize compensation cost based on the excess, if any, of the quoted market price of our common stock at the date of grant (or other measurement date) and the amount an employee must pay to acquire the common stock.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
      The following table illustrates the effect on net earnings and earnings per share if we had applied the fair value method of accounting to stock-based employee compensation.
                             
    Years ended December 31
     
    2004   2003   2002
             
    (In thousands, except per share amounts)
Net earnings, as reported
  $ 215,609       131,436       93,666  
Add: Stock-based employee compensation expense included in reported net earnings, net of tax
    1,155       523       886  
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of tax
    (8,971 )     (5,694 )     (8,201 )
                         
Pro forma net earnings
  $ 207,793       126,265       86,351  
                         
Earnings per share:
                       
 
Basic:
                       
   
As reported
  $ 3.35       2.09       1.52  
   
Pro forma
  $ 3.23       2.01       1.40  
 
Diluted:
                       
   
As reported
  $ 3.28       2.06       1.50  
   
Pro forma
  $ 3.16       1.98       1.38  
      The fair values of options granted were estimated at the dates of grant using the Black-Scholes option-pricing model. See Note 17, “Stock-Based Compensation Plans,” for a description of option pricing assumptions.
Earnings Per Share
      Basic earnings per common share is computed by dividing net earnings by the weighted-average number of common shares outstanding. Restricted stock granted to employees and directors are not included in the computation of basic earnings per common share until the securities vest. Diluted earnings per common share reflect the dilutive effect of potential common shares from securities such as stock options and unvested restricted stock. The dilutive effect of stock options and unvested restricted stock is computed using the treasury stock method, which assumes any proceeds that could be obtained upon the exercise of stock options and restricted stock would be used to purchase common shares at the average market price for the period.
Share Repurchases
      Repurchases of shares of common stock are made periodically in open-market transactions using working capital, and are subject to market conditions, legal requirements and other factors. The cost of share repurchases is allocated between common stock and retained earnings based on the amount of capital surplus at the time of the share repurchase.
Comprehensive Income (Loss)
      Comprehensive income (loss) presents a measure of all changes in shareholders’ equity except for changes resulting from transactions with shareholders in their capacity as shareholders. Ryder’s total comprehensive income (loss) presently consists of net earnings, currency translation adjustments associated

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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.
Reclassifications
      In order to maintain consistency and comparability between periods, certain reclassifications of amounts previously reported have been made to the accompanying Consolidated Financial Statements and related notes at December 31, 2003 and for the years ended December 31, 2003 and 2002, as follows: (i) tax contingency accruals previously included within “Deferred income taxes” have been reclassified to “Other non-current liabilities” to conform to the current year presentation; (ii) pension accruals expected to be settled within the next year previously included within “Other non-current liabilities” have been reclassified to “Accrued expenses” to conform to current year presentation based on management’s best estimate of pension contributions in the next year and (iii) the presentation of “Purchases of property and revenue earning equipment” in the Consolidated Statements of Cash Flows has been revised to reflect the non-cash impact of changes in accounts payable related to purchases of revenue earning equipment.
Recent Accounting Pronouncements
      In December 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after June  15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition. Under SFAS No. 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include prospective and retroactive adoption options. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of this standard, while the retroactive method would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. We are currently evaluating the requirements of SFAS No. 123R and expect the adoption of this standard will result in amounts that are similar to our current pro forma disclosures under SFAS No. 123. We have not yet determined the appropriate fair value model to value share-based payments, the method of adoption or the effect of adopting SFAS No. 123R.
      In May 2004, the FASB issued FASB Staff Position (FSP) No. FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004,” which provides guidance under SFAS No. 109, “Accounting for Income Taxes,” with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the Jobs Act) on enterprises’ income tax expense and deferred tax liability. The Jobs Act was enacted on October 22, 2004. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. We expect to complete our evaluation of the impact of the repatriation provisions by June 2005. Accordingly, as provided for in FSP 109-2, we have not adjusted our tax expense or deferred tax liability to reflect the repatriation provisions of the Jobs Act.
      In May 2004, the FASB issued FSP No. FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” (the Act) in response to a new law regarding prescription drug benefits under Medicare (Medicare Part D) and a Federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least

