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, 2008
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
 
(COMPANY LOGO)
RYDER SYSTEM, INC.
(Exact name of registrant as specified in its charter)
 
     
Florida
(State or other jurisdiction of incorporation or organization)
  59-0739250
(I.R.S. Employer Identification No.)
11690 N.W. 105th Street,    
Miami, Florida 33178   (305) 500-3726
(Address of principal executive offices, including zip code)   (Telephone number, including area code)
 
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
 
Securities registered pursuant to Section 12(g) of the Act:     None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
 
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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:
 
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No þ
 
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, 2008 was $3,876,375,009. The number of shares of Ryder System, Inc. Common Stock ($0.50 par value per share) outstanding at January 31, 2009 was 55,638,154.
 
     
Documents Incorporated by Reference into this Report
 
Part of Form 10-K into which Document is Incorporated
 
Ryder System, Inc. 2009 Proxy Statement
  Part III
 


 

 
RYDER SYSTEM, INC.
FORM 10-K ANNUAL REPORT
 
TABLE OF CONTENTS
 
                 
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PART I
 
ITEM 1. BUSINESS
 
OVERVIEW
 
Ryder System, Inc. (Ryder), a Florida corporation founded in 1933, is a global leader in transportation and supply chain management solutions. Our business is divided into three business segments: Fleet Management Solutions (FMS), which provides full service leasing, contract maintenance, contract-related maintenance and commercial rental of 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 solutions including distribution and transportation services throughout North America and in Europe, South America and Asia; and Dedicated Contract Carriage (DCC), which provides vehicles and drivers as part of a dedicated transportation solution in the U.S. Our customers range from small businesses to large international enterprises. These customers operate in a wide variety of industries, the most significant of which include automotive, electronics, transportation, grocery, lumber and wood products, food service, and home furnishings.
 
On December 17, 2008, we announced strategic initiatives to increase our competitiveness and drive long-term profitable growth. As part of these initiatives, during 2009 we will discontinue current SCS operations in certain international markets and transition out of specific SCS customer contracts in order to focus the organization and resources on the industries, accounts, and geographical regions that present the greatest opportunities for competitive advantage and long-term sustainable profitable growth. This will include discontinuing current operations in the markets of Brazil, Argentina, and Chile, and transitioning out of SCS customer contracts in Europe. We believe these changes will allow us to focus on enhancing the competitiveness and growth of our service offerings in the U.S., Canada, Mexico, the U.K. and Asia markets.
 
For financial information and other information relating to each of our business segments see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 8, “Financial Statements and Supplementary Data,” of this report.
 
INDUSTRY AND OPERATIONS
Fleet Management Solutions
 
Value Proposition
 
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, lower their costs and redirect their capital to other parts of their business. Our FMS product offering is comprised primarily of contractual-based full service leasing and contract maintenance services. We also offer transactional fleet solutions including commercial truck rental, maintenance services, and value-added fleet support services such as insurance, vehicle administration and fuel services. In addition, we provide our customers with access to a large selection of used trucks, tractors and trailers through our used vehicle sales program.
 
Market Trends
 
Over the last several years, many key trends have been reshaping the transportation industry, particularly the $63 billion U.S. private commercial fleet market and the $26 billion U.S. commercial fleet lease and rental market. The maintenance and operation of commercial vehicles has 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 efficiency 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. More recently, fluctuating energy prices have made it difficult for businesses to predict and manage fleet costs and the tightened credit market has limited businesses’ access to capital.


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Operations
 
For the year ended December 31, 2008, our global FMS business accounted for 65% of our consolidated revenue.
 
U.S.  Our FMS customers in the U.S. range from small businesses to large national enterprises. These customers operate in a wide variety of industries, including transportation, grocery, lumber and wood products, food service and home furnishings. At December 31, 2008, we had 636 locations in 49 states and Puerto Rico and operated 217 maintenance facilities on-site at customer properties. A location 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 fueling, safety inspections and preliminary maintenance checks as well as a shop for preventive maintenance and repairs.
 
Canada.  We have been operating in Canada for over 50 years. The Canadian private commercial fleet market is estimated to be $8 billion and the Canadian commercial fleet lease and rental market is estimated to be $2 billion. At December 31, 2008, we had 41 locations throughout 9 Canadian provinces. We also have 5 on-site maintenance facilities in Canada.
 
Europe.  We began operating in the U.K. in 1971 and since then have expanded into Ireland and Germany by leveraging our operations in the U.S. and the U.K. The U.K. commercial fleet lease and rental market is estimated to be $6 billion. At December 31, 2008, we had 40 locations throughout the U.K., Ireland and Germany, 29 of which are owned or leased by Ryder. We also manage a network of 344 independent maintenance facilities in the U.K. to serve our customers where it is more effective than providing the 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.
 
FMS Product Offerings
 
Full Service Leasing.  Under a typical full service lease, we provide vehicle 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. Our full service lease includes all the maintenance services that are part of our contract maintenance service offering. 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. We will assess a customer’s situation, and after considering the size of the customer, residual risk 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 customer for periods generally ranging from three to seven years for trucks and tractors and up to ten years for trailers. Because we purchase a large number of vehicles from a limited number of manufacturers, we are able to leverage our buying power for the benefit of our customers. In addition, given our continued focus on improving the efficiency and effectiveness of our maintenance services, we can provide our customers with a cost effective alternative to maintaining their own fleet of vehicles. We also offer our leasing customers the additional fleet support services described below.
 
Contract Maintenance.  Our contract maintenance customers include non-Ryder owned vehicles related to our full service lease customers as well as other 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. The contract maintenance service offering is designed to reduce vehicle downtime through preventive and predictive maintenance based on vehicle type and time or mileage intervals. The service also provides vehicle repairs including parts and labor, 24-hour emergency roadside service and replacement vehicles for vehicles that are temporarily out of service. Vehicles covered under this offering 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 at the customer’s location.
 
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


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commercial rental fleet also provides additional vehicles to our full service lease customers to handle their peak or seasonal business needs. In addition to one-off commercial rental transactions, we seek to build national relationships with large national customers to become their preferred source of commercial vehicle rentals. Our rental representatives assist 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 extend to our rental customers liability insurance coverage under our existing policies and the benefits of our comprehensive fuel services program.
 
The following table provides information regarding the number of vehicles and customers by FMS product offering, at December 31, 2008:
 
                                                 
    U.S.     Foreign     Total  
    Vehicles     Customers     Vehicles     Customers     Vehicles     Customers  
 
Full service leasing
    100,300       12,400       20,100       2,300       120,400       14,700  
Contract maintenance(1)
    31,000       1,400       4,500       200       35,500       1,600  
Commercial rental
    26,300       10,400       6,000       4,000       32,300       14,400  
 
 
(1) Contract maintenance customers include 700 full service lease customers.
 
Contract-Related Maintenance.  Our full service lease and contract maintenance customers periodically require additional maintenance services that are not included in their contracts. For example, additional maintenance services may arise when a customer’s driver damages the vehicle and these services are performed or managed by Ryder. Some customers also periodically require maintenance work on vehicles that are not covered by a long-term lease or maintenance contract. Ryder may provide service on these vehicles and charge the customer on an hourly basis for work performed. We obtain contract-related maintenance work because of our contractual relationship with the customers; however, the service provided is in addition to that included in their contractual agreements.
 
Fleet Support Services.  We have developed a variety of fleet support services tailored to the needs of our large base of lease customers. Customers may elect to include these services as part of their full service lease or contract maintenance agreements. Currently, we offer the following fleet support services:
 
     
Service   Description
 
Fuel
  Full service diesel fuel dispensing at competitive prices; fuel planning; fuel tax reporting; centralized billing; and fuel cards
     
     
Insurance
  Liability insurance coverage under our existing insurance policies which includes monthly invoicing, flexible deductibles, claims administration and discounts based on driver performance and vehicle specifications; physical damage waivers; gap insurance; and 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; and loss prevention consulting
     
     
Administrative
  Vehicle use and other tax reporting; permitting and licensing; and regulatory compliance (including hours of service administration)
     
     
Environmental management
  Storage tank monitoring; stormwater management; environmental training; and ISO 14001 certification
     
     
Information technology
  RydeSmartTM is a full-featured GPS fleet location, tracking, and vehicle performance management system designed to provide our customers improved fleet operations and cost controls. FleetCARE is our web based tool that provides customers with 24/7 access to key operational and maintenance management information about their fleets.


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Used Vehicles.  We primarily sell our used vehicles at one of our 57 retail sales centers throughout North America, at our branch locations or through our website at www.Usedtrucks.Ryder.com. Typically, before we offer used vehicles for sale, our technicians assure that it is Road ReadyTM, which means that the vehicle has passed a comprehensive, multi-point performance inspection based on specifications formulated through our contract maintenance program. Our retail sales centers throughout North America allow us to leverage our expertise and in turn realize higher sales proceeds than in the wholesale market. Although we generally 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:
 
  •   improve customer retention levels and focus on conversion of private fleets and commercial rental customers to full service lease customers;
 
  •   successfully implement sales growth initiatives in our contractual product offerings;
 
  •   focus on contractual revenue growth strategies, including the evaluation of selective acquisitions;
 
  •   deliver unparalleled maintenance to our customers while continuing to implement process designs, productivity improvements and compliance discipline;
 
  •   optimize asset utilization and management;
 
  •   leverage infrastructure;
 
  •   offer a wide range of support services that complement our leasing, rental and maintenance businesses; and
 
  •   offer competitive pricing through cost management initiatives and maintain pricing discipline on new business.
 
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 business segment competes with companies providing similar services on a national, regional and local level. Many regional and local competitors provide services on a national level through their participation in various cooperative programs. Competitive factors include price, equipment, maintenance, service and geographic coverage. We compete with finance lessors and also with truck and trailer manufacturers, and independent dealers, who provide full service lease products, finance leases, extended warranty maintenance, rental and other transportation services. Value-added differentiation of the full service leasing, contract maintenance, contract-related maintenance and commercial rental service has been, and will continue to be, our emphasis.
 
Acquisitions
 
In addition to our continued focus on organic growth, acquisitions play an important role in enhancing our growth strategy in the U.S., Canada and the U.K. In assessing potential acquisition targets, we look for companies that would create value for the Company through the creation of operating synergies, leveraging our existing facility infrastructure and fixed costs, improving our geographic coverage, diversifying our customer base and improving our competitive position in target markets.


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During 2008, we took several actions to enhance our growth, including the following acquisitions:
 
  •   On January 11, 2008, we acquired the assets of Lily Transportation Corporation (“Lily”) which included Lily’s fleet of approximately 1,600 vehicles and over 200 contractual customers, complementing our FMS market coverage and service network in the Northeast United States.
 
  •   On May 12, 2008, we acquired the assets of Gator Leasing, Inc. (“Gator”) which included Gator’s fleet of approximately 2,300 vehicles and nearly 300 contractual customers, complementing our FMS market coverage and service network in Florida.
 
  •   On August 29, 2008, we acquired the assets of Gordon Truck Leasing (“Gordon”) which included Gordon’s fleet of approximately 500 vehicles and approximately 130 contractual customers complementing our FMS market coverage and service network in Pennsylvania.
 
On February 2, 2009, we acquired the assets of Edart Leasing LLC (“Edart”), which included Edart’s fleet of approximately 1,600 vehicles and more than 340 contractual customers, complementing our FMS market coverage in the Northeast. We also acquired approximately 525 vehicles that will be re-marketed.
Supply Chain Solutions
 
Value Proposition
 
Through our SCS business, we offer a broad range of innovative logistics management services that are designed to optimize a customer’s global supply chain and address key customer business requirements. 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 the delivery of finished products to the end-user. Our SCS product offerings are organized into three categories: professional services, distribution operations and transportation solutions. These offerings are supported by a variety of information technology solutions which are an integral part of our other SCS services. These product offerings can be offered independently or as an integrated solution to optimize supply chain effectiveness.
 
Market Trends
 
The global supply chain logistics market is estimated to be $487 billion. Several key trends are affecting the market for third-party logistics services. Outsourcing all or a portion of a customer’s supply chain is becoming a more attractive alternative for several reasons including: (1) the lengthening of the global supply chain due to the location of manufacturing activities further away from the point of consumption, (2) the increasing complexity of customers’ supply chains, and (3) the need for new and innovative technology-based solutions. In addition, industry consolidation is increasing as providers look to expand their service offerings and create economies of scale in order to be competitive and satisfy customers’ global needs. To meet our customers’ demands in light of these trends, we provide an integrated suite of global supply chain solutions with sophisticated technologies and industry-leading engineering services, designed to help our customers manage their supply chains more efficiently.
 
Operations
 
For the year ended December 31, 2008, our global SCS business accounted for 26% of our consolidated revenue. For the year ended December 31, 2008, approximately 50% of our global SCS revenue was related to dedicated contract carriage services.
 
U.S.  At December 31, 2008, we had 102 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 including automotive, electronics, high-tech, telecommunications, industrial, consumer goods, paper and paper products, office equipment, food and beverage, and general retail industries. We continue to further diversify our customer base by expanding into new industry verticals, including retail/consumer goods. Most of our core SCS business operations in the U.S. revolve around our customers’ supply chains and are geographically


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located to maximize efficiencies and reduce costs. At December 31, 2008, managed warehouse space totaled approximately 15 million square feet for the U.S. and Puerto Rico. Along with those core customer specific locations, we also concentrate certain logistics expertise in locations not associated with specific customer sites. For example, our carrier procurement, contract management and freight bill audit and payment services groups operate out of our carrier management center, and our transportation optimization and execution groups operate out of our logistics center, both of which have locations in Novi, Michigan and Fort Worth, Texas.
 
Canada.  At December 31, 2008, we had 57 SCS customer accounts and managed warehouse space totaling approximately 900,000 square feet. 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.
 
Mexico.  We began operating in Mexico in the mid-1990s. At December 31, 2008, we operated and maintained 700 vehicles in Mexico. At December 31, 2008, we had 77 SCS customer accounts and managed warehouse space totaling approximately 2 million square feet. Our Mexico operations offer a full range of SCS services and manages approximately 3,000 border crossings each week between Mexico and the U.S., often highly integrated with our domestic distribution and transportation operations.
 
Asia.  We began operating in Asia in 2001. Although our Asian operations are headquartered in Singapore, we also provide services in China via our Shanghai office and coordinate logistics activities in countries such as Malaysia. At December 31, 2008, we had 47 SCS customer accounts and managed warehouse space totaling approximately 795,000 square feet. As part of our strategy to expand with our customers into major markets, we will continue to refine our strategy in China and focus our efforts on growing our operations in that region.
 
Europe.  At December 31, 2008, we had 21 SCS customer accounts and managed warehouse space totaling approximately 400,000 square feet. In addition to the full range of SCS services, we operate a comprehensive shipment, planning and execution system through our European transportation management services center located in Düsseldorf, Germany. Due to current global economic conditions, we plan to transition out of SCS contracts during 2009.
 
South America.  We began operating in Brazil and Argentina in the mid-1990s and in Chile in 2004. At December 31, 2008, we operated and maintained 700 vehicles in South America. At December 31, 2008, we had 129 SCS customer accounts and managed warehouse space totaling approximately 4 million square feet. In all of these markets we offer a full range of SCS services. In our Argentina and Brazil operations, we also offered international transportation services for freight moving between these markets, including transportation, backhaul and customs procedure management. Due to current global economic conditions, we plan to discontinue our operations in South America during 2009.
 
Our largest customer, General Motors Corporation (GM), is comprised of multiple contracts in various geographic regions. In 2008, GM accounted for approximately 17% of SCS total revenue and 4% of consolidated revenue. We derive approximately 48% of our SCS revenue from the automotive industry, mostly from manufacturers and suppliers of original equipment parts.
 
SCS Product Offerings
 
Professional Services.  Our SCS business offers a variety of knowledge-based services that support every aspect of a customer’s supply chain. Our SCS professionals 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, our SCS logistics team, supported by functional experts, and representatives from our information technology, real estate and finance groups work together to design a strategically focused supply chain solution. The solution


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may include both a network design that sets forth the number, location and function of key components of the network and a transportation solution that optimizes 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. For the year ended December 31, 2008, knowledge-based professional services accounted for 5% of our U.S. SCS revenue.
 
Distribution Operations.  Our SCS business offers a wide range of services relating to a customer’s distribution operations from designing a customer’s distribution network to managing the customer’s existing distribution facilities or a facility we acquire. Services within the facilities generally include managing the flow of goods from the receiving function to the shipping function, coordinating warehousing and transportation for inbound and outbound material flows, handling import and export for international shipments, coordinating just-in-time replenishment of component parts to manufacturing and final assembly and providing shipments to customer distribution centers or end-customer delivery points. Additional value-added services such as light assembly of components into defined units (kitting), packaging and refurbishment are also provided. For the year ended December 31, 2008, distribution operations accounted for 28% of our U.S. SCS revenue.
 
Transportation Solutions.  Our SCS business offers services relating to all aspects of a customer’s transportation network including equipment maintenance and drivers. Our team of transportation specialists provides shipment planning and execution, which includes shipment optimization, load scheduling and delivery confirmation through a series of technological and web-based solutions. Our transportation consultants, including our freight brokerage department, focus on carrier procurement of all modes of transportation with an emphasis on truck-based 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 meet backhaul opportunities and minimize excess miles. For the year ended December 31, 2008, we purchased and (or) executed over $4 billion in freight moves on our customers behalf. For the year ended December 31, 2008, transportation solutions accounted for 67% of our U.S. SCS revenue.
 
SCS Business Strategy
 
Our SCS business strategy revolves around the following interrelated goals and priorities:
 
  •   further diversify customer base through expansion into new industry verticals;
 
  •   offer comprehensive supply chain solutions to our customers;
 
  •   enhance distribution management as a core platform to grow integrated solutions;
 
  •   leverage our transportation management capabilities including 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; and
 
  •   serve our customer’s global needs as lead manager, integrator and high-value operator.
 
Competition
 
In the SCS business segment, we compete with a large number of companies providing similar services on an international, national, regional and local level, each of which has a different set of core competencies. 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, geographic coverage, market knowledge, expertise in logistics-related technology, and overall


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performance (e.g., timeliness, accuracy and flexibility). Value-added differentiation of these service offerings across the global supply chain continues to be our overriding strategy.
 
Acquisitions
 
On December 19, 2008, we completed the acquisition of substantially all of the assets of Transpacific Container Terminal Ltd. (TCTL) and CRSA Logistics Ltd. (CRSA) in Canada, as well as CRSA Logistics operations in Hong Kong and Shanghai, China. This strategic acquisition adds complementary solutions to our SCS capabilities including consolidation services in key Asian hubs, as well as deconsolidation operations in Vancouver, Toronto and Montreal.
Dedicated Contract Carriage
 
Value Proposition
 
Through our DCC business segment, we combine the equipment, maintenance and administrative services of a full service lease with drivers and 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 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, high service levels, efficient routing and 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 solution offers a high degree of specialization to meet the needs of customers with high service requirements such as tight delivery windows, high-value or time-sensitive freight, closed-loop distribution, and multi-stop shipments.
 
Market Trends
 
The U.S. dedicated contract carriage market is estimated to be $12 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 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.
 
Operations/Product Offerings
 
For the year ended December 31, 2008, our DCC business accounted for 9% of our consolidated revenue. At December 31, 2008, we had 182 DCC customer accounts in the U.S. 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 (6% of U.S. DCC revenue), as well as to companies whose distribution systems involve multiple stops within a closed loop highway route. These customers operate in a wide variety of industries, the most significant of which include retail (38% of DCC revenue). Because DCC accounts typically operate in a limited geographic area, most of the drivers assigned to these accounts are short haul drivers, meaning they return home at the end of each work day. 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.
 
