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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2010
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
 
Commission File Number: 1-4364
 
(RYDER LOGO)
RYDER SYSTEM, INC.
(Exact name of registrant as specified in its charter)
 
     
Florida
(State or other jurisdiction of incorporation or organization)
  59-0739250
(I.R.S. Employer Identification No.)
11690 N.W. 105th Street,    
Miami, Florida 33178   (305) 500-3726
(Address of principal executive offices, including zip code)   (Telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of each class   Name of exchange on which registered
 
Ryder System, Inc. Common Stock ($0.50 par value)   New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act:     None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ  No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o  No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  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.
 
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No þ
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant computed by reference to the price at which the common equity was sold at June 30, 2010 was $2,106,482,262. The number of shares of Ryder System, Inc. Common Stock ($0.50 par value per share) outstanding at January 31, 2011 was 51,227,648.
 
     
Documents Incorporated by Reference into this Report   Part of Form 10-K into which Document is Incorporated
 
Ryder System, Inc. 2011 Proxy Statement
  Part III
 


 

 
RYDER SYSTEM, INC.
FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS
 
             
        Page No.
 
PART I
           
ITEM 1       1  
ITEM 1A       12  
ITEM 1B       16  
ITEM 2       16  
ITEM 3       16  
ITEM 4       16  
 
PART II
           
ITEM 5       17  
ITEM 6       21  
ITEM 7       22  
ITEM 7A       59  
ITEM 8       60  
ITEM 9       124  
ITEM 9A       124  
ITEM 9B       124  
 
PART III
           
ITEM 10       124  
ITEM 11       125  
ITEM 12       125  
ITEM 13       125  
ITEM 14       125  
 
PART IV
           
ITEM 15       126  
        127  
       
SIGNATURES     130  
 EX-10.1.b
 EX-21.1
 EX-23.1
 EX-24.1
 EX-31.1
 EX-31.2
 EX-32
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT


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PART I
 
ITEM 1. BUSINESS
 
OVERVIEW
 
Ryder System, Inc. (Ryder), a Florida corporation founded in 1933, is a global leader in transportation and supply chain management solutions. Our business is divided into three business segments: Fleet Management Solutions (FMS), which provides full service leasing, contract maintenance, contract-related maintenance and commercial rental of trucks, tractors and trailers to customers principally in the U.S., Canada and the U.K.; Supply Chain Solutions (SCS), which provides comprehensive supply chain solutions including distribution and transportation services throughout North America and Asia; and Dedicated Contract Carriage (DCC), which provides vehicles and drivers as part of a dedicated transportation solution in the U.S. Our customers range from small businesses to large international enterprises. These customers operate in a wide variety of industries, the most significant of which include automotive, electronics, transportation, grocery, lumber and wood products, food service, and home furnishings.
 
For financial information and other information relating to each of our business segments see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 8, “Financial Statements and Supplementary Data,” of this report.
 
INDUSTRY AND OPERATIONS
Fleet Management Solutions
 
Value Proposition
 
Through our FMS business, we provide our customers with flexible fleet solutions that are designed to improve their competitive position by allowing them to focus on their core business, lower their costs and redirect their capital to other parts of their business. Our FMS product offering is comprised primarily of contractual-based full service leasing and contract maintenance services. We also offer transactional fleet solutions including commercial truck rental, maintenance services, and value-added fleet support services such as insurance, vehicle administration and fuel services. In addition, we provide our customers with access to a large selection of used trucks, tractors and trailers through our used vehicle sales program.
 
Market Trends
 
Over the last several years, many key trends have been reshaping the transportation industry, particularly the U.S. private commercial fleet market which is estimated to include approximately 3.8 million vehicles(1) and the U.S. commercial fleet lease and rental market which is estimated to include approximately 0.6 million vehicles(2). The maintenance and operation of commercial vehicles has become more complicated requiring companies to spend a significant amount of time and money to keep up with new technology, diagnostics, retooling and training. Because of increased demand for efficiency and reliability, companies that own and manage their own fleet of vehicles have put greater emphasis on the quality of their preventive maintenance and safety programs. More recently, fluctuating energy prices have made it difficult for businesses to predict and manage fleet costs and the tightened credit market has limited businesses’ access to capital.
 
Operations
 
For the year ended December 31, 2010, our global FMS business accounted for 66% of our consolidated revenue.
 
 
 (1) U.S. private fleet as of June 2010, Class 3-8, Source: RL Polk
 (2) U.S. outsourced fleet services as of June 2010, Class 3-8, Source: RL Polk


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U.S.  Our FMS customers in the U.S. range from small businesses to large national enterprises. These customers operate in a wide variety of industries, including transportation, grocery, lumber and wood products, food service and home furnishings. At December 31, 2010, we had 550 operating locations in 2010 exclude ancillary storage locations in 49 states and Puerto Rico and operated 174 maintenance facilities on-site at customer properties. A location typically consists of a maintenance facility or “shop,” offices for sales and other personnel, and in many cases, a commercial rental counter. Our maintenance facilities typically include a service island for fueling, safety inspections and preliminary maintenance checks as well as a shop for preventive maintenance and repairs.
 
Canada.  We have been operating in Canada for over 50 years. The Canadian private commercial fleet market is estimated to be approximately 0.4 million vehicles(3) and the Canadian commercial fleet lease and rental market is estimated to include approximately 0.02 million vehicles(4). At December 31, 2010, we had 37 operating locations throughout 9 Canadian provinces. We also have 8 on-site maintenance facilities in Canada.
 
Europe.  We began operating in the U.K. in 1971 and since then have expanded into Germany. The U.K. commercial rental fleet lease and rental market are estimated to include approximately 0.2 million vehicles(5). At December 31, 2010, we had 41 operating locations throughout the U.K. and Germany. We also manage a network of 320 independent maintenance facilities in the U.K. to serve our customers when it is more effective than providing the service in a Ryder location. In addition to our typical FMS operations, we also supply and manage vehicles, equipment and personnel for military organizations in the U.K. and Germany.
 
FMS Product Offerings
 
Full Service Leasing.  Under a typical full service lease, we provide vehicle maintenance, supplies and related equipment necessary for operation of the vehicles while our customers furnish and supervise their own drivers and dispatch and exercise control over the vehicles. Our full service lease includes all the maintenance services that are part of our contract maintenance service offering. We target 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 signed an agreement, we acquire vehicles and components that are custom engineered to the customer’s requirements and lease the vehicles to the customer for periods generally ranging from three to seven years for trucks and tractors and up to ten years for trailers. Because we purchase a large number of vehicles from a limited number of manufacturers, we are able to leverage our buying power for the benefit of our customers. In addition, given our continued focus on improving the efficiency and effectiveness of our maintenance services, we can provide our customers with a cost effective alternative to maintaining their own fleet of vehicles. We also offer our leasing customers the additional fleet support services described below.
 
Contract Maintenance.  Our contract maintenance customers include non-Ryder owned vehicles that want to utilize our extensive network of maintenance facilities and trained technicians to maintain the vehicles they own or lease from third parties. The contract maintenance service offering is designed to reduce vehicle downtime through preventive maintenance based on vehicle type and time or mileage intervals. The service also provides vehicle repairs including parts and labor, 24-hour emergency roadside service and replacement vehicles for vehicles that are temporarily out of service. Vehicles covered under this offering are typically serviced at our own facilities. However, based on the size and complexity of a customer’s fleet, we may operate an on-site maintenance facility at the customer’s location.
 
Commercial Rental.  We target rental customers that have a need to supplement their private fleet of vehicles on a short-term basis (typically from less than one month up to one year in length) either because of
 
 
 (3) Canada private fleet as of November 2010, Class 3-8, Source: RL Polk
 (4) Canada outsourced fleet market as of November 2010, Class 3-8, Source: RL Polk
 (5) U.K. Lease and Rental HGV Market, Projection for December 2010, Source: The Society of Motor Manufacturers & Traders (SMMT) 2009


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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. In addition to one-off commercial rental transactions, we build national relationships with large national customers to become their preferred source of commercial vehicle rentals. Our rental representatives assist in selecting a vehicle that satisfies the customer’s needs and supervise the rental process, which includes execution of a rental agreement and a vehicle inspection. In addition to vehicle rental, we extend to our rental customers liability insurance coverage under our existing policies and the benefits of our comprehensive fuel services program.
 
The following table provides information regarding the number of vehicles and customers by FMS product offering at December 31, 2010:
 
                                                 
    U.S.   Foreign   Total
    Vehicles   Customers   Vehicles   Customers   Vehicles   Customers
 
Full service leasing
    93,200       10,400       17,900       2,200       111,100       12,600  
Contract maintenance(6)
    29,100       1,200       4,300       200       33,400       1,400  
Commercial rental
    24,600       8,200       5,100       5,800       29,700       14,000  
 
Contract-Related Maintenance.  Our full service lease and contract maintenance customers periodically require additional maintenance services that are not included in their contracts. 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. For example, additional maintenance services may arise when a customer’s driver damages the vehicle and these services are performed or managed by Ryder. Some customers also periodically require maintenance work on vehicles that are not covered by a long-term lease or maintenance contract. Ryder may provide service on these vehicles and charge the customer on an hourly basis for work performed.
 
Fleet Support Services.  We have developed a variety of fleet support services tailored to the needs of our large base of lease customers. Customers may elect to include these services as part of their full service lease or contract maintenance agreements. Currently, we offer the following fleet support services:
 
     
Service   Description
 
Fuel
  Full service diesel fuel dispensing at competitive prices; fuel planning; fuel tax reporting; centralized billing; and fuel cards
Insurance
  Liability insurance coverage under our existing insurance policies which includes monthly invoicing, flexible deductibles, claims administration and discounts based on driver performance and vehicle specifications; physical damage waivers; gap insurance; and fleet risk assessment
Safety
  Establishing safety standards; providing safety training, driver certification, prescreening and road tests; safety audits; instituting procedures for transport of hazardous materials; coordinating drug and alcohol testing; and loss prevention consulting
Administrative
  Vehicle use and other tax reporting; permitting and licensing; and regulatory compliance (including hours of service administration)
Environmental management
  Storage tank monitoring; storm water management; environmental training; and ISO 14001 certification
Information technology
  RydeSmarttm is a full-featured GPS fleet location, tracking, and vehicle performance management system designed to provide our customers improved fleet operations and cost controls. FleetCARE is our web based tool that provides customers with 24/7 access to key operational and maintenance management information about their fleets.
 
Used Vehicles.  We primarily sell our used vehicles at one of our 55 retail sales centers throughout North America (18 of which are collocated at an FMS shop), at our branch locations or through our website at
 
 
 (6) Contract maintenance customers include approximately 800 full service lease customers


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www.Usedtrucks.Ryder.com. Typically, before we offer used vehicles for sale, our technicians assure that it is Road Readytm, which means that the vehicle has passed a comprehensive, multi-point performance inspection based on specifications formulated through our contract maintenance program. Our retail sales centers throughout North America allow us to leverage our expertise and in turn realize higher sales proceeds than in the wholesale market. Although we generally sell our used vehicles for prices in excess of book value, the extent to which we are able to realize a gain on the sale of used vehicles is dependent upon various factors including the general state of the used vehicle market, the age and condition of the vehicle at the time of its disposal and depreciation rates with respect to the vehicle.
 
FMS Business Strategy
 
Our FMS business mission is to be the leading leasing and maintenance service provider for light, medium and heavy duty vehicles. This will be achieved through the following goals and priorities:
 
  •   improve customer retention levels and focus on conversion of private fleets and commercial rental customers to full service lease customers;
 
  •   successfully implement sales growth initiatives in our contractual product offerings;
 
  •   focus on contractual revenue growth strategies, including selective acquisitions;
 
  •   deliver consistent industry leading maintenance to our customers while continuing to implement process designs, productivity improvements and compliance discipline in a cost effective manner;
 
  •   offer a wide range of support services that complement our leasing, rental and maintenance businesses;
 
  •   offer competitive pricing through cost management initiatives and maintain pricing discipline on new business;
 
  •   optimize asset utilization and management; and
 
  •   leverage our maintenance facility infrastructure.
 
Competition
 
As an alternative to using our services, customers may choose to provide these services for themselves, or may choose to obtain similar or alternative services from other third-party vendors.
 
Our FMS business segment competes with companies providing similar services on a national, regional and local level. Many regional and local competitors provide services on a national level through their participation in various cooperative programs. Competitive factors include price, equipment, maintenance, service and geographic coverage. We compete with finance lessors and also with truck and trailer manufacturers, and independent dealers, who provide full service lease products, finance leases, extended warranty maintenance, rental and other transportation services. Value-added differentiation of the full service leasing, contract maintenance, contract-related maintenance and commercial rental service has been, and will continue to be, our emphasis.
 
