UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Form 10-K

 

 

Commission File Number: 1-4364

 

RYDER SYSTEM, INC.

(Exact name of registrant as specified in its charter)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

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 smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

(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, 2007 was $3,224,831,825. The number of shares of Ryder System, Inc. Common Stock ($0.50 par value per share) outstanding at January 31, 2008 was 58,052,350.

 

 

 

RYDER SYSTEM, INC.
Form 10-K Annual Report

TABLE OF CONTENTS

 

 

OVERVIEW

 

Ryder System, Inc. (Ryder), a Florida corporation organized in 1955, 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 Latin America, Europe and Asia; and Dedicated Contract Carriage (DCC), which provides vehicles and drivers as part of a dedicated transportation solution in the U.S.

 

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

 

Over the last several years, many key trends have been reshaping the transportation industry, particularly the $61 billion U.S. private commercial fleet market and the $26 billion U.S. commercial fleet lease and rental market. Commercial vehicles have become more complicated requiring companies to spend a significant amount of time and money to keep up with new technology, diagnostics, retooling and training. Because of increased demand for convenience, speed and reliability, companies that own and manage their own fleet of vehicles have put greater emphasis on the quality of their preventive maintenance and safety programs. Finally, new regulatory requirements such as regulations covering diesel emissions and the number of off-duty rest hours a driver must take (hours of service regulations) have placed additional administrative burdens on private fleet owners.

 

Through our FMS business, we provide our customers with flexible fleet solutions that are designed to improve their competitive position by allowing them to focus on their core business, 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.

 

For the year ended December 31, 2007, our global FMS business accounted for 57% of our consolidated revenue. Our FMS customers in the U.S. range from small businesses to large national enterprises. These customers operate in a wide variety of industries, the most significant of which include beverage, newspaper, grocery, lumber and wood products, home furnishings and metal. At December 31, 2007, we had a U.S. fleet of approximately 126,400 commercial trucks, tractors and trailers leased or rented through 683 locations in 49 states and Puerto Rico. At December 31, 2007, we operated 221 on-site maintenance facilities in the U.S. and Puerto Rico. On January 11, 2008, we entered into an asset purchase agreement with Lily Transportation Corporation (“Lily”) under which we acquired Lily’s fleet of approximately 1,600 vehicles and over 200 contractual customers.

 

Our domestic FMS business is divided into 3 regions: East, Central and West. Each region is divided into 8 to 16 business units (BU) and each BU contains approximately 10 to 30 branch locations. A branch 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.

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. 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. Our full service lease includes all the maintenance services that are part of our contract maintenance service offering. We also offer our leasing customers the additional fleet support services described below. At December 31, 2007, we leased approximately 95,900 vehicles under full service leases in the U.S. At December 31, 2007, we had approximately 11,000 full service lease customer accounts in the U.S.

 

Contract Maintenance.  Our contract maintenance customers typically include 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, usually a bank or other financial institution. The contract maintenance service offering is designed to reduce vehicle downtime through preventive and predictive maintenance based on vehicle type and driving habits, vehicle repair including parts and labor, 24-hour emergency roadside service and replacement vehicles for vehicles that are temporarily out of service. These vehicles are typically serviced at our own facilities. However, based on the size and complexity of a customer’s fleet, we may operate an on-site maintenance facility at the customer’s location. At December 31, 2007, we had approximately 1,100 contract maintenance customer accounts in the U.S., 500 of which are not full service lease customers.

 

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 commercial rental fleet also provides additional vehicles to our full service lease customers to handle their peak or seasonal business needs. 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. At December 31, 2007, a fleet of approximately 28,100 vehicles, ranging from heavy-duty tractors and trailers to light-duty trucks, was available for commercial short-term rental in the U.S. The utilization rate of the U.S. rental fleet during fiscal year 2007 was approximately 71% (based on 365 days). At December 31, 2007, we had approximately 10,300 commercial rental customer accounts in the U.S.

 

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 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 offer a variety of fleet support services in order to capitalize on our large base of lease customers. Currently, we offer the following fleet support services:

 

 

Used Vehicles.  We typically sell our used vehicles at one of our 58 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 Ready^TM, which means that the vehicle has passed a comprehensive, multi-point performance inspection based on specifications formulated through our contract maintenance program. Our 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 typically sell our used vehicles for prices in excess of book value, the extent to which we are able to realize a gain on the sale of used vehicles is dependent upon various factors including the general state of the used vehicle market, the age and condition of the vehicle at the time of its disposal and depreciation rates with respect to the vehicle.

 

FMS Business Strategy.  Our FMS business strategy revolves around the following interrelated goals and priorities:

 

 

Supply Chain Solutions

 

The global supply chain logistics market is estimated to be $317 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.

 

Through our SCS business, we offer a broad range of innovative lead logistics management services that are designed to optimize a customer’s global supply chain and address the needs and concerns reflected by the trends previously mentioned. The term “supply chain” refers to a strategically designed process that directs the movement of materials, funds and related information from the acquisition of raw materials to 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. We also offer our SCS customers a variety of information technology solutions which are an integral part of our other SCS services. For the year ended December 31, 2007, we estimated 69% of our global SCS revenue was related to dedicated contract carriage.