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 logistics design 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


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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 team, in conjunction with our SCS transportation specialists, selects appropriate transportation modes and carriers, places the freight, monitors carrier performance and audits 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).
 
DCC Business Strategy
 
Our DCC business strategy revolves around the following interrelated goals and priorities:
 
  •   increase market share with customers with large fleets that require a more comprehensive and flexible transportation solution;
 
  •   align our DCC business with other SCS product lines to create revenue opportunities and improve operating efficiencies in both segments, particularly through increased backhaul utilization;
 
  •   leverage the expertise and resources of our SCS and FMS businesses; and
 
  •   expand our DCC support services to create customized transportation solutions for new customers and enhance the solutions we have created for existing customers.
 
Competition
 
Our DCC business segment competes with truckload carriers and other dedicated providers servicing on a national, regional and local level. Competitive factors include price, equipment, maintenance, service and geographic coverage and driver and operations expertise. Value-added differentiation of the DCC offerings has been, and will continue to be, our emphasis.
 
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 operations, a centralized processing center located in Alpharetta, Georgia. Our Shared Services Center also manages contracted third parties providing administrative finance and support services outside of the U.S. in order to reduce ongoing operating expenses and maximize our technology resources. This centralization results in more efficient and consistent centralized processing of selected administrative operations. Certain administrative functions are also performed at the Shared Services Center for our customers. The Shared Services Center’s main objectives are to reduce ongoing 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 Department of Transportation 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 U.S. 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 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 our Customs-Trade Partnership Against


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Terrorism 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 U.S. Environmental Protection Agency has issued regulations that require progressive reductions in exhaust emissions from diesel engines from 2007 through 2010. Some of these regulations require subsequent reductions in the sulfur content of diesel fuel which began in June 2006 and the introduction of emissions after-treatment devices on newly manufactured engines and vehicles beginning with the model year 2007.
 
ENVIRONMENTAL
 
We have always been committed to sound environmental practices that reduce risk and build value for us and our customers. We have a history of adopting “green” designs and processes because they are efficient, cost effective transportation solutions that improve our bottom line and bring value to our customers. We adopted our first worldwide Environmental Policy mission in 1991 and published our first environmental performance report in 1996 following PERI (Public Environmental Reporting Initiative) guidelines. Our environmental policy reflects our commitment to supporting the goals of sustainable development, environmental protection and pollution prevention in our business. We have adopted pro-active environmental strategies that have advanced business growth and continued to improve our performance in ways that reduce emission outputs and environmental impact. Our environmental team works with our staff and operating employees to develop and administer programs in support of our environmental policy and to help ensure that environmental considerations are integrated into all business processes and decisions.
 
In establishing appropriate environmental objectives and targets for our wide range of business activities around the world, we focus on (i) the needs of our customers; (ii) the communities in which we provide services; and (iii) relevant laws and regulations. We regularly review and update our environmental management procedures, and information regarding our environmental activities is routinely disseminated throughout Ryder. In 2008, we launched a “Green Center” on http://www.Ryder.com/greencenter to share our key environmental programs and initiatives with all stakeholders.
 
SAFETY
 
Our safety culture is founded upon a core commitment to the safety, health and well-being of our employees, customers, and the community. It is this commitment that made us an industry leader in safety throughout our 75-year history and contributed to our being awarded the Green Cross for Safety from the National Safety Council.
 
Safety is an integral part of our business strategy because preventing injury improves employee quality of life, eliminates service disruptions to our customers, increases efficiency and customer satisfaction. As a core value, our focus on safety is a daily regimen, reinforced by many safety programs and continuous operational improvement and supported by a talented and dedicated safety organization.
 
Training is a critical component of our safety program. Monthly safety training topics delivered by location safety committees cover specific and relevant safety topics and managers receive annual safety leadership training. Regular safety behavioral observations are conducted by managers throughout the organization everyday and remedial training takes place on-the-spot and at every location with a reported injury. We also deliver a comprehensive suite of highly interactive training lessons through Ryder Pro-TREAD to each driver individually over the internet.
 
Our safety policies require that all managers, supervisors and employees incorporate processes in all aspects of our business. Monthly safety scorecards are tracked and reviewed by management for progress toward key safety objectives. Our proprietary web-based safety tracking system, RyderStar, delivers proactive safety programs tailored to every location and helps measure safety activity effectiveness.


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EMPLOYEES
 
At December 31, 2008, we had approximately 28,000 full-time employees worldwide, of which 24,100 were employed in North America, 2,000 in South America, 1,400 in Europe and 500 in Asia. On December 17, 2008, we announced strategic initiatives to increase our global competitiveness, which we expect to result in the elimination of approximately 3,200 positions worldwide during 2009. We have approximately 15,200 hourly employees in the U.S., approximately 3,400 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 99 labor agreements that are renegotiated periodically. Some of the businesses in which we currently engage have experienced a material work stoppage, slowdown or strike. 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 2, 2008 in conjunction with Ryder’s 2008 Annual 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
    59     Chairman of the Board and Chief Executive Officer
Robert E. Sanchez
    43     Executive Vice President and Chief Financial Officer
Robert D. Fatovic
    43     Executive Vice President, General Counsel and Corporate Secretary
Art A. Garcia
    47     Senior Vice President and Controller
Gregory F. Greene
    49     Executive Vice President and Chief Human Resources Officer
Thomas S. Renehan
    46     Executive Vice President, Sales and Marketing, U.S. Fleet Management Solutions
Anthony G. Tegnelia
    63     President, Global Fleet Management Solutions
John H. Williford
    52     President, Global Supply Chain Solutions
 
Gregory T. Swienton has been Chairman since May 2002 and Chief Executive Officer since November 2000. He also served as President from June 1999 to June 2005. 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 E. Sanchez has served as Executive Vice President and Chief Financial Officer since October 2007. He previously served as Executive Vice President of Operations, U.S. Fleet Management Solutions from October 2005 to October 2007 and as Senior Vice President and Chief Information Officer from January 2003 to October 2005. Mr. Sanchez joined Ryder in 1993 and has held various positions.
 
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 Senior Vice President and Controller since October 2005 and as Vice President and Controller since February 2002. Mr. Garcia joined Ryder in December 1997 and has held various positions within Corporate Accounting.
 
Gregory F. Greene has served as Executive Vice President since December 2006 and as Chief Human Resources Officer since February 2006. Previously, Mr. Greene served as Senior Vice President, Strategic


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Planning and Development from April 2003. Mr. Greene joined Ryder in August 1993 and has since held various positions within Human Resources.
 
Thomas S. Renehan has served as Executive Vice President, Sales and Marketing, U.S. Fleet Management Solutions, since October 2005 and as Senior Vice President, Sales and Marketing from July 2005 to October 2005. He previously served as Senior Vice President, Asset Management, Sales and Marketing from March 2004 to July 2005, as Senior Vice President, Asset Management from December 2002. Mr. Renehan joined Ryder in October 1985 and has held various positions within Ryder’s FMS business.
 
Anthony G. Tegnelia has served as President, Global Fleet Management Solutions since October 2005. He previously served as Executive Vice President, U.S. Supply Chain Solutions from December 2002 to October 2005. Prior to that, 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 Supply Chain Solutions and Senior Vice President, Field Finance.
 
John H. Williford has served as President, Global Supply Chain Solutions since June 2008. Prior to joining Ryder, Mr. Williford founded and served as President and Chief Executive Officer of Golden Gate Logistics LLC from 2006 to June 2008. From 2002 to 2005, he served as President and Chief Executive Officer of Menlo Worldwide, Inc., the supply chain business of CNF, Inc. From 2005 to 2006, Mr. Williford was engaged as an advisor to Menlo Worldwide subsequent to the sale of Menlo Forwarding to United Parcel Service.
 
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 the Investor Relations page on 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 1A. RISK FACTORS
 
In addition to the factors discussed elsewhere in this report, the following are some of the important factors that could affect our business.
 
Our operating and financial results may fluctuate due to a number of factors, many of which are beyond our control.
 
Our annual and quarterly operating and financial results are affected by a number of economic, regulatory and competitive factors, including:
 
  •   changes in current financial, tax or regulatory requirements that could negatively impact the leasing market;
 
  •   our inability to obtain expected customer retention levels or sales growth targets;
 
  •   unanticipated interest rate and currency exchange rate fluctuations;
 
  •   labor strikes, work stoppages or driver shortages affecting us or our customers;
 
  •   sudden changes in fuel prices and fuel shortages;


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  •   competition from vehicle manufacturers in our U.K. business operations; and
 
  •   changes in accounting rules, estimates, assumptions and accruals.
 
Our business and operating results could be adversely affected by unfavorable economic and industry conditions.
 
We have achieved annual operating revenue growth over the last few years in spite of a U.S. freight recession, in part due to a strong focus on increased contractual revenue growth and market expansion and acquisitions. During the fourth quarter of 2008, however, our business, particularly our transactional commercial rental business, began to experience the effects of worsening macroeconomic conditions, further exacerbated by certain customer-specific challenges and significant disruptions in the financial and credit markets globally. As economic conditions worsened globally during late 2008, we began to see a significant decline in rental performance and utilization as well as slow used vehicle sales activity resulting from a worsening freight recession. Significant uncertainty around macroeconomic and industry conditions may impact the spending and financial position of our customers.
 
Challenging economic and market conditions may also result in:
 
  •   difficulty forecasting, budgeting and planning due to limited visibility into the spending plans of current or prospective customers;
 
  •   increased competition for fewer projects and sales opportunities;
 
  •   pricing pressure that may adversely affect revenue and gross margin;
 
  •   higher overhead costs as a percentage of revenue;
 
  •   increased risk of charges relating to asset impairments, including goodwill and other intangible assets;
 
  •   customer financial difficulty and increased risk of uncollectible accounts receivable;
 
  •   increased pension costs due to negative asset returns; and
 
  •   increased risk of declines in the residual values of our vehicles.
 
We are uncertain as to how long current, unfavorable macroeconomic and industry conditions will persist and the magnitude of their effects on our business and results of operations. If these conditions persist or further weaken, our business and results of operations could be materially adversely affected.
 
We are exposed to risks associated with the current financial crisis.
 
Financial markets in the U.S. and abroad have experienced extreme disruption, including severely diminished liquidity and credit availability resulting in higher short-term borrowing costs and more stringent borrowing terms. Recessionary conditions in the global economy threaten to cause further tightening of the credit markets, more stringent lending standards and terms and higher volatility in interest rates. While these conditions and the current economic downturn have not impaired our ability to access credit markets, these conditions may adversely affect our business in the future, particularly if there is further deterioration in the world financial markets and major economies. The current credit conditions may also adversely affect the business of our customers. Difficulties in obtaining capital may lead to the inability of some customers to obtain affordable financing to fund their operations, resulting in lower demand for leasing services from Ryder. Furthermore, liquidity issues could impair the ability of those with whom we do business to satisfy their obligations to us.
 
We bear the residual risk on the value of our vehicles.
 
We generally bear the residual risk on the value of our vehicles. Therefore, if the market for used vehicles declines, or our vehicles are not properly maintained, we may obtain lower sales proceeds upon the sale of used vehicles. Changes in residual values also impact the overall competitiveness of our full service lease product line, as estimated sales proceeds are a critical component of the overall price of the product.


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Additionally, technology changes and sudden changes in supply and demand together with other market factors beyond our control vary from year to year and from vehicle to vehicle, making it difficult to accurately predict residual values used in calculating our depreciation expense. Although we have developed disciplines related to the management and maintenance of our vehicles that are designed to prevent these losses, there is no assurance that these practices will sufficiently reduce the residual risk. For a detailed discussion on our accounting policies and assumptions relating to depreciation and residual values, please see the section titled “Critical Accounting Estimates — Depreciation and Residual Value Guarantees” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Our profitability could be adversely impacted by our inability to maintain appropriate commercial rental utilization rates through our asset management initiatives.
 
We typically do not purchase vehicles for our full service lease product line until we have an executed contract with a customer. In our commercial rental product line, however, we do not purchase vehicles against specific customer contracts. Rather, we purchase vehicles and optimize the size and mix of the commercial rental fleet based upon our expectations of overall market demand for short-term and long-term rentals. As a result, we bear the risk for ensuring that we have the proper vehicles in the right condition and location to effectively capitalize on this market demand to drive the highest levels of utilization and revenue per unit. We employ a sales force and operations team on a full-time basis to manage and optimize this product line; however, their efforts may not be sufficient to overcome a significant change in market demand in the rental business or used vehicle market.
 
Continued decline in automotive volumes and instability in the automotive industry would adversely affect our results and increase our credit risk.
 
Approximately 48% of our global SCS revenues is from the automotive industry and is directly impacted by automotive vehicle production. In addition, a number of our FMS customers, particularly transportation and trucking companies, provide services to the automotive industry. Automotive sales and production are impacted by general economic conditions, consumer preference, fuel prices, labor relations, the availability of credit and other factors. The North American automotive industry which generally includes General Motor Corporation (GM), Ford Motor Company and Cerberus Capital Management L.P. (Chrysler LLC) (the Detroit 3), has been weak for some time as a result of strong competition from foreign OEMs, high fixed costs particularly related to significant employee pension and healthcare benefit commitments, unsuccessful product launches and overcapacity. More recently both domestic and foreign automakers have reported significantly lower sales, and have responded by reducing production capacity both through plant shutdowns and a reduction in the number of production shifts. These plant shutdowns and shift eliminations have negatively impacted our results in 2008. Any prolonged plant shutdowns and additional shift eliminations can significantly reduce our operations with the OEMs as well as the operations of the automotive suppliers and transportation providers that we service in both our FMS and SCS businesses, and can have a negative impact on our future results.
 
We are also subject to credit risk associated with the concentration of our accounts receivable from our automotive and automotive-related customers. In response to declining market share and significant losses, the Detroit 3 have announced significant restructuring actions. In addition, GM has sought and obtained assistance from the U.S. government. If these actions do not improve GM’s financial condition and liquidity position, they may not be able to fund their operations and may seek bankruptcy protection. If GM or our other automotive or automotive-related customers combined were to become bankrupt, insolvent or otherwise were unable to pay for the services provided by us, we may incur significant write-offs of accounts receivable, incur impairment charges or require additional restructuring actions, all of which could have a material negative impact on our operating results and financial condition.
 
We derive a significant portion of our SCS revenue from a relatively small number of customers.
 
During 2008, sales to our top ten SCS customers representing all of the industry groups we service, accounted for 65% of our SCS total revenue and 61% of our SCS operating revenue (revenue less


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subcontracted transportation), with GM accounting for 17% of our SCS total and operating revenue. The loss of any of these customers or a significant reduction in the services provided to any of these customers, particularly GM, could impact our domestic and international operations and adversely affect our SCS financial results. While we continue to focus our efforts on diversifying our customer base we may not be successful in doing so in the short-term.
 
In addition, our largest SCS customers can exert downward pricing pressure and often require modifications to our standard commercial terms. While we believe our ongoing cost reduction initiatives have helped mitigate the effect of price reduction pressures from our SCS customers, there is no assurance that we will be able to maintain or improve profitability in those accounts.
 
Our profitability could be negatively impacted if the key assumptions and pricing structure of our SCS contracts prove to be invalid.
 
Substantially all of our SCS services are provided under contractual arrangements with our customers. Under most of these contracts, all or a portion of our pricing is based on certain assumptions regarding the scope of services, production volumes, operational efficiencies, the mix of fixed versus variable costs, productivity and other factors. If, as a result of subsequent changes in our customers’ business needs or operations or market forces that are outside of our control, these assumptions prove to be invalid, we could have lower margins than anticipated. Although certain of our contracts provide for renegotiation upon a material change, there is no assurance that we will be successful in obtaining the necessary price adjustments.
 
We operate in a highly competitive industry and our business may suffer if we are unable to adequately address potential downward pricing pressures and other competitive factors.
 
Numerous competitive factors could impair our ability to maintain our current profitability. These factors include the following:
 
  •   we compete with many other transportation and logistics service providers, some of which have greater capital resources than we do;
 
  •   some of our competitors periodically reduce their prices to gain business, which may limit our ability to maintain or increase prices;
 
  •   because cost of capital is a significant competitive factor, any increase in either our debt or equity cost of capital as a result of reductions in our debt rating or stock price volatility could have a significant impact on our competitive position; and
 
  •   advances in technology require increased investments to remain competitive, and our customers may not be willing to accept higher prices to cover the cost of these investments.
 
We operate in a highly regulated industry, and costs of compliance with, or liability for violation of, existing or future regulations could significantly increase our costs of doing business.
 
Our business is subject to regulation by various federal, state and foreign governmental entities. Specifically, the U.S. Department of Transportation and various state and federal agencies exercise broad powers over our motor carrier operations, safety, and the generation, handling, storage, treatment and disposal of waste materials. We may also become subject to new or more restrictive regulations imposed by the Department of Transportation, the Occupational Safety and Health Administration, the Environmental Protection Agency or other authorities, relating to the hours of service that our drivers may provide in any one-time period, security and other matters. Compliance with these regulations could substantially impair equipment productivity and increase our costs.
 
New regulations governing exhaust emissions could adversely impact our business. The Environmental Protection Agency has issued regulations that require progressive reductions in exhaust emissions from certain diesel engines through 2007. Emissions standards require reductions in the sulfur content of diesel fuel since June 2006 and the introduction of emissions after-treatment devices on newly-manufactured engines and


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vehicles utilizing engines built after January 1, 2007. In addition, each of these requirements could result in higher prices for tractors, diesel engines and fuel, which are passed on to our customers, as well as higher maintenance costs and uncertainty as to reliability of the new engines, all of which could, over time, increase our costs and adversely affect our business and results of operations. The new technology may also impact the residual values of these vehicles when sold in the future.
 
Volatility in assumptions and asset values related to our pension plans may reduce our profitability and adversely impact current funding levels.
 
We sponsor a number of defined benefit plans for employees in the U.S., U.K. and other foreign locations. Our major defined benefit plans are funded, with trust assets invested in a diversified portfolio. The cash contributions made to our defined benefit plans are required to comply with minimum funding requirements imposed by employee benefit and tax laws. The projected benefit obligation and assets of our global defined benefit plans as of December 31, 2008 were $1.48 billion and $976 million, respectively. The difference between plan obligations and assets, or the funded status of the plans, is a significant factor in determining pension expense and the ongoing funding requirements of those plans. Macroeconomic factors, as well as changes in investment returns and discount rates used to calculate pension expense and related assets and liabilities can be volatile and may have an unfavorable impact on our costs and funding requirements. Although we have actively sought to control increases in these costs and funding requirements, there can be no assurance that we will succeed, and continued upward pressure could reduce the profitability of our business and negatively impact our cash flows.
 
We establish self-insurance reserves based on historical loss development factors, which could lead to adjustments in the future based on actual development experience.
 
We retain a portion of the accident risk under vehicle liability and workers’ compensation insurance programs. Our self-insurance accruals are based on actuarially estimated, undiscounted cost of claims, which includes claims incurred but not reported. While we believe that our estimation processes are well designed, every estimation process is inherently subject to limitations. Fluctuations in the frequency or severity of accidents make it difficult to precisely predict the ultimate cost of claims. In recent years, our development has been favorable compared to historical selected loss development factors because of improved safety performance, payment patterns and settlement patterns; however, there is no assurance we will continue to enjoy similar favorable development in the future. For a detailed discussion on our accounting policies and assumptions relating to our self-insurance reserves, please see the section titled “Critical Accounting Estimates — Self-Insurance Accruals” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2. PROPERTIES
 
Our properties consist primarily of vehicle maintenance and repair facilities, warehouses and other real estate and improvements.
 