Acquisitions
 
In addition to our continued focus on organic growth, acquisitions play an important role in enhancing our growth strategy in the U.S., Canada and the U.K. In assessing potential acquisition targets, we look for companies that would create value through the creation of operating synergies, leveraging our existing facility infrastructure and fixed costs, improving our geographic coverage, diversifying our customer base and improving our competitive position in target markets.
 
We completed four FMS acquisitions from 2008 to 2009, under which we acquired a company’s fleet and contractual customers. The FMS acquisitions operate under Ryder’s name and complement our existing market coverage and service network. On January 10, 2011 we acquired the assets of Carmenita Leasing, Inc., full


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service leasing and rental business located in Santa Fe Springs, California, which included a fleet of approximately 190 full service lease and rental units, and 60 contract customers. On January 28, 2011, we acquired The Scully Companies, Inc. (“Scully”), which includes Scully’s fleet of approximately 1,800 full service lease units and 300 rental vehicles, and approximately 200 contractual customers primarily served from its six service facilities.
Supply Chain Solutions
 
Value Proposition
 
Through our SCS business, we offer a broad range of innovative logistics management services that are designed to optimize a customer’s supply chain and address key customer business requirements. The organization is aligned by industry verticals (Automotive, Industrial, Hi-Tech, Retail and Consumer Packaged Goods) to enable the teams to focus on the specific needs of their customers. Our SCS product offerings are organized into three categories: distribution management, transportation management and professional services. These offerings are supported by a variety of information technology and engineering solutions which are an integral part of our other SCS services. These product offerings can be offered independently or as an integrated solution to optimize supply chain effectiveness. A key aspect of our value proposition is our operational execution. We believe our operational execution is an important differentiator in the marketplace.
 
Market Trends
 
Global logistics is approximately $7 trillion, of which approximately $500 billion is outsourced. Logistics spending in our primary markets of North America and Asia equates to approximately $3 trillion, of which $260 billion is outsourced. Over the long-term, companies tend to outsource more of their logistics. As companies continue to focus on their core competencies, they find value in utilizing third party logistics (3PLs) to manage their supply chains. In 2010, the North American outsourced logistics market grew approximately 10%. We expect 2011 to be another year of outsourced logistics growth.
 
Operations
 
For the year ended December 31, 2010, our SCS business accounted for 24% of our consolidated revenue.
 
U.S.  At December 31, 2010, we had 106 SCS customer accounts in the U.S., most of which are large enterprises that maintain large, complex supply chains. In addition, the Total Logistic Control acquisition added 168 SCS customer accounts, which included 131 public warehousing customers. These customers operate in a variety of industries including automotive, electronics, high-tech, telecommunications, industrial, consumer goods, consumer packaged goods, paper and paper products, office equipment, food and beverage, and general retail industries. We continue to further diversify our customer base by expanding into new industry verticals, most recently retail and consumer packaged goods. 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. At December 31, 2010, managed warehouse space totaled approximately 14 million square feet for the U.S. and Puerto Rico. Along with those core customer specific locations, we also concentrate certain logistics expertise in locations not associated with specific customer sites. For example, our carrier procurement, contract management and freight bill audit and payment services groups operate out of our carrier management center, and our transportation optimization and execution groups operate out of our logistics center, both of which have locations in Novi, Michigan and Fort Worth, Texas.
 
Canada.  At December 31, 2010, we had 50 SCS customer accounts and managed warehouse space totaling approximately 1 million square feet. Given the proximity of this market to our U.S. and Mexico operations, the Canadian operations are highly coordinated with their U.S. and Mexico counterparts, managing cross-border transportation and freight movements.
 
Mexico.  We began operating in Mexico in the mid-1990s. At December 31, 2010, we operated and maintained 789 vehicles in Mexico. At December 31, 2010, we had 116 SCS customer accounts and managed


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warehouse space totaling approximately 3 million square feet. Our Mexican operations offer a full range of SCS services and manage approximately 1,400 border crossings each month between Mexico and the U.S. and Canada, often highly integrated with our distribution and transportation operations.
 
Asia.  We began operating in Asia in 2000. At December 31, 2010, we had 32 SCS customer accounts and managed warehouse space totaling approximately 320,000 square feet. Asia is a key component to our retail strategy. With the 2008 acquisition of CRSA Logistics and Transpacific Container Terminals, we were able to gain significant presence in Asia. We now have a network of owned and agent offices throughout Asia, with headquarters in Shanghai. We also entered into a joint venture with a partner in Asia to provide export consolidation services to North American retailers and other companies importing from Asia.
 
SCS Product Offerings
 
Dedicated Contract Carriage.  Although offered as a stand-alone service, dedicated contract carriage can also be offered as part of an integrated supply chain solution to our customers. The DCC offerings combine the equipment, maintenance and administrative services of a full service lease with drivers and additional services. This combination provides 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. Our DCC solution offers a high degree of specialization to meet the needs of customers with sophisticated service requirements such as tight delivery windows, high-value or time-sensitive freight, closed-loop distribution, multi-stop shipments, specialized equipment or integrated transportation needs. For the year ended December 31, 2010, approximately 44% of our SCS revenue was related to dedicated contract carriage services.
 
Transportation Management.  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 optimization, load scheduling and delivery confirmation through a series of technological and web-based solutions. Our transportation consultants, including our freight brokerage department, focus on carrier procurement of all modes of transportation with an emphasis on truck-based transportation, rate negotiation and freight bill audit and payment services. In addition, our SCS business provides customers as well as our FMS and DCC businesses with capacity management services that are designed to meet backhaul opportunities and minimize excess miles. For the year ended December 31, 2010, we purchased and/or executed over $3.7 billion in freight moves on our customers behalf. For the year ended December 31, 2010, transportation management solutions accounted for 13% of our SCS revenue.
 
Distribution Management.  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 distribution facilities. Services within the facilities generally include managing the flow of goods from the receiving function to the shipping function, coordinating warehousing and transportation for inbound and outbound material flows, handling import and export for international shipments, coordinating just-in-time replenishment of component parts to manufacturing and final assembly and providing shipments to customer distribution centers or end-customer delivery points. Additional value-added services such as light assembly of components into defined units (kitting), packaging and refurbishment are also provided. For the year ended December 31, 2010, distribution management solutions accounted for 38% of our SCS revenue.
 
Professional Services.  Our SCS business offers a variety of knowledge-based services that support every aspect of a customer’s supply chain. Our SCS professionals are available to evaluate a customer’s existing supply chain to identify inefficiencies, as well as opportunities for integration and improvement. Once the assessment is complete, we work with the customer to develop a supply chain strategy that will create the most value for the customer and their target clients. Once a customer has adopted a supply chain strategy, our SCS logistics team, supported by functional experts, and representatives from our information technology, real estate and finance groups work together to design a strategically focused supply chain solution. The solution may include both a network design that sets forth the number, location and function of key components of the network and a transportation solution that optimizes the mode or modes of transportation and route selection. In addition to providing the distribution and transportation expertise necessary to implement the supply chain


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solution, our SCS representatives can coordinate and manage all aspects of the customer’s supply chain provider network to assure consistency, efficiency and flexibility. For the year ended December 31, 2010, knowledge-based professional services accounted for 5% of our SCS revenue.
 
SCS Business Strategy
 
Our SCS business strategy is to offer our customers differentiated functional execution, and proactive solutions from deep expertise in key industry verticals. The strategy revolves around the following interrelated goals and priorities:
 
  •   Further diversifying our customer base through expansion with key industry verticals;
 
  •   Developing services specific to the needs of the retail and consumer packaged goods industry;
 
  •   Providing customers with a differentiated quality of service through reliable and flexible supply chain solutions;
 
  •   Creating a culture of innovation that fosters new solutions for our customers’ supply chain needs;
 
  •   Focusing on continuous improvement and standardization; and
 
  •   Training and developing employees to share best practices and improve talent.
 
Competition
 
In the SCS business segment, we compete with a large number of companies providing similar services, each of which has a different set of core competencies. We compete with a handful of large, multi-service companies across all of our service offerings and industries. We also compete against other companies only on a specific service offering (for example, in transportation management or distribution management) or in a specific industry. We face different competitors in each country or region where they may have a greater operational presence. Competitive factors include price, service, market knowledge, expertise in logistics-related technology, and overall performance (e.g. timeliness, accuracy, and flexibility).
 
Acquisitions
 
On December 31, 2010, we completed the acquisition of Total Logistic Control (TLC). TLC is a leading provider of comprehensive supply chain solutions to food, beverage, and consumer packaged goods manufacturers with significant supply chains in the U.S. TLC provides clients a broad suite of end-to-end services, including distribution management, contract packaging services and solutions engineering. TLC’s clients consist of local, regional, national, and international firms engaged in food and beverage manufacturing, consumer and wholesale distribution. TLC operates 34 facilities comprising 10.6 million square feet of dry and temperature-controlled warehousing across 13 states.
 
TLC compliments our strategic initiative to develop a new industry group focused on the consumer packaged goods industry. TLC’s leading capabilities in the areas of packaging and warehousing, including temperature-controlled facilities, will continue to be at the center of our consumer packaged goods offering.
Dedicated Contract Carriage
 
Value Proposition
 
Through our DCC business segment, we combine the equipment, maintenance and administrative services of a full service lease with drivers and additional services to provide a customer with a dedicated transportation solution that is designed to increase their competitive position, improve risk management and integrate their transportation needs with their overall supply chain. Such additional services include routing and scheduling, fleet sizing, safety, regulatory compliance, risk management, technology and communication systems support including on-board computers, and other technical support. These additional services allow us to address, on behalf of our customers, high service levels, efficient routing and the labor issues associated


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with maintaining a private fleet of vehicles, such as driver turnover, government regulation, including hours of service regulations, DOT audits and workers’ compensation. Our DCC solution offers a high degree of specialization to meet the needs of customers with sophisticated service requirements such as tight delivery windows, high-value or time-sensitive freight, closed-loop distribution, multi-stop shipments, specialized equipment or integrated transportation needs.
 
Market Trends
 
The U.S. dedicated contract carriage market is estimated to be $13 billion. This market is affected by many of the trends that impact our FMS business, including the tightening of capacity in the current U.S. trucking market. The administrative requirements 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 and driver management. This is expected to become even more significant in light of Compliance, Safety, Accountability (CSA) 2010 regulatory changes. The CSA 2010 regulatory changes will also put pressure on the availability of qualified truck drivers which continues to lag market requirements. 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 that are offered as part of our DCC product.
 
Operations/Product Offerings
 
For the year ended December 31, 2010, our DCC business accounted for 10% of our consolidated revenue. At December 31, 2010, we had 154 DCC customer accounts in the U.S. Because it is highly customized, our DCC product is particularly attractive to companies that operate in industries that have time-sensitive deliveries or special handling requirements, as well as to companies who require specialized equipment. Because DCC accounts typically operate in a limited geographic area, most of the drivers assigned to these accounts are short haul drivers, meaning they return home at the end of each work day. Although a significant portion of our DCC operations are located at customer facilities, our DCC business utilizes and benefits from our extensive network of FMS facilities.
 
In order to customize an appropriate DCC transportation solution for our customers, our DCC logistics specialists perform a transportation analysis using advanced logistics planning and operating tools. Based on this analysis, they formulate a logistics design that includes the routing and scheduling of vehicles, the efficient use of vehicle capacity and overall asset utilization. The goal of the plan is to create a distribution system that optimizes freight flow while meeting a customer’s service goals. A team of DCC transportation specialists can then implement the plan by leveraging the resources, expertise and technological capabilities of both our FMS and SCS businesses.
 
To the extent a distribution plan includes multiple modes of transportation (air, rail, sea and highway), our DCC team, in conjunction with our SCS transportation specialists, selects appropriate transportation modes and carriers, places the freight, monitors carrier performance and audits billing. In addition, through our SCS business, we can reduce costs and add value to a customer’s distribution system by aggregating orders into loads, looking for shipment consolidation opportunities and organizing loads for vehicles that are returning from their destination point back to their point of origin (backhaul).
 
DCC Business Strategy
 
Our DCC business strategy is to focus on customers who need specialized equipment, specialized handling or integrated services. This strategy revolves around the following interrelated goals and priorities:
 
  •   Increase market share with customers in the energy and utility, metals and mining, retail, construction, healthcare products, and food and beverage industries;
 
  •   Leverage the support and talent of the FMS sales team in a joint sales program;


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  •   Align DCC business with other SCS product lines to create revenue opportunities and improve operating efficiencies in both segments; and
 
  •   Improve competitiveness in the non-specialized and non-integrated customer segments.
 
Competition
 
Our DCC business segment competes with truckload carriers and other dedicated providers servicing on a national, regional and local level. Competitive factors include price, equipment, maintenance, service and geographic coverage and driver and operations expertise. We are able to differentiate the DCC product offering by leveraging FMS and integrating the DCC services with those of SCS to create a more comprehensive transportation solution for our customers. Our strong safety record and focus on customer service enable us to uniquely meet the needs of customers with high-value products that require specialized handling in a manner that differentiates us from truckload carriers.
 