 

For the year ended December 31, 2007, our SCS business accounted for 34% of our consolidated revenue. At December 31, 2007, 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. Our largest customer, General Motors Corporation (GM), is comprised of multiple contracts in various geographic regions. In 2007, GM accounted for approximately 42% of SCS total revenue, 19% of SCS operating revenue (total revenue less subcontracted transportation) and 14% of consolidated Ryder revenue. 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, we will be acting as an agent in the arrangement. As a result, total revenue will decrease in the future due to the reporting of revenue net of subcontracted transportation expense. This change in contract terms will have no impact on earnings. During 2007, 2006 and 2005, revenue associated with this portion of the contract was $640 million, $565 million and $360 million, respectively.

 

Unlike our FMS operations, which are managed through a network of regional offices, BUs and branch locations, most of our core SCS business operations in the U.S. revolve around our customers’ supply chains and are geographically located to maximize efficiencies and reduce costs. These SCS facilities are typically leased. At December 31, 2007, leased SCS warehouse space totaled approximately 9 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 in Ann Arbor, Michigan, and our transportation optimization and execution groups operate out of our logistics centers in Farmington Hills, Michigan, and Ft. Worth, Texas.

 

We are awarded a significant portion of our SCS business through requests for proposals (RFP) processes. Many companies that maintain elaborate supply chain networks, including many of our existing customers, submit an RFP with respect to all or a portion of their supply chain. A team of SCS operations and logistics design specialists, as well as representatives from our finance, real estate and information technology departments, will formulate a bid that includes a proposed supply chain solution as well as pricing information. The bid may include one or more of the following SCS services:

 

Professional Services.  Our SCS business offers a variety of consulting services that support every aspect of a customer’s supply chain. Our SCS consultants 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 and representatives from our information technology, real estate, finance and transportation management groups work together to design a strategically focused supply chain solution. The solution may include both a distribution plan that sets forth the number, location and function of each distribution facility and a transportation solution that sets forth the mode or modes of transportation and route selection. In addition to providing the distribution and transportation expertise necessary to implement the supply chain solution, our SCS representatives can coordinate and manage all aspects of the customer’s supply chain provider network to assure consistency, efficiency and flexibility.

 

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 material flows, handling import and export for international shipments and coordinating just-in-time replenishment of component parts to manufacturing and final assembly. Additional value-added services such as light assembly of components into defined units (kitting), packaging and refurbishment are also provided.

 

Transportation Solutions.  Our SCS business offers services relating to all aspects of a customer’s transportation network. Our team of transportation specialists provides shipment planning and execution, which includes shipment consolidation, load scheduling and delivery confirmation through a series of technological and web-based solutions. Our transportation consultants, in conjunction with our Ryder Freight Brokerage department, focus on carrier procurement of all modes of transportation 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 create load-building opportunities and minimize excess capacity. For the year ended December 31, 2007, we purchased over $2 billion in freight moves.

 

SCS Business Strategy.  Our SCS business strategy revolves around the following interrelated goals and priorities:

 

 

Dedicated Contract Carriage

 

The U.S. dedicated contract carriage market is estimated to be $11 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.

 

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, 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.

 

In order to customize an appropriate DCC transportation solution for our customers, our DCC logistics specialists perform a transportation analysis using advanced logistics planning and operating tools. Based on this analysis, they formulate a distribution plan that includes the routing and scheduling of vehicles, the efficient use of vehicle capacity and overall asset utilization. The goal of the plan is to create a distribution system that optimizes freight flow while meeting a customer’s service goals. A team of DCC transportation specialists can then implement the plan by leveraging the resources, expertise and technological capabilities of both our FMS and SCS businesses.

 

To the extent a distribution plan includes multiple modes of transportation (air, rail, sea and highway), our DCC 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).

 

Because it is highly customized, our DCC product is particularly attractive to companies that operate in industries that have time-sensitive deliveries or special handling requirements, such as newspapers and refrigerated products, as well as to companies whose distribution systems involve multiple stops within a closed loop highway route. Because DCC accounts typically operate in a limited geographic area, most of the drivers assigned to these accounts are shorthaul drivers, meaning they return home at the end of each work day.

 

For the year ended December 31, 2007, our DCC business accounted for 9% of our consolidated revenue. At December 31, 2007, we had approximately 300 DCC customer accounts in the U.S. Although a significant portion of our DCC operations are located at customer facilities, our DCC business utilizes and benefits from our extensive network of FMS facilities.

 

DCC Business Strategy.  Our DCC business strategy revolves around the following interrelated goals and priorities:

 

 

International

 

In addition to our operations in the U.S., we have FMS operations in Canada and Europe and SCS operations in Canada, Latin America, Europe and Asia. Our goal is to expand our international operations by leveraging our domestic product offerings and customer base.