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RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
actuarially equivalent to Medicare Part D. Currently, SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” requires that changes in relevant law be considered in measurement of postretirement benefit costs. We have determined that the enactment of the Act was not a significant event with respect to our plans, and accordingly, as required by FSP 106-2, the effects of the Act are incorporated into our December 31, 2004 measurement of the plans’ benefit obligations.
2. ACCOUNTING CHANGES
      The following table summarizes the after-tax non-cash charges recorded in connection with accounting standards adopted in 2003 and 2002:
                   
    Years ended
    December 31
     
    2003   2002
         
    (In thousands)
FIN 46 — Variable interest entities (See Note 1)
  $ (2,954 )      
SFAS No. 143 — Asset retirement obligations
    (1,169 )      
SFAS No. 142 — Goodwill and other intangible assets
          (18,899 )
                 
 
Cumulative effect of changes in accounting principles
  $ (4,123 )     (18,899 )
                 
      Effective January 1, 2003, we adopted SFAS No. 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 asset retirement costs. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made and that the associated asset retirement costs be capitalized as part of the carrying amount of the long-lived asset. The cumulative effect adjustment recognized upon adoption of this standard was $1 million on an after-tax basis, or $0.02 per diluted common share, consisting primarily of costs associated with the retirement of certain components of revenue earning equipment. Adoption of this standard would not have had a material impact on our results of operations or financial condition for 2002.
      Effective January 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” which requires goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. SFAS No. 142 also requires that intangible assets with finite lives be amortized over their respective estimated useful lives to their estimated residual values. The cumulative effect adjustment recognized upon adoption of this standard was $19 million on a before and after-tax basis, or $0.30 per diluted common share, consisting of a goodwill impairment charge associated with the Asian operations of our SCS business segment. The goodwill impairment charge resulted from the application of the new impairment methodology introduced by SFAS No. 142. The impact of this accounting change had no effect on Ryder’s operating earnings.
      During 2004, Ryder did not record any cumulative effect charge in connection with the adoption of accounting standards.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
3. ACQUISITIONS
      Ruan Acquisition — On March 1, 2004, Ryder completed an asset purchase agreement with Ruan Leasing Company (Ruan) under which we acquired Ruan’s fleet of approximately 6,400 vehicles, 37 of its 111 service locations and more than 500 customers. Ryder also acquired full service contract maintenance agreements covering approximately 1,700 vehicles. The combined Ryder/ Ruan network allowed us to leverage our existing U.S. infrastructure in key markets while adding new infrastructure to strengthen our presence in targeted areas of the Midwest, Southeast, Mid-Atlantic and Southwest. The purchase price, which is subject to post closing adjustments, was allocated to the net assets acquired based on their fair values. At December 31, 2004, approximately $142 million of the purchase price had been paid with the remaining amount expected to be paid by the first quarter of 2006, subject to holdback provisions set forth in the agreement. The initial recording of the transaction was based on preliminary valuation assessments and was subject to change.
      The following table provides a rollforward of the original estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
                             
    Original Amount   Purchase    
    Disclosed First   Accounting    
    Quarter 2004   Adjustments   Total Allocation
             
    (In thousands)
Assets:
                       
 
Revenue earning equipment
  $ 138,587       612       139,199  
 
Operating property and equipment
    1,280       (749 )     531  
 
Customer relationship intangibles
    5,209       (9 )     5,200  
 
Other assets
    3,370       64       3,434  
                         
   
Total assets
    148,446       (82 )     148,364  
Liabilities:
                       
 
Asset retirement obligations and other liabilities
    (213 )           (213 )
                         
Purchase price
  $ 148,233       (82 )     148,151  
                         
      General Acquisition — On December 31, 2003, Ryder completed an asset purchase agreement with General Car and Truck Leasing System, Inc. (General) under which we acquired General’s fleet of approximately 4,200 vehicles, 15 of its 34 service locations and more than 700 customers. The combined Ryder/ General network allowed us to leverage our existing U.S. infrastructure in key markets while adding new infrastructure to strengthen our presence in targeted areas of the Midwest and Southeast. The purchase price, which is subject to post closing adjustments, was allocated to the net assets acquired based on their fair values. At December 31, 2004, approximately $102 million of the purchase price had been paid with the remaining amount required to be paid in 2005, subject to holdback provisions set forth in the agreement.