ADMINISTRATION
 
Our financial administrative functions for the U.S. and Canada, including credit, billing and collections are consolidated into our Shared Services Center operations, a centralized processing center located in Alpharetta, Georgia. Our Shared Services Center also manages contracted third parties providing administrative finance and support services outside of the U.S. in order to reduce ongoing operating expenses and maximize our technology resources. This centralization results in more efficient and consistent centralized processing of selected administrative operations. Certain administrative functions are also performed at the Shared Services Center for our customers. The Shared Services Center’s main objectives are to reduce ongoing annual administrative costs, enhance customer service through process standardization, create an organizational structure that will improve market flexibility and allow future reengineering efforts to be more easily attained at lower implementation costs.
 
REGULATION
 
Our business is subject to regulation by various federal, state and foreign governmental entities. The Department of Transportation and various federal and 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 carbon controls and reporting, engine exhaust emissions, drivers’ hours of service, security and ergonomics.
 
The Environmental Protection Agency has issued regulations that require progressive reductions in exhaust emissions from certain diesel engines from 2007 through 2010. Emissions standards require reductions in the sulfur content of diesel fuel since June 2006. Also, the first phase of progressively stringent emissions standards relating to emissions after-treatment devices was introduced on newly-manufactured engines and vehicles utilizing engines built after January 1, 2007. The second phase, which required an additional after treatment system, became effective January 1, 2010.
 
ENVIRONMENTAL
 
We have always been committed to sound environmental practices that reduce risk and build value for us and our customers. We have a history of adopting “green” designs and processes because they are efficient, cost effective transportation solutions that improve our bottom line and bring value to our customers. We adopted our first worldwide Environmental Policy mission in 1991 and have updated it periodically as


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regulatory and customer needs have changed. 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. We published our first Corporate Responsibility Report (CSR) in 2008 which details our sustainable business practices and environmental strategies to improve energy use, fuel costs and reduce overall carbon emissions. Currently there is no global carbon disclosure requirement for reporting emissions. However, for the past three years, we have participated in the Carbon Disclosure Project (CDP), voluntarily disclosing direct and indirect emissions resulting from our operations. Both of these reports are publicly available on Ryder’s Green Center at http://www.Ryder.com/greencenter. The Green Center provides all stakeholders information on our key environmental programs and initiatives.
 
SAFETY
 
Our safety culture is founded upon a core commitment to the safety, health and well-being of our employees, customers, and the community, a commitment that made us an industry leader in safety throughout our history.
 
Safety is an integral part of our business strategy because preventing injury improves employee quality of life, eliminates service disruptions to our customers, increases efficiency and customer satisfaction. As a core value, our focus on safety is a daily regimen, reinforced by many safety programs and continuous operational improvement and supported by a talented and dedicated safety organization.
 
Training is a critical component of our safety program. Monthly safety training topics delivered by location safety committees cover specific and relevant safety topics and managers receive annual safety leadership training. Regular safety behavioral observations are conducted by managers throughout the organization everyday and remedial training takes place on-the-spot and at every location with a reported injury. We also deliver comprehensive suite of highly interactive training lessons through Ryder Pro-TREAD to each driver individually over the internet.
 
Our safety policies require that all managers, supervisors and employees incorporate processes in all aspects of our business. Monthly safety scorecards are tracked and reviewed by management for progress toward key safety objectives. Our proprietary web-based safety tracking system, RyderStar, delivers proactive safety programs tailored to every location and helps measure safety activity effectiveness.
 
EMPLOYEES
 
At December 31, 2010, we had approximately 25,900 full-time employees worldwide, of which 24,600 were employed in North America, 1,000 in Europe and 300 in Asia. We have approximately 13,800 hourly employees in the U.S., approximately 2,900 of which are organized by labor unions. Those employees organized by labor unions are principally represented by the International Brotherhood of Teamsters, the International Association of Machinists and Aerospace Workers, and the United Auto Workers, and their wages and benefits are governed by 99 labor agreements that are renegotiated periodically. Some of the businesses in which we currently engage have experienced a material work stoppage, slowdown or strike. We consider that our relationship with our employees is good.


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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 14, 2010 in conjunction with Ryder’s 2010 Annual Meeting. They all hold such offices, at the discretion of the Board of Directors, until their removal, replacement or retirement.
 
             
Name   Age   Position
 
Gregory T. Swienton
    61     Chairman of the Board and Chief Executive Officer
Art A. Garcia
    49     Executive Vice President and Chief Financial Officer
Robert D. Fatovic
    45     Executive Vice President, Chief Legal Officer and Corporate Secretary
Cristina A. Gallo-Aquino
    37     Vice President and Controller
Gregory F. Greene
    51     Executive Vice President and Chief Administrative Officer
Robert E. Sanchez
    45     President, Global Fleet Management Solutions
John H. Williford
    54     President, Global Supply Chain Solutions
 
Gregory T. Swienton has been Chairman since May 2002 and Chief Executive Officer since November 2000. He also served as President from June 1999 to June 2005. Before joining Ryder, Mr. Swienton was Senior Vice President of Growth Initiatives of Burlington Northern Santa Fe Corporation (BNSF) and before that Mr. Swienton was BNSF’s Senior Vice President, Coal and Agricultural Commodities Business Unit.
 
Art A. Garcia has served as Executive Vice President and Chief Financial Officer since September 2010. Previously, Mr. Garcia served as Senior Vice President and Controller since October 2005 and as Vice President and Controller since February 2002. Mr. Garcia joined Ryder in December 1997 and has held various positions within Corporate Accounting.
 
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.
 
Cristina A. Gallo-Aquino has served as Vice President and Controller since September 2010. Previously, Ms. Gallo-Aquino served as Assistant Controller from November 2009 to September 2010, where she was responsible for Ryder’s Corporate Accounting, Benefits Accounting and Payroll Accounting departments. Ms. Gallo-Aquino joined Ryder in 2004 and has held various positions within Corporate Accounting.
 
Gregory F. Greene has served as Executive Vice President since December 2006, as Chief Human Resources Officer since February 2006 and as Chief Administrative Officer since September 2010. Previously, Mr. Greene served as Senior Vice President, Strategic Planning and Development from April 2003. Mr. Greene joined Ryder in August 1993 and has since held various positions within Human Resources.
 
Robert E. Sanchez has served as President, Global Fleet Management Solutions since September 2010. Previously, Mr. Sanchez has served as Executive Vice President and Chief Financial Officer since October 2007. He also previously served as Executive Vice President of Operations, U.S. Fleet Management Solutions from October 2005 to October 2007 and as Senior Vice President and Chief Information Officer from January 2003 to October 2005. Mr. Sanchez joined Ryder in 1993 and has held various positions.
 
John H. Williford has served as President, Global Supply Chain Solutions since June 2008. Prior to joining Ryder, Mr. Williford founded and served as President and Chief Executive Officer of Golden Gate Logistics LLC from 2006 to June 2008. From 2002 to 2005, he served as President and Chief Executive Officer of Menlo Worldwide, Inc., the supply chain business of CNF, Inc. From 2005 to 2006, Mr. Williford was engaged as an advisor to Menlo Worldwide subsequent to the sale of Menlo Forwarding to United Parcel Service.


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FURTHER INFORMATION
 
For further discussion concerning our business, see the information included in Items 7 and 8 of this report. Industry and market data used throughout Item 1 was obtained through a compilation of surveys and studies conducted by industry sources, consultants and analysts.
 
We make available free of charge through the Investor Relations page on our website at www.ryder.com our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.
 
In addition, our Corporate Governance Guidelines, Principles of Business Conduct (including our Finance Code of Conduct), and Board committee charters are posted on the Corporate Governance page of our website at www.ryder.com.
 
ITEM 1A. RISK FACTORS
 
In addition to the factors discussed elsewhere in this report, the following are some of the important factors that could affect our business.
 
Our operating and financial results may fluctuate due to a number of factors, many of which are beyond our control.
 
Our annual and quarterly operating and financial results are affected by a number of economic, regulatory and competitive factors, including:
 
  •   changes in current financial, tax or regulatory requirements that could negatively impact the leasing market;
 
  •   our inability to obtain expected customer retention levels or sales growth targets;
 
  •   our inability to integrate acquisitions as projected, achieve planned synergies or retain customers of companies we acquire;
 
  •   unanticipated interest rate and currency exchange rate fluctuations;
 
  •   labor strikes, work stoppages, driver shortages;
 
  •   higher costs to procure drivers and high driver turnover rates affecting our customers;
 
  •   sudden changes in fuel prices and fuel shortages;
 
  •   relationships with and competition from vehicle manufacturers;
 
  •   changes in accounting rules, estimates, assumptions and accruals, including changes in lease accounting that could impact customers’ leasing decisions;
 
  •   increases in healthcare costs resulting in higher insurance costs;
 
  •   outages, system failures or delays in timely access to data in legacy information technology systems that support key business processes; and
 
  •   reputational risk and other detrimental business consequences in the U.S. and internationally associated with employees, customers, agents, suppliers or other persons using our supply chain or assets to commit illegal acts, including the use of company assets for terrorist activities.
 
Changes in economic conditions could have an adverse effect on the profitability of our business.
 
A decline in economic activity can adversely affect demand for any of our businesses, thus reducing our revenue and earnings. The freight recession caused our revenues to decline as FMS customers ran fewer miles with their fleets and SCS customers had lower freight volumes. The most recent decline in economic


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conditions has caused some of our full service lease customers to downsize their existing fleets and/or extend instead of renew their leases. Our profitability has been impacted by higher maintenance costs on an aging fleet. Our customers remain cautious about entering into long-term leases. Challenging economic and market conditions may also result in:
 
  •   increased competition for fewer projects and sales opportunities;
 
  •   pricing pressure that may adversely affect revenue and gross margin;
 
  •   customer financial difficulty and increased risk of uncollectible accounts receivable;
 
  •   diminished liquidity and credit availability resulting in higher short-term borrowing costs and more stringent borrowing terms;
 
  •   difficulty forecasting, budgeting and planning due to limited visibility into the spending plans of current or prospective customers;
 
  •   fleet downsizing to match demand which could adversely impact profitability;
 
  •   higher overhead costs as a percentage of revenue;
 
  •   increased risk of charges relating to asset impairments, including goodwill and other intangible assets; and
 
  •   increased risk of declines in the residual values of our vehicles.
 
In 2010, we began to see signs of a slow, uneven economic recovery. Our commercial rental and used vehicle sales performance improved significantly from the prior year and we saw an increase in the miles run per vehicle. However, we are uncertain whether the recent improvements in miles run and demand for commercial rental will continue and whether we will be able to maintain our current commercial rental rates, which increased this year due to customer demand. Uncertainty and lack of customer confidence around macroeconomic and industry conditions may continue to impact the spending and financial position of our customers.
 
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, technology changes and sudden changes in supply and demand together with other market factors beyond our control vary from year to year and from vehicle to vehicle, making it difficult to accurately predict residual values used in calculating our depreciation expense. Although we have developed disciplines related to the management and maintenance of our vehicles that are designed to prevent these losses, there is no assurance that these practices will sufficiently reduce the residual risk. For a detailed discussion on our accounting policies and assumptions relating to depreciation and residual values, please see the section titled “Critical Accounting Estimates — Depreciation and Residual Value Guarantees” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Our profitability could be adversely impacted by our inability to maintain appropriate commercial rental utilization rates through our asset management initiatives.
 
We typically do not purchase vehicles for our full service lease product line until we have an executed contract with a customer. In our commercial rental product line, however, we do not purchase vehicles against specific customer contracts. Rather, we purchase vehicles and optimize the size and mix of the commercial rental fleet based upon our expectations of overall market demand. 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 market demand in order to drive the highest levels of utilization and revenue per unit. We employ a sales force and operations


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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 relatively small number of customers.
 
During 2010, sales to our top ten SCS customers representing all of the industry groups we service, accounted for 65% of our SCS total revenue and 64% of our SCS operating revenue (revenue less subcontracted transportation). Additionally, approximately 43% of our global SCS revenue is from the automotive industry and is directly impacted by automotive vehicle production. The loss of any of these customers or a significant reduction in the services provided to any of these customers could impact our domestic and international operations and adversely affect our SCS financial results. In addition, our largest SCS customers can exert downward pricing pressure and often require modifications to our standard commercial terms. While we believe our ongoing cost reduction initiatives have helped mitigate the effect of price reduction pressures from our SCS customers, there is no assurance that we will be able to maintain or improve profitability in those accounts. In 2010, we further diversified our customer base with the acquisition of TLC, which is concentrated in the consumer packaged goods industry. While we continue to focus our efforts on diversifying our customer base we may not be successful in doing so in the short-term.
 