 

Canada.  We have been operating in Canada for over 50 years. Our FMS operations in Canada include full service leasing, contract maintenance, contract-related maintenance and commercial rental. We also offer fleet support services such as insurance, fuel services and administrative services. On October 5, 2007, we entered into an asset purchase agreement with Pollock NationaLease (“Pollock”), under which we acquired Pollock’s fleet of approximately 2,000 vehicles and nearly 200 contractual customers served by 6 locations. At December 31, 2007, we had a fleet of approximately 12,400 commercial trucks, tractors and trailers leased or rented from 52 locations throughout 6 Canadian provinces. We also have 2 on-site maintenance facilities in Canada. At December 31, 2007, we leased vehicles to approximately 1,400 full service lease customer accounts in Canada and performed contract maintenance on approximately 120 customer accounts in Canada.

 

Our Canadian SCS operations also include a full range of services including lead logistics management services and distribution and transportation solutions. Given the proximity of this market to our U.S. operations, the Canadian operations are highly coordinated with their U.S. counterparts, managing cross-border transportation and freight movements. At December 31, 2007, we had approximately 60 SCS customer accounts and leased SCS warehouse space totaling approximately 700,000 square feet 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. Our FMS operations in Europe include full service leasing, contract maintenance, contract-related maintenance and commercial rental. We also offer fleet support services such as insurance, fuel services, administrative services, driver capability and on-board technology.

 

At December 31, 2007, we had a fleet of approximately 11,800 commercial trucks, tractors and trailers leased or rented through 39 locations throughout the U.K., Ireland and Germany. We also manage a network of 300 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. At December 31, 2007, we leased vehicles to approximately 1,000 full service lease customer accounts in Europe.

 

Our European SCS operations include a complete range of service offerings including lead logistics management services, distribution and transportation solutions, and logistics consulting and design services. In addition, we operate a comprehensive shipment, planning and execution system through our European transportation management services center located in Düsseldorf, Germany. At December 31, 2007, we had 24 SCS customer accounts and leased SCS warehouse space totaling approximately 200,000 square feet in Europe.

 

Latin America.  We began operating in Mexico, Brazil and Argentina in the mid-1990s and in Chile in 2004. In all of these markets we offer a full range of SCS services, including managing distribution operations and cross-docking terminals, and designing and managing customer specific solutions. In our Argentina and Brazil operations, we also offer international transportation services for freight moving between these markets, including transportation, backhaul and customs procedure management. Our Mexico operations also manage approximately 3,000 border crossings each week between Mexico and the U.S., often highly integrated with our domestic distribution and transportation operations. At December 31, 2007, we operated and maintained 1,200 vehicles in Latin America. At December 31, 2007, we had 215 SCS customer accounts and leased SCS warehouse space totaling approximately 5 million square feet in Latin America.

 

Asia.  We began operating in Asia in 2000. 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. 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. We offer a wide range of SCS services to customers in the region, including management of distribution

operations, domestic transportation management, coordination, scheduling and management of international freight movement, postponement, bundling and other customization activities, and freight procurement. At December 31, 2007, we had 56 SCS customer accounts and owned and leased SCS warehouse space totaling approximately 441,000 square feet in Asia.

 

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 DOT and various state agencies exercise broad powers over certain aspects of our business, generally governing such activities as authorization to engage in motor carrier operations, safety and financial reporting. We are also subject to a variety of requirements of national, state, provincial and local governments, including the 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 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 good 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

 

Safety is an integral part of our strategy because preventing injury and decreasing service interruptions increases efficiency and customer satisfaction. In 2002, we were awarded the Green Cross for Safety from the National Safety Council for our commitment to workplace safety and corporate citizenship.

 

Our Safety department focuses on (i) recruiting and maintaining qualified drivers; (ii) improving driver and management safety training; (iii) implementing periodic reviews of driver records; (iv) creating incentives for drivers and technicians with good safety records; and (v) raising awareness of safety-related issues on a company-wide basis. Our Safety, Health and Security Policy requires that all managers, supervisors, and employees ensure that safety, health and security processes are incorporated into all aspects of our business.

 

In addition, our Safety department develops driver safety and training programs such as hours of service, driving ethics, security and hazardous material transport in order to promote safety, positive customer relations, service standards and productivity. All of our drivers in the U.S. must meet or exceed DOT qualifications. Our DOT department updates driver qualification files at least annually to maintain compliance with DOT regulations.

 

Risk Management

 

The nature of our business exposes us to risk of liability for loss to our customers’ vehicle liability, workers’ compensation, property damage and inventory when in our care. We currently have large deductible insurance programs with highly rated insurers for auto liability, physical damage, cargo and workers’ compensation. Based on actuarial analysis, we accrue for the funding of claims under the deductible. Management believes that our insurance coverage is adequate.

 

Competition

 

As an alternative to using our services, customers may choose to provide these services for themselves, or may choose to obtain similar or alternative services from other third-party vendors.

 

Our FMS and DCC business segments compete with companies providing similar services on a national, regional and local level. 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 and, with respect to DCC, driver and operations expertise. 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 and DCC offerings has been, and will continue to be, our emphasis.

 

In the SCS business segment, we compete with companies providing similar services on an international, national, regional and local level. Additionally, this business is subject to potential competition in most of the regions it serves from air cargo, shipping, railroads, motor carriers and other companies that are expanding logistics services such as freight forwarders, contract manufacturers and integrators. Competitive factors include price, service, equipment, maintenance, geographic coverage, market knowledge, expertise in logistics-related technology, and overall performance (e.g., timeliness, accuracy and flexibility). Value-added differentiation of these service offerings across the global supply chain continues to be our overriding strategy.