We maintain 677 FMS locations in the U.S., Puerto Rico and Canada; we own 440 of these facilities and lease the remaining facilities. Our FMS locations generally include a repair shop, rental counter, fuel service island and administrative offices.
 
Additionally, we manage 222 on-site maintenance facilities, located at customer locations.
 
We also maintain 126 locations in the U.S. 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.


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We maintain 140 international locations (locations outside of the U.S. and Canada) for our international businesses. These locations are in the U.K., Ireland, Germany, Mexico, Argentina, Brazil, Chile, China, Thailand and Singapore. The majority of these locations are leased and generally include a repair shop, warehouse and administrative offices.
 
ITEM 3. LEGAL PROCEEDINGS
 
We are involved in various claims, lawsuits and administrative actions arising in the normal 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 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, 2008.
 
PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Ryder Common Stock Prices
 
                         
                Dividends per
 
    Stock Price     Common
 
    High     Low     Share  
 
2008
                       
First quarter
  $ 65.25       40.31       0.23  
Second quarter
    76.64       60.28       0.23  
Third quarter
    75.09       58.02       0.23  
Fourth quarter
    62.19       27.71       0.23  
                         
2007
                       
First quarter
  $ 55.62       47.88       0.21  
Second quarter
    55.89       49.24       0.21  
Third quarter
    57.70       48.19       0.21  
Fourth quarter
    49.93       38.95       0.21  
 
Our common shares are listed on the New York Stock Exchange under the trading symbol “R.” At January 30, 2009, there were 9,713 common stockholders of record and our stock price on the New York Stock Exchange was $33.78.


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Performance Graph
 
The following graph compares the performance of our common stock with the performance of the Standard & Poor’s 500 Composite Stock Index and the Dow Jones Transportation 20 Index for a five year period by measuring the changes in common stock prices from December 31, 2003 to December 31, 2008.
 
(PERFORMANCE GRAPH)
 
The stock performance graph assumes for comparison that the value of the Company’s Common Stock and of each index was $100 on December 31, 2003 and that all dividends were reinvested. Past performance is not necessarily an indicator of future results.


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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, 2008:
                                         
                            Approximate Dollar
 
                Total Number of
    Maximum Number
    Value That May
 
                Shares Purchased as
    of Shares That May
    Yet Be Purchased
 
    Total Number
    Average Price
    Part of Publicly
    Yet Be Purchased
    Under the
 
    of Shares
    Paid per
    Announced
    Under the Anti-Dilutive
    Discretionary
 
    Purchased(1)     Share     Program     Program(2)     Program(3)  
 
October 1 through
October 31, 2008
    5,857     $ 51.71             636,564     $ 130,400,437  
November 1 through November 30, 2008
    10,294       30.01             636,564       130,400,437  
December 1 through December 31, 2008
    1,280       35.14            —       636,564       130,400,437  
                                         
Total
    17,431     $ 37.68                        
                                         
 
 
(1)   During the three months ended December 31, 2008, we purchased an aggregate of 17,431 shares of our common stock in employee-related transactions. Employee-related transactions may include: (i) shares of common stock delivered as payment for the exercise price of options exercised or to satisfy the option holders’ tax withholding liability associated with our share-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.
 
(2)   In December 2007, our Board of Directors authorized a two-year anti-dilutive repurchase program. Under the anti-dilutive program, management is authorized to repurchase shares of common stock in an amount not to exceed the lesser of the number of shares issued to employees upon the exercise of stock options or through the employee stock purchase plan for the period from September 1, 2007 to December 12, 2009, or 2 million shares. Share repurchases of common stock may be made periodically in open-market transactions and are subject to market conditions, legal requirements and other factors. Management may establish a prearranged written plan for the Company under Rule 10b5-1 of the Securities Exchange Act of 1934 as part of the anti-dilutive repurchase program, which would allow for share repurchases during Ryder’s quarterly blackout periods as set forth in the trading plan. During the three months ended December 31, 2008, no repurchases had been made under this program. Towards the end of the third quarter, we temporarily paused purchases under both programs given current market conditions. We will continue to monitor financial conditions and will resume repurchases when we believe it is prudent to do so.
 
(3)   In December 2007, our Board of Directors also authorized a $300 million share repurchase program over a period not to exceed two years. Share repurchases of common stock may be made periodically in open-market transactions and are subject to market conditions, legal requirements and other factors. Management may establish a prearranged written plan for the Company under Rule 10b5-1 of the Securities Exchange Act of 1934 as part of the $300 million share repurchase program, which would allow for share repurchases during Ryder’s quarterly blackout periods as set forth in the trading plan. During the three months ended December 31, 2008, no repurchases had been made under this program. Towards the end of the third quarter, we temporarily paused purchases under both programs given current market conditions. We will continue to monitor financial conditions and will resume repurchases when we believe it is prudent to do so.
 
Securities Authorized for Issuance under Equity Compensation Plans
 
The following table includes information as of December 31, 2008 about certain plans which provide for the issuance of common stock in connection with the exercise of stock options and other share-based awards.
 
                         
                Number of
 
                Securities
 
                Remaining
 
                Available for
 
    Number of
          Future Issuance
 
    Securities to be
          Under Equity
 
    Issued upon
    Weighted-Average
    Compensation
 
    Exercise of
    Exercise Price of
    Plans Excluding
 
    Outstanding
    Outstanding
    Securities
 
    Options, Warrants
    Options, Warrants
    Reflected in
 
Plans
  and Rights     and Rights     Column (a)  
    (a)     (b)     (c)  
 
Equity compensation plans approved by security holders:
                       
Broad based employee stock option plans
    2,836,965     $ 39.87       5,044,201  
Employee stock purchase plan
                557,924  
Non-employee directors’ stock plans
    123,074       11.09       41,471  
Equity compensation plans not approved by security holders
                 
                         
Total
    2,960,039     $ 38.67       5,643,596  
                         


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ITEM 6. SELECTED FINANCIAL DATA
 
The following selected consolidated financial information should be read in conjunction with Items 7 and 8 of this report.
                                         
    Years ended December 31  
    2008     2007     2006     2005     2004  
    (Dollars and shares in thousands, except per share amounts)  
 
Operating Data:
                                       
Revenue
  $ 6,203,743       6,565,995       6,306,643       5,740,847       5,150,278  
Earnings from continuing operations(1)
  $ 199,881       253,861       248,959       227,628       215,609  
Net earnings(1),(2)
  $ 199,881       253,861       248,959       226,929       215,609  
                                         
Per Share Data:
                                       
Earnings from continuing operations — Diluted(1)
  $ 3.52       4.24       4.04       3.53       3.28  
Net earnings — Diluted(1),(2)
  $ 3.52       4.24       4.04       3.52       3.28  
Cash dividends
  $ 0.92       0.84       0.72       0.64       0.60  
Book value(3)
  $ 24.17       32.52       28.34       24.69       23.48  
                                         
Financial Data:
                                       
Total assets
  $ 6,689,508       6,854,649       6,828,923       6,033,264       5,683,164  
Average assets(4)
  $ 6,924,342       6,914,060       6,426,546       5,922,758       5,496,429  
Return on average assets(%)(4)
    2.9       3.7       3.9       3.8       3.9  
Long-term debt
  $ 2,478,537       2,553,431       2,484,198       1,915,928       1,393,666  
Total debt
  $ 2,862,799       2,776,129       2,816,943       2,185,366       1,783,216  
Shareholders’ equity(3),
  $ 1,345,161       1,887,589       1,720,779       1,527,456       1,510,188  
Debt to equity(%)(3)
    213       147       164       143       118  
Average shareholders’ equity(3),(4)
  $ 1,778,489       1,790,814       1,610,328       1,554,718       1,412,039  
Return on average shareholders’ equity(%)(3),(4)
    11.2       14.2       15.5       14.6       15.3  
Adjusted return on capital(%)(5)
    7.3       7.4       7.9       7.8       7.7  
Net cash provided by operating activities
  $ 1,255,531       1,102,939       853,587       779,062       866,849  
Capital expenditures paid
  $ 1,234,065       1,317,236       1,695,064       1,399,379       1,092,158  
                                         
Other Data:
                                       
Average common shares — Diluted
    56,790       59,845       61,578       64,560       65,671  
Number of vehicles — Owned and leased
    163,400       160,700       167,200       163,600       165,800  
Average number of vehicles — Owned and leased(4)
    162,200       165,400       164,400       166,700       165,100  
Number of employees
    28,000       28,800       28,600       27,800       26,300  
 
                                                 
        2008     2007     2006     2005     2004  
 
 
(1)
    Comparable earnings from continuing operations   $ 254,753       251,910       245,883       220,001       190,979  
        Comparable earnings per diluted common share from continuing operations   $ 4.49       4.21       3.99       3.41       2.91  
       
        Refer to the section titled “Non-GAAP Financial Measures” in Item 7 of this report for a reconciliation of comparable earnings to net earnings.
       
 
(2)
    Net earnings in 2005 included (i) income from discontinued operations associated with the reduction of insurance reserves related to discontinued operations resulting in an after-tax benefit of $2 million, or $0.03 per diluted common share, and (ii) the cumulative effect of a change in accounting principle for costs associated with the future removal of underground storage tanks resulting in an after-tax charge of $2 million, or $0.04 per diluted common share.
       
 
(3)
    Shareholders’ equity at December 31, 2008, 2007, 2006, 2005 and 2004 reflected after-tax equity charges of $480 million, $148 million, $201 million, $221 million, and $189 million, respectively, related to our pension and postretirement plans.
       
 
(4)
    Amounts were computed using an 8-point average based on quarterly information.
       
 
(5)
    Our adjusted return on capital (ROC) represents the rate of return generated by the capital deployed in our business. We use ROC as an internal measure of how effectively we use the capital invested (borrowed or owned) in our operations. Refer to the section titled “Non-GAAP Financial Measures” in Item 7 of this report for a reconciliation of net earnings to adjusted net earnings and average total debt and shareholders’ equity to adjusted average total capital.


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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. The following MD&A describes the principal factors affecting results of operations, financial resources, liquidity, contractual cash obligations, and critical accounting estimates.
 
OVERVIEW
 
Ryder System, Inc. (Ryder) is a global leader in transportation and supply chain management solutions. Our business is divided into three business segments, which operate in highly 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 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 enterprises operating in a variety of industries including automotive, electronics, transportation, grocery, lumber and wood products, food service, and home furnishing.
 
The Fleet Management Solutions (FMS) business segment is our largest segment providing full service leasing, contract maintenance, contract-related maintenance, and commercial rental of trucks, tractors and trailers to customers principally in the U.S., Canada and the U.K. FMS revenue and assets in 2008 were $4.01 billion and $6.14 billion, respectively, representing 65% of our consolidated revenue and 92% of consolidated assets.
 
The Supply Chain Solutions (SCS) business segment provides comprehensive supply chain consulting including distribution and transportation services throughout North America and in South America, Europe and Asia. SCS revenue in 2008 was $1.64 billion, representing 26% of our consolidated revenue.
 
The Dedicated Contract Carriage (DCC) business segment provides vehicles and drivers as part of a dedicated transportation solution in the U.S. DCC revenue in 2008 was $548 million, representing 9% of our consolidated revenue.
 
2008 was a year of significant accomplishments for us, as we delivered strong earnings, operating revenue growth and positive free cash flow following more than two full years of a U.S. freight recession. We also successfully completed four accretive acquisitions in 2008. However, in the fourth quarter of 2008, we saw significant deterioration in general economic conditions, particularly affecting our transactional commercial rental business. In December 2008, we announced several strategic actions, including discontinuing certain operations and workforce reductions, that will better position us for the market conditions we anticipate in the upcoming year.
 
Total revenue was $6.20 billion, down 6% from $6.57 billion in 2007. Revenue comparisons were impacted by a previously announced change from gross to net revenue reporting in a subcontracted transportation agreement, which had no impact on operating revenue or earnings. Excluding this item, total revenue increased 5% primarily as a result of higher fuel services revenue. Operating revenue (total revenue less fuel and subcontracted transportation) was $4.70 billion in 2008, up 1%. Operating revenue growth was driven by contractual revenue, including acquisitions in our FMS business segment, new and expanded business in SCS partially offset by lower commercial rental revenue.
 
Net earnings decreased to $200 million from $254 million in 2007 and net earnings per diluted common share decreased to $3.52 from $4.24 in 2007. Net earnings included certain items we do not consider indicative of our ongoing operations and have been excluded from our comparable earnings measure. The


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
following discussion provides a summary of the 2008 and 2007 special items which are discussed in more detail throughout our MD&A and within the Notes to Consolidated Financial Statements:
 
                         
    NBT     Net Earnings     EPS  
    (Dollars in thousands,
 
    except per share amounts)  
 
2008
                       
Earnings / EPS
  $ 349,922     $ 199,881     $ 3.52  
•  Restructuring and other charges primarily related to exit costs associated with a previously announced plan to discontinue certain international supply chain operations and workforce reductions
    58,435       53,159       0.94  
•  Benefit associated with the reversal of reserves for uncertain tax positions due to the expiration of statutes of limitation in various jurisdictions
          (7,931 )     (0.14 )
•  Benefit from a tax law change in Massachusetts
          (1,614 )     (0.03 )
•  Brazil charges for prior years’ adjustments(1)
    6,498       6,831       0.12  
•  Charges related to impairments and write-offs of international assets(1)
    5,548       4,427       0.08  
                         
Comparable earnings
  $ 420,403     $ 254,753     $ 4.49  
                         
2007
                       
Earnings / EPS
  $ 405,464     $ 253,861     $ 4.24  
•  Benefit from tax law changes in Canada
          (3,333 )     (0.06 )
•  Gain on sale of property(1)
    (10,110 )     (6,154 )     (0.10 )
•  Restructuring and other charges related to cost management and process improvement actions
    11,578       7,536       0.13  
                         
Comparable earnings
  $ 406,932     $ 251,910     $ 4.21  
                         
 
 
(1) Refer to Note 25, “Other Items Impacting Comparability,” in the Notes to Consolidated Financial Statements.
 
Excluding the special items listed above, comparable net earnings were $255 million, up 1% from $252 million in 2007. Comparable earnings per diluted common share were $4.49, up 7% from $4.21 in 2007. Earnings growth in the FMS and DCC business segments was largely offset by a decline in SCS earnings.
 
With our strong earnings and cash flows, we repurchased a total of 4 million shares of common stock in 2008 for $256 million. We also increased our annual dividend by 10% to $0.92 per share of common stock. In addition, during 2008, we paid $246 million and acquired the assets of Lily Transportation, Gator Leasing, Gordon Truck Leasing and Transpacific Container Terminal Ltd. and CRSA Logistics Ltd.
 
Capital expenditures increased to $1.27 billion compared to $1.19 billion in 2007. The growth in capital expenditures reflects higher full service lease vehicle spending for replacements and expansion of customer fleets. Our debt balances grew 3% to $2.86 billion at December 31, 2008 due to acquisitions and share repurchase programs. Our debt to equity ratio also increased to 213% from 147% in 2007. Our total obligations (including off-balance sheet debt) to equity ratio also increased to 225% from 157% in 2007. Leverage ratios were impacted by the unrecognized pension plan losses, share repurchases, foreign currency translation adjustments and acquisitions.
 
2009 Outlook
 
In 2009, we plan to manage through the impacts of a prolonged economic recession by focusing our efforts on the cyclical impacts in commercial rental and used vehicle sales and concentrating on cost improvement actions. We expect 2009 comparable earnings per diluted common share to decline because of


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
higher pension expense, lower commercial rental and used vehicle sales results and lower volumes, particularly in the automotive industry. We expect to partially offset these negative impacts through cost reduction initiatives, operational improvements and the carryover impact of acquisitions and share repurchases. In 2009, we will continue to focus on our contractual revenue growth and retention strategies, including the evaluation of selective acquisitions, while retaining financial discipline. Total revenue is targeted to decrease by 10% to 16% while operating revenue is expected to decrease by 5% to 11%. The 2009 forecast for total revenue includes the adverse impact of lower anticipated fuel prices and unfavorable foreign exchange rates.
 
ITEMS AFFECTING COMPARABILITY BETWEEN PERIODS
 
Revenue Reporting
 
In transportation management arrangements where we act as principal, revenue is reported on a gross basis for subcontracted transportation services billed to our customers. We realize minimal changes in profitability as a result of fluctuations in subcontracted transportation. Determining whether revenue should be reported as gross (within total revenue) or net (deducted from total revenue) is based on an assessment of whether we are acting as the principal or the agent in the transaction and involves judgment based on the terms and conditions of the arrangement. Effective January 1, 2008, our contractual relationship with a significant customer for certain transportation management services changed, and we determined, after a formal review of the terms and conditions of the services, that we were acting as an agent based on the revised terms of the arrangement. This contract modification required a change in revenue recognition from a gross basis to a net basis for subcontracted transportation beginning on January 1, 2008. This contract represented $640 million and $565 million of total revenue for the years ended December 31, 2007 and 2006, respectively.
 
Accounting Changes
 
See Note 2, “Accounting Changes,” for a discussion of the impact of changes in accounting standards.
 
ACQUISITIONS
 
We have completed various asset purchase agreements in the past two years, under which we acquired a company’s fleet and contractual customers. The FMS acquisitions operate under Ryder’s name and complement our existing market coverage and service network. The results of these acquisitions have been included in our consolidated results since the dates of acquisition.
 
                             
    Business
            Contractual
     
Company Acquired   Segment   Date   Vehicles     Customers     Market
 
Gordon Truck Leasing
  FMS   August 29, 2008     500       130     Pennsylvania
Gator Leasing, Inc. 
  FMS   May 12, 2008     2,300       300     Florida
Lily Transportation Corp. 
  FMS   January 11, 2008     1,600       200     Northeast U.S.
Pollock NationaLease
  FMS/SCS   October 5, 2007     2,000       200     Canada
 
On December 19, 2008, we completed the acquisition of substantially all of the assets of Transpacific Container Terminal Ltd. and CRSA Logistics Ltd. (CRSA) in Canada, as well as CRSA operations in Hong Kong and Shanghai, China. This strategic acquisition adds complementary solutions to our SCS capabilities including consolidation services in key Asian hubs, as well as deconsolidation operations in Vancouver, Toronto and Montreal.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
FULL YEAR CONSOLIDATED RESULTS
 
                                 
    Years ended December 31     Change
                      2008/
  2007/
    2008     2007     2006     2007   2006
    (Dollars and shares in thousands,
         
    except per share amounts)          
 
Earnings before income taxes
  $ 349,922       405,464       392,973     (14)%   3%
Provision for income taxes
    150,041       151,603       144,014     (1)    
                                 
Net earnings
  $ 199,881       253,861       248,959     (21)%   2%
                                 
                                 
Per diluted common share
  $ 3.52       4.24       4.04     (17)%   5%
                                 
                                 
Weighted-average shares outstanding — Diluted
    56,790       59,845       61,578      (5)%   (3)%
                                 
 
Earnings before income taxes (NBT) decreased to $350 million in 2008 compared to $405 million in 2007. NBT in 2008 included a fourth quarter restructuring charge primarily associated with a plan to discontinue current supply chain operations in Brazil, Argentina, Chile and Europe. Comparable NBT increased to $420 million compared to $407 million in the prior year. The improvement in comparable NBT was driven by better operating performance in our FMS contractual business partially offset by a decline in commercial rental results and reduced profitability in our SCS business segment. Net earnings decreased to $200 million in 2008 or $3.52. Net earnings in 2008 included income tax benefits primarily related to the reversal of reserves for uncertain tax positions. Comparable net earnings increased to $255 million or $4.49 in 2008 from $252 million or $4.21 in 2007 due to the improvement in NBT. This improvement was slightly offset by a higher tax rate on comparable earnings resulting from an increase in non-deductible foreign losses. Earnings per diluted common share growth in 2008 exceeded the net earnings growth rate reflecting the impact of share repurchase programs.
 