Our profitability could be negatively impacted if the key assumptions and pricing structure of our SCS contracts prove to be invalid.
 
Substantially all of our SCS services are provided under contractual arrangements with our customers. Under most of these contracts, all or a portion of our pricing is based on certain assumptions regarding the scope of services, production volumes, operational efficiencies, the mix of fixed versus variable costs, productivity and other factors. If, as a result of subsequent changes in our customers’ business needs or operations or market forces that are outside of our control, these assumptions prove to be invalid, we could have lower margins than anticipated. Although certain of our contracts provide for renegotiation upon a material change, there is no assurance that we will be successful in obtaining the necessary price adjustments.
 
We operate in a highly competitive industry and our business may suffer if we are unable to adequately address potential downward pricing pressures and other competitive factors.
 
Numerous competitive factors could impair our ability to maintain our current profitability. These factors include the following:
 
  •   advances in technology require increased investments to remain competitive, and our customers may not be willing to accept higher prices to cover the cost of these investments;
 
  •   we compete with many other transportation and logistics service providers, some of which have greater capital resources than we do;
 
  •   some of our competitors periodically reduce their prices to gain business, which may limit our ability to maintain or increase prices; and
 
  •   because cost of capital is a significant competitive factor, any increase in either our debt or equity cost of capital as a result of reductions in our debt rating or stock price volatility could have a significant impact on our competitive position.
 
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 Department of Homeland Security and U.S. Customs Service, the Environmental Protection Agency or other authorities,


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relating to the hours of service that our drivers may provide in any one-time period, homeland security, carbon emissions and reporting and other matters. Compliance with these regulations could substantially impair labor and equipment productivity and increase our costs. Recent changes in and ongoing development of data privacy laws may result in increased exposure relating to our data security costs in order to comply with new standards.
 
With respect to our international operations, we are subject to compliance with local laws and regulatory requirements in foreign jurisdictions, including local tax laws, and compliance with the Federal Corrupt Practices Act. Adherence to rigorous local laws and regulatory requirements may limit our ability to expand into certain international markets and result in residual liability for legal claims and tax disputes arising out of previously discontinued operations.
 
Regulations governing exhaust emissions that have been enacted over the last few years could adversely impact our business. The Environmental Protection Agency issued regulations that required progressive reductions in exhaust emissions from certain diesel engines from 2007 through 2010. Emissions standards require reductions in the sulfur content of diesel fuel since June 2006. Also, the first phase of progressively stringent emissions standards relating to emissions after-treatment devices was introduced on newly-manufactured engines and vehicles utilizing engines built after January 1, 2007. The second phase, which required an additional after-treatment system, became effective after January 1, 2010. Each of these requirements could result in higher prices for vehicles, diesel engines and fuel, which are passed on to our customers, as well as higher maintenance costs and uncertainty as to reliability of the new engines, all of which could, over time, increase our costs and adversely affect our business and results of operations. The new technology may also impact the residual values of these vehicles when sold in the future.
 
Volatility in assumptions and asset values related to our pension plans may reduce our profitability and adversely impact current funding levels.
 
We historically sponsored a number of defined benefit plans for employees in the U.S., U.K. and other foreign locations. In recent years, we made amendments to defined benefit plans which freeze the retirement benefits for non-grandfathered and certain non-union employees. Our major defined benefit plans are funded, with trust assets invested in a diversified portfolio. The cash contributions made to our defined benefit plans are required to comply with minimum funding requirements imposed by employee benefit and tax laws. The projected benefit obligation and assets of our global defined benefit plans as of December 31, 2010 were $1.74 billion and $1.43 billion, respectively. The difference between plan obligations and assets, or the funded status of the plans, is a significant factor in determining pension expense and the ongoing funding requirements of those plans. Macroeconomic factors, as well as changes in investment returns and discount rates used to calculate pension expense and related assets and liabilities can be volatile and may have an unfavorable impact on our costs and funding requirements. We also participate in twelve U.S. multi-employer pension (MEP) plans that provide defined benefits to employees covered by collective bargaining agreements. In the event that we withdraw from participation in one of these plans, then applicable law could require us to make an additional lump-sum contribution to the plan. Our withdrawal liability for any MEP plan would depend on the extent of the plan’s funding of vested benefits. Economic conditions have caused MEP plans to be significantly underfunded. If the financial condition of the MEP plans were to continue to deteriorate, participating employers could be subject to additional assessments. Although we have actively sought to control increases in these costs and funding requirements, there can be no assurance that we will succeed, and continued cost pressure could reduce the profitability of our business and negatively impact our cash flows.
 
We establish self-insurance reserves based on historical loss development factors, which could lead to adjustments in the future based on actual development experience.
 
We retain a portion of the accident risk under vehicle liability and workers’ compensation insurance programs. Our self-insurance accruals are based on actuarially estimated, undiscounted cost of claims, which includes claims incurred but not reported. While we believe that our estimation processes are well designed, every estimation process is inherently subject to limitations. Fluctuations in the frequency or severity of accidents make it difficult to precisely predict the ultimate cost of claims. The actual cost of claims can be


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different than the historical selected loss development factors because of safety performance, payment patterns and settlement patterns. 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.
 
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 lower quality drivers or face difficulty meeting customer demands, all of which could adversely affect our growth and profitability.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2. PROPERTIES
 
Our properties consist primarily of vehicle maintenance and repair facilities, warehouses and other real estate and improvements.
 
We maintain 624 FMS properties in the U.S., Puerto Rico and Canada; we own 394 of these and lease the remaining 230. Our FMS properties are primarily comprised of maintenance facilities generally including a repair shop, rental counter, fuel service island administrative offices, and used vehicle retail sales centers.
 
Additionally, we manage 182 on-site maintenance facilities, located at customer locations.
 
We also maintain 125 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 88 international locations (locations outside of the U.S. and Canada) for our international businesses. These locations are in the U.K., Luxembourg, Germany, Mexico, China and Singapore. The majority of these locations are leased and may be a repair shop, warehouse or administrative office.
 
Additionally, we maintain 8 U.S. locations primarily used for Central Support Services. These facilities are generally administrative offices, of which we own one and lease the remaining seven.
 
ITEM 3. LEGAL PROCEEDINGS
 
We are involved in various claims, lawsuits and administrative actions arising in the normal course of our businesses. Some involve claims for substantial amounts of money and/or claims for punitive damages. While any proceeding or litigation has an element of uncertainty, management believes that the disposition of such matters, in the aggregate, will not have a material impact on our consolidated financial condition or liquidity.
 
ITEM 4. REMOVED AND RESERVED
 


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PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Ryder Common Stock Prices
 
                         
            Dividends per
    Stock Price   Common
    High   Low   Share
 
2010
                       
First quarter
  $ 42.08       31.86       0.25  
Second quarter
    48.49       38.57       0.25  
Third quarter
    44.78       37.00       0.27  
Fourth quarter
    52.80       41.43       0.27  
                         
2009
                       
First quarter
  $ 41.24       19.00       0.23  
Second quarter
    32.89       23.47       0.23  
Third quarter
    43.18       24.09       0.25  
Fourth quarter
    46.58       35.91       0.25  
 
Our common shares are listed on the New York Stock Exchange under the trading symbol “R.” At January 31, 2011, there were 9,192 common stockholders of record and our stock price on the New York Stock Exchange was $48.08.


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Performance Graph
 
The following graph compares the performance of our common stock with the performance of the Standard & Poor’s 500 Composite Stock Index and the Dow Jones Transportation 20 Index for a five year period by measuring the changes in common stock prices from December 31, 2005 to December 31, 2010.
 
(PERFORMANCE GRAPH)
 
The stock performance graph assumes for comparison that the value of the Company’s Common Stock and of each index was $100 on December 31, 2005 and that all dividends were reinvested. Past performance is not necessarily an indicator of future results.


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Purchases of Equity Securities
 
The following table provides information with respect to purchases we made of our common stock during the three months ended December 31, 2010:
 
                                         
                            Approximate Dollar
 
                Total Number of
    Maximum Number
    Value That May
 
                Shares Purchased as
    of Shares That May
    Yet Be Purchased
 
    Total Number
    Average Price
    Part of Publicly
    Yet Be Purchased
    Under the
 
    of Shares
    Paid per
    Announced
    Under the Anti-Dilutive
    Discretionary
 
    Purchased(1)     Share     Program     Program(2)     Program(3)  
 
October 1 through October 31, 2010
    108,800     $ 44.00       105,000       1,583,239     $ 20,263,949  
November 1 through November 30, 2010
    552,244       43.97       549,444       1,438,795       2,423,909  
December 1 through December 31, 2010
    56,131       43.74       55,841       1,438,344        
                                         
Total
    717,175     $ 43.96       710,285                  
                                         
 
 
(1)   During the three months ended December 31, 2010, we purchased an aggregate of 6,890 shares of our common stock in employee-related transactions. Employee-related transactions may include: (i) shares of common stock delivered as payment for the exercise price of options exercised or to satisfy the option holders’ tax withholding liability associated with our share-based compensation programs and (ii) open-market purchases by the trustee of Ryder’s deferred compensation plans relating to investments by employees in our stock, one of the investment options available under the plans.
 
(2)   In December 2009, our Board of Directors authorized a share repurchase program intended to mitigate the dilutive impact of shares issued under our various employee stock, stock option and stock purchase plans. Under the December 2009 program, management is authorized to repurchase shares of common stock in an amount not to exceed the number of shares issued to employees under our various employee stock, stock option and stock purchase plans from December 1, 2009 through December 15, 2011. The December 2009 program limits aggregate share repurchases to no more than 2 million shares of Ryder common stock. Share repurchases of common stock are made periodically in open-market transactions and are subject to market conditions, legal requirements and other factors. Management may establish a prearranged written plan for the Company under Rule 10b5-1 of the Securities Exchange Act of 1934 as part of the December 2009 program, which allows for share repurchases during Ryder’s quarterly blackout periods as set forth in the trading plan. For the three months ended December 31, 2010, we repurchased and retired 144,895 shares under this program at an aggregate cost of $6.4 million.
 
(3)   In February 2010, our Board of Directors authorized a $100 million discretionary share repurchase program over a period not to exceed two years. Share repurchases of common stock were made periodically in open-market transactions and were subject to market conditions, legal requirements and other factors. Management established a prearranged written plan for the Company under Rule 10b5-1 of the Securities Exchange Act of 1934 as part of the February 2010 program, which allowed for share repurchases during Ryder’s quarterly blackout periods as set forth in the trading plan. For the three months ended December 31, 2010, we completed the program and repurchased and retired 565,390 shares at an aggregate cost of $24.9 million.


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Securities Authorized for Issuance under Equity Compensation Plans
 
The following table includes information as of December 31, 2010 about certain plans which provide for the issuance of common stock in connection with the exercise of stock options and other share-based awards.
 
                         
                Number of
 
                Securities
 
                Remaining
 
                Available for
 
    Number of
          Future Issuance
 
    Securities to be
          Under Equity
 
    Issued upon
    Weighted-Average
    Compensation
 
    Exercise of
    Exercise Price of
    Plans Excluding
 
    Outstanding
    Outstanding
    Securities
 
    Options, Warrants
    Options, Warrants
    Reflected in
 
Plans   and Rights     and Rights     Column (a)  
    (a)     (b)     (c)  
 
Equity compensation plans approved by security holders:
                       
Broad based employee stock plans
    4,116,254(1 )   $ 42.25(3 )     3,073,875  
Employee stock purchase plan
                1,139,805  
Non-employee directors’ stock plans
    165,689(2 )     33.29(3 )     41,471  
Equity compensation plans not approved by security holders
                 
                         
Total
    4,281,943     $ 42.16(3 )     4,255,151  
                         
 
 
(1) Includes 670,970 time-vested and performance-based restricted stock awards.
 
(2) Includes 128,189 restricted stock units.
 
(3) Weighted-average exercise price of outstanding options; excludes restricted stock awards and restricted stock units.


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ITEM 6. SELECTED FINANCIAL DATA
 
The following selected consolidated financial information should be read in conjunction with Items 7 and 8 of this report.
 