 

Employees

 

At December 31, 2007, we had approximately 28,800 full-time employees worldwide, of which 23,400 were employed in North America, 3,400 in Latin America, 1,500 in Europe and 500 in Asia. We have approximately 16,000 hourly employees in the U.S., approximately 3,900 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 95 labor agreements that are renegotiated periodically. None of the businesses in which we currently engage have experienced a material work stoppage, slowdown or strike and we consider that our relationship with our employees is good.

 

EXECUTIVE OFFICERS OF THE REGISTRANT

 

All of the executive officers of Ryder were elected or re-elected to their present offices either at or subsequent to the meeting of the Board of Directors held on May 4, 2007 in conjunction with Ryder’s 2007 Annual Meeting. They all hold such offices, at the discretion of the Board of Directors, until their removal, replacement or retirement.

 

 

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. Previously, he also served as Senior Vice President of Global Transportation Management from March 2002 to January 2003 and as Chief Information Officer from June 2001 to March 2002. Mr. Sanchez joined Ryder in 1993 as a Senior Business System Designer.

 

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. Previously, Mr. Garcia served as Vice President and Controller from February 2002 to October 2005, and Group Director, Accounting Services, from September 2000 to February 2002 and from April 2000 to June 2000. Mr. Garcia was Chief Financial Officer of Blue Dot Services, Inc., a national provider of heating and air conditioning services, from June 2000 to September 2000. Mr. Garcia served as Director, Corporate Accounting, for Ryder from April 1998 to April 2000. Mr. Garcia joined Ryder in December 1997 as Senior Manager, Corporate Accounting.

 

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 Planning and Development, from April 2003 to February 2006, and served as Senior Vice President, Global Talent Management, from March 2002 to April 2003. Mr. Greene joined Ryder in August 1993 as Manager of Executive and International Compensation and has since held various positions. Prior to joining Ryder, Mr. Greene served as Director of Human Resources for Sunglass Hut, Inc.

Thomas S. Renehan has served as Executive Vice President, Sales and Marketing, U.S. Fleet Management Solutions, since October 2005. He previously served as Senior Vice President, Sales and Marketing from July 2005 to October 2005, as Senior Vice President, Asset Management, Sales and Marketing from March 2004 to July 2005, as Senior Vice President, Asset Management from December 2002 to March 2004 and as Vice President, Asset Management from June 2001 to December 2002. Prior to heading Asset Management, Mr. Renehan served as Vice President, Fleet Management Solutions in the Southwest Region from January 2000 to June 2001. Mr. Renehan joined Ryder in October 1985 and has held various positions with Ryder since that time.

 

Anthony G. Tegnelia has served as President, U.S. 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 business segment and Senior Vice President, Field Finance.

 

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.

 

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:

 

 

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. Additionally, 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 asset 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.

 

We derive a significant portion of our SCS revenue from a small number of customers, many of which are in the automotive industry.

 

During 2007, sales to our top ten SCS customers accounted for 72% of our SCS total revenue and 60% of our SCS operating revenue (revenue less subcontracted transportation), with GM accounting for 42% of our SCS total revenue and 19% of our SCS 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 both outside and within the automotive industry, we may not be successful in doing so in the short-term.

 

In addition, the revenue derived from our SCS customers is dependent in large part on their production and sales volumes, which are impacted by economic conditions and customer spending and preferences. Production volumes in the automotive industry are sensitive to consumer demand as well as employee and labor relations. Declines in sales volumes could result in production cutbacks and unplanned plant shutdowns. To the extent that the market share of any of our largest SCS customers deteriorates, or their sales or production volumes otherwise decline, our revenues and profitability could be adversely affected.

 

We are also subject to credit risk associated with the concentration of our accounts receivable from our SCS customers. Certain of our automotive customers have or are currently facing financial difficulties. If one or more of these customers were to become bankrupt, insolvent or otherwise were unable to pay for the services provided by us, our operating results and financial condition could be adversely affected.

 

Our profitability could be negatively impacted by downward pricing pressure from certain of our SCS customers.

 

Given the nature of our services and the competitive environment in which we operate, our largest SCS customers 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 our current levels of profitability.

 

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 may face difficulties in attracting and retaining drivers.

 

We hire drivers primarily for our DCC and SCS business segments. There is significant competition for qualified drivers in the transportation industry. As a result of driver shortages, we could be required to increase driver compensation, let trucks sit idle, utilize less experienced drivers or face difficulty meeting customer demands, all of which could adversely affect our growth and profitability.

 

In order to serve our customers globally, we must continue to expand our international operations, which may result in additional risks.

 

We are committed to meeting our customers’ global needs by continuing to grow our international operations in Canada, Europe, Asia and Latin America. Our international operations, particularly in Latin America and Asia, are subject to adverse developments in foreign political, governmental and economic conditions, varying competitive factors, foreign currency fluctuations, potential difficulties in identifying and retaining qualified managers and personnel, potential adverse tax consequences and difficulties in protecting intellectual property rights. These factors may have a significant effect on our ability to profitably grow our international operations or retain existing customers that require global expansion. In addition, entry into new international markets requires considerable management time as well as start-up expenses for market development, staffing and establishing office facilities before any significant revenue is generated. As a result, initial operations in a new market may operate at low margins or may be unprofitable.