NBT increased to $405 million in 2007 compared to $393 million in 2006. NBT in 2007 included restructuring charges and a gain on the sale of property. Comparable NBT increased to $407 million compared to $399 million in 2006 reflecting the benefits of (i) lower pension costs; (ii) contractual revenue growth in the FMS business segment; (iii) lower safety and insurance costs; (iv) lower incentive-based compensation; and (v) lower depreciation as a result of our annual depreciation review implemented January 1, 2007. These items more than offset the significant impact of weak U.S. commercial rental market demand and lower used vehicle sales results in our FMS business segment. Net earnings increased to $254 million in 2007 compared to $249 million in 2006. Net earnings in 2007 included an income tax benefit primarily associated with enacted changes in Canadian tax laws. Net earnings in 2006 included an income tax benefit associated with enacted changes in Texas and Canadian tax laws. Comparable net earnings increased to $252 million or $4.21 in 2007 from $246 million or $3.99 in 2006. Earnings per diluted common share growth in 2007 exceeded the net earnings growth rate reflecting the impact of share repurchase programs.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
See subsequent discussion within “Full Year Consolidated Results” and “Full Year Operating Results by Business Segment” for additional information on the results noted above.
 
                                 
    Years ended December 31     Change
                      2008/
  2007/
    2008     2007     2006     2007   2006
    (Dollars in thousands)          
 
Revenue:
                               
Fleet Management Solutions
  $ 4,450,016       4,162,644       4,096,046       7%    2%
Supply Chain Solutions
    1,643,056       2,250,282       2,028,489     (27)   11
Dedicated Contract Carriage
    547,751       567,640       568,842     (4)  
Eliminations
    (437,080 )     (414,571 )     (386,734 )   (5)   (7)
                                 
Total
  $ 6,203,743       6,565,995       6,306,643       (6)%    4%
                                 
                                 
Operating revenue(1)
  $ 4,704,506       4,636,557       4,454,231       1%    4%
                                 
 
 
(1) We use operating revenue, a non-GAAP financial measure, to evaluate the operating performance of our businesses and as a measure of sales activity. FMS fuel services revenue net of related intersegment billings, which is directly impacted by fluctuations in market fuel prices, is excluded from the operating revenue computation as fuel is largely a pass-through to our customers for which we realize minimal changes in profitability during periods of steady market fuel prices. However, profitability may be positively or negatively impacted by increases or decreases in market fuel prices during a short period of time as customer pricing for fuel services is established based on market fuel costs. Subcontracted transportation revenue in our SCS and DCC business segments is excluded from the operating revenue computation as subcontracted transportation is largely a pass-through to our customers and we realize minimal changes in profitability as a result of fluctuations in subcontracted transportation. Refer to the section titled “Non-GAAP Financial Measures” for a reconciliation of total revenue to operating revenue.
 
Total revenue decreased 6% to $6.20 billion in 2008 compared with 2007. Total revenue in 2008 was impacted by a change, effective January 1, 2008, in our contractual relationship with a significant customer that required a change in revenue recognition from a gross basis to a net basis for subcontracted transportation. This change did not impact operating revenue or earnings. During 2007, total revenue from this contractual relationship was $640 million. Excluding this item, total revenue increased 5% during 2008 compared with 2007 primarily as a result of higher fuel services revenue. Operating revenue increased 1% primarily due to FMS contractual revenue growth, including acquisitions, which more than offset the decline in commercial rental revenue. Total revenue in 2008 included an unfavorable foreign exchange impact of 0.3% due primarily to the weakening of the British pound.
 
Total revenue increased 4% to $6.57 billion in 2007 compared with 2006. Total revenue growth was driven by contractual revenue growth in our SCS and FMS business segments, and by favorable movements in foreign currency exchange rates related to our international operations, offset partially by a decline in FMS commercial rental revenue. SCS revenue growth was due primarily to new and expanded business. Contractual revenue growth in our FMS segment, principally full service lease revenue, resulted from new contract sales and lease replacements beginning in the second half of 2006. We realized revenue growth in all geographic markets served by FMS in 2007. Total revenue in 2007 included a favorable foreign exchange impact of 1.2% due primarily to the strengthening of the Canadian dollar and British pound.
 
Our FMS segment leases revenue earning equipment and provides fuel, maintenance and other ancillary services to our SCS and DCC segments. Eliminations relate to inter-segment sales that are accounted for at


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
rates similar to those executed with third parties. The increases in eliminations in 2008 and 2007, reflects primarily the pass-through of higher average fuel costs.
 
                     
    Years ended December 31   Change
                2008/
  2007/
    2008   2007   2006   2007   2006
    (Dollars in thousands)        
 
Operating expense (exclusive of items shown separately)
  $3,029,673   2,776,999   2,735,752   9%   2%
Percentage of revenue
  49%   42%   43%        
 
Operating expense increased in 2008 compared with 2007 from the impact of higher fuel costs due to higher average market prices. Fuel costs are largely a pass-through to customers for which we realize minimal changes in profitability during periods of steady market fuel prices. We continue to realize favorable development in prior years’ self-insurance loss reserves and as a result benefited from lower safety and insurance costs. In recent years, our development has been favorable compared with historical selected loss development factors because of improved safety performance, payment patterns and settlement patterns.
 
Operating expense increased in 2007 compared with 2006 in conjunction with the growth in operating revenue as well as higher fuel costs due to higher average market prices. The increase in operating expense was partially offset by lower safety and insurance costs due to favorable development in prior years’ self-insurance loss reserves.
 
                     
    Years ended December 31   Change
                2008/
  2007/
    2008   2007   2006   2007   2006
    (Dollars in thousands)        
 
Salaries and employee-related costs
  $1,399,121   1,410,388   1,397,391   (1)%   1%
Percentage of revenue
  23%   21%   22%        
Percentage of operating revenue
  30%   30%   31%        
 
Salaries and employee-related costs decreased in 2008 compared with 2007 primarily due to lower headcount, including cost savings initiatives from 2007. Average headcount decreased 3% in 2008 compared with 2007. The number of employees at December 31, 2008 decreased to approximately 28,000 compared to 28,800 at December 31, 2007. We expect headcount to decline in 2009 due to the previously announced strategic initiatives.
 
Pension expense totaled $3 million in 2008 compared to $29 million in 2007. Lower pension expense was primarily a result of the freeze of our U.S. and Canadian pension plans. On January 5, 2007, our Board of Directors approved an amendment to freeze U.S. pension plans effective December 31, 2007 for current participants who did not meet certain grandfathering criteria. As a result, these employees ceased accruing further benefits after December 31, 2007 and began participating in an enhanced 401(k) plan. During the third quarter of 2008, our Board of Directors approved the freeze of the defined benefit portion of the Canadian retirement plan, which resulted in a curtailment gain of $4 million. In connection with the freeze of the pension plans, we provided an enhanced 401(k) savings plan to employees. See Note 23, “Employee Benefit Plans,” in the Notes to Consolidated Financial Statements, for additional information regarding these items. Total savings plan costs increased $20 million during 2008 primarily as a result of the enhanced 401(k) plan. The net impact of pension and savings plan costs was a net decrease of $6 million for 2008 compared with 2007.
 
We apply actuarial methods to determine the annual net periodic pension expense and pension plan liabilities. 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 and the expected


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
long-term rate of return on assets. Accounting guidance applicable to pension plans does not require immediate recognition of the current year effects of a deviation between these assumptions and actual experience. We have experienced significant negative pension asset returns in 2008 the result of which will materially increase pension expense for 2009. We expect 2009 pension expense, on a pre-tax basis, to increase approximately $62 million primarily because of a lower than expected return on assets in 2008 partially offset by higher discount rates. See the section titled “Critical Accounting Estimates — Pension Plans” for further discussion on pension accounting estimates.
 
Salaries and employee-related costs increased in 2007 compared with 2006 primarily as a result of merit increases and higher outside labor costs from new and expanded business in our SCS business segment offset partially by lower pension expense and incentive-based compensation. Average headcount increased 2% in 2007 compared with 2006. Pension expense decreased $41 million in 2007 compared with 2006 due to (i) higher expected return on assets because of prior year actual returns and contributions, and (ii) the impact of higher interest rate levels at December 31, 2006. Incentive-based compensation expense decreased $15 million in 2007 compared with 2006, as we achieved a lower level of performance relative to target in 2007.
 
                         
    Years ended December 31   Change  
      
          2008/
  2007/
 
    2008   2007   2006   2007   2006  
    (Dollars in thousands)          
 
Subcontracted transportation
  $323,382   950,500   865,475   (66)%     10%  
Percentage of revenue
  5%   14%   14%            
 
Subcontracted transportation expense represents freight management costs on logistics contracts for which we purchase transportation from third parties. Subcontracted transportation expense decreased in 2008 as a result of net reporting from a contract change. Subcontracted transportation expense in 2007 grew due to increased volumes of freight management activity from new and expanded business and higher average pricing on subcontracted freight costs, resulting from increased fuel costs.
 
Subcontracted transportation expense is directly impacted by whether we are acting as an agent or principal in our transportation management contracts. To the extent that we are acting as a principal, revenue is reported on a gross basis and carriage costs to third parties are recorded as subcontracted transportation expense. The impact to net earnings is the same whether we are acting as an agent or principal in the arrangement. Effective January 1, 2008, our contractual relationship with a significant customer changed, and we determined, after a formal review of the terms and conditions of the services, we were acting as an agent based on the revised terms of the arrangement. As a result, the amount of total revenue and subcontracted transportation expense decreased by $640 million in 2008 compared with 2007 due to the reporting of revenue net of subcontracted transportation expense for this particular customer contract.
 
                     
    Years ended December 31   Change
      
          2008/
  2007/
    2008   2007   2006   2007   2006
    (Dollars in thousands)        
 
Depreciation expense
  $843,459   815,962   743,288   3%   10%
Gains on vehicle sales, net
  (39,312)   (44,094)   (50,766)   (11)   (13)
Equipment rental
  80,105   93,337   90,137   (14)   4
 
Depreciation expense relates primarily to FMS revenue earning equipment. Depreciation expense increased to $843 million in 2008 compared to $816 million in 2007, reflecting the impact of recent acquisitions and increased capital spending. The increases were partially offset by lower adjustments in the carrying value of vehicles held for sale of $13 million in 2008 compared with 2007. Depreciation expense increased to $816 million in 2007 compared to $743 million in 2006, reflecting higher average vehicle investment from increased capital spending and higher adjustments in the carrying value of vehicles held for


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
sale of $18 million. 2007 benefited from adjustments made to residual values as part of our annual depreciation review.
 
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 the section titled “Critical Accounting Estimates — Depreciation and Residual Value Guarantees” for further discussion. While we believe that the carrying values and estimated sales proceeds for revenue earning equipment are appropriate, there can be no assurance that deterioration in economic conditions or adverse changes to expectations of future sales proceeds will not occur, resulting in lower gains or losses on sales. At the end of 2008, 2007 and 2006, we completed our annual depreciation review of the residual values and useful lives of our revenue earning equipment. Our annual review is established with a long-term view considering historical market price changes, current and expected future market price trends, expected life of vehicles and extent of alternative uses. Based on the results of the 2007 review, the adjustment to 2008 depreciation was not significant. Based on the results of our 2006 analysis, we adjusted the residual values of certain classes of our revenue earning equipment effective January 1, 2007. The residual value changes increased pre-tax earnings for 2007 by approximately $11 million compared with 2006. Based on the results of the 2008 review, the adjustment to 2009 depreciation is not significant.
 
Gains on vehicle sales, net decreased in 2008 compared with 2007 due to a 32% decline in the number of vehicles sold partially offset by improved gains per unit sold. In 2007, we had excess used truck inventories and increased our wholesale activity in order to reduce inventory levels. Wholesale prices are lower than our retail prices and result in lower gains per unit. In light of current market conditions, we expect a significant decline in overall used vehicle sales results, including gains and carrying value adjustments, reflecting lower retail prices and higher wholesale activity. Gains on vehicle sales, net decreased in 2007 compared with 2006 due to a decline in the average price of vehicles sold mostly as a result of wholesale activity taken to reduce excess used truck inventories.
 
Equipment rental consists primarily of rent expense for FMS revenue earning equipment under lease by us as lessee. Equipment rental decreased $13 million in 2008 due to the reduction in the average number of leased vehicles. Equipment rental increased $3 million in 2007 compared with 2006 as a result of the sale and leaseback of $150 million of revenue earning equipment completed in May 2007.
 
                         
    Years ended December 31   Change  
      
          2008/
  2007/
 
    2008   2007   2006   2007   2006  
    (Dollars in thousands)          
 
Interest expense
  $157,257   160,074   140,561   (2)%     14%  
Effective interest rate
  5.5%   5.6%   5.7%            
 
Interest expense totaled $157 million in 2008 compared to $160 million in 2007. The decrease in interest expense reflects a lower average cost of debt principally from lower commercial paper borrowing rates. The growth in interest expense in 2007 compared with 2006 reflects higher average debt levels to support capital spending, the funding of global pension contributions in 2006 and share repurchase programs. A hypothetical 10 basis point change in short-term market interest rates would change annual pre-tax earnings by $0.7 million.
 
                                 
    Years ended December 31     Change
      
                2008/
  2007/
    2008     2007     2006     2007   2006
    (Dollars in thousands)          
 
Miscellaneous expense (income), net
  $ 1,735       (15,904 )     (11,732 )   (111)%   36%
 
Miscellaneous expense (income), net consists of investment losses (income) on securities used to fund certain benefit plans, interest income, losses (gains) from sales of property, foreign currency transaction losses (gains), and non-operating items. Miscellaneous expense (income), net decreased $18 million in 2008


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
primarily due to a $10 million gain on sale of property recognized in the prior year. See Note 25, “Other Items Impacting Comparability,” in the Notes to Consolidated Financial Statements for additional information on the property sale. Miscellaneous expense in the current year was also negatively impacted by $6 million due to the declining market performance of our investments classified as trading securities and was partially offset by foreign currency transaction gains this year compared to losses in the prior year.
 
Miscellaneous expense (income), net increased to $16 million in 2007 compared to $12 million in 2006 because of the $10 million gain recognized on the sale of property. Miscellaneous expense (income), net also increased by $2 million as a result of a favorable contractual litigation settlement in 2007 compared with an unfavorable settlement in 2006. These favorable items were offset by (i) $3 million of additional foreign currency transaction losses compared with 2006, (ii) a 2006 business interruption insurance claim recovery from hurricane-related losses of $3 million ($2 million within our FMS business segment and $1 million within our DCC business segment), and (iii) a one-time recovery of $2 million in 2006 for the recognition of common stock received from mutual insurance companies.
 
                         
    Years ended December 31  
    2008     2007     2006  
    (In thousands)  
 
Restructuring and other charges, net
  $ 58,401       13,269       3,564  
 
2008 Activity
 
During the fourth quarter of 2008, we announced several restructuring initiatives designed to address current global economic conditions and drive long-term profitable growth. The initiatives include discontinuing supply chain operations in Brazil, Argentina and Chile during 2009 and transitioning out of SCS customer contracts in Europe. These actions will enable us to focus the organization and resources to expand our service offerings, further diversify our mix of industries served and continue our pursuit of “tuck-in” and strategic acquisitions that create synergies and/or expand capabilities. Our actions resulted in a pre-tax restructuring charge of $37 million, including severance and other termination benefits, contract termination costs and asset impairments. Approximately, 2,500 employees support the discontinued operations. The majority of the separation actions are expected to be completed and will start to benefit earnings by the latter part of 2009.
 
In connection with the decision to transition out of European supply chain contracts and a declining economic environment, we performed an impairment analysis relating to our U.K. FMS reporting unit. Based on our analysis, given current market conditions and business expectations, in the fourth quarter of 2008, we recorded a non-cash pre-tax impairment charge of $10 million related to the write-off of goodwill.
 
In addition to the longer-term strategic initiatives described above, we approved a plan to eliminate approximately 700 positions, primarily in the U.S. across all business segments. The workforce reduction resulted in a pre-tax restructuring charge of $11 million in the fourth quarter of 2008, all of which related to the payment of severance and other termination benefits. These actions will be substantially completed by the end of the first quarter of 2009. The workforce reduction is expected to result in annual cost savings of approximately $38 million once all activities are completed.
 
2007 Activity
 
Restructuring and other charges, net in 2007 related primarily to $10 million of employee severance and benefit costs incurred in connection with global cost savings initiatives and $2 million of contract termination costs. We approved a plan to eliminate approximately 300 positions as a result of cost management and process improvement actions throughout our domestic and international operations and Central Support Services (CSS). By December 31, 2008, the 2007 actions were completed and the cost reductions associated with these activities benefited salaries and employee-related costs throughout most of 2008.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
Restructuring and other charges, net also included a charge of $1 million incurred to extinguish debentures that were originally set to mature in 2017. The charge included the premium paid on the early extinguishment of debt and the write-off of related debt discount and issuance costs.
 
2006 Activity
 
During 2006, we recorded net restructuring and other charges of $4 million that primarily consisted of early debt retirement costs and employee severance and benefit costs incurred in connection with global cost savings initiatives. The majority of these charges were recorded during the fourth quarter. These charges were partially offset by adjustments to prior year severance and employee-related accruals and contract termination costs. By December 31, 2007, the 2006 actions were completed and the cost reductions associated with these activities benefited salaries and employee-related costs in the latter half of 2007.
 
As part of ongoing cost management actions, we incurred $2 million of costs in the fourth quarter to extinguish debentures that were originally set to mature in 2016. The total debt retirement costs consisted of the premium paid on the early extinguishment and the write-off of the related debt discount and issuance costs. We realized annual pre-tax interest savings of approximately $2 million from the early extinguishment of these debentures. In 2006, we also approved a plan to eliminate approximately 150 positions as a result of ongoing cost management and process improvement actions throughout our domestic and international business segments and CSS. The charge related to these actions included severance and employee-related costs totaling $1 million. During 2006, we also had employee-related accruals and contract termination costs recorded in prior restructuring charges that were adjusted due to subsequent refinements in estimates.
 
See Note 4, “Restructuring and Other Charges,” in the Notes to Consolidated Financial Statements for further discussion.
 