                                         
    Years ended December 31
    2010   2009   2008   2007   2006
    (Dollars and shares in thousands, except per share amounts)
 
Operating Data:
                                       
Revenue(1)
  $ 5,136,435       4,887,254       5,999,041       6,363,130       6,136,418  
Earnings from continuing operations
  $ 124,608       90,117       257,579       251,779       246,694  
Comparable earnings from continuing operations(2)
  $ 116,988       94,630       267,144       248,227       243,618  
Net earnings(2)
  $ 118,170       61,945       199,881       253,861       248,959  
Per Share Data:
                                       
Earnings from continuing operations — Diluted(2)
  $ 2.37       1.62       4.51       4.19       3.99  
Comparable earnings from continuing operations — Diluted(2)
  $ 2.22       1.70       4.68       4.13       3.94  
Net earnings — Diluted(3)
  $ 2.25       1.11       3.50       4.22       4.03  
Cash dividends
  $ 1.04       0.96       0.92       0.84       0.72  
Book value(4)
  $ 27.44       26.71       24.17       32.52       28.34  
Financial Data:
                                       
Total assets
  $ 6,652,374       6,259,830       6,689,508       6,854,649       6,828,923  
Average assets(5)
  $ 6,366,647       6,507,432       6,924,342       6,914,060       6,426,546  
Return on average assets (%)(5)
    1.9       1.0       2.9       3.7       3.9  
Long-term debt
  $ 2,326,878       2,265,074       2,478,537       2,553,431       2,484,198  
Total debt
  $ 2,747,002       2,497,691       2,862,799       2,776,129       2,816,943  
Shareholders’ equity(4)
  $ 1,404,313       1,426,995       1,345,161       1,887,589       1,720,779  
Debt to equity(%)(4)
    196       175       213       147       164  
Average shareholders’ equity(4),(5)
  $ 1,401,681       1,395,629       1,778,489       1,790,814       1,610,328  
Return on average shareholders’ equity(%)(4),(5)
    8.4       4.4       11.2       14.2       15.5  
Adjusted return on average capital(%)(6)
    4.8       4.1       7.3       7.4       7.9  
Net cash provided by operating activities of continuing operations
  $ 1,028,034       984,956       1,248,169       1,096,559       852,466  
Free cash flow(7)
  $ 257,574       614,090       340,665       380,269       (438,612 )
Capital expenditures paid
  $ 1,070,092       651,953       1,230,401       1,304,033       1,692,719  
Other Data:
                                       
Average common shares — Diluted
    51,884       55,094       56,539       59,728       61,478  
Number of vehicles — Owned and leased
    148,700       152,400       163,400       160,700       167,200  
Average number of vehicles — Owned and leased
    150,700       159,500       161,500       165,400       164,400  
Number of employees
    25,900       22,900       28,000       28,800       28,600  
 
 
(1) Effective January 1, 2008, our contractual relationship with a significant customer changed, and we determined, after formal review of the terms and conditions of the services, we are acting as an agent based on the revised terms of the agreement. As a result, the amount of total revenue and subcontracted transportation expense decreased by $640 million in 2008 due to the reporting of revenue net of subcontracted transportation expense for this particular customer contract.
 
(2) Refer to the section titled “Overview” and “Non-GAAP Financial Measures” in Item 7 of this report for a reconciliation of comparable earnings to net earnings.
 
(3) Net earnings in 2010, 2009, 2008, 2007 and 2006 included (losses) earnings from discontinued operations of $(6) million, or $(0.12) per diluted common share, $(28) million, or $(0.51) per diluted common share, $(58) million, or $(1.01) per diluted common share, $2 million, or $0.03 per diluted common share, and $2 million, or $0.04 per diluted common share, respectively.
 
(4) Shareholders’ equity at December 31, 2010, 2009, 2008, 2007 and 2006 reflected after-tax equity charges of $423 million, $412 million, $480 million, $148 million, and $201 million, respectively, related to our pension and postretirement plans.
 
(5) Amounts were computed using an 8-point average based on quarterly information.
 
(6) Our adjusted return on capital (ROC) represents the rate of return generated by the capital deployed in our business. We use ROC as an internal measure of how effectively we use the capital invested (borrowed or owned) in our operations. Refer to the section titled “Non-GAAP Financial Measures” in Item 7 of this report for a reconciliation of return on average shareholders’ equity to adjusted return on average capital.
 
(7) Refer to the section titled “Financial Resources and Liquidity” in Item 7 of this report for a reconciliation of net cash provided by operating activities to free cash flow.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with our consolidated financial statements and related notes contained in Item 8 of this report on Form 10-K. The following MD&A describes the principal factors affecting results of operations, financial resources, liquidity, contractual cash obligations, and critical accounting estimates.
 
OVERVIEW
 
Ryder System, Inc. (Ryder) is a global leader in transportation and supply chain management solutions. Our business is divided into three business segments, which operate in highly competitive markets. Our customers select us based on numerous factors including service quality, price, technology, and service offerings. As an alternative to using our services, customers may choose to provide these services for themselves, or may choose to obtain similar or alternative services from other third-party vendors. Our customer base includes enterprises operating in a variety of industries including automotive, food service, electronics, transportation, grocery, lumber and wood products, and home furnishing.
 
The Fleet Management Solutions (FMS) business segment is our largest segment providing full service leasing, contract maintenance, contract-related maintenance, and commercial rental of trucks, tractors and trailers to customers principally in the U.S., Canada and the U.K. FMS revenue and assets in 2010 were $3.40 billion and $5.94 billion, respectively, representing 66% of our consolidated revenue and 89% of consolidated assets.
 
The Supply Chain Solutions (SCS) business segment provides comprehensive supply chain consulting including distribution and transportation services throughout North America and Asia. SCS revenue in 2010 was $1.25 billion, representing 24% 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 2010 was $483 million, representing 10% of our consolidated revenue.
 
In 2010, we had a very successful year. In what continues to be an uneven, slow economic recovery, we achieved revenue growth and very good earnings leverage, including a 38% increase in net earnings from continuing operations and a 24% increase in comparable earnings from continuing operations. Our steady progress throughout the year, culminating in a particularly strong fourth quarter, enabled Ryder to deliver an increase in total shareholder value. In Fleet Management Solutions, our commercial rental performance improved because of better pricing due to rising demand in the overall marketplace. Used vehicle sales results improved because of better pricing stemming from a lower supply of vehicles for sale in the marketplace and higher demand. Our full service lease product line continued to improve in miles driven per vehicle; however, customers remain cautious on entering long-term leases. Our Supply Chain solutions business delivered solid margins with particularly strong results from our high-tech and automotive accounts. Our solid balance sheet and strong cash flow enabled us to announce several strategic acquisitions which will help grow and expand capabilities in all three business segments. Additionally, our financial strength enabled us to continue repurchasing shares under the previously announced stock buyback programs and increase our annual dividend.
 
Total revenue was $5.14 billion, up 5% from $4.89 billion in 2009. Operating revenue (total revenue less FMS fuel and subcontracted transportation) was $4.16 billion in 2010, up 2%. Operating revenue increased primarily due to higher commercial rental revenue and favorable movements in foreign exchange rates partially offset by lower full service lease revenue.
 
Earnings from continuing operations increased to $125 million in 2010 from $90 million in 2009 and earnings per diluted common share from continuing operations increased to $2.37 from $1.62 in 2009. Earnings from continuing operations included certain items we do not consider indicative of our ongoing operations and have been excluded from our comparable earnings measure. The following discussion provides


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
a summary of the 2010 and 2009 special items which are discussed in more detail throughout our MD&A and within the Notes to Consolidated Financial Statements:
 
                         
    Continuing Operations  
    Earnings Before
          Diluted Earnings
 
    Income Taxes     Earnings     per Share  
    (Dollars in thousands,
 
    except per share amounts)  
 
2010
                       
Earnings/EPS from continuing operations
  $ 186,305     $ 124,608     $ 2.37  
• Tax benefit associated with settlement of prior tax year’s audits and the expiration of a statute of limitation
          (10,771 )     (0.21 )
• Gain on sale of an international asset previously impaired(1)
    (946 )     (946 )     (0.02 )
• Acquisition costs(1)
    4,097       4,097       0.08  
                         
Comparable earnings from continuing operations
  $ 189,456     $ 116,988     $ 2.22  
                         
2009
                       
Earnings/EPS from continuing operations
  $ 143,769     $ 90,117     $ 1.62  
• Restructuring and other charges
    6,406       4,176       0.08  
• Benefit associated with the reversal of reserves for uncertain tax positions due to the expiration of statutes of limitation in various jurisdictions
          (2,239 )     (0.04 )
• Benefit from a tax law change in Ontario, Canada
          (4,100 )     (0.07 )
• Charges related to impairment of international asset(1)
    6,676       6,676       0.12  
                         
Comparable earnings from continuing operations
  $ 156,851     $ 94,630     $ 1.70  
                         
 
 
(1) Refer to Note 26, “Other Items Impacting Comparability,” in the Notes to Consolidated Financial Statements.
 
Excluding the special items listed above, comparable earnings from continuing operations increased 24% to $117 million in 2010. Comparable earnings per diluted common share from continuing operations increased 31% to $2.22 in 2010. Results reflect higher earnings in our FMS and SCS business segments. The FMS earnings increase was driven by improved global commercial rental performance and used vehicle sales results. This increase was partially offset by lower full service lease performance resulting from higher maintenance costs on a relatively older fleet and the cumulative impact of customer fleet downsizings. SCS earnings increased due to improved operating performance, particularly in high-tech accounts and higher automotive volumes partially offset by higher compensation costs.
 
Free cash flow was $258 million in 2010 compared to $614 million in 2009. The decline was driven by higher capital expenditures. With our stronger earnings and positive cash flows, we repurchased a total of 3 million shares of common stock in 2010 for $123 million and made voluntary pension contributions of approximately $50 million. We also increased our annual dividend by 8% to $1.08 per share of common stock. In addition, during 2010 we paid $205 million to acquire Total Logistic Control.
 
Capital expenditures increased 78% to $1.09 billion in 2010 and reflects increased commercial rental spending to refresh and grow the fleet. Our debt balances increased 10% to $2.75 billion at December 31, 2010 due to acquisitions and higher vehicle capital spending levels. Our debt to equity ratio increased to 196% from 175% in 2009. Our total obligations (including off-balance sheet debt) to equity ratio also increased to 203% from 183% in 2009.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
2011 Outlook
 
We enter 2011 very well positioned to profitably grow the business. For 2011, we expect to see the continuation of many of the same positive trends we experienced in 2010. We plan to benefit from productivity initiatives and operational efficiencies in our FMS business. This benefit will be partially offset by higher maintenance costs as our fleet continues to age. Earnings per share growth is expected from continued improvement in commercial rental performance, the impact of acquisitions, continued strong used vehicle sales results and the benefit of 2010 stock repurchases.
 
Total revenue for the full-year 2011 is forecast to be $5.73 billion, which is an increase of 12% compared with 2010. In FMS, contractual leasing and maintenance revenue is expected to increase 2%. Commercial rental revenue is forecast to grow by 19%, driven by strong demand and higher pricing. Total SCS revenue is forecast to increase by 25% reflecting the impact of acquisitions. Total DCC revenue is expected to increase by 14% reflecting the impact of the Scully acquisition. See Note 3, “Acquisitions,” in the Notes to Consolidated Financial Statements for further discussion.
 
ITEMS AFFECTING COMPARABILITY BETWEEN PERIODS
 
Accounting Changes
 
See Note 2, “Accounting Changes,” for a discussion of the impact of changes in accounting standards.
 
ACQUISITIONS
 
On December 31, 2010, we acquired Total Logistic Control (TLC), which is a leading provider of comprehensive supply chain solutions to food, beverage, and consumer packaged goods (CPG) manufacturers in the U.S. TLC provides customers a broad suite of end-to-end services, including distribution management, contract packaging services and solutions engineering. This acquisition will enhance our SCS capabilities and growth prospects in the areas of packaging and warehousing, including temperature-controlled facilities.
 
We completed four FMS acquisitions from 2008 to 2009, under which we acquired a company’s fleet and contractual customers. The FMS acquisitions operate under Ryder’s name and complement our existing market coverage and service network. The results of these acquisitions have been included in our consolidated results since the dates of acquisition.
 
                         
            Contractual
   
Company Acquired   Date   Vehicles   Customers   Market
 
Edart Leasing LLC
  February 2, 2009     1,600       340     Northeast U.S.
Gordon Truck Leasing
  August 29, 2008     500       130     Pennsylvania
Gator Leasing, Inc. 
  May 12, 2008     2,300       300     Florida
Lily Transportation Corp. 
  January 11, 2008     1,600       200     Northeast U.S.
 