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RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
      As described in the 2003 Annual Report, the initial recording of the transaction was based on preliminary valuation assessments and was subject to change. The following table provides a rollforward of the original estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
                             
    Original Amount   Purchase    
    Disclosed in 2003   Accounting    
    Annual Report   Adjustments   Total Allocation
             
    (In thousands)
Assets:
                       
 
Revenue earning equipment
  $ 98,236       (378 )     97,858  
 
Operating property and equipment
    6,646       (621 )     6,025  
 
Customer relationship intangibles
    2,330       153       2,483  
 
Other assets
    1,709       599       2,308  
                         
   
Total assets
    108,921       (247 )     108,674  
Liabilities:
                       
 
Asset retirement obligations and other liabilities
    (133 )     (811 )     (944 )
                         
Purchase price
  $ 108,788       (1,058 )     107,730  
                         
      Pro Forma Information — The results of Ruan and General have been included in the consolidated financial statements from the date of acquisition. The following table provides the unaudited pro forma revenue, earnings before cumulative effect of changes in accounting principles, net earnings and earnings per share as if the results of these businesses had been included in operations commencing January 1, 2003. This pro forma information is not necessarily indicative either of the combined results of operations that actually would have been realized had the acquisitions been consummated during the period for which the pro forma information is presented, or of future results. The pro forma results for 2003 include approximately $27 million of asset impairment charges recorded by one of the acquired entities in the period prior to the acquisition.
                   
    Unaudited
    December 31
     
    2004   2003
         
    (In thousands, except per share
    amounts)
Revenue
  $ 5,173,276       5,044,304  
Earnings before cumulative effect of changes in accounting principles
  $ 214,193       115,273  
Net earnings
  $ 214,193       111,150  
Earnings per common share — Diluted:
               
 
Before cumulative effect of changes in accounting principles
  $ 3.26       1.80  
 
Net earnings
  $ 3.26       1.74  
      Vertex Acquisition — During November 2003, Ryder also acquired substantially all of the assets of Vertex Services, LLC (Vertex), an environmental services firm providing fuel storage tank management services for approximately $2 million in cash. Vertex’s operating results from November 15, 2003 (the closing date) have been included in our consolidated results. Pro forma results of operations have not been presented because the effect of this acquisition was not significant.
      No acquisitions were completed in 2002.

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RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
4. RESTRUCTURING AND OTHER (RECOVERIES) CHARGES
      The components of restructuring and other (recoveries) charges, net in 2004, 2003 and 2002 were as follows:
                             
    Years ended December 31
     
    2004   2003   2002
             
    (In thousands)
Restructuring (recoveries) charges, net:
                       
 
Severance and employee-related (recoveries) costs
  $ (1,216 )     4,902       5,198  
 
Facilities and related (recoveries) costs
    (79 )     (8 )     106  
                         
      (1,295 )     4,894       5,304  
Other (recoveries) charges, net:
                       
 
Asset write-downs
    (61 )     (1,182 )     (285 )
 
Gain on sale of headquarters complex
    (24,308 )            
 
Strategic consulting fees
                (64 )
 
Contract termination and transition costs
    8,000             (219 )
 
Insurance reserves — sold business
          (42 )     (520 )
 
Settlement of commercial dispute
    (12 )     (3,900 )      
                         
   
Total
  $ (17,676 )     (230 )     4,216  
                         
      Allocation of restructuring and other (recoveries) charges, net across business segments in 2004, 2003 and 2002 was as follows:
                           
    Years ended December 31
     
    2004   2003   2002
             
    (In thousands)
Fleet Management Solutions
  $ 4,312       (961 )     (177 )
Supply Chain Solutions
    1,937       536       5,137  
Dedicated Contract Carriage
    503       (311 )     243  
Central Support Services
    (24,428 )     506       (987 )
                         
 
Total
  $ (17,676 )     (230 )     4,216  
                         
2004 Activity
      Restructuring recoveries, net during 2004 related primarily to employee severance and benefits recorded in prior restructuring charges that were reversed due to refinements in estimates.
      Other recoveries, net during 2004 related primarily to $24 million in gains from properties sold in connection with the relocation of our headquarters. In May 2004, we completed the sale of our corporate headquarters facility for $39 million in cash. In conjunction with this sale, we entered into a lease agreement with the purchaser to lease back the headquarters facility until we relocate to our new headquarters in 2005. The terms of the leaseback agreement met the criteria for a “normal leaseback” and full gain recognition of $22 million. Also during 2004, we recognized gains totaling $2 million from the sale of properties ancillary to our main headquarters facility.
      Other charges during 2004 related to the termination of certain services covered by an information technology contract. As part of on-going cost containment initiatives, Ryder management approved and committed to a plan to transition certain outsourced information technology infrastructure services to Ryder employees. Under the terms of the agreement, Ryder was obligated to pay termination costs in the event of termination prior to the expiration date of 2010. In accordance with the terms of the services