                     
    Years ended December 31   Change
      
          2008/
  2007/
    2008   2007   2006   2007   2006
    (Dollars in thousands)        
 
Provision for income taxes
  $150,041   151,603   144,014   (1)%   5%
Effective tax rate
   42.9%    37.4%    36.6%        
 
The 2008 effective income tax rate increased due to the adverse impact of non-deductible restructuring and other charges and higher non-deductible foreign losses in the current year, mostly in our Brazil, Argentina and Chile operations. The income tax rate in 2008 benefited from enacted tax law changes in Massachusetts and the reversal of reserves for uncertain tax positions for which the statute of limitation in various jurisdictions had expired. The 2007 effective income tax rate included a net tax benefit of $5 million from the reduction of deferred income taxes as a result of enacted changes in tax laws in various jurisdictions. The 2006 effective income tax rate included a tax benefit of $7 million from the reduction of deferred income taxes as a result of enacted changes in Texas and Canadian tax laws. See Note 13, “Income Taxes,” in the Notes to Consolidated Financial Statements for further discussion.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
FULL YEAR OPERATING RESULTS BY BUSINESS SEGMENT
 
                                 
    Years ended December 31     Change
                      2008/
  2007/
    2008     2007     2006     2007   2006
    (Dollars in thousands)          
 
Revenue:
                               
Fleet Management Solutions
  $ 4,450,016       4,162,644       4,096,046         7%     2%
Supply Chain Solutions
    1,643,056       2,250,282       2,028,489     (27)   11
Dedicated Contract Carriage
    547,751       567,640       568,842     (4)  
Eliminations
    (437,080 )     (414,571 )     (386,734 )   (5)   (7)
                                 
Total
  $ 6,203,743       6,565,995       6,306,643       (6)%     4%
                                 
Operating Revenue:
                               
Fleet Management Solutions
  $ 3,034,688       2,979,416       2,921,062       2%     2%
Supply Chain Solutions
    1,330,671       1,314,531       1,182,925     1   11
Dedicated Contract Carriage
    536,754       552,891       548,931     (3)   1
Eliminations
    (197,607 )     (210,281 )     (198,687 )   6   (6)
                                 
Total
  $ 4,704,506       4,636,557       4,454,231       1%     4%
                                 
NBT:
                               
Fleet Management Solutions
  $ 398,540       373,697       368,069       7%     2%
Supply Chain Solutions
    42,745       63,223       62,144     (32)   2
Dedicated Contract Carriage
    49,628       47,409       42,589     5   11
Eliminations
    (31,803 )     (31,248 )     (33,732 )   (2)   7
                                 
      459,110       453,081       439,070     1   3
Unallocated Central Support Services
    (38,741 )     (44,458 )     (39,486 )   13   (13)
Restructuring and other charges, net and other
items(1)
    (70,447 )     (3,159 )     (6,611 )   NM   NM
                                 
Earnings before income taxes
  $ 349,922       405,464       392,973       (14)%     3%
                                 
 
 
(1) See Note 25, “Other Items Impacting Comparability,” in the Notes to Consolidated Financial Statements for a discussion of items excluded from our segment measure of profitability.
 
As part of management’s evaluation of segment operating performance, we define the primary measurement of our segment financial performance as “Net Before Taxes” (NBT), which includes an allocation of CSS and excludes restructuring and other charges, net. These exclusions are described more fully in Note 4, “Restructuring and Other Charges,” and Note 25, “Other Items Impacting Comparability,” in the Notes to Consolidated Financial Statements.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
The following table provides a reconciliation of items excluded from our segment NBT measure to their classification within our Consolidated Statements of Earnings:
 
                             
    Consolidated
                 
    Statements of Earnings
  Years ended December 31  
Description   Line Item(1)   2008     2007     2006  
        (In thousands)  
 
Severance and employee-related costs(2)
  Restructuring   $ (26,470 )     (10,442 )     (1,048 )
Contract termination costs(2)
  Restructuring     (3,787 )     (1,547 )     (375 )
Early retirement of debt(2)
  Restructuring           (1,280 )     (2,141 )
Asset impairments(2)
  Restructuring     (28,144 )            
                             
Restructuring and other charges, net
        (58,401 )     (13,269 )     (3,564 )
Brazil charges(3)
  Operating expense     (4,877 )            
Brazil charges(3)
  Subcontracted transportation     (1,621 )            
International asset write-offs(3)
  Operating expense     (3,931 )            
International asset impairment(3)
  Depreciation expense     (1,617 )            
Gain on sale of property(3)
  Miscellaneous income           10,110        
Pension accounting charge(3)
  Salaries                 (5,872 )
Pension remeasurement benefit(3)
  Salaries                 4,667  
Postretirement benefit plan charge(3)
  Salaries                 (1,842 )
                             
Restructuring and other charges, net and other items
      $ (70,447 )     (3,159 )     (6,611 )
                             
 
 
(1) Restructuring refers to the “Restructuring and other charges, net;” Miscellaneous income refers to “Miscellaneous expense (income), net” and Salaries refers to “Salaries and employee-related costs;” on our Consolidated Statements of Earnings.
 
(2) See Note 4, “Restructuring and Other Charges,” in the Notes to Consolidated Financial Statements for additional information.
 
(3) See Note 25, “Other Items Impacting Comparability,” in the Notes to Consolidated Financial Statements for additional information.
 
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 rates similar to those executed with third parties. NBT related to inter-segment equipment and services billed to customers (equipment contribution) are included in both FMS and the business segment which served the customer and then eliminated (presented as “Eliminations”).
 
The following table sets forth equipment contribution included in NBT for our SCS and DCC segments:
 
                         
    Years ended December 31  
    2008     2007     2006  
    (In thousands)  
 
Equipment Contribution:
                       
Supply Chain Solutions
  $ 16,701       16,282       16,983  
Dedicated Contract Carriage
    15,102       14,966       16,749  
                         
Total
  $ 31,803       31,248       33,732  
                         
 
CSS represents those costs incurred to support all business segments, including human resources, finance, corporate services and public affairs, information technology, health and safety, legal and corporate communications. The objective of the NBT measurement is to provide clarity on the profitability of each business segment and, ultimately, to hold leadership of each business segment and each operating segment within each business segment accountable for their allocated share of CSS costs. 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. Certain costs are considered to be overhead not


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
attributable to any segment and remain unallocated in CSS. Included within the unallocated overhead remaining within CSS are the costs for investor relations, public affairs and certain executive compensation. See Note 27, “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.
 
Fleet Management Solutions
 
                                 
    Years ended December 31     Change
                      2008/
  2007/
    2008     2007     2006     2007   2006
    (Dollars in thousands)          
 
Full service lease
  $ 2,042,064       1,965,308       1,848,141       4%     6%
Contract maintenance
    168,157       159,635       141,933      5    12
                                 
Contractual revenue
    2,210,221       2,124,943       1,990,074      4     7 
Contract-related maintenance
    193,856       198,747       193,134     (2)    3 
Commercial rental
    557,532       583,336       665,730     (4)   (12)
Other
    73,079       72,390       72,124     1  
                                 
Operating revenue(1)
    3,034,688       2,979,416       2,921,062      2     2 
Fuel services revenue
    1,415,328       1,183,228       1,174,984     20     1 
                                 
Total revenue
  $ 4,450,016       4,162,644       4,096,046       7%    2%
                                 
                                 
Segment NBT
  $ 398,540       373,697       368,069       7%    2%
                                 
                                 
Segment NBT as a % of total revenue
    9.0%       9.0%       9.0%     — bps   — bps
                                 
                                 
Segment NBT as a % of operating revenue(1)
    13.1%       12.5%       12.6%     60 bps   (10) bps
                                 
 
 
(1) We use operating 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 operating revenue computation as fuel is largely a pass-through to customers for which we realize minimal changes in profitability during periods of steady market fuel prices. However, profitability may be positively or negatively impacted by sudden increases or decreases in market fuel prices during a short period of time as customer pricing for fuel services is established based on market fuel costs.
 
2008 versus 2007
 
Total revenue increased 7% in 2008 to $4.45 billion compared to $4.16 billion in 2007 due to higher fuel services revenue and contractual revenue growth. Fuel services revenue increased in 2008 due to higher fuel prices partially offset by reduced fuel volumes. Operating revenue increased 2% in 2008 to $3.03 billion compared to $2.98 billion in 2007 as a result of contractual revenue growth, including acquisitions, which more than offset the decline in commercial rental revenue. Total and operating revenue in 2008 also included an unfavorable foreign exchange impact of 0.5% and 0.7%, respectively.
 
Revenue growth was realized in both contractual FMS product lines in 2008. Full service lease revenue grew 4% reflecting increases in the North American market primarily due to acquisitions. Contract maintenance revenue increased 5% due primarily to new contract sales. We expect contractual revenue levels to remain flat with the current year as real growth will be offset by unfavorable foreign exchange rates. Commercial rental revenue decreased 4% in 2008, reflecting weak global market demand and reduced pricing particularly in the fourth quarter of 2008. The average global rental fleet size declined 5% in 2008 compared


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
with 2007. We expect commercial rental revenue comparisons in 2009 to decline from 2008 levels because of continuing weak market demand and pricing decline.
 
The following table provides rental statistics for the U.S. fleet, which generates more than 80% of total commercial rental revenue:
                                 
    Years ended December 31     Change
                      2008/
  2007/
    2008     2007     2006     2007   2006
    (Dollars in thousands)          
 
Non-lease customer rental revenue
  $ 265,704       259,723       282,528       2%    (8)%
                                 
                                 
Lease customer rental revenue(1)
  $ 182,735       210,657       277,461     (13)%   (24)%
                                 
                                 
Average commercial rental fleet size — in service(2)
    27,600       29,600       32,800      (7)%   (10)%
                                 
Average commercial rental power fleet
size — in service(2),(3)
    20,300       21,100       24,100      (4)%   (12)%
                                 
                                 
Commercial rental utilization — power fleet
    71.7%       71.0%       71.9%      70 bps     (90) bps
                                 
 
 
(1) Lease customer rental revenue is revenue from rental vehicles provided to our existing full service lease customers, generally during peak periods in their operations.
 
(2) Number of units rounded to nearest hundred and calculated using average counts.
 
(3) Fleet size excluding trailers.
 
FMS NBT increased $25 million in 2008 due primarily to improved contractual business performance, including acquisitions, and to a lesser extent, from higher fuel margins associated with unusually volatile fuel prices and better used vehicle sales results. This improvement was partially offset by a decline in commercial rental results, especially in the fourth quarter of 2008, as weak market demand drove lower pricing. Used vehicle sales results improved $9 million in 2008 primarily because of lower average used truck inventories.
 
2007 versus 2006
 
Total revenue increased 2% in 2007 to $4.16 billion compared to $4.10 billion in 2006 and operating revenue increased 2% in 2007 to $2.98 billion compared to $2.92 billion in 2006, due to contractual revenue growth offset by decreased commercial rental revenue. Total and operating revenue in 2007 also included a favorable foreign exchange impact of 1.0% and 1.3%, respectively.
 
Revenue growth was realized in both contractual FMS product lines in 2007. Full service lease revenue grew 6% due to higher new contract sales and lease replacements in all geographic markets served. Contract maintenance revenue increased 12% due primarily to new contract sales. Commercial rental revenue decreased 12% in 2007 due to weak U.S. market demand. We reduced our rental fleet size throughout the year in response to weak demand. The average global rental fleet size declined 8% in 2007 compared with 2006.
 
FMS NBT increased $6 million in 2007 due primarily to improved contractual business performance and lower pension expense of $32 million. This improvement was partially offset by a substantial decline in commercial rental results due to a lower rental fleet and, to a lesser extent, reduced pricing as well as lower used vehicle sales results. Used vehicles sales results declined $25 million in 2007 due to higher valuation adjustments on an increased inventory of used vehicles held for sale in North America and lower gains from the sale of used vehicles due to wholesale activity taken to reduce excess used truck inventories. Depreciation expense, although higher than 2006, benefited $11 million from our annual depreciation review effective January 1, 2007. FMS NBT in 2007 also benefited from lower safety and insurance costs and lower incentive-based compensation. The decrease in safety and insurance costs was mainly due to favorable development in estimated prior years’ self-insured loss reserves.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
Our global fleet of owned and leased revenue earning equipment and contract maintenance vehicles is summarized as follows (number of units rounded to the nearest hundred):
 
                                 
    December 31     Change
                      2008/
  2007/
    2008     2007     2006     2007   2006
 
End of period vehicle count
                               
By type:
                               
Trucks(1)
    68,300       62,800       65,200         9%     (4)%
Tractors(2)
    51,900       50,400       56,100     3   (10)
Trailers(3)
    39,900       40,400       38,900     (1)    4
Other
    3,300       7,100       7,000     (54)     1
                                 
Total
    163,400       160,700       167,200       2%       (4)%
                                 
By ownership:
                               
Owned
    158,200       155,100       160,800       2%       (4)%
Leased
    5,200       5,600       6,400     (7)    (13)
                                 
Total
    163,400       160,700       167,200       2%       (4)%
                                 
By product line:
                               
Full service lease
    120,400       115,500       118,800       4%       (3)%
Commercial rental
    32,300       34,100       37,000     (5)     (8)
Service vehicles and other
    2,800       3,600       3,500     (22)      3
                                 
Active units
    155,500       153,200       159,300     2     (4)
Held for sale
    7,900       7,500       7,900     5     (5)
                                 
Total
    163,400       160,700       167,200     2     (4)
                                 
Customer vehicles under contract maintenance
    35,500       31,500       30,700      13%        3%
                                 
Average vehicle count
                               
By product line:
                               
Full service lease
    118,500       116,400       115,700     2%   1%
Commercial rental
    34,200       35,800       38,900     (4)   (8)
Service vehicles and other
    3,200       3,500       3,300     (9)   6
                                 
Active units
    155,900       155,700       157,900       (1)
Held for sale
    6,300       9,700       6,500     (35)   49
                                 
Total
    162,200       165,400       164,400     (2)   1
                                 
Customer vehicles under contract maintenance
    33,600       30,800       27,900     9%   10%
                                 
 
 
(1) Generally comprised of Class 1 through Class 6 type vehicles with a Gross Vehicle Weight (GVW) up to 26,000 pounds.
 
(2) Generally comprised of over the road on highway tractors and are primarily comprised of Classes 7 and 8 type vehicles with a GVW of over 26,000 pounds.
 
(3) Generally comprised of dry, flatbed and refrigerated type trailers.
 
Note:  Prior year vehicle counts have been reclassified to conform to current year presentation.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
The totals in the previous table include the following non-revenue earning equipment for the U.S. fleet (number of units rounded to the nearest hundred):
 
                                 
    December 31     Change
                      2008/
  2007/
Number of Units   2008     2007     2006     2007   2006
 
Not yet earning revenue (NYE)
    1,300       900       4,200     44%    (79)%
No longer earning revenue (NLE):
                               
Units held for sale
    6,300       6,400       7,500      (2)    (15)
Other NLE units
    1,300       1,000       1,900      30   (47)
                                 
Total(1)
    8,900       8,300       13,600       7%     (39)%
                                 
 
 
(1) Non-revenue earning equipment for FMS operations outside the U.S. totaled approximately 1,500 vehicles at December 31, 2008, 1,900 vehicles at December 31, 2007, and 1,700 at December 31, 2006, 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. For 2008, the number of NYE units increased compared with prior year consistent with higher lease replacement activity. NLE units represent all vehicles held for sale and vehicles for which no revenue has been earned in the previous 30 days. Accordingly, these vehicles may be temporarily out of service, being prepared for sale or awaiting redeployment. For 2008, the number of NLE units increased slightly compared with the prior year because of the decline in commercial rental demand. We expect the number of NLE units in 2009 to be up modestly from 2008 levels.
 
Supply Chain Solutions
 
                                     
    Years ended December 31     Change
                      2008/
    2007/
    2008     2007     2006     2007     2006
    (Dollars in thousands)            
 
U.S. operating revenue:
                                   
Automotive and industrial
  $ 547,843       551,730       495,363       (1 )%    11%
High-tech and consumer industries
    310,455       288,913       291,933       7     (1)
Transportation management
    38,523       32,596       30,737       18     6
                                     
U.S. operating revenue
    896,821       873,239       818,033       3     7
International operating revenue
    433,850       441,292       364,892       (2 )   21 
                                     
Total operating revenue(1)
    1,330,671       1,314,531       1,182,925       1     11 
Subcontracted transportation
    312,385       935,751       845,564       (67 )   11 
                                     
Total revenue
  $ 1,643,056       2,250,282       2,028,489       (27 )%   11%
                                     
                                     
Segment NBT
  $ 42,745       63,223       62,144       (32 )%    2%
                                     
                                     
Segment NBT as a % of total revenue
    2.6%       2.8%       3.1%       (20 ) bps   (30) bps
                                     
                                     
Segment NBT as a % of operating revenue(1)
    3.2%       4.8%       5.3%       (160 ) bps   (50) bps
                                     
                                     
Memo: Fuel costs(2)
  $ 147,440       124,519       104,233       18 %   19%
                                     
 
 
(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. Subcontracted transportation is excluded from our operating revenue computation as subcontracted transportation is largely a pass-through to customers. We realize minimal changes in profitability as a result of fluctuations in subcontracted transportation.
 
(2) Fuel costs are largely a pass-through to customers and therefore have a direct impact on revenue.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
 
2008 versus 2007
 
Total revenue decreased 27% to $1.64 billion in 2008 compared to $2.25 billion in 2007 as a result of net reporting of a transportation management arrangement previously reported on a gross basis. Effective January 1, 2008, our contractual relationship with a significant customer for certain transportation management services changed, and we determined, after a formal review of the terms and conditions of the services, that we were acting as an agent based on the revised terms of the arrangement. As a result, total revenue and subcontracted transportation expense decreased by $640 million in 2008. Operating revenue grew 1% due to new and expanded business and higher fuel cost pass-throughs and was offset by lower automotive volumes, especially in the fourth quarter of 2008. For 2008, SCS operating revenue included an unfavorable foreign currency exchange impact of 0.2%. Our largest customer, General Motors Corporation (GM), accounted for approximately 17% of both SCS total and operating revenue in 2008, and is comprised of multiple contracts in various geographic regions.
 
In the fourth quarter of 2008, we announced that we were transitioning out of our current operations in Brazil, Argentina and Chile and supply chain contracts in Europe. These operations accounted for approximately $209 million, $209 million and $174 million of total revenue in 2008, 2007 and 2006, respectively, and approximately $119 million, $127 million and $106 million of operating revenue in 2008, 2007 and 2006, respectively. Approximately 45% of operating revenue was in the automotive sector for the year ended December 31, 2008. These operations will be reported as part of continuing operations in our Consolidated Financial Statements until all operations cease. We expect unfavorable operating revenue comparisons in the near term because of current market conditions, particularly related to automotive production volumes, the impact of discontinued operations in South America and unfavorable foreign exchange rates.
 
SCS NBT decreased $20 million in 2008 largely driven by lower operating results related to South America and the start-up of a U.S. based operation. South America’s results declined $15 million, primarily in Brazil, due to higher transportation and labor costs and adverse developments in certain litigation-related matters. NBT was also impacted by higher overhead spending from increased sales and marketing investments and facility relocation costs slightly offset by lower incentive-based compensation.
 
2007 versus 2006
 
Total revenue grew 11% to $2.25 billion in 2007 compared to $2.03 billion in 2006 as a result of new and expanded business, increased levels of managed subcontracted transportation and favorable foreign currency exchange rates slightly offset by the impact of a significant automotive plant closure. SCS operating revenue grew 11% in 2007. For 2007, SCS total revenue and operating revenue included a favorable foreign currency exchange impact of 1.8% and 1.6%, respectively. In 2007, GM accounted for approximately 42% and 19% of SCS total revenue and operating revenue, respectively.
 
SCS NBT increased slightly in 2007 as a result of new and expanded business, particularly in international markets served, lower incentive-based compensation of $7 million and lower safety and insurance costs. The decrease in safety and insurance costs was mainly due to favorable development in estimated prior years’ self-insured loss reserves. The increase in NBT was partially offset by the impact of a significant automotive plant closure and a $3 million net benefit recognized in the prior year related to a contract termination.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
Dedicated Contract Carriage
 
                                 
    Years ended December 31     Change
                      2008/
  2007/
    2008     2007     2006     2007   2006
    (Dollars in thousands)          
 
Operating revenue(1)
  $ 536,754       552,891       548,931         (3)%       1%
Subcontracted transportation
    10,997       14,749       19,911     (25)   (26)
                                 
Total revenue
  $ 547,751       567,640       568,842         (4)%     —%
                                 
                                 
Segment NBT
  $ 49,628       47,409       42,589         5%     11%
                                 
                                 
Segment NBT as a % of total revenue
    9.1%       8.4%       7.5%     70 bps   90 bps
                                 
                                 
Segment NBT as a % of operating revenue(1)
    9.2%       8.6%       7.8%     60 bps   80 bps
                                 
                                 
Memo: Fuel costs(2)
  $ 123,003       107,140       104,647         15%       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. Subcontracted transportation is excluded from our operating revenue computation as subcontracted transportation is largely a pass-through to customers. We realize minimal changes in profitability as a result of fluctuations in subcontracted transportation.
 