 

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 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 beginning in June 2006 and the introduction of emissions after-treatment devices on newly-manufactured engines and 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 related to our pension plans may increase our pension expense 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. We are required to make cash contributions to our defined benefit plans to the extent necessary to comply with minimum funding requirements imposed by employee benefit and tax laws. Our major defined benefit plans are funded, with trust assets invested in a diversified portfolio. The projected benefit obligation and assets of our global defined benefit plans as of December 31, 2007 were $1.52 billion. 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. Changes in interest rates, mortality rates, investment returns and the market value of plan assets can affect the funded status of our pension plans and cause volatility in the pension expense and future funding requirements. 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. For a detailed discussion on our accounting policies and assumptions relating to our pension plans, please see the section titled “Critical Accounting Estimates — Pension Plans” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

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.

 

None.

 

Our properties consist primarily of vehicle maintenance and repair facilities, warehouses and other real estate and improvements.

 

We maintain 793 FMS locations in the U.S., Puerto Rico and Canada; we own 434 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 223 on-site maintenance facilities, located at customer locations.

 

We also maintain 145 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.

 

We maintain 96 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.

 

 

Our subsidiaries 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, results of operations or liquidity.

 

There were no matters submitted to a vote of our security holders during the quarter ended December 31, 2007.

 

 

Ryder Common Stock Prices

 

 

Our common shares are listed on the New York Stock Exchange under the trading symbol “R.” At January 31, 2008, there were 9,914 common stockholders of record and our stock price on the New York Stock Exchange was $52.00.

 

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, 2002 to December 31, 2007.

 

 

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, 2002 and that all dividends were reinvested. Past performance is not necessarily an indicator of future results.

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, 2007:

 

 

 

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The following table includes information as of December 31, 2007 about certain plans which provide for the issuance of common stock in connection with the exercise of stock options and other share-based awards.

 

 

The following selected consolidated financial information should be read in conjunction with Items 7 and 8 of this report.

 

 

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, high-tech, telecommunications, industrial, consumer goods, paper and paper products, office equipment, food and beverage, general retail industries and governments.

 

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 2007 were $3.75 billion and $6.17 billion, respectively, representing 57% of our consolidated revenue and 90% 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 Latin America, Europe and Asia. SCS revenue in 2007 was $2.25 billion, representing 34% 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 2007 was $568 million, representing 9% of our consolidated revenue.

 

2007 was a year of significant accomplishments for us, as we realized record earnings for the fourth consecutive year, despite weakening economic conditions in the U.S. Continued development of our global sales and operating capabilities in each of our business segments, continued focus on financial discipline and cost and safety management while investing for strategic growth provided support for earnings expansion. Total revenue was $6.57 billion, up 4% from $6.31 billion in 2006, while our operating revenue (total revenue less fuel and subcontracted transportation) measure was up $182 million or 4%. Operating revenue growth was driven by contractual revenue growth in our SCS and FMS business segments. The growth in SCS revenue was driven primarily by new and expanded business and higher volumes particularly in international markets served. The growth in FMS revenue was driven by higher full service lease revenue resulting from higher lease rates and business expansion. Comparisons for 2007 were also impacted by favorable movements in foreign currency exchange rates of 1.2% related to our international operations.

 

Earnings from continuing operations grew to $254 million from $249 million in 2006 and earnings per diluted common share from continuing operations increased to $4.24 from $4.04 in 2006. Included in earnings from continuing operations are certain items we do not consider indicative of our ongoing operations. The following discussion provides a summary of the 2007 and 2006 special items which are discussed in more detail throughout our MD&A and within the Notes to Consolidated Financial Statements:

 

2007

 

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

 

 

2006

 

 

Excluding the special items listed above, comparable earnings from continuing operations were $252 million, up 2% from $246 million in 2006. Comparable earnings from continuing operations per diluted common share were $4.21, up 6% from $3.99 in 2006. All business segments contributed to the improved results. The earnings growth was driven primarily by lower pension and safety and insurance costs and contractual revenue growth within our FMS business segment, which more than offset the impact of a soft commercial rental market in FMS for 2007.

 

With the continuing improvements in earnings and cash flows over the past four years, we repurchased a total of 3.9 million shares of common stock in 2007 for $209 million. We also increased our annual dividend by 17% to $0.84 per share of common stock. In addition, during 2007, we acquired Pollock NationaLease and paid $75 million.

 

Capital expenditures decreased to $1.19 billion compared with $1.76 billion in 2006. The reduction in capital expenditures reflects lower full service lease vehicle spending for replacements and expansion of customer fleets. Our debt decreased from $2.82 billion at December 31, 2006 to $2.78 billion at December 31, 2007 due to improved operating cash flows and proceeds from the sale of revenue earning equipment offset by spending required to support the contractual full service lease business and share repurchase programs. Our debt to equity ratio also decreased to 147% from 164% in 2006. Our total obligations (including off-balance sheet debt) to equity ratio decreased to 157% from 168% in 2006.