On December 19, 2008, we acquired substantially all of the assets of Transpacific Container Terminal Ltd. and CRSA Logistics Ltd. (CRSA) in Canada, as well as CRSA operations in Hong Kong and Shanghai, China. This strategic acquisition added complementary solutions to our SCS capabilities including consolidation services in key Asian hubs, as well as deconsolidation operations in Vancouver, Toronto and Montreal.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
FULL YEAR CONSOLIDATED RESULTS
 
                                         
    Years ended December 31   Change
                2010/
  2009/
    2010   2009   2008   2009   2008
    (Dollars in thousands)        
 
Earnings from continuing operations before income taxes
    $186,305       143,769       409,288       30 %     (65 )%
Provision for income taxes
    61,697       53,652       151,709       15       (65 )
                                         
Earnings from continuing operations
    124,608       90,117       257,579       38       (65 )
Loss from discontinued operations, net of tax
    (6,438 )     (28,172 )     (57,698 )     NM       NM  
                                         
Net earnings
    $118,170       61,945       199,881       91 %     (69 )%
                                         
Earnings (loss) per common share — Diluted
                                       
Continuing operations
    $       2.37       1.62       4.51       46 %     (64 )%
Discontinued operations
    (0.12 )     (0.51 )     (1.01 )     NM       NM  
                                         
Net earnings
    $       2.25       1.11       3.50       103 %     (68 )%
                                         
Weighted-average shares outstanding — Diluted
    51,884       55,094       56,539       (6 )%     (3 )%
                                         
 
Earnings from continuing operations before income taxes (NBT) increased 30% in 2010 to $186 million. Excluding restructuring and other items, comparable NBT increased 21% in 2010 to $189 million, and comparable earnings from continuing operations increased 24% to $117 million. The increase in comparable NBT and earnings from continuing operations reflects the impact of stronger results in our FMS and SCS business segments. FMS earnings increased due to improved global commercial rental performance and used vehicle sales results. This increase was partially offset by lower full service lease performance reflecting higher maintenance costs on a relatively older fleet and the cumulative impact of customer fleet downsizing. SCS earnings increased due to improved high-tech and global automotive industry volumes partially offset by higher compensation costs. Net earnings increased 91% in 2010 to $118 million or $2.25 per diluted common share. Net earnings in 2010 included losses from discontinued operations for SCS South America and Europe of $6 million or $0.12 per diluted common share. Earnings per share growth in 2010 exceeded the net earnings growth reflecting the impact of share repurchase programs.
 
NBT decreased 65% in 2009 to $144 million. Excluding restructuring and other items, comparable NBT declined 64% in 2009 to $157 million, and comparable earnings from continuing operations declined 65% to $95 million. The decrease in comparable NBT and earnings from continuing operations reflected significantly lower earnings in our FMS business segment because of a decline in commercial rental, full service lease and used vehicle sales as well as higher pension expense. NBT was also negatively impacted by lower global SCS automotive industry volumes. Net earnings decreased 69% in 2009 to $62 million or $1.11 per diluted common share. Net earnings in 2009 included losses from discontinued operations for SCS South America and Europe of $28 million or $0.51 per diluted common share.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
See subsequent discussion within “Full Year Consolidated Results” and “Full Year Operating Results by Business Segment” and refer to our Notes to Consolidated Financial Statements for other items impacting comparability related to discontinued operations, restructuring and other charges and income taxes.
 
                                         
    Years ended December 31   Change
                2010/
  2009/
    2010   2009   2008   2009   2008
    (Dollars in thousands)        
 
Revenue:
                                       
Fleet Management Solutions
    $3,712,153       3,567,836       4,454,251       4 %     (20 )%
Supply Chain Solutions
    1,252,251       1,139,911       1,429,632       10       (20 )
Dedicated Contract Carriage
    482,583       470,956       547,751       2       (14 )
Eliminations
    (310,552 )     (291,449 )     (432,593 )     (7 )     33  
                                         
Total
    $5,136,435       4,887,254       5,999,041       5 %     (19 )%
                                         
Operating revenue(1)
    $4,158,239       4,062,512       4,590,080       2 %     (11 )%
                                         
 
 
(1) We use operating revenue, a non-GAAP financial measure, to evaluate the operating performance of our businesses and as a measure of sales activity. FMS fuel services revenue net of related intersegment billings, which is directly impacted by fluctuations in market fuel prices, is excluded from the operating revenue computation as fuel is largely a pass-through to our customers for which we realize minimal changes in profitability during periods of steady market fuel prices. However, profitability may be positively or negatively impacted by increases or decreases in market fuel prices during a short period of time as customer pricing for fuel services is established based on market fuel costs. Subcontracted transportation revenue in our SCS and DCC business segments is excluded from the operating revenue computation as subcontracted transportation is largely a pass-through to our customers and we realize minimal changes in profitability as a result of fluctuations in subcontracted transportation. Refer to the section titled “Non-GAAP Financial Measures” for a reconciliation of total revenue to operating revenue.
 
Total revenue increased 5% to $5.14 billion in 2010 primarily due to higher fuel services revenue, operating revenue and subcontracted transportation. Operating revenue increased 2% to $4.16 billion in 2010 primarily due to higher commercial rental revenue and favorable movements in foreign exchange rates partially offset by lower full service lease revenue. Total and operating revenue in 2010 included a favorable foreign exchange impact of 0.9% due primarily to the strengthening of the Canadian dollar.
 
Total revenue decreased 19% to $4.89 billion in 2009 reflecting lower fuel services and operating revenue. Operating revenue decreased 11% to $4.06 billion in 2009 primarily due to lower commercial rental revenue and SCS automotive production volumes. To a lesser extent, operating revenue was also negatively impacted by lower SCS and DCC fuel pass-throughs, unfavorable foreign currency movements and lower FMS contractual revenues partially offset by the benefit of acquisitions. Total revenue in 2009 included an unfavorable foreign exchange impact of 1.4% due primarily to the weakening of the British pound and Mexican peso.
 
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 increase in eliminations in 2010 reflects primarily the pass-through of higher average fuel costs. The decrease in eliminations in 2009 reflects primarily the pass-through of lower average fuel costs.
 


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
                     
    Years ended December 31   Change
                2010/
  2009/
    2010   2009   2008   2009   2008
    (Dollars in thousands)        
 
Operating expense (exclusive of items shown separately)
  $2,441,924   2,229,539   2,959,518   10%   (25)%
Percentage of revenue
  48%   46%   49%        
 
Operating expense and operating expense as a percentage of revenue increased in 2010 primarily as a result of higher fuel costs and higher maintenance costs. The increase in fuel costs was driven by an increase in average U.S. fuel prices on lower fuel volumes. 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 growth in maintenance costs reflects the impact of an aging global fleet.
 
Operating expense decreased 25% to $2.23 billion in 2009 as a result of lower fuel costs. The decrease in fuel costs was due to lower average market prices and lower fuel volumes. The decrease was partially offset by higher maintenance costs and safety and insurance costs. The growth in safety and insurance costs reflects less favorable development in self-insured loss reserves. During 2010, 2009 and 2008, we recorded a (charge) benefit of $(3) million, $1 million, and $23 million, respectively, from development in estimated prior years’ self-insured loss reserves.
 
                     
    Years ended December 31   Change
                2010/
  2009/
    2010   2009   2008   2009   2008
    (Dollars in thousands)        
 
Salaries and employee-related costs
  $1,255,659   1,233,243   1,345,216   2%   (8)%
Percentage of revenue
  24%   25%   22%        
Percentage of operating revenue
  30%   30%   29%        
 
Salaries and employee-related costs increased 2% to $1.26 billion in 2010 primarily due to higher incentive-based compensation, unfavorable changes in foreign currency exchange rates and higher driver costs, partially offset by lower retirement plans expense. Average headcount, excluding discontinued operations, increased 1% in 2010. The number of employees at December 31, 2010 increased to approximately 25,900 compared to 22,900 (excluding those from discontinued operations) at December 31, 2009. The higher headcount was primarily due to the acquisition of TLC at the end of the year.
 
Pension expense totaled $42 million in 2010 compared to $66 million in 2009. The decrease in pension expense reflects reduced amortization of actuarial losses attributed to higher than expected return on pension assets in 2009 and the favorable impact from voluntary pension contributions made in the fourth quarter of 2009. We expect 2011 pension expense to decrease approximately $9 million primarily because of reduced amortization of actuarial losses attributed to higher than expected return on plan assets in 2010. Our 2011 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.
 
Salaries and employee-related costs decreased 8% to $1.23 billion in 2009 primarily due to lower headcount, favorable foreign exchange rate changes and lower incentive-based compensation and commissions partially offset by higher pension expense and the impact of acquisitions. Average headcount decreased 9% in 2009 compared with 2008. Pension expense increased by $65 million as a result of significant negative pension asset returns in 2008.
 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
                     
    Years ended December 31   Change
                2010/
  2009/
    2010   2009   2008   2009   2008
    (Dollars in thousands)        
 
Subcontracted transportation
  $261,325   198,860   233,106   31%   (15)%
Percentage of revenue
  5%   4%   4%        
 
Subcontracted transportation expense represents freight management costs on logistics contracts for which we purchase transportation from third parties. 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. Subcontracted transportation expense increased 31% to $261 million in 2010 as a result of increased freight volumes particularly in the automotive industry.
 
Subcontracted transportation expense decreased 15% to $199 million in 2009 as a result of decreased freight volumes.
 
                             
    Years ended December 31   Change
                2010/
  2009/
    2010   2009   2008   2009   2008
    (Dollars in thousands)        
 
Depreciation expense
  $833,841   881,216   836,149     (5 )%     5 %
Gains on vehicle sales, net
  (28,727)   (12,292)   (39,020)     134       (68 )
Equipment rental
  63,228   65,828   78,292     (4 )     (16 )
 
Depreciation expense relates primarily to FMS revenue earning equipment. Depreciation expense decreased 5% to $834 million in 2010 because of a smaller fleet as well as decreased write-downs of $26 million in the carrying value of vehicles held for sale. The decline was also impacted by a prior year impairment charge on a Singapore facility. The decrease in depreciation expense was partially offset by higher average vehicle investments as well as changes in both residual values of certain classes of our revenue earning equipment effective January 1, 2010 and accelerated depreciation for select vehicles expected to be sold by 2011. Depreciation expense increased 5% to $881 million in 2009 because of increased write-downs of $24 million in the carrying value of vehicles held for sale, accelerated depreciation of $10 million on certain classes of vehicles expected to be held for sale through 2010, the impact of acquisitions, higher average vehicle investments and impairment charges on a Singapore facility, partially offset by the impact of foreign exchange rates and a lower number of owned vehicles.
 
We periodically review and adjust residual values, reserves for guaranteed lease termination values and useful lives of revenue earning equipment based on current and expected operating trends and projected realizable values. See the section titled “Critical Accounting Estimates — Depreciation and Residual Value Guarantees” for further discussion. While we believe that the carrying values and estimated sales proceeds for revenue earning equipment are appropriate, there can be no assurance that deterioration in economic conditions or adverse changes to expectations of future sales proceeds will not occur, resulting in lower gains or losses on sales. In 2010 and 2009, we accelerated depreciation on certain classes of vehicles expected to be sold through 2011. The impact of this change increased depreciation by $5 million and $10 million in 2010 and 2009, respectively. At the end of each year, we complete 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 2008 review, the adjustment to depreciation was not significant for 2009. Based on the results of our 2009 analysis, we adjusted the residual values of certain classes of our revenue earning equipment effective January 1, 2010. The residual value changes decreased pre-tax earnings for 2010 by approximately $14 million compared with 2009. Based on the results of the 2010 review, we adjusted the residual values and useful lives of certain classes of revenue

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
earning equipment effective January 1, 2011. The changes will increase pre-tax earnings by approximately $5 million compared with 2010.
 
Gains on vehicle sales, net increased 134% to $29 million in 2010 due to higher average pricing on vehicles sold. Gains on vehicle sales, net decreased 68% to $12 million in 2009 due to lower average pricing on vehicles sold primarily in our used truck class.
 
Equipment rental consists primarily of rent expense for FMS revenue earning equipment under lease by us as lessee. Equipment rental decreased 4% to $63 million in 2010 primarily due to a lower number of leased vehicles partially offset by higher rental costs associated with investments in material handling equipment to support our SCS operations. Equipment rental decreased 16% to $66 million in 2009 because of a reduction in the average number of vehicles leased from third parties.
 
                             
    Years ended December 31   Change
                2010/
  2009/
    2010   2009   2008   2009   2008
    (Dollars in thousands)        
 
Interest expense
  $129,994   144,342   152,448     (10 )%     (5 )%
Effective interest rate
  5.2%   5.4%   5.3%                
 
Interest expense decreased 10% to $130 million in 2010 because of lower average debt balances and a lower effective interest rate. Interest expense decreased 5% to $144 million in 2009 because of lower average debt balances partially offset by a higher effective interest rate. A hypothetical 10 basis point change in short-term market interest rates would change annual pre-tax earnings by $0.7 million.
 
                         
    Years ended December 31
    2010   2009   2008
    (In thousands)
 
Miscellaneous (income) expense, net
    $(7,114 )     (3,657 )     2,564  
 
Miscellaneous (income) expense, net consists of investment (income) losses on securities held to fund certain benefit plans, interest income, (gains) losses from sales of property, foreign currency transaction (gains) losses, and non-operating items. Miscellaneous (income) expense, net improved $3 million in 2010 primarily due to gains from sales of property and a life insurance recovery partially offset by lower income on investment securities. Miscellaneous (income) expense, net improved $6 million in 2009 due to better market performance of our investment securities partially offset by lower foreign currency transaction gains in 2009.
 