(2) Fuel costs are largely a pass-through to customers and therefore have a direct impact on revenue.
 
2008 versus 2007
 
Total revenue declined 4% to $548 million and operating revenue declined 3% to $537 million in 2008 as a result of the non-renewal of certain customer contracts partially offset by the pass-through of higher fuel costs. We expect unfavorable operating revenue comparisons in the near term primarily driven by lower volumes associated with the current economic environment and lower fuel cost pass-throughs.
 
DCC NBT increased $2 million to $50 million in 2008 compared with 2007 as a result of better operating performance partially offset by higher safety and insurance costs. The increase in safety and insurance costs reflects less favorable development in estimated prior years’ self-insured loss reserves.
 
2007 versus 2006
 
Total revenue of $568 million was flat in 2007 compared with 2006 because of decreased volumes of managed subcontracted transportation. Operating revenue increased slightly in 2007 due to pricing increases associated with higher fuel costs.
 
DCC NBT increased $5 million in 2007 compared with 2006 as a result of better operating performance and lower safety and insurance costs offset slightly by lower FMS equipment contribution. The decrease in safety and insurance costs reflects favorable development in estimated prior years’ self-insured loss reserves.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
Central Support Services
 
                                 
    Years ended December 31     Change
                      2008/
  2007/
    2008     2007     2006     2007   2006
    (Dollars in thousands)          
 
Human resources
  $ 15,943       16,504       15,548       (3)%     6%
Finance
    55,835       58,209       59,495     (4)   (2)
Corporate services and public affairs
    13,117       12,124       11,620     8   4
Information technology
    57,538       54,826       54,847     5  
Health and safety
    7,754       7,973       8,147     (3)   (2)
Other
    35,286       40,837       41,310     (14)    (1)
                                 
Total CSS
    185,473       190,473       190,967     (3)  
Allocation of CSS to business segments
    (146,732 )     (146,015 )     (151,481 )     4
                                 
Unallocated CSS
  $ 38,741       44,458       39,486      (13)%    13%
                                 
 
2008 versus 2007
 
Total and unallocated CSS costs in 2008 decreased compared with the prior year as a result of a decrease in foreign currency transaction losses, reduced severance costs and lower share-based compensation expense due to a prior year charge related to the accelerated amortization of restricted stock unit expense.
 
2007 versus 2006
 
Total CSS costs in 2007 were flat compared with the prior year. CSS costs in 2007 were impacted by (i) higher severance and foreign currency transaction losses; (ii) a non-cash compensation charge of $2 million related to an adjustment in the amortization of restricted stock units; and (iii) the one-time recovery in 2006 of $2 million associated with the recognition of common stock received from mutual insurance companies. These cost increases were offset by lower incentive-based compensation of $7 million and a prior year litigation settlement charge associated with a discontinued operation. Unallocated CSS expense increased in 2007 because of higher foreign currency transaction losses, the adjustment in the amortization of restricted stock unit compensation expense and higher severance expense offset partially by lower incentive-based compensation of $3 million and the litigation settlement charge in the prior year.


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Table of Contents

 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
FOURTH QUARTER CONSOLIDATED RESULTS
 
                     
    Three months ended December 31,     Change
    2008     2007     2008/ 2007
    (Dollars and shares in thousands,
     
    except per share amounts)      
 
Total revenue
  $ 1,373,798       1,666,200     (18)%
                     
                     
Operating revenue
  $ 1,109,469       1,189,599      (7)%
                     
                     
Earnings before income taxes
  $ 33,178       111,797     (70) 
Provision for income taxes
    22,533       39,851     (43) 
                     
Net earnings
  $ 10,645       71,946      (85)%
                     
                     
Per diluted common share
  $ 0.19       1.24      (85)%
                     
                     
Weighted-average shares outstanding — Diluted
    55,499       58,099       (4)%
                     
 
Total revenue decreased 18% in the fourth quarter of 2008 compared with the year-earlier period. Total revenue in 2008 was impacted by a change, effective January 1, 2008, in our contractual relationship with a significant SCS customer that required a change in revenue recognition from a gross basis to a net basis for subcontracted transportation. This change did not impact operating revenue or net earnings. In the fourth quarter of 2007, we recorded revenue of $133 million related to this contractual relationship. Excluding this item, total revenue decreased in the fourth quarter of 2008 primarily as a result of lower fuel services revenue and unfavorable foreign exchange rate movements related to international operations. Operating revenue decreased 7% primarily due to unfavorable foreign exchange rate movements, lower commercial rental revenue, lower automotive volumes and lower fuel services revenue in DCC which more than offset contractual revenue growth. Total revenue and operating revenue in the fourth quarter of 2008 included an unfavorable foreign exchange impact of 4.6%.
 
NBT decreased to $33 million in the fourth quarter of 2008 compared to $112 million in the same period in 2007. 2008 NBT included a fourth quarter restructuring and other charges of $58 million ($53 million after-tax or $0.96 per diluted common share) associated with a plan to discontinue current supply chain operations in Brazil, Argentina, Chile and Europe and workforce reductions, primarily in the U.S. See Note 4, “Restructuring and Other Charges,” in the Notes to Consolidated Financial Statements for additional discussion. The decline in NBT was also due to deteriorating economic conditions which impacted commercial rental demand in FMS and volumes in SCS and DCC.
 
Net earnings in the fourth quarter of 2008 included income tax benefits of $8 million or $0.14 per diluted common share associated with reversal of reserves for uncertain tax positions due to the expiration of the statutes of limitation in various jurisdictions. Net earnings in the fourth quarter of 2007 included a benefit of $4 million, or $0.06 per diluted common share, related primarily to changes in Canadian income tax laws.


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Table of Contents

 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
FOURTH QUARTER OPERATING RESULTS BY BUSINESS SEGMENT
 
                     
    Three months ended December 31,     Change
    2008     2007     2008/2007
    (In thousands)      
 
Revenue:
                   
Fleet Management Solutions
  $ 976,319       1,085,366       (10)%
Supply Chain Solutions
    357,196       545,837     (35)
Dedicated Contract Carriage
    126,209       144,278     (13)
Eliminations
    (85,926 )     (109,281 )   (21)
                     
Total
  $ 1,373,798       1,666,200       (18)%
                     
Operating Revenue:
                   
Fleet Management Solutions
  $ 736,695       764,770       (4)%
Supply Chain Solutions
    294,846       337,190     (13)
Dedicated Contract Carriage
    123,624       140,278     (12)
Eliminations
    (45,696 )     (52,639 )   (13)
                     
Total
  $ 1,109,469       1,189,599         (7)%
                     
NBT:
                   
Fleet Management Solutions
  $ 86,552       102,254       (15)%
Supply Chain Solutions
    14,982       18,921     (21)
Dedicated Contract Carriage
    12,720       12,256     4
Eliminations
    (8,399 )     (8,007 )   5
                     
      105,855       125,424     (16) 
Unallocated Central Support Services
    (8,695 )     (14,023 )   (38) 
Restructuring and other (charges) recoveries, net
    (63,982 )     396     NM 
                     
Earnings before income taxes
  $ 33,178       111,797       (70)%
                     
 
Fleet Management Solutions
 
Total revenue decreased 10% in the fourth quarter of 2008 compared with the year-earlier period reflecting lower fuel services revenue due to lower prices and reduced volume. The decrease in total revenue also reflects unfavorable foreign exchange rate movements. Operating revenue decreased 4% in the fourth quarter compared with the year-earlier period primarily due to unfavorable foreign exchange rate movements. Declines in commercial rental revenue of 15% more than offset contractual revenue growth, including acquisitions. FMS total revenue and operating revenue in the fourth quarter of 2008 included an unfavorable foreign exchange impact of 3%.
 
FMS NBT decreased 15% in the fourth quarter of 2008 reflecting a decline in global commercial rental results partially offset by improved contractual business performance, including acquisitions. Commercial rental results were impacted by weak market demand which drove lower utilization and reduced pricing. FMS NBT included an unfavorable foreign exchange impact of 4%.
 
Supply Chain Solutions
 
Total revenue decreased 35% in the fourth quarter of 2008 compared with the year-earlier period. Total revenue declined largely due to a previously announced change in reporting of a transportation services arrangement from a gross to a net basis. Excluding this contract change, total revenue declined 13%. Operating revenue decreased 13% in the fourth quarter primarily due to lower automotive volumes and


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Table of Contents

 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
unfavorable foreign exchange rate changes. In the fourth quarter of 2008, SCS total revenue and operating revenue included an unfavorable foreign currency exchange impact of 8% and 7%, respectively.
 
SCS NBT decreased 21% in the fourth quarter of 2008 compared with the year-earlier period due to lower international operating results and, to a lesser extent, the impact of lower automotive revenue partially offset by lower compensation costs.
 
Dedicated Contract Carriage
 
Total revenue decreased 13% in the fourth quarter of 2008 compared with the year-earlier period. Operating revenue decreased 12% compared with the year-earlier period. Revenue decreased due to the impact of the non-renewal of customer contracts, lower volumes as well as the pass-through of lower fuel costs.
 
DCC NBT increased 4% in the fourth quarter of 2008 compared with the year-earlier period due to better operating margins and improved efficiencies.
 
Central Support Services
 
Unallocated CSS costs were $9 million compared to $14 million in 2007. The improvement in CSS costs primarily reflects lower compensation and prior year severance expense.
 
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  
    2008     2007     2006  
    (In thousands)  
 
Net cash provided by (used in):
                       
Operating activities
  $ 1,255,531       1,102,939       853,587  
Financing activities
    (150,630 )     (299,203 )     488,202  
Investing activities
    (1,102,790 )     (823,219 )     (1,339,550 )
Effect of exchange rate changes on cash
    1,735       7,303       (2,327 )
                         
Net change in cash and cash equivalents
  $ 3,846       (12,180 )     (88 )
                         
 
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 to $1.26 billion in 2008 compared to $1.10 billion in 2007, because of higher cash-based earnings and reduced working capital needs primarily from improved accounts receivable collections. Cash used in financing activities was $151 million in 2008 compared with cash used of $299 million in 2007. The decrease in cash used in financing activities in 2008 reflects higher borrowing needs partially offset by higher share repurchase activity. Cash used in investing activities increased to $1.10 billion in 2008 compared to $823 million in 2007 primarily due to acquisition-related payments in 2008 and lower proceeds from sales of revenue earning equipment which included proceeds of $150 million from a sale-leaseback transaction in 2007. This increase was partially offset by lower vehicle capital spending.
 
Cash provided by operating activities increased to $1.10 billion in 2007 compared to $854 million in 2006, because of higher cash-based earnings, reduced working capital needs primarily from improved accounts receivable collections, lower income tax payments of $87 million and lower pension contributions of $70 million. Cash used in financing activities was $299 million in 2007 compared with cash provided of $488 million in 2006. Cash used in financing activities in 2007 reflects lower borrowing needs and higher share repurchase activity. Cash used in investing activities decreased to $823 million in 2007 compared to


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
$1.34 billion in 2006 as a result of lower cash payments for vehicle capital spending, a $150 million sale-leaseback transaction completed in 2007 and higher proceeds associated with sales of used vehicles. These items were partially offset by higher acquisition-related payments.
 
Our principal sources of operating liquidity are cash from operations and proceeds from the sale of revenue earning equipment. We refer to the sum of operating cash flows, proceeds from the sales of revenue earning equipment and operating property and equipment, sale and leaseback of revenue earning equipment, collections on direct finance leases and other cash inflows as “total cash generated.” We refer to the net amount of cash generated from operating and investing activities (excluding changes in restricted cash and acquisitions) as “free cash flow.” Although total cash generated and free cash flow are non-GAAP financial measures, we consider them to be important measures of comparative operating performance. We also believe total cash generated to be an important measure of total cash inflows generated from our ongoing business activities. 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  
    2008     2007     2006  
    (In thousands)  
 
Net cash provided by operating activities
  $ 1,255,531       1,102,939       853,587  
Sales of revenue earning equipment
    260,598       354,767       326,079  
Sales of operating property and equipment
    4,302       18,868       6,575  
Collections on direct finance leases
    61,944       63,358       66,274  
Sale and leaseback of revenue earning equipment
          150,348        
Other, net
    395       1,588       2,163  
                         
Total cash generated
    1,582,770       1,691,868       1,254,678  
Purchases of property and revenue earning equipment
    (1,234,065 )     (1,317,236 )     (1,695,064 )
                         
Free cash flow
  $ 348,705       374,632       (440,386 )
                         
 
Free cash flow decreased to $349 million in 2008 compared to $375 million in 2007 because of lower proceeds from sales of revenue earning equipment, primarily from the $150 million sale-leaseback transaction in 2007. This was partially offset by higher cash flows from operations and lower cash payments for vehicle capital spending. Free cash flow improved to $375 million in 2007 compared to negative $440 million in 2006 because of lower cash payments for vehicle capital spending, reduced working capital needs, the sale-leaseback transaction completed in 2007 and lower pension contributions during 2007. We expect free cash flow in 2009 to increase to $365 million based on lower capital expenditures, partially offset by higher pension contributions, cash taxes and working capital needs.
 
Capital expenditures are generally used to purchase revenue earning equipment (trucks, tractors, trailers) within our FMS segment. These expenditures primarily support the full service lease product line and also the commercial rental product line. The level of capital required to support the full service lease product line varies directly with the customer contract signings for replacement vehicles and growth. These contracts are long-term agreements that result in predictable cash flows to us typically over a three to seven year term for trucks and tractors and up to ten years for trailers. The commercial rental product line utilizes capital for the purchase of vehicles to replenish and expand the fleet available for shorter-term use by contractual or occasional customers. Operating property and equipment expenditures primarily relate to FMS and SCS


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
spending on items such as vehicle maintenance facilities and equipment, computer and telecommunications equipment, investments in technologies and warehouse facilities and equipment.
 
The following is a summary of capital expenditures:
 
                         
    Years ended December 31  
    2008     2007     2006  
    (In thousands)  
 
Revenue earning equipment:
                       
Full service lease
  $ 986,333       900,028       1,492,720  
Commercial rental
    171,128       218,830       195,023  
                         
      1,157,461       1,118,858       1,687,743  
Operating property and equipment
    111,539       75,978       71,772  
                         
Total capital expenditures(1)
    1,269,000       1,194,836       1,759,515  
Changes in accounts payable related to purchases of revenue earning equipment
    (34,935 )     122,400       (64,451 )
                         
Cash paid for purchases of property and revenue earning equipment
  $ 1,234,065       1,317,236       1,695,064  
                         
 
 
(1) Capital expenditures exclude non-cash additions of approximately $1 million, $11 million, and $2 million in 2008, 2007, and 2006, respectively, in assets held under capital leases resulting from the extension of existing operating leases and other additions.
 
Capital expenditures increased in 2008 as a result of higher full service lease vehicle spending for replacement and expansion of customer fleets and reduced spending on transactional commercial rental vehicles to meet market demand. Capital expenditures decreased in 2007 as a result of lower full service lease vehicle spending for replacement and expansion of customer fleets. We expect capital expenditures to decrease to approximately $940 million in 2009 largely as a result of the elimination of virtually all planned commercial rental spending. We expect to fund 2009 capital expenditures with both internally generated funds and additional financing.
 
During 2008, we completed four acquisitions related to the FMS and SCS segment. Total consideration paid in 2008 for these acquisitions was $246 million. In 2007, we completed the acquisition of Pollock NationaLease in Canada. Total consideration paid during 2007 for this acquisition was $75 million. See Note 3, “Acquisitions,” in the Notes to Consolidated Financial Statements for further discussion. On February 2, 2009, we acquired the assets of Edart Leasing Company LLC (“Edart”) which included Edart’s fleet of approximately 1,600 vehicles and more than 340 contractual customers complementing our FMS market coverage and service network in the Northeast United States. We also acquired approximately 525 vehicles that will be re-marketed. We will continue to evaluate selective acquisitions in 2009.
 
Financing and Other Funding Transactions
 
We utilize external capital primarily to support working capital needs and growth in our asset-based product lines. The variety of financing alternatives typically available to fund our capital needs include commercial paper, long-term and medium-term public and private debt, asset-backed securities, bank term loans, leasing arrangements and bank credit facilities. Our principal sources of financing are issuances of commercial paper and medium-term notes.
 
Our net working capital (current assets less current liabilities) was negative $160 million in 2008 compared to $203 million in 2007. The decline in net working capital was due to a higher amount of short-term debt outstanding under the trade receivables program and increased current maturities of long-term debt. The decline was also due to a decrease in receivables from improved collections and lower fuel services revenue. We expect to fund these debt requirements with issuances of commercial paper.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
Our ability to access unsecured debt in the capital markets is linked to both our short-term and long-term debt ratings. These ratings are intended to provide guidance to investors in determining the credit risk associated with particular Ryder securities based on current information obtained by the rating agencies from us or from other sources. Lower ratings generally result in higher borrowing costs as well as reduced access to unsecured capital markets. A significant downgrade of our short-term debt ratings would impair our ability to issue commercial paper. As a result, we would have to rely on alternative funding sources. A significant downgrade would not affect our ability to borrow amounts under our revolving credit facility described below.
 
Our debt ratings are as follows:
 
                     
    Short-term     Long-term     Outlook(1)
 
Moody’s Investors Service
    P2       Baa1     Stable (June 2004)(2)
Standard & Poor’s Ratings Services
    A2       BBB+     Negative (January 2009)
Fitch Ratings
    F2       A−     Stable (July 2005)
 
 
(1) Month and year attained.
 
(2) In February 2009, Moody’s Investors Service affirmed their long-term debt rating and outlook.
 
Global capital and credit markets, including the commercial paper markets, have recently experienced increased volatility and disruption. Despite this volatility and disruption, we have continued to have access to the commercial paper markets. There is no guarantee that such markets will continue to be available to us at terms commercially acceptable to us or at all. If we cease to have access to commercial paper and other sources of unsecured borrowings, we would meet our liquidity needs by drawing on contractually committed lending agreements as described below and (or) by seeking other funding sources. We believe that our operating cash flow, together with our revolving credit facility and other available debt financing, will be adequate to meet our operating, investing and financing needs in the foreseeable future. There can be no assurance that continued or increased volatility and disruption in the global capital and credit markets will not impair our ability to access these markets on terms commercially acceptable to us or at all.
 
We can borrow up to $870 million through a global revolving credit facility with a syndicate of thirteen lenders. The credit facility matures in May 2010 and is used primarily to finance working capital and provide support for the issuance of commercial paper in the U.S. and Canada. This 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, 2008). At our 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 11 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, we 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, 2008 was 181%. At December 31, 2008, $825 million was available under the credit facility. Foreign borrowings of $8 million were outstanding under the facility at December 31, 2008.
 