 

2008 Outlook

 

Our outlook for 2008 is positive, despite uncertainty of U.S. economic conditions. Our efforts will focus on the implementation of our contractual revenue growth strategies, including the evaluation of selective acquisitions, across all business segments while retaining financial discipline. Total revenue is targeted to decline by 6% while operating revenue is expected to increase by 5%. The 2008 forecast for total revenue includes the impact of net revenue reporting in 2008 for subcontracted transportation revenues previously reported on a gross basis. See Note 1, “Summary of Significant Accounting Policies — Revenue Recognition” for additional information. We will also continue to focus on cost and safety management and process improvement actions that complement our growth strategies and establish a foundation for sustainable long-term profitable growth. As a result, we expect earnings per diluted common share in 2008 to grow by 7% to 10% compared to 2007 comparable earnings per diluted common share.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

CONSOLIDATED RESULTS

 

 

 

Earnings from continuing operations before income taxes (NBT) increased to $405 million in 2007 compared with $393 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. Our 2007 NBT also benefited from a gain on sale of property of $10 million. 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. Our 2006 NBT was impacted by a one-time charge of $6 million to properly account for prior service costs related to retiree pension benefit improvements made in 1995 and 2000. Earnings from continuing operations increased to $254 million in 2007 compared with $249 million in 2006. Earnings from continuing operations in 2007 included an income tax benefit of $3 million, or $0.06 per diluted common share, associated with the reduction of deferred income taxes due primarily to enacted changes in Canadian tax laws. Earnings from continuing operations in 2006 included an income tax benefit of $7 million, or $0.11 per diluted common share, associated with the reduction of deferred income taxes due to enacted changes in Texas and Canadian tax laws. Earnings per diluted common share growth in 2007 exceeded the net earnings growth rate reflecting the impact of share repurchase programs.

 

NBT increased to $393 million in 2006 compared with $357 million in 2005, reflecting better operating performance in all business segments. The 2006 operating performance improvement was driven by contractual revenue growth in each of our business segments, which more than offset the impact of a soft commercial rental market on our FMS business segment results in the second half of 2006. Our 2006 NBT was impacted by a one-time charge of $6 million to properly account for prior service costs related to retiree pension benefit improvements made in 1995 and 2000. Earnings from continuing operations increased to $249 million in 2006 compared with $228 million in 2005. Earnings from continuing operations in 2006 included an income tax benefit of $7 million, or $0.11 per diluted common share, associated with the reduction of deferred income taxes due to enacted changes in Texas and Canadian tax laws. Earnings from continuing operations in 2005 included a state income tax benefit of $8 million, or $0.12 per diluted common share, associated with the reduction of deferred income taxes in the State of Ohio. Earnings per diluted common share growth in 2006 exceeded the net earnings growth rate reflecting the impact of share repurchase programs.

 

See subsequent discussion within “Consolidated Results” and “Operating Results by Business Segment” for additional information on the results noted above.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

 

 

 

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.

 

All business segments reported revenue growth in 2006. Revenue growth for FMS was driven by higher fuel services revenue, primarily as a result of higher average fuel prices from increased fuel costs, and higher full service lease revenue resulting from increased lease rates and new contract sales. SCS revenue growth was due primarily to increased volumes of managed subcontracted transportation and higher volumes and new and expanded business. DCC revenue growth was due to expanded and new business as well as pricing increases associated with higher fuel costs. Revenue comparisons were also impacted by favorable movements in foreign currency exchange rates related to our international operations. Total revenue included a favorable foreign currency exchange impact of 0.8% due primarily to the strengthening of the Canadian dollar and Brazilian real.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

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 rates similar to those executed with third parties. The increases in eliminations in 2007 and 2006, reflects primarily the pass-through of higher average fuel costs.

 

 

Operating expense increased in 2007 compared to 2006 in conjunction with the growth in operating revenue as well as 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. The increase in operating expense was partially offset by lower safety and insurance costs due to favorable development in prior years’ self-insured loss reserves. 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. During 2007, 2006 and 2005, we recorded a benefit of $24 million, $12 million and $7 million, respectively, to reduce estimated prior years’ self-insured loss reserves for the reasons noted above.

 

Operating expense grew in 2006 principally as a result of higher fuel costs due to higher average market prices. The revenue growth from each business segment, excluding fuel, also contributed to the increase in operating expenses.

 

 

Salaries and employee-related costs increased in 2007 compared to 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. The number of employees at December 31, 2007 increased to approximately 28,800 compared with 28,600 at December 31, 2006.