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agreements, Ryder notified the information technology services provider of its intent to terminate the services and recorded charges totaling $8 million for contract termination ($6 million) and transition costs incurred since termination ($2 million). By December 31, 2004, all transition activities were completed and we expect cost reductions associated with the termination of these services to benefit our results starting in 2005.
2003 Activity
      During 2003, Ryder approved a plan to eliminate approximately 140 positions as a result of on-going cost management and process improvement actions in Ryder’s FMS and SCS business segments and Central Support Services. The charge related to these actions included severance and employee-related costs totaling $6 million. While many of these employees had not been terminated by December 31, 2003, such actions were substantially finalized by March 31, 2004. Our estimated annual pre-tax cost savings in salaries and employee-related costs realized from these actions approximate $11 million. During 2003, we also reversed severance and employee-related costs totaling $1 million that had been recorded in prior restructurings due to refinements in estimates.
      Other recoveries during 2003 principally include a settlement of a commercial dispute pertaining to prior billings with an information technology vendor and gains on sales of owned facilities identified for closure in prior restructuring charges.
2002 Activity
      During the fourth quarter of 2002, Ryder approved a plan to eliminate approximately 140 positions as a result of cost management actions principally in our SCS business segment and Central Support Services, which were substantially finalized at December 31, 2002. The charge related to these actions included severance and employee-related costs totaling $7 million. Our estimated annual pre-tax cost savings in salaries and employee-related costs realized from these actions approximate $14 million. During 2002, we also reversed severance and employee-related costs totaling $2 million that had been recorded in prior restructuring charges due to refinements in the estimates.
      Other recoveries during 2002 include net gains (recoveries) on sale of owned facilities identified for closure in prior restructuring charges, the reversal of contract termination costs recognized in 2001 resulting from refinements in estimates and the final settlement of insurance reserves attributed to a previously sold business.
      The following table presents a roll-forward of the activity and balances of our restructuring reserve account for the years ended December 31, 2004 and 2003:
                                     
    Beginning           Ending
    Balance   Additions   Deductions   Balance
                 
    (In thousands)
Year Ended December 31, 2004:
                               
 
Employee severance and benefits
  $ 6,665       271       5,811       1,125  
 
Facilities and related costs
    1,322       101       663       760  
                                 
   
Total
  $ 7,987       372       6,474       1,885  
                                 
Year Ended December 31, 2003:
                               
 
Employee severance and benefits
  $ 9,369       5,832       8,536       6,665  
 
Facilities and related costs
    3,275       367       2,320       1,322  
                                 
   
Total
  $ 12,644       6,199       10,856       7,987  
                                 

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      At December 31, 2004, employee terminations from prior year restructuring plans were substantially finalized. Deductions represent cash payments made during the period of $5 million and $10 million and prior year charge reversals of $1 million in 2004 and 2003. At December 31, 2004, outstanding restructuring obligations are generally required to be paid over the next year.
5. RECEIVABLES
                   
    December 31
     
    2004   2003
         
    (In thousands)
Trade receivables
  $ 654,752       556,209  
Financing lease
    67,671       61,791  
Income tax receivable
    3,888       2,653  
Other
    18,447       29,477  
                 
      744,758       650,130  
Allowance
    (11,923 )     (9,361 )
                 
 
Total
  $ 732,835       640,769  
                 
      Ryder participated in an agreement to sell with limited recourse trade receivables on a revolving and uncommitted basis. This agreement expired in December 2004. Under the program, Ryder sold receivables from time to time in order to fund operations, particularly when the cost of such sales was cost effective compared with other means of funding, notably, commercial paper. Losses on receivable sales and related costs associated with this program were $0.5 million, $0.5 million and $2 million in 2004, 2003 and 2002, respectively, and included in “Miscellaneous income, net.”
6. REVENUE EARNING EQUIPMENT
                           