In September 2008, we renewed our trade receivables purchase and sale program, pursuant to which we sell certain of our domestic trade accounts receivable to Ryder Receivable Funding II, L.L.C. (RRF LLC), a bankruptcy remote, consolidated subsidiary of Ryder, that in turn may sell, on a revolving basis, an ownership interest in certain of these accounts receivable to a receivables conduit or committed purchasers. We use this program to provide additional liquidity to fund our operations, particularly when it is cost effective to do so. The costs under the program may vary based on changes in our unsecured debt ratings and changes in interest rates. The available proceeds that may be received under the program are limited to $250 million. If no event occurs which causes early termination, the 364-day program will expire on September 8, 2009. The program


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
contains provisions restricting its availability in the event of a material adverse change to our business operations or the collectibility of the securitized receivables. At December 31, 2008 and 2007, $190 million and $100 million, respectively, was outstanding under the program and was included within “Short-term debt and current portion of long-term debt” on our Consolidated Balance Sheets.
 
Historically, we have established asset-backed securitization programs whereby we sell beneficial interests in certain long-term vehicle leases and related vehicle residuals to a bankruptcy-remote special purpose entity that in turn transfers the beneficial interest to a special purpose securitization trust in exchange for cash. The securitization trust funds the cash requirement with the issuance of asset-backed securities, secured or otherwise collateralized by the beneficial interest in the long-term vehicle leases and the residual value of the vehicles. The securitization provides us with further liquidity and access to new capital markets based on market conditions. On June 18, 2008, Ryder Funding II LP, a special purpose bankruptcy-remote subsidiary wholly-owned by Ryder, filed a registration statement on Form S-3 with the Securities and Exchange Commission for the registration of $600 million in asset-backed notes. The registration statement became effective on November 6, 2008 and allows us to access the public asset-backed securities market for three years, subject to market conditions. Based on current market conditions, we do not expect to utilize this program in the near term.
 
On February 27, 2007, Ryder filed an automatic shelf registration statement on Form S-3 with the Securities and Exchange Commission. The registration is for an indeterminate number of securities and is effective for three years. Under this universal shelf registration statement, we have the capacity to offer and sell from time to time various types of securities, including common stock, preferred stock and debt securities, subject to market demand and ratings status. In August 2008, we issued $300 million of unsecured medium-term notes maturing in September 2015. The proceeds from the notes were used for general corporate purposes. If the notes are downgraded following, and as a result of, a change of control, the note holder can require us to repurchase all or a portion of the notes at a purchase price equal to 101% of the principal amount plus accrued and unpaid interest. Our other outstanding unsecured U.S. notes are not subject to change of control repurchase obligations. See Note 15, “Debt,” for other issuances under this registration statement.
 
At December 31, 2008, we had the following amounts available to fund operations under the aforementioned facilities:
 
         
    (In millions)  
 
Global revolving credit facility
    825  
Trade receivables program
    60  


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
The following table shows the movements in our debt balance:
 
                 
    Years ended December 31  
    2008     2007  
    (In thousands)  
 
Debt balance at January 1
  $ 2,776,129       2,816,943  
                 
Cash-related changes in debt:
               
Net change in commercial paper borrowings
    (522,312 )     (159,771 )
Proceeds from issuance of medium-term notes
    550,000       250,000  
Proceeds from issuance of other debt instruments
    207,077       263,021  
Retirement of medium-term notes and debentures
    (90,000 )     (263,021 )
Other debt repaid, including capital lease obligations
    (48,209 )     (175,979 )
                 
      96,556       (85,750 )
Non-cash changes in debt:
               
Fair market value adjustment on notes subject to hedging
    18,391       (96 )
Addition of capital lease obligations
    1,430       10,920  
Changes in foreign currency exchange rates and other non-cash items
    (29,707 )     34,112  
                 
Total changes in debt
    86,670       (40,814 )
                 
Debt balance at December 31
  $ 2,862,799       2,776,129  
                 
 
In accordance with our funding philosophy, we attempt to match the aggregate average remaining re-pricing life of our debt with the aggregate average remaining re-pricing life of our assets. We utilize both fixed-rate and variable-rate debt to achieve this match and generally target a mix of 25% - 45% variable-rate debt as a percentage of total debt outstanding. The variable-rate portion of our total obligations (including notional value of swap agreements) was 26% at December 31, 2008 and 31% at December 31, 2007.
 
Ryder’s leverage ratios and a reconciliation of on-balance sheet debt to total obligations were as follows:
 
                         
    December 31,
    %
  December 31,
    %
    2008     of Equity   2007     of Equity
    (Dollars in thousands)
 
On-balance sheet debt
  $ 2,862,799     213%   $ 2,776,129     147%
Off-balance sheet debt — PV of minimum lease payments and guaranteed residual values under operating leases for
vehicles(1)
    163,039           177,992      
                         
Total obligations
  $ 3,025,838     225%   $ 2,954,121     157%
                         
 
 
(1) Present value (PV) does not reflect payments we would be required to make if we terminated the related leases prior to the scheduled expiration dates.
 
On-balance sheet debt to equity consists of balance sheet debt divided by total equity. Total obligations to equity represents balance sheet 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 provides a more complete analysis of our existing financial obligations and helps better assess our overall leverage position. The increase in our leverage ratios in 2008 is driven by the decline in equity caused by unrecognized losses on our pension plans, share repurchases, foreign currency translation adjustments and acquisitions.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
Off-Balance Sheet Arrangements
 
Sale and leaseback transactions.  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, insurance companies, etc.) 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 variable interest entities (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.
 
Our sale-leaseback transactions contain limited guarantees by us of the residual values of the leased vehicles (residual value guarantees) that are conditioned upon disposal of the leased vehicles prior to the end of their lease term. The amount of future payments for residual value guarantees will depend on the market for used vehicles and the condition of the vehicles at time of disposal. See Note 18, “Guarantees,” in the Notes to Consolidated Financial Statements for additional information. In May 2007, we completed a sale-leaseback transaction of revenue earning equipment with a third party not deemed to be a VIE and this transaction qualified for off-balance sheet operating lease treatment. Proceeds from the sale-leaseback transaction totaled $150 million. We did not enter into any sale-leaseback transactions during 2008 and 2006.
 
Guarantees.  We executed various agreements with third parties that contain standard indemnifications that may require us to indemnify a third party against losses arising from a variety of matters such as lease obligations, financing agreements, environmental matters, and agreements to sell business assets. In each of these instances, payment by us is contingent on the other party bringing about a claim under the procedures outlined in the specific agreement. Normally, these procedures allow us to dispute the other party’s claim. Additionally, our obligations under these agreements may be limited in terms of the amount and (or) timing of any claim. We have entered into individual indemnification agreements with each of our independent directors, through which we will indemnify such director acting in good faith against any and all losses, expenses and liabilities arising out of such director’s service as a director of Ryder. The maximum amount of potential future payments under these agreements is generally unlimited.
 
We cannot predict the maximum potential amount of future payments under certain of these agreements, including the indemnification agreements, due to the contingent nature of the potential obligations and the distinctive provisions that are involved in each individual agreement. Historically, no such payments made by Ryder have had a material adverse effect on our business. We believe that if a loss were incurred in any of these matters, the loss would not result in a material adverse impact on our consolidated results of operations or financial position. The total amount of maximum exposure determinable under these types of provisions at December 31, 2008 and 2007 was $14 million and $16 million, respectively, and we accrued $1 million in 2008 and $2 million in 2007, as a corresponding liability. See Note 18, “Guarantees,” in the Notes to Consolidated Financial Statements for further discussion.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
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, 2008:
 
                                         
    2009     2010 - 2011     2012 - 2013     Thereafter     Total  
    (In thousands)  
 
Debt
  $ 381,752       827,700       620,157       1,021,349       2,850,958  
Capital lease obligations
    2,510       3,071       2,827       3,433       11,841  
                                         
Total debt, including capital leases(1)
    384,262       830,771       622,984       1,024,782       2,862,799  
                                         
Interest on debt(2)
    147,535       239,874       164,517       238,678       790,604  
Operating leases(3)
    112,734       187,248       72,101       68,090       440,173  
Purchase obligations(4)
    293,918       7,643       2,415       10       303,986  
                                         
Total contractual cash obligations
    554,187       434,765       239,033       306,778       1,534,763  
                                         
Insurance obligations(5)
    109,167       92,722       38,034       33,616       273,539  
Other long-term liabilities(6),(7),(8)
    36,953       4,223       1,260       45,686       88,122  
                                         
Total
  $ 1,084,569       1,362,481       901,311       1,410,862       4,759,223  
                                         
 
 
(1) Net of unamortized discount.
 
(2) 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, 2008. Amounts are based on existing debt obligations, including capital leases, and do not consider potential refinancings of expiring debt obligations.
 
(3) Represents future lease payments associated with vehicles, equipment and properties under operating leases. Amounts are based upon the general 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.
 
(4) 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 item included in the above table are purchase obligations related to vehicles. Purchase orders made in the ordinary course of business that are cancelable are excluded from the above table. Any amounts for which we are liable under purchase orders for goods received are reflected in our Consolidated Balance Sheets as “Accounts payable” and “Accrued expenses and other current liabilities.”
 
(5) Insurance obligations are primarily comprised of self-insurance accruals.
 
(6) Represents other long-term liability amounts reflected in our Consolidated Balance Sheets that have known payment streams. The most significant items included were asset retirement obligations and deferred compensation obligations.
 
(7) The amounts exclude our estimated pension contributions. For 2009, our pension contributions, including our minimum funding requirements as set forth by ERISA and international regulatory bodies, are expected to be $100 million. Our minimum funding requirements after 2009 are dependent on several factors. However, we estimate that the present value of required global contributions over the next five years is approximately $571 million (pre-tax) (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 Note 23, “Employee Benefit Plans,” in the Notes to Consolidated Financial Statements for further discussion.
 
(8) The amounts exclude $56 million of liabilities under FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” as we are unable to reasonably estimate the ultimate amount or timing of settlement. See Note 13, “Income Taxes,” in the Notes to Consolidated Financial Statements for further discussion.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
 
Pension Information
 
In July 2008, our Board of Directors approved an amendment to freeze the defined benefit portion of our Canadian retirement plan effective January 1, 2010 for current participants who do not meet certain grandfathering criteria. As a result, these employees will cease accruing further benefits under the defined benefit plan after January 1, 2010 and will begin receiving an enhanced benefit under the defined contribution portion of the plan. All retirement benefits earned as of January 1, 2010 will be fully preserved and will be paid in accordance with the plan and legal requirements. Employees hired after January 1, 2009 will not be eligible to participate in the Canadian defined benefit plan. The freeze of the Canadian defined benefit plan created a curtailment gain of $4 million (pre-tax).
 
In January 2007, our Board of Directors approved an amendment to freeze U.S. pension plans effective December 31, 2007 for current participants who did not meet certain grandfathering criteria. As a result, these employees ceased accruing further benefits after December 31, 2007 and began participating in an enhanced 401(k) plan. Those participants that met the grandfathering criteria were given the option to either continue to earn benefits in the U.S. pension plans or transition into an enhanced 401(k) plan. All retirement benefits earned as of December 31, 2007 were fully preserved and will be paid in accordance with the plan and legal requirements. Employees hired after January 1, 2007 are not eligible to participate in the pension plan.
 
We had an accumulated net pension equity charge (after-tax) of $480 million and $148 million at December 31, 2008 and 2007, respectively. The higher equity charge in 2008 reflects the decline in our funded status as a result of significant negative asset returns during 2008. Total asset returns for our U.S. qualified pension plan (our primary plan) were negative 31% in 2008.
 
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. We review pension assumptions regularly and we may from time to time make voluntary contributions to our pension plans, which exceed the amounts required by statute. During 2008, total pension contributions, including our international plans, were $21 million compared to $60 million in 2007. We estimate 2009 pension contributions, including our international plans, will be $100 million of which approximately $73 million represents voluntary contributions for the U.S. pension plan. After considering the 2008 contributions and asset performance, the projected present value of estimated global pension contributions that would be required over the next 5 years totals approximately $571 million (pre-tax). Changes in interest rates and the market value of the securities held by the plans could materially change, positively or negatively, the underfunded status of the plans and affect the level of pension expense and required contributions in future years. The ultimate amount of contributions is also dependent upon the requirements of applicable laws and regulations. See Note 23, “Employee Benefit Plans,” in the Notes to Consolidated Financial Statements for additional information.
 
Share Repurchase Programs and Cash Dividends
 
As discussed in Note 19, “Shareholders’ Equity,” in the Notes to Consolidated Financial Statements, in December 2007, our Board of Directors authorized a $300 million discretionary share repurchase program over a period not to exceed two years. Additionally, our Board of Directors authorized a separate two-year anti-dilutive repurchase program. For the year ended December 31, 2008, we repurchased and retired 2,615,000 shares under the $300 million program at an aggregate cost of $170 million. For the year ended December 31, 2008, we repurchased and retired 1,363,436 shares under the anti-dilutive repurchase program at an aggregate cost of $86 million. The timing and amount of repurchase transactions is determined based on management’s evaluation of market conditions, share price and other factors. Towards the end of the third quarter of 2008, we temporarily paused purchases under both programs given current market conditions. We will continue to monitor financial conditions and will resume repurchases when we believe it is prudent to do so.
 
Cash dividend payments to shareholders of common stock were $52 million in 2008, $50 million in 2007 and $44 million in 2006. During 2008, we increased our annual dividend to $0.92 per share of common stock. In February 2009, our Board of Directors declared a quarterly cash dividend of $0.23 per share of common stock.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
Market Risk
 
In the normal course of business, we are 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 enter into leveraged derivative financial transactions or use derivative financial instruments for trading purposes.
 
Exposure to market risk for changes in interest rates exists for our debt obligations. Our interest rate risk management program objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. We manage our exposure to interest rate risk primarily through the proportion of fixed-rate and variable-rate debt we hold 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 17, “Financial Instruments and Risk Management,” in the Notes to Consolidated Financial Statements for further discussion on interest rate swap agreements.
 
At December 31, 2008, we had $2.18 billion of fixed-rate debt outstanding (excluding capital leases) with a weighted-average interest rate of 5.5% and a fair value of $1.88 billion. A hypothetical 10% decrease or increase in the December 31, 2008 market interest rates would impact the fair value of our fixed-rate debt by approximately $11 million.
 
At December 31, 2008, we had $673 million of variable-rate debt, including the impact of interest rate swaps, which effectively changed $250 million of fixed-rate debt instruments with an interest rate of 6.0% to LIBOR-based floating-rate debt with an interest rate of 5.25%. Changes in the fair value of the interest rate swaps were offset by changes in the fair value of the debt instruments and no net gain or loss was recognized in earnings. The fair value of our interest rate swap agreement at December 31, 2008 was recorded as an asset totaling $18 million. A hypothetical 10% increase in market interest rates would impact 2008 pre-tax earnings by approximately $3 million.
 
Exposure to market risk for changes in foreign currency exchange rates relates primarily to our foreign operations’ buying, selling and financing in currencies other than local currencies and to the carrying value of net investments in foreign subsidiaries. The majority of our transactions are denominated in U.S. dollars. The principal foreign currency exchange rate risks to which we are exposed include the Canadian dollar, British pound sterling, Brazilian real and Mexican peso. 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 to the extent possible. A hypothetical uniform 10% strengthening in the value of the dollar relative to all the currencies in which our transactions are denominated would result in a decrease to pre-tax earnings of approximately $6 million. 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. However, we had a $78 million cross-currency swap in place to hedge our net investment in a foreign subsidiary which matured in 2007. As of December 31, 2008, the accumulated derivative net loss in “Accumulated other comprehensive loss” was $17 million, net of tax, and will be recognized in earnings upon sale or repatriation of our net investment. At December 31, 2008 and 2007, we also had forward foreign currency exchange contracts with an aggregate fair value of negative $0.6 million and negative $0.1 million, respectively, used to hedge the variability of foreign currency equivalent cash flows. The potential loss in fair value of our forward foreign currency exchange contracts from a hypothetical 10% adverse change in quoted foreign currency exchange rates was not material at December 31, 2008. 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


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
adjust for increases in fuel prices. At December 31, 2008, we also 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 for which we realize minimal changes in profitability during periods of steady market fuel prices. However, profitability may be positively or negatively impacted by sudden increases or decreases in market fuel prices during a short period of time as customer pricing for fuel services is established based on market fuel costs. We believe the exposure to fuel price fluctuations would not materially impact our results of operations, cash flows or financial position.
 
ENVIRONMENTAL MATTERS
 
Refer to Note 24, “Environmental Matters,” in the Notes to Consolidated Financial Statements for a discussion surrounding environmental matters.
 
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 our 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 and Deferred Gains,” 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. Our annual review is established with a long-term view considering historical market price changes, current and expected future market price trends, 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. At the end of 2008, we completed our annual review of the residual values and useful lives of revenue earning equipment. In connection with this review, we reduced the residual values of certain vehicle classes and increased the useful lives of certain vehicle classes. Based on the results of our analysis, the adjustment to the residual values and useful lives of revenue earning equipment on January 1, 2009 was not significant. Based on the mix of revenue earning equipment at December 31, 2008, a 10% decrease in expected vehicle residual values would increase depreciation expense in 2009 by approximately $94 million.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
We also lease 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, 2008, total liabilities for residual value guarantees of $2 million were included in “Accrued expenses and other current liabilities” (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, 2008, a 10% decrease in expected vehicle residual values would increase rent expense in 2009 by approximately $1 million.
 
Pension Plans.  We apply actuarial methods to determine the annual net periodic pension expense and pension plan liabilities on an annual basis, or on an interim basis if there is an event requiring remeasurement. 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. In order to provide a more accurate estimate of the discount rate relevant to our plan, we use 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. 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 using plan assets are factored into the determination of asset return assumptions. In 2008, we adjusted our long-term expected rate of return assumption for our primary U.S. plan down to 8.4% from 8.5% based on the factors reviewed. The composition of our pension assets was 67% equity securities and 33% debt securities and other investments. As part of our strategy to manage future pension costs and net funded status volatility, we regularly assess our pension investment strategy. We evaluate our mix of investments between equity and fixed income securities and may adjust the composition of our pension assets when appropriate. The rate of increase in compensation levels is reviewed based upon actual experience. Retirement rates are based primarily on actual plan experience. For purposes of estimating mortality in the measurement of our pension obligation, as of December 31, 2007, we began using the Retirement Plans 2000 Table of Combined Healthy Lives (RP 2000 Table), projected seven years. The rates in the table were adjusted to reflect our historical experience over the past 5 years and to reflect future mortality improvements. Previously, we used the 1994 Uninsured Pensioners Mortality Tables (UP-94). The impact of this change to our benefit obligation at December 31, 2007 was not material.
 
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 and recorded within “Accumulated other comprehensive loss.” We had a pre-tax actuarial loss of $754 million at the end of 2008 compared to a loss of $238 million at the end of 2007. The increase in the net actuarial loss in 2008 resulted primarily from lower than expected pension asset returns. To the extent the amount of actuarial gains and losses exceed 10% of the larger of the benefit obligation or plan assets, such amount is amortized over the average remaining service life of active participants or the remaining life expectancy of inactive participants if all or almost all of a plan’s participants are inactive. Prior to 2008, our amortization period was historically based on the average remaining service period of active employees expected to receive benefits (8 years). However, due to the freeze of the qualified U.S. pension plan, almost all of the plan’s participants became inactive beginning on January 1, 2008. Consequently, by rule, the amortization period for actuarial losses on the qualified U.S. pension plan was changed to the average remaining life expectancy of plan participants


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
(28 years) resulting in an extended amortization period. The amount of the actuarial loss subject to amortization in 2009 and future years will be $606 million. The effect on years beyond 2009 will depend substantially upon the actual experience of our plans.
 
Disclosure of the significant assumptions used in arriving at the 2008 net pension expense is presented in Note 23, “Employee Benefit Plans,” in the Notes to Consolidated Financial Statements. A sensitivity analysis of projected 2009 net pension expense to changes in key underlying assumptions for our primary plan, the U.S. pension plan, is presented below.
 