 

Pension expense totaled $29 million in 2007 compared with $70 million in 2006. The decrease in 2007 pension expense is 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. Pension expense in 2006 was also impacted by a pension accounting charge of $6 million ($4 million after-tax), which represented a one-time, non-cash charge to properly account for prior service costs related to retiree pension benefit improvements made in 1995 and 2000. The impact of this one-time charge was partially offset by a reduction of our 2006 pension expense of $5 million ($3 million after-tax) resulting from the interim remeasurement of plan assets and pension obligations due to the removal of a substantive commitment. All other decreases to pension expense primarily impact our FMS business segment, which employs the majority of our employees who participate in the primary U.S. pension plan. 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. See Note 23, “Employee Benefit

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

Plans,” in the Notes to Consolidated Financial Statements, for additional information regarding these items. We expect pension expense on a pre-tax basis to decrease approximately $21 million in 2008 because of the freeze of U.S. pension plans. However, we expect this decrease to be principally offset by our new enhanced 401(k) plan. Our 2008 pension expense estimates are subject to change based upon the completion of the actuarial analysis for all pension plans. See the section titled “Critical Accounting Estimates-Pension Plans” for further discussion on pension accounting estimates.

 

Our incentive-based compensation program is comprised of annual cash incentive awards, amounts earned under discontinued cash-based long-term incentive plans and 401(k) company contributions which are based on the achievement of certain levels of financial performance generally over one fiscal year. The performance metrics and targets are based on internal business plans and center around operating revenue, earnings, earnings per share and return on capital. Incentive-based compensation expense decreased $15 million in 2007 compared to 2006, as we achieved a lower level of performance relative to target in the current year.

 

Salaries and employee-related costs and salaries and employee-related costs as a percentage of operating revenue increased in 2006 compared with 2005 primarily as a result of added headcount, increased outside labor costs to support the growth in our SCS and DCC business segments, higher share-based compensation and higher employee benefit costs. Average headcount increased 4% in 2006 compared with 2005. Additionally, on January 1, 2006, we adopted SFAS No. 123R and recognized $10 million of additional share-based compensation expense in 2006. See Note 22, “Share-Based Compensation Plans,” in the Notes to Consolidated Financial Statements for additional information. Pension expense also increased $11 million in 2006 to $70 million compared to 2005.

 

 

Subcontracted transportation expense represents freight management costs on logistics contracts for which we purchase transportation from third parties. During 2007 and 2006, subcontracted transportation expense in our SCS business segment 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 have determined, after a formal review of the terms and conditions of the services, we will be acting as an agent in the arrangement. As a result, the amount of total revenue and subcontracted transportation expense will decrease in the future due to the reporting of revenue net of subcontracted transportation expense. During 2007, 2006 and 2005, contract revenue associated with this portion of the subcontracted transportation contract totaled $640 million, $565 million and $360 million, respectively.

 

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

Depreciation expense relates primarily to FMS revenue earning equipment. Depreciation expense increased to $816 million in 2007 compared to $743 million in 2006, reflecting higher average vehicle investment from purchases during the past two years. In addition, adjustments in the carrying value of vehicles held for sale exceeded prior year levels by $18 million due to wholesale activity taken this year in light of increased average inventory levels. This 2007 activity does not reflect our long-term expectations of residual values for revenue earning equipment. Depreciation expense increased slightly in 2006 to $743 million compared to $740 million in 2005, reflecting the impact of a higher average vehicle investment on purchases during 2006. These changes were partially offset by the impact of a lower average fleet count. Both 2007 and 2006 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 a 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 2007, 2006 and 2005, 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 is not significant. Based on the results of our 2006 and 2005 analysis, we adjusted the residual values of certain classes of our revenue earning equipment effective January 1, 2007 and 2006. These residual value changes increased pre-tax earnings for 2007 by approximately $11 million compared to 2006 and increased pre-tax earnings for 2006 by approximately $13 million compared to 2005.

 

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. Wholesale prices are lower than our retail prices and result in lower gains per unit. The decrease was offset partially by a 21% increase in the number of vehicles sold in 2007 compared with 2006. Based on our used truck inventory at December 31, 2007, we expect the level of wholesale activity to decrease in 2008. Gains on vehicle sales, net increased in 2006 compared with 2005 due to improved average pricing on vehicles sold, which more than offset the decline in the number of vehicles sold.

 

Equipment rental consists primarily of rent expense for FMS revenue earning equipment under lease. Equipment rental increased $3 million in 2007 as a result of the sale and leaseback of $150 million of revenue earning equipment completed in May 2007.

 

 

Interest expense totaled $160 million in 2007 compared to $141 million in 2006 and $120 million in 2005. The growth in interest expense reflects higher average debt levels to support capital spending, principally on our contractual full service lease business, the funding of global pension contributions in 2006 and share repurchase programs.

 

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

Miscellaneous income, net consists of investment income on securities used to fund certain benefit plans, interest income, (gains) losses from sales of property, foreign currency transaction (gains) losses, and other non-operating items. Miscellaneous income, net increased to $16 million in 2007 compared to $12 million in 2006 because of a $10 million gain recognized on the sale of property. See Note 9, “Operating Property and Equipment,” in the Notes to Consolidated Financial Statements for additional information. Miscellaneous income, net for 2007 also increased by $2 million as a result of a favorable contractual litigation settlement in the current year compared to an unfavorable settlement in the prior year. These favorable items were offset by (i) $3 million of additional foreign currency transaction losses compared to 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.

 

Miscellaneous income, net increased to $12 million in 2006 compared to $9 million in 2005 due to the previously mentioned 2006 $3 million business interruption insurance claim and $2 million recovery for the recognition of common stock received from mutual insurance companies, as well as better market performance of investments classified as trading securities. These favorable comparisons were partially offset by a $1 million 2006 charge related to the settlement of litigation associated with a discontinued operation, as well as the 2005 one-time recovery of $3 million of project costs incurred in prior years.