        December 31
    Estimated    
    Useful Lives   2004   2003
             
    (In years)    
        (In thousands)
Full service lease
    3 — 12     $ 4,518,029       4,186,497  
Commercial rental
    4.5 — 12       1,518,462       1,333,525  
                       
              6,036,491       5,520,022  
Accumulated depreciation
            (2,704,780 )     (2,473,982 )
                       
 
Total(1)
          $ 3,331,711       3,046,040  
                       
 
(1) Revenue earning equipment, net includes vehicles acquired under capital leases of $67 million, less accumulated amortization of $24 million at December 31, 2004, and $107 million, less accumulated amortization of $28 million at December 31, 2003. Amortization expense attributed to vehicles acquired under capital leases is combined with depreciation expense.
     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 Ryder’s Fleet Management Solutions business segment are full service leasing and short-term commercial rental. Under a full service lease, Ryder provides customers with vehicles, maintenance, supplies (including fuel), ancillary services and related equipment necessary for operation, while our customers exercise control of the related vehicles over the lease term (generally three to seven years depending upon the nature of the equipment). We also provide short-term rentals (generally daily or weekly), which tend to be seasonal, to commercial customers to supplement their fleets during peak business periods. Approximately 50% of commercial rentals are to existing full service lease customers to supplement their fleets during peak periods or to substitute full service lease units not yet delivered or temporarily out of service.

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7. OPERATING PROPERTY AND EQUIPMENT
                           
        December 31
    Estimated    
    Useful Lives   2004   2003
             
    (In years)    
        (In thousands)
Land
    —      $ 105,820       107,770  
Buildings and improvements
    10 — 40       573,717       603,610  
Machinery and equipment
    3 — 10       473,036       477,145  
Other
    3 — 10       65,168       56,800  
                       
              1,217,741       1,245,325  
Accumulated depreciation
            (738,143 )     (738,427 )
                       
 
Total
          $ 479,598       506,898  
                       
8. DIRECT FINANCING LEASES AND OTHER ASSETS
                         
        December 31
         
        2004   2003
             
        (In thousands)
Direct financing leases, net   $ 333,339       344,091  
Cash reserve deposits (vehicle securitization credit enhancements)     24,537       24,267  
Investments held in Rabbi Trust     21,737       18,239  
Swap and cap agreements     4,911       14,431  
Deferred debt issuance costs     6,933       5,488  
Other     25,074       34,455  
                 
Total   $ 416,531       440,971  
                 
9. GOODWILL AND OTHER INTANGIBLE ASSETS
                         
        December 31
         
        2004   2003
             
        (In thousands)
Unamortizable intangible assets:                
Goodwill   $ 157,904       155,628  
Trade name     8,686       8,686  
Pension intangible     8,804       10,950  
                 
              175,394       175,264  
                       
Amortizable intangible assets:                
Customer relationship intangibles(1)     7,683       2,330  
Accumulated amortization     (653 )      
                 
              7,030       2,330  
                       
Total   $ 182,424       177,594  
                 
 
(1) Customer relationship intangibles are being amortized over their estimated useful lives of 10 years.
     The Ryder trade name has been identified as having an indefinite useful life. In 2004, we completed our annual impairment test of goodwill and indefinite-lived intangibles and determined that there was no impairment. We recorded amortization expense associated with amortizable intangible assets of approximately $1 million in 2004. Based on the current amount of amortizable intangible assets, we estimate amortization expense to be approximately $1 million for each of the next five years.

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      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 at December 31, 2003
  $ 126,318       24,410       4,900       155,628  
Acquisitions(1)
    260                   260  
Currency translation adjustment
    751       1,265             2,016  
                                 
Balance at December 31, 2004
  $ 127,329       25,675       4,900       157,904  
                                 
 
(1) Amounts represent purchase accounting adjustments relating to the November 2003 acquisition of Vertex Services, LLC.
10. ACCRUED EXPENSES AND OTHER NON-CURRENT LIABILITIES
                     
    December 31
     
    2004   2003
         
    (In thousands)
   
Accrued Expenses
               
Salaries and wages
  $ 82,613       60,869  
Pension benefits
    39,189       41,498  
Deferred compensation
    3,589       1,856  
Postretirement benefits other than pensions
    7,441       6,894