                                 
                      Effect on
 
                Impact on 2009 Net
    December 31, 2008
 
    Assumed Rate     Change     Pension Expense     Projected Benefit Obligation  
 
Discount rate increase
    6.35%       + 0.25%       − $0.5 million       − $35 million  
Discount rate decrease
    6.35%       − 0.25%       + $0.3 million       + $35 million  
Expected long-term rate of return on assets
    8.40%       +/− 0.25%       −/+ $2.0 million          
 
Self-Insurance Accruals.  Self-insurance accruals were $256 million and $278 million as of December 31, 2008 and 2007, respectively. The majority of our self-insurance relates to vehicle liability and workers’ compensation. 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. 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.
 
In recent years, our actual claim development has been favorable compared with historical selected loss development factors because of improved safety performance, payment patterns and settlement patterns. During 2008, 2007, and 2006, we recorded a benefit of $23 million, $24 million, and $12 million, respectively, to reduce estimated prior years’ self-insured loss reserves. Based on self-insurance accruals at December 31, 2008, a 5% adverse change in actuarial claim loss estimates would increase operating expense in 2009 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 an average of discounted future cash flow models that use ten years of projected cash flows and various terminal values based on multiples, book value or growth assumptions. We considered the current trading multiples for comparable publicly-traded companies and the historical pricing multiples for comparable merger and acquisition transactions that have occurred in our industry. Rates used to discount cash flows are dependent upon interest rates and the cost of capital at a point in time. Our discount rates reflect a weighted average cost of capital based on our industry and capital structure adjusted for equity risk premiums and size risk premiums based on market capitalization. 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, including long-term growth rates, capital requirements and useful lives. Our estimates of cash flow are also based on historical and future operating performance, economic conditions and actions we expect to take. In addition to these factors, our SCS reporting units are


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
dependent on several key customers or industry sectors. The loss of a key customer may have a significant impact to one of our SCS reporting units, causing us to assess whether or not the event resulted in a goodwill impairment loss. While we believe our estimates of future cash flows are reasonable, there can be no assurance that deterioration in economic conditions, customer relationships or adverse changes to expectations of future performance will not occur, resulting in a goodwill impairment loss.
 
Our annual impairment test, performed as of April 1, 2008, did not result in any impairment of goodwill. Based on market conditions in the fourth quarter and our decision to exit certain contracts in SCS Europe, we updated our annual impairment test as of December 31, 2008. Based on our analysis, current market conditions and business expectations relating to our European FMS and SCS business units, we recorded an impairment charge of $21 million for all goodwill in the U.K. as of December 31, 2008. At December 31, 2008, goodwill totaled $198 million.
 
Revenue Recognition.  In the normal course of business, we may act as or use an agent in executing transactions with our customers. The accounting issue encountered in these arrangements is whether we should report revenue based on the gross amount billed to the customer or on the net amount received from the customer after payments to third parties. To the extent revenues are recorded on a gross basis, any payments to third parties are recorded as expenses so that the net amount is reflected in net earnings. Accordingly, the impact on net earnings is the same whether we record revenue on a gross or net basis.
 
Determining whether revenue should be reported as gross or net is based on an assessment of whether we are acting as the principal or the agent in the transaction and involves judgment based on the terms of the arrangement. To the extent we are acting as the principal in the transaction, revenue is reported on a gross basis. To the extent we are acting as an agent in the transaction, revenue is reported on a net basis. In the majority of our arrangements, we are acting as a principal and therefore report revenue on a gross basis. However, our SCS business segment engages in some transactions where we act as agents and thus record revenue on a net basis.
 
In transportation management arrangements where we act as principal, revenue is reported on a gross basis for subcontracted transportation billed to our customers. From time to time, the terms and conditions of our transportation management arrangements may change, which could require a change in revenue recognition from a gross basis to a net basis or vice versa. Our non-GAAP measure of operating revenue would not be impacted from this change in revenue reporting. Effective January 1, 2008, our contractual relationship for certain transportation management services changed, and we determined, after a formal review of the terms and conditions of the services, that we were acting as an agent in the arrangement. As a result, total revenue and subcontracted transportation expense decreased in 2008 due to the reporting of revenue net of subcontracted transportation expense. During 2007 and 2006, revenue associated with this portion of the contract was $640 million and $565 million, respectively.
 
Income Taxes.  Our 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. Deferred tax assets amounted to $399 million and $207 million at December 31, 2008 and 2007, respectively. We record a valuation allowance for deferred tax assets to reduce such assets to amounts expected to be realized. At December 31, 2008 and 2007, the deferred tax valuation allowance, principally attributed to foreign tax loss carryforwards in the SCS business segment, was $28 million and $15 million, respectively. In determining the required level of valuation allowance, we


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
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 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 determine whether the benefits of our tax positions are at least more likely than not of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, we accrue the largest amount of the benefit that is more likely than not of being sustained in our consolidated financial statements. 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.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
Refer to Note 1, “Summary of Significant Accounting Policies — Recent Accounting Pronouncements,” in the Notes to Consolidated Financial Statements for discussion of recent accounting pronouncements. See Note 2, “Accounting Changes,” in the Notes to Consolidated Financial Statements for additional discussion surrounding the adoption of accounting standards.
 
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 are considered “non-GAAP financial measures” as defined by SEC rules. Specifically, we refer to adjusted return on capital, operating revenue, salaries and employee-related costs as a percentage of operating revenue, FMS operating revenue, FMS NBT as a% of operating revenue, SCS operating revenue, SCS NBT as a % of operating revenue, DCC operating revenue, DCC NBT as a % of operating revenue, total cash generated, free cash flow, total obligations, total obligations to equity, and comparable earnings from continuing operations and comparable earnings per diluted common share from continuing operations. We believe that the comparable earnings from continuing operations and comparable earnings per diluted common share from continuing operations measures provide useful information to investors because they exclude significant items that are unrelated to our ongoing business operations. 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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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
The following table provides a numerical reconciliation of earnings before income taxes to comparable earnings before income taxes for the years ended December 31, 2008, 2007 and 2006 which was not provided within the MD&A discussion:
 
                         
    Years ended December 31  
    2008     2007     2006  
    (In thousands)  
 
Earnings before income taxes
  $ 349,922       405,464       392,973  
Net restructuring charges
    58,435       11,578        
Brazil charges
    6,498              
International impairment and write-offs
    5,548              
Gain on sale of property
          (10,110 )      
Pension accounting charge
                5,872  
                         
Comparable earnings before income taxes
  $ 420,403       406,932       398,845  
                         
 
The following table provides a numerical reconciliation of earnings from continuing operations and earnings per diluted common share from continuing operations to comparable earnings from continuing operations and comparable earnings per diluted common share from continuing operations for the years ended December 31, 2008, 2007, 2006, 2005 and 2004 which was not provided within the MD&A discussion:
 
                                         
    Years ended December 31  
    2008     2007     2006     2005     2004  
    (In thousands, except per share amounts)  
 
Earnings from continuing operations
  $ 199,881       253,861       248,959       227,628       215,609  
Net restructuring charges
    53,159       7,536                    
Tax accrual reversals
    (7,931 )                        
Tax law changes
    (1,614 )     (3,333 )     (6,796 )     (7,627 )     (9,221 )
Brazil charges
    6,831                          
International impairment and write-offs
    4,427                          
Pension accounting charge
                3,720              
Gain on sale of property
          (6,154 )                  
Gain on sale of headquarter complex
                            (15,409 )
                                         
Comparable earnings from continuing operations
  $ 254,753       251,910       245,883       220,001       190,979  
                                         
                                         
Earnings per diluted common share from continuing operations
  $ 3.52       4.24       4.04       3.53       3.28  
Net restructuring charges
    0.94       0.13                    
Tax accruals reversals
    (0.14 )                        
Tax law changes
    (0.03 )     (0.06 )     (0.11 )     (0.12 )     (0.14 )
Brazil charges
    0.12                          
International impairment and write-offs
    0.08                          
Pension accounting charge
                0.06              
Gain on sale of property
          (0.10 )                  
Gain on sale of headquarter complex
                            (0.23 )
                                         
Comparable earnings per diluted common share from continuing operations
  $ 4.49       4.21       3.99       3.41       2.91  
                                         


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
The following table provides a numerical reconciliation of total revenue to operating revenue for the years ended December 31, 2008, 2007 and 2006 which was not provided within the MD&A discussion:
 
                         
    Years ended December 31  
    2008     2007     2006  
    (In thousands)  
 
Total revenue
  $ 6,203,743       6,565,995       6,306,643  
Fuel services and subcontracted transportation revenue
    (1,738,710 )     (2,133,728 )     (2,040,459 )
Fuel eliminations
    239,473       204,290       188,047  
                         
Operating revenue
  $ 4,704,506       4,636,557       4,454,231  
                         
 
The following table provides a numerical reconciliation of net earnings to adjusted net earnings and average total debt to adjusted average total capital for the years ended December 31, 2008, 2007, 2006, 2005 and 2004 which was not provided within the MD&A discussion:
 
                                         
    Years ended December 31  
    2008     2007     2006     2005     2004  
    (Dollars in thousands)  
 
Net earnings
  $ 199,881       253,861       248,959       226,929       215,609  
Discontinued operations
                      (1,741 )      
Cumulative effect of change in accounting principle
                      2,440        
Restructuring and other charges (recoveries), net and other items(1)
    70,447       1,467                   (24,308 )
Income taxes
    150,075       151,603       144,014       129,460       115,513  
                                         
Adjusted net earnings before income taxes
    420,403       406,931       392,973       357,088       306,814  
Adjusted interest expense(2)
    164,975       169,060       146,565       127,072       106,100  
Adjusted income taxes(3)
    (230,456 )     (219,971 )     (207,183 )     (185,917 )     (155,545 )
                                         
Adjusted net earnings
  $ 354,922       356,020       332,355       298,243       257,369  
                                         
                                         
Average total debt
  $ 2,881,931       2,847,692       2,480,314       2,147,836       1,811,502  
Average off-balance sheet debt
    170,694       150,124       98,767       147,855       151,804  
Average adjusted total shareholders’ equity(4)
    1,788,097       1,791,669       1,605,214       1,550,038       1,395,682  
                                         
Adjusted average total capital
  $ 4,840,722       4,789,485       4,184,295       3,845,729       3,358,988  
                                         
                                         
Adjusted return on capital (%)
    7.3       7.4       7.9       7.8       7.7  
                                         
 
 
(1) For 2008, see Note 4, “Restructuring and Other Charges” and Note 25, “Other Items Impacting Comparability,” in the Notes to Consolidated Financial Statements; 2007 includes restructuring and other charges (recoveries) of $11 million in the second half of 2007 and a gain of $10 million related to the sale of property in the third quarter; 2004 includes a gain on sale of headquarter complex of $24 million. Restructuring and other charges (recoveries), net and other items not presented in this reconciliation were not significant in the respective periods.
 
(2) Includes interest on off-balance sheet vehicle obligations.
 
(3) Calculated using the effective income tax rate for the period exclusive of benefits from tax law changes.
 
(4) Represents shareholders’ equity adjusted for cumulative effect of accounting changes and tax benefits in the respective periods.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
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:
 
  •   the status of our unrecognized tax benefits for 2008 related to the U.S. federal, state and foreign tax positions and the impact of recent state tax law changes;
 
  •   our expectations as to anticipated revenue and earnings trends and future economic conditions specifically, earnings per share, operating revenue, used vehicle sales results, contract revenue growth and commercial rental declines;
 
  •   the economic and business impact of continuing supply chain operations in the U.S., Canada, Mexico, U.K. and Asia markets and workforce reductions;
 
  •   the anticipated pre-tax annual cost savings from our global cost savings initiatives;
 
  •   our ability to successfully achieve the operational goals that are the basis of our business strategies, including offering competitive pricing, diversifying our customer base, optimizing asset utilization, leveraging the expertise of our various business segments, serving our customers’ global needs and expanding our support services;
 
  •   impact of losses from conditional obligations arising from guarantees;
 
  •   our expectations as to the future level of vehicle wholesaling activity;
 
  •   number of NLE vehicles in inventory, and the size of our commercial rental fleet, for the remainder of the year;
 
  •   estimates of free cash flow and, capital expenditures for 2009;
 
  •   the adequacy of our accounting estimates and reserves for pension expense, depreciation and residual value guarantees, self-insurance reserves, goodwill impairment, accounting changes and income taxes;
 
  •   our ability to fund all of our operations for the foreseeable future through internally generated funds and outside funding sources;
 
  •   the anticipated impact of fuel price fluctuations;
 
  •   our expectations as to future pension expense and contributions, the impact of pension legislation, as well as the effect of the freeze of the U.S. and Canadian pension plan on our benefit funding requirements;
 
  •   the anticipated deferral of tax gains on disposal of eligible revenue earning equipment pursuant to our vehicle like-kind exchange program;
 
  •   our expectations as to the future effect of amendments to our contractual relationship with GM; and
 
  •   our expectations regarding the effect of the adoption of recent accounting pronouncements.
 
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. For a detailed description of certain of these risk factors, please see “Item 1A. Risk Factors” of this Annual Report.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
The risks included in the Annual Report 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 (page 51) of PART II of this report.


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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
FINANCIAL STATEMENTS
 
         
    Page No.
 
    62  
    63  
    64  
    65  
    66  
    67  
       
    68  
    76  
    78  
    80  
    82  
    83  
    83  
    84  
    84  
    85  
    85  
    86  
    87  
    90  
    93  
    95  
    96  
    98  
    100  
    101  
    101  
    102  
    106  
    113  
    114  
    116  
    116  
    120  
    121  
 
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, 2008. 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 determined that Ryder maintained effective internal control over financial reporting as of December 31, 2008.
 
Ryder’s independent registered certified public accounting firm has audited the effectiveness of Ryder’s internal control over financial reporting. Their report appears on page 63.


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REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM
 
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
RYDER SYSTEM, INC.:
 
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, shareholders’ equity, and cash flows present fairly, in all material respects, the financial position of Ryder System, Inc. and its subsidiaries at December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule and on the Company’s internal control over financial reporting based on our integrated 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
 
As discussed in Note 2 to the consolidated financial statements, in 2007 the Company changed its method of accounting for uncertainty in income taxes and in 2006 the Company changed its methods of accounting for share-based compensation and pension and other postretirement plans.
 
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 (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) 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 (iii) 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.
 
/s/ PricewaterhouseCoopers LLP
 
February 11, 2009
Miami, Florida


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RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
 
                         
    Years ended December 31  
    2008     2007     2006  
    (In thousands, except per share amounts)  
 
Revenue
  $ 6,203,743       6,565,995       6,306,643  
                         
Operating expense (exclusive of items shown separately)
    3,029,673       2,776,999       2,735,752  
Salaries and employee-related costs
    1,399,121       1,410,388       1,397,391  
Subcontracted transportation
    323,382       950,500       865,475  
Depreciation expense
    843,459       815,962       743,288  
Gains on vehicle sales, net
    (39,312 )     (44,094 )     (50,766 )
Equipment rental
    80,105       93,337       90,137  
Interest expense
    157,257       160,074       140,561  
Miscellaneous expense (income), net
    1,735       (15,904 )     (11,732 )
Restructuring and other charges, net
    58,401       13,269       3,564  
                         
      5,853,821       6,160,531       5,913,670  
                         
Earnings before income taxes
    349,922       405,464       392,973  
Provision for income taxes
    150,041       151,603       144,014  
                         
Net earnings
  $ 199,881       253,861       248,959  
                         
Earnings per common share:
                       
Basic
  $ 3.56       4.28       4.09  
                         
                         
Diluted
  $ 3.52       4.24       4.04  
                         
 
See accompanying notes to consolidated financial statements.


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RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
                 
    December 31  
    2008     2007  
    (Dollars in thousands, except per share amount)  
 
Assets:
               
Current assets:
               
Cash and cash equivalents
  $ 120,305       116,459  
Receivables, net
    635,376       843,662  
Inventories
    48,324       58,810  
Prepaid expenses and other current assets
    147,191       203,131  
                 
Total current assets
    951,196       1,222,062  
Revenue earning equipment, net of accumulated depreciation of $2,749,654 and $2,724,565, respectively
    4,565,224       4,501,397  
Operating property and equipment, net of accumulated depreciation of $842,427 and $811,579, respectively
    546,816       518,728  
Goodwill
    198,253       166,570  
Intangible assets
    36,705       19,231  
Direct financing leases and other assets
    391,314       426,661  
                 
Total assets
  $ 6,689,508       6,854,649  
                 
Liabilities and shareholders’ equity:
               
Current liabilities:
               
Short-term debt and current portion of long-term debt
  $ 384,262       222,698  
Accounts payable
    295,083       383,808  
Accrued expenses and other current liabilities
    431,820       412,855  
                 
Total current liabilities
    1,111,165       1,019,361  
Long-term debt
    2,478,537       2,553,431  
Other non-current liabilities
    837,280       409,907  
Deferred income taxes
    917,365       984,361  
                 
Total liabilities
    5,344,347       4,967,060  
                 
Shareholders’ equity:
               
Preferred stock of no par value per share — authorized, 3,800,917; none outstanding, December 31, 2008 or 2007
           
Common stock of $0.50 par value per share — authorized, 400,000,000; outstanding, 2008 — 55,658,059; 2007 — 58,041,563
    27,829       28,883  
Additional paid-in capital
    756,190       729,451  
Retained earnings
    1,105,369       1,160,132  
Accumulated other comprehensive loss
    (544,227 )     (30,877 )
                 
Total shareholders’ equity
    1,345,161       1,887,589  
                 
Total liabilities and shareholders’ equity
  $ 6,689,508       6,854,649  
                 
 
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  
    2008     2007     2006  
    (In thousands)  
 
Cash flows from operating activities:
                       
Net earnings
  $ 199,881       253,861       248,959  
Depreciation expense
    843,459       815,962       743,288  
Goodwill impairment
    21,259              
Gains on vehicle sales, net
    (39,312 )     (44,094 )     (50,766 )
Share-based compensation expense
    17,076       16,754       13,643  
Amortization expense and other non-cash charges, net
    25,022       15,126       14,106  
Deferred income tax expense
    128,246       64,396       76,235  
Tax benefits from share-based compensation
    1,151       1,458       5,405  
Changes in operating assets and liabilities, net of acquisitions:
                       
Receivables
    181,024       57,969       (58,306 )
Inventories
    10,370       1,409       513  
Prepaid expenses and other assets
    (30,992 )     6,526       (16,683 )
Accounts payable
    (104,955 )     (18,104 )     32,640  
Accrued expenses and other non-current liabilities
    3,302       (68,324 )     (155,447 )
                         
Net cash provided by operating activities
    1,255,531       1,102,939       853,587  
                         
Cash flows from financing activities:
                       
Net change in commercial paper borrowings
    (522,312 )     (159,771 )     328,641  
Debt proceeds
    757,077       513,021       670,568  
Debt repaid, including capital lease obligations
    (138,209 )     (439,000 )     (378,519 )
Dividends on common stock
    (52,238 )     (50,152 )     (43,957 )
Common stock issued
    54,713       42,340       61,593  
Common stock repurchased
    (256,132 )     (209,018 )     (159,050 )
Excess tax benefits from share-based compensation
    6,471       3,377       8,926  
                         
Net cash (used in) provided by financing activities
    (150,630 )     (299,203 )     488,202  
                         
Cash flows from investing activities:
                       
Purchases of property and revenue earning equipment
    (1,234,065 )     (1,317,236 )     (1,695,064 )
Sales of revenue earning equipment
    260,598       354,767       326,079  
Sales of operating property and equipment
    4,302       18,868