 

 

2007 Activity

 

Restructuring and other charges, net in 2007 related primarily to $11 million of employee severance and benefit costs incurred in connection with global cost savings initiatives and $1 million of facility and related 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). We expect to realize annual pre-tax cost savings of up to $25 million from these initiatives once all employee severance actions have been completed. Most severance actions will be substantially completed in the first quarter of 2008 and approximately $20 million of cost savings is expected to be realized in 2008.

 

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. We expect to realize annual pre-tax interest savings of approximately $2 million from the early extinguishment of these debentures.

 

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 facility charges. 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 realize 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

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

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 facility charges recorded in prior restructuring charges that were adjusted due to subsequent refinements in estimates.

 

2005 Activity

 

During 2005, we approved a plan to eliminate approximately 160 positions as a result of ongoing cost management and process improvement actions in our domestic and international FMS and SCS business segments and CSS. The charge related to these actions included severance and employee-related costs totaling $3 million. Cost reductions associated with these actions benefited salaries and employee-related costs beginning in the first quarter of 2006. Many of the eliminated positions in our domestic operations were impacted by the decision to outsource certain administrative finance functions to lower-cost foreign providers and maximize our technology resources. We also closed two administrative offices in the U.S. as a result of the restructuring of our FMS domestic business operations and recorded a charge for future cash payments related to lease obligations. Also in 2005, management approved and committed to a plan to transition certain outsourced telecommunication services to Ryder employees. In accordance with the terms of this service agreement, we notified the information technology services provider of our intent to terminate the services and recorded charges totaling nearly $1 million for contract termination costs. In 2006, the transition activities were completed and cost reductions associated with the termination of these services benefited operating expenses in the latter part of 2006. These charges were partially offset by reversals of prior year severance and employee-related accruals due to refinements in estimates.

 

See Note 5, “Restructuring and Other Charges,” in the Notes to Consolidated Financial Statements for further discussion.

 

 

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. The 2005 effective tax rate included a tax benefit of $8 million associated with the State of Ohio enacted tax legislation, which phases out the Ohio corporate franchise tax and phases in a new gross receipts tax called the Commercial Activity Tax (CAT) over a five-year period. See Note 14, “Income Taxes,” in the Notes to Consolidated Financial Statements for further discussion.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

OPERATING RESULTS BY BUSINESS SEGMENT

 

 

 

 

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, the 2007 gain on sale of property described in Note 9, “Operating Property and Equipment,” and certain 2006 net retirement plan charges described in Note 23, “Employee Benefit Plans,” in the Notes to Consolidated Financial Statements.

 

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”).

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

The following table sets forth equipment contribution included in NBT for our SCS and DCC segments:

 

 

The following table provides a reconciliation of items excluded from our segment NBT measure to their classification within our Consolidated Statements of Earnings:

 

 

 

 

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 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 26, “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.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

Fleet Management Solutions

 

 

 

 

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.

 

Contractual revenue growth was realized in both 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. We expect favorable contractual revenue comparisons to continue in the near term due to recent acquisitions and increased 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 U.S. rental fleet size declined 10% in 2007 compared to 2006. We expect commercial rental revenue comparisons to improve from 2007 levels as our fleet count has stabilized.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

 

The following table provides rental statistics for the U.S. fleet, which generates more than 80% of total commercial rental revenue:

 

 

 

 

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 vehicle sales results in 2007 were impacted by higher carrying costs 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. FMS NBT was negatively impacted by $25 million in 2007 because of higher valuation adjustments and lower gains on sale. Depreciation expense, although higher than 2006, benefited $11 million from our annual depreciation policy change effective January 1, 2007. FMS NBT in 2007 also benefited from lower safety and insurance costs and lower incentive-based compensation of $4 million compared to 2006. The decrease in safety and insurance costs was mainly due to favorable development in estimated prior years’ self-insured loss reserves of $11 million compared to $3 million in 2006.

 

2006 versus 2005

 

Total revenue grew 4% in 2006 reflecting higher fuel services revenue as a result of higher average fuel prices. Operating revenue increased 2% to $2.92 billion in 2006 compared to $2.86 billion in 2005 due to full service lease growth primarily in North America. Total revenue included a favorable foreign currency exchange impact of 0.3%.

 

Contractual revenue growth in 2006 was realized in both FMS product lines. Full service lease revenue grew 4% due to higher lease rates and higher levels of sales activity in North America. Contract maintenance revenue increased 6% due primarily to new contract sales. Commercial rental revenue decreased 3% in 2006 reflecting a smaller average fleet and lower vehicle utilization from a weakening U.S. commercial rental market.

 

FMS NBT grew $14 million in 2006 primarily as a result of higher contractual revenue. The favorable impact of contractual revenue growth was partially offset by reduced commercial rental volumes, higher sales and marketing expenses, compensation-related expenses and higher interest expense due primarily to planned higher debt levels to support investments in the full service lease business, pension contributions and share repurchases.

 

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):