                         
    Years ended December 31
    2010   2009   2008
    (In thousands)
 
Restructuring and other charges, net
    $ —       6,406       21,480  
 
See Note 5, “Restructuring and Other Charges,” in the Notes to Consolidated Financial Statements for further discussion around the charges related to these actions.
 
                                 
    Years ended December 31   Change
                2010/
  2009/
    2010   2009   2008   2009   2008
    (Dollars in thousands)        
 
Provision for income taxes
  $ 61,697     53,652   151,709     15 %     (65 )%
Effective tax rate from continuing operations
    33.1%     37.3%   37.1%                
 
The 2010 effective income tax rate benefited from the favorable settlement of domestic tax audits in 2010 and the reversal of reserves for uncertain tax positions due to the expiration of a statute of limitation. In the aggregate, these items reduced the effective rate by 5.7% of pre-tax earnings from continuing operations. The 2009 effective income tax rate benefited from enacted tax law changes in Ontario, Canada, the favorable settlement of a foreign tax audit and reversal of reserves for uncertain tax positions for which the statute of limitation in various jurisdictions had expired. In the aggregate, these items reduced the effective rate by 6.5%


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
of pre-tax earnings. The benefits in 2009 were partially offset by the impact of non-deductible expenses on lower pre-tax earnings from continuing operations. The 2008 effective income tax rate benefited from enacted tax law changes in Massachusetts and the reversal of reserves for uncertain tax positions, for which the statute of limitation in various jurisdictions had expired which, in the aggregate, totaled 3.3% of pre-tax earnings. The benefits in 2008 were partially offset by the adverse impact of non-deductible restructuring and other charges.
 
On December 17, 2010 and September 27, 2010, the U.S. enacted the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act, and the Small Business Job Act of 2010, respectively. These Acts expanded and extended bonus depreciation to qualified property placed in service during 2010 through 2012. The impact of these changes is expected to result in a net operating loss carryforward in 2011. In addition, these changes are expected to significantly reduce our U.S. federal tax payments through 2013.
 
                             
    Years ended December 31
    2010       2009   2008
    (In thousands)
 
Loss from discontinued operations, net of tax
  $ (6,438 )         (28,172 )     (57,698 )
 
Pre-tax loss from discontinued operations in 2010 primarily included exit costs related to a leased facility and adverse legal developments. Pre-tax loss from discontinued operations in 2009 and 2008 included operating losses of $11 million and $12 million, respectively. During 2009 and 2008, we also incurred $17 million and $47 million, respectively, of pre-tax restructuring and other charges (primarily exit-related) related to discontinued operations. See Note 4, “Discontinued Operations,” in the Notes to Consolidated Financial Statements for additional information.


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Table of Contents

 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
FULL YEAR OPERATING RESULTS BY BUSINESS SEGMENT
 
                                         
    Years ended December 31   Change
                2010/
  2009/
    2010   2009   2008   2009   2008
    (Dollars in thousands)        
 
Revenue:
                                       
Fleet Management Solutions
    $3,712,153       3,567,836       4,454,251       4 %     (20 )%
Supply Chain Solutions
    1,252,251       1,139,911       1,429,632       10       (20 )
Dedicated Contract Carriage
    482,583       470,956       547,751       2       (14 )
Eliminations
    (310,552 )     (291,449 )     (432,593 )     (7 )     33  
                                         
Total
    $5,136,435       4,887,254       5,999,041       5 %     (19 )%
                                         
Operating Revenue:
                                       
Fleet Management Solutions
    $2,846,532       2,817,733       3,038,923       1 %     (7 )%
Supply Chain Solutions
    1,004,962       955,409       1,207,523       5       (21 )
Dedicated Contract Carriage
    468,547       456,598       536,754       3       (15 )
Eliminations
    (161,802 )     (167,228 )     (193,120 )     3       13  
                                         
Total
    $4,158,239       4,062,512       4,590,080       2 %     (11 )%
                                         
NBT:
                                       
Fleet Management Solutions
    $   172,185       140,400       395,909       23 %     (65 )%
Supply Chain Solutions
    47,111       35,700       56,953       32       (37 )
Dedicated Contract Carriage
    30,966       37,643       49,628       (18 )     (24 )
Eliminations
    (19,275 )     (21,058 )     (31,803 )     8       34  
                                         
      230,987       192,685       470,687       20       (59 )
Unallocated Central Support Services
    (41,531 )     (35,834 )     (38,302 )     (16 )     6  
Restructuring and other charges, net and other items(1)
    (3,151 )     (13,082 )     (23,097 )     NM       NM  
                                         
Earnings from continuing operations before income taxes
    $   186,305       143,769       409,288       30 %     (65 )%
                                         
 
 
(1) See Note 5, “Restructuring and Other Charges” and Note 26, “Other Items Impacting Comparability,” in the Notes to Consolidated Financial Statements for a discussion of items excluded from our segment measure of profitability.
 
As part of management’s evaluation of segment operating performance, we define the primary measurement of our segment financial performance as “Net Before Taxes” (NBT) from continuing operations, which includes an allocation of CSS and excludes restructuring and other charges, net and other items we do not believe are representative of the ongoing operations of the segment.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
The following table provides a reconciliation of items excluded from our segment NBT measure to their classification within our Consolidated Statements of Earnings:
 
                             
    Consolidated
                 
    Statements of Earnings
  Years ended December 31  
Description   Line Item(1)   2010     2009     2008  
        (In thousands)  
 
Severance and employee-related costs(2)
  Restructuring   $       (2,206 )     (11,209 )
Contract termination costs(2)
  Restructuring                 (29 )
Early retirement of debt(2)
  Restructuring           (4,178 )      
Asset impairments(2)
  Restructuring           (22 )     (10,242 )
                             
Restructuring and other charges, net
              (6,406 )     (21,480 )
International asset impairment(3)
  Depreciation expense           (6,676 )     (1,617 )
Gain on sale of property(3)
  Miscellaneous income     946              
Acquisition costs(3)
  Operating expense     (4,097 )            
                             
Restructuring and other charges, net and other items
      $ (3,151 )     (13,082 )     (23,097 )
                             
 
 
(1) Restructuring refers to the “Restructuring and other charges, net;” and Miscellaneous income refers to “Miscellaneous (income) expense, net” on our Consolidated Statements of Earnings.
 
(2) See Note 5, “Restructuring and Other Charges,” in the Notes to Consolidated Financial Statements for additional information.
 
(3) See Note 26, “Other Items Impacting Comparability” in the Notes to Consolidated Financial Statements for additional information.
 
Our FMS segment leases revenue earning equipment and provides fuel, maintenance and other ancillary services to our SCS and DCC segments. Inter-segment revenue and NBT are accounted for at rates similar to those executed with third parties. NBT related to inter-segment equipment and services billed to customers (equipment contribution) are included in both FMS and the business segment which served the customer and then eliminated (presented as “Eliminations”).
 
The following table sets forth equipment contribution included in NBT for our SCS and DCC segments:
 
                         
    Years ended December 31  
    2010     2009     2008  
    (In thousands)  
 
Equipment Contribution:
                       
Supply Chain Solutions
  $ 8,426       9,461       16,701  
Dedicated Contract Carriage
    10,849       11,597       15,102  
                         
Total
  $ 19,275       21,058       31,803  
                         
 
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 29, “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.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
Fleet Management Solutions
 
                                         
    Years ended December 31   Change
                2010/
  2009/
    2010   2009   2008   2009   2008
    (Dollars in thousands)        
 
Full service lease
    $1,934,346       1,989,676       2,041,513       (3 )%     (3 )%
Contract maintenance
    158,784       167,182       168,157       (5 )     (1 )
                                         
Contractual revenue
    2,093,130       2,156,858       2,209,670       (3 )     (2 )
Contract-related maintenance
    160,871       163,306       193,856       (1 )     (16 )
Commercial rental
    525,083       431,058       557,491       22       (23 )
Other
    67,448       66,511       77,906       1       (15 )
                                         
Operating revenue(1)
    2,846,532       2,817,733       3,038,923       1       (7 )
Fuel services revenue
    865,621       750,103       1,415,328       15       (47 )
                                         
Total revenue
    $3,712,153       3,567,836       4,454,251       4 %     (20 )%
                                         
Segment NBT
    $   172,185       140,400       395,909       23 %     (65 )%
                                         
Segment NBT as a % of total revenue
    4.6%       3.9%       8.9%       70 bps     (500 ) bps
                                         
Segment NBT as a % of operating revenue(1)
    6.0%       5.0%       13.0%       100 bps     (800 ) bps
                                         
 
 
(1) We use operating revenue, a non-GAAP financial measure, to evaluate the operating performance of our FMS business segment and as a measure of sales activity. Fuel services revenue, which is directly impacted by fluctuations in market fuel prices, is excluded from our operating revenue computation as fuel is largely a pass-through to customers for which we realize minimal changes in profitability during periods of steady market fuel prices. However, profitability may be positively or negatively impacted by sudden increases or decreases in market fuel prices during a short period of time as customer pricing for fuel services is established based on market fuel costs.
 
2010 versus 2009
 
Total revenue increased 4% in 2010 to $3.71 billion due primarily to higher fuel services revenue. Fuel services revenue increased 15% in 2010 due to higher fuel cost pass-throughs. Operating revenue increased 1% in 2010 to $2.85 billion reflecting higher commercial rental revenue partially offset by lower contractual revenue. Total and operating revenue in 2010 also included a favorable foreign exchange impact of 0.6%.
 
Full service lease revenue declined 3% and contract maintenance revenue declined 5% as a result of the cumulative impact of customer fleet downsizings. However, the level of downsizings decreased toward the latter half of the year. We expect favorable contractual revenue comparisons next year due to acquisitions as well as a reduction in customer fleet downsizings. Commercial rental revenue increased 22% in 2010 reflecting improving global market demand and higher pricing. The average global rental fleet increased 1% in 2010 in response to increased demand. Power fleet utilization increased to 76.1% in 2010. We expect favorable commercial rental comparisons next year driven by higher demand and higher pricing on a larger fleet.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
The following table provides rental statistics on our global fleet:
 
                                         
    Years ended December 31   Change
                2010/
  2009/
    2010   2009   2008   2009   2008
    (Dollars in thousands)        
 
Non-lease customer rental revenue
    $332,077       265,143       329,875       25 %     (20) %
                                         
Lease customer rental revenue(1)
    $193,006       165,915       227,616       16 %     (27) %
                                         
Average commercial rental power fleet size — in service (2),(3)
    23,800       23,000       25,800       3 %     (11) %
                                         
Commercial rental utilization — power fleet
    76.1 %     68.0 %     71.4 %     810 bps     (340) bps
                                         
 
 
(1) Lease customer rental revenue is revenue from rental vehicles provided to our existing full service lease customers, generally during peak periods in their operations.
 
(2) Number of units rounded to nearest hundred and calculated using average counts.
 
(3) Fleet size excluding trailers.
 
FMS NBT increased 23% in 2010 to $172 million primarily due to better commercial rental performance, improved used vehicle sales results, and lower retirement plans expense. These items were partially offset by lower full service lease results and, to a lesser extent, higher compensation and depreciation expense. Commercial rental performance improved as a result of increased market demand and higher pricing. Used vehicle sales results were positively impacted by higher pricing and a lower average inventory level. Retirement plan costs decreased $20 million because of improved performance in the overall stock market in 2009 which impacted 2010 pension expense. Full service lease performance was adversely impacted by increased maintenance costs on a relatively older fleet and the cumulative impact of customer fleet downsizing. Depreciation expense increased $10 million resulting from residual value changes and accelerated depreciation.
 
2009 versus 2008
 
Total revenue decreased 20% in 2009 to $3.57 billion due primarily to lower fuel services revenue. Fuel services revenue decreased 47% in 2009 because of lower average fuel prices as well as reduced gallons pumped. Operating revenue decreased 7% in 2009 to $2.82 billion reflecting declines in all product lines, especially commercial rental, in light of the deterioration in global economic conditions in 2009, partially offset by the benefit of acquisitions. Total and operating revenue in 2009 also included an unfavorable foreign exchange impact of 1.2% and 1.7%, respectively.
 
Full service lease revenue declined 3% and contract maintenance revenue declined 1% as a result of fleet downsizing decisions and lower variable revenue from fewer miles driven by our customers with their fleets. Commercial rental revenue decreased 23% in 2009 reflecting weak global market demand and lower pricing. In 2009, we reduced the size and mix of our rental fleet in order to better align with market demand. The average global rental fleet size declined 13% in 2009 and year-end fleet counts decreased by 15% compared with 2008. As a result of our fleet right-sizing actions, rental fleet utilization in the fourth quarter of 2009 improved over the prior-year period for the first time in 2009.
 
FMS NBT decreased 65% in 2009 to $140 million driven primarily by the economic slowdown and freight recession, which resulted in a decline in global commercial rental demand, lower full service lease performance and lower used vehicle sales results. Results in 2009 were also impacted by significantly higher pension expense. These items were partially offset by cost reduction initiatives, including workforce reductions implemented in early 2009. Commercial rental results were impacted by weak global demand which drove lower utilization and, to a lesser extent, reduced pricing on a smaller fleet. Full service lease results were adversely impacted by the protracted length and severity of the freight recession, which resulted in reduced customer demand for new leases and downsizing of customer fleets. Used vehicle sales results declined primarily due to weak market demand which drove lower pricing, as well as higher average inventory levels. Used vehicle inventory levels


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
improved during the second half of the year and finished the year 10% below the prior year. Pension expense significantly increased in 2009 because of poor performance in the overall stock market in 2008.
 
Our global fleet of owned and leased revenue earning equipment and contract maintenance vehicles is summarized as follows (number of units rounded to the nearest hundred):
 
                                         
    December 31   Change
                2010/
  2009/
    2010   2009   2008   2009   2008
 
End of period vehicle count
                                       
By type:
                                       
Trucks(1)
    63,000       63,600       68,300       (1 )%     (7 )%
Tractors(2)
    49,600       50,300       51,900       (1 )     (3 )
Trailers(3)
    33,000       35,400       39,900       (7 )     (11 )
Other
    3,100       3,100       3,300             (6 )
                                         
Total
    148,700       152,400       163,400       (2 )%     (7 )%
                                         
By ownership:
                                       
Owned
    145,000       147,200       158,100       (1 )%     (7 )%
Leased
    3,700       5,200       5,300       (29 )     (2 )
                                         
Total
    148,700       152,400       163,400       (2 )%     (7 )%
                                         
By product line:
                                       
Full service lease
    111,100       115,100       120,600       (3 )%     (5 )%
Commercial rental
    29,700       27,400       32,300       8       (15 )
Service vehicles and other
    2,700       3,000       2,800       (10 )     7  
                                         
Active units
    143,500       145,500       155,700       (1 )     (7 )
Held for sale
    5,200       6,900       7,700       (25 )     (10 )
                                         
Total
    148,700       152,400       163,400       (2 )     (7 )
                                         
Customer vehicles under contract maintenance
    33,400       34,400       35,500       (3 )%     (3 )%
                                         
Average vehicle count
                                       
By product line:
                                       
Full service lease
    112,500       118,800       118,100       (5 )%     1 %
Commercial rental
    29,800       29,400       33,900       1       (13 )
Service vehicles and other
    2,600       2,900       3,300       (10 )     (12 )
                                         
Active units
    144,900       151,100       155,300       (4 )     (3 )
Held for sale
    5,800       8,400       6,200       (31 )     35  
                                         
Total
    150,700       159,500       161,500       (6 )     (1 )
                                         
Customer vehicles under contract maintenance
    33,700       35,200       33,900       (4 )%     4 %
                                         
 
 
(1) Generally comprised of Class 1 through Class 6 type vehicles with a Gross Vehicle Weight (GVW) up to 26,000 pounds.
 
(2) Generally comprised of over the road on highway tractors and are primarily comprised of Classes 7 and 8 type vehicles with a GVW of over 26,000 pounds.
 
(3) Generally comprised of dry, flatbed and refrigerated type trailers.
 
Note: Average vehicle counts were computed using 24-point average based on monthly information.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
The totals in the previous table include the following non-revenue earning equipment for the global fleet (number of units rounded to the nearest hundred):
 
                                         
    December 31   Change
                2010/
  2009/
Number of Units   2010   2009   2008   2009   2008
 
Not yet earning revenue (NYE)
    800       700       1,500       14 %     (53 )%
No longer earning revenue (NLE):
                                       
Units held for sale
    5,200       6,900       7,700       (25 )     (10 )
Other NLE units
    2,000       2,900       2,900       (31 )      
                                         
Total
    8,000       10,500       12,100       (24 )%     (13 )%
                                         
 
NYE units represent new vehicles on hand that are being prepared for deployment to a lease customer or into the rental fleet. Preparations include activities such as adding lift gates, paint, decals, cargo area and refrigeration equipment. For 2010, the number of NYE units increased compared with prior year reflecting new lease sales and, to a lesser extent, the refresh and growth of the rental fleet. For 2009, the number of NYE units decreased reflecting lower new replacement lease activity. NLE units represent all vehicles held for sale and vehicles for which no revenue has been earned in the previous 30 days. Accordingly, these vehicles may be temporarily out of service, being prepared for sale or awaiting redeployment. The number of NLE units decreased because of lower used vehicle inventory levels and higher rental utilization. For 2009, the number of NLE units decreased because of lower used vehicle inventory levels. We expect NLE levels in 2011 to be slightly higher due to increased levels of vehicle replacement activity from both our lease and rental fleets.
 
Supply Chain Solutions
 
                                         
    Years ended December 31   Change
                2010/
  2009/
    2010   2009   2008   2009   2008
    (Dollars in thousands)        
 
Operating revenue:
                                       
Automotive
    $   449,170       409,862       616,477       10 %     (34 )%
High-tech
    220,494       209,852       229,923       5       (9 )
Retail and CPG
    177,797       167,097       167,874       6        
Industrial and other
    157,501       168,598       193,249       (7 )     (13 )
                                         
Total operating revenue(1)
    1,004,962       955,409       1,207,523       5       (21 )
Subcontracted transportation
    247,289       184,502       222,109       34       (17 )
                                         
Total revenue
    $1,252,251       1,139,911       1,429,632       10 %     (20 )%
                                         
Segment NBT
    $47,111       35,700       56,953       32 %     (37 )%
                                         
Segment NBT as a % of total revenue
    3.8%       3.1%       4.0%       70   bps     (90 ) bps
                                         
Segment NBT as a % of operating revenue(1)
    4.7%       3.7%       4.7%       100   bps     (100 ) bps
                                         
Memo: Fuel costs(2)
    $     78,806       64,915       136,400       21 %     (52 )%
                                         
 
 
(1) We use operating revenue, a non-GAAP financial measure, to evaluate the operating performance of our SCS business segment and as a measure of sales activity. Subcontracted transportation is excluded from our operating revenue computation as subcontracted transportation is largely a pass-through to customers. We realize minimal changes in profitability as a result of fluctuations in subcontracted transportation.
 
(2) Fuel costs are largely a pass-through to customers and therefore have a direct impact on revenue.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
 
2010 versus 2009
 
Total revenue increased 10% in 2010 to $1.25 billion due to higher subcontracted transportation, higher operating revenue and favorable foreign exchange rate movements. Operating revenue increased 5% to $1.00 billion primarily due to higher freight volumes particularly in the automotive industry and favorable foreign exchange rate movements partially offset by prior year contract rationalizations. For 2010, SCS total revenue and operating revenue included a favorable foreign currency exchange impact of 2.3% and 2.1%, respectively. We expect favorable operating revenue comparisons next year due to the impact of the TLC acquisition, higher overall freight volumes and new business.
 
SCS NBT increased 32% in 2010 to $47 million primarily due to improved operating performance, particularly in high tech accounts and higher automotive production volumes partially offset by higher compensation costs.
 
2009 versus 2008
 
Total revenue decreased 20% in 2009 to $1.14 billion and operating revenue decreased 21% in 2009 to $955 million. Total revenue and operating revenue decreased as a result of lower automotive production, overall freight volumes and fuel cost pass-throughs. For 2009, SCS total revenue and operating revenue included an unfavorable foreign currency exchange impact of 2.4% and 2.0%, respectively.
 
SCS NBT decreased 37% in 2009 to $36 million primarily due to significantly reduced North American automotive volumes which decreased NBT by $19 million, including costs incurred upon the termination of certain automotive operations. During the second quarter of 2009, several of our automotive customers filed for bankruptcy. We did not realize any losses on our pre-petition accounts receivable with any of these customers.
 
Dedicated Contract Carriage
 
                                         
    Years ended December 31     Change  
                      2010/
    2009/
 
    2010     2009     2008     2009     2008  
    (Dollars in thousands)              
 
Operating revenue(1)
  $ 468,547       456,598       536,754       3 %     (15 )%
Subcontracted transportation
    14,036       14,358       10,997       (2 )     31  
                                         
Total revenue
  $ 482,583       470,956       547,751       2 %     (14 )%
                                         
Segment NBT
  $   30,966       37,643       49,628       (18 )%     (24 )%
                                         
Segment NBT as a % of total revenue
    6.4%       8.0%       9.1%       (160 )  bps     (110 ) bps
                                         
Segment NBT as a % of operating revenue(1)
    6.6%       8.2%       9.2%       (160 )  bps     (100 ) bps
                                         
Memo: Fuel costs(2)
  $   83,928       69,858       123,003       20 %     (43 )%
                                         
 
 
(1) We use operating revenue, a non-GAAP financial measure, to evaluate the operating performance of our DCC business segment and as a measure of sales activity. Subcontracted transportation is excluded from our operating revenue computation as subcontracted transportation is largely a pass-through to customers. We realize minimal changes in profitability as a result of fluctuations in subcontracted transportation.
 
(2) Fuel costs are largely a pass-through to customers and therefore have a direct impact on revenue.
 
2010 versus 2009
 
Total revenue increased 2% in 2010 to $483 million and operating revenue increased 3% in 2010 to $469 million due to higher fuel cost pass-throughs. We expect favorable operating revenue comparisons next


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
year because of the announced Scully acquisition which closed on January 28, 2011. See Note 3, “Acquisitions,” in the Notes to Consolidated Financial Statements for additional information.
 
DCC NBT decreased 18% in 2010 to $31 million primarily due to investments associated with new technology initiatives, higher compensation costs, increased self-insurance costs from unfavorable development related to prior year claims, and lower operating performance caused by increased driver costs.
 
2009 versus 2008
 
Total revenue declined 14% in 2009 to $471 million and operating revenue declined 15% in 2009 to $457 million as a result of lower fuel cost pass-throughs, lower freight volumes and non-renewal of customer contracts.
 
DCC NBT decreased 24% in 2009 to $38 million as a result of lower revenue, and to a lesser extent, increased self-insurance costs. The increase in self-insurance costs reflected less favorable development in estimated prior years’ self-insured loss reserves.
 
Central Support Services
 
                                         
    Years ended December 31   Change
                2010/
  2009/
    2010   2009   2008   2009   2008
    (Dollars in thousands)        
 
Human resources
    $    15,504       14,707       15,943       5 %     (8 )%
Finance
    53,409       51,353       55,835       4       (8 )
Corporate services and public affairs
    11,440       11,556       13,117       (1 )     (12 )
Information technology
    56,873       52,826       57,538       8       (8 )
Health and safety
    6,690       6,673       7,754             (14 )
Other
    39,794       30,450       34,847       31       (13 )
                                         
Total CSS
    183,710       167,565       185,034       10       (9 )
Allocation of CSS to business segments
    (142,179 )     (131,731 )     (146,732 )     (8 )     10  
                                         
Unallocated CSS
    $    41,531       35,834       38,302       16 %     (6 )%
                                         
 
2010 versus 2009
 
Total CSS costs increased 10% in 2010 to $184 million primarily due to increased compensation costs, information technology investments and professional service fees related to strategic initiatives. Unallocated CSS costs increased due to higher compensation costs.
 
2009 versus 2008
 
Total CSS costs decreased 9% in 2009 to $168 million reflecting lower spending across all functional areas as a result of cost reduction actions implemented in early 2009 and lower incentive-based compensation. These items were partially offset by higher professional service fees on cost savings initiatives. Unallocated CSS costs decreased 6% in 2009 to $36 million primarily due to lower incentive-based compensation offset slightly by higher spending on cost savings initiatives.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
FOURTH QUARTER CONSOLIDATED RESULTS
 
                         
    Three months ended
   
    December 31,   Change
    2010   2009   2010/ 2009
    (Dollars and shares in thousands,
   
    except per share amounts)
   
 
Total revenue
    $1,313,426       1,246,968       5 %
                         
                         
Operating revenue
    $1,061,939       1,019,822       4 %
                         
Earnings from continuing operations before income taxes
    $      49,608       31,800       56 %
Provision for income taxes
    8,146       8,130        
                         
Earnings from continuing operations
    41,462       23,670       75  
Loss from discontinued operations, net of tax
    (4,341 )     (15,422 )     (72 )
                         
Net earnings
    $      37,121       8,248       350 %
                         
                         
Earnings (loss) per common share — Diluted
                       
Continuing operations
    $           0.80       0.43       86 %
Discontinued operations
    (0.08 )     (0.28 )     (71 )
                         
Net earnings
    $           0.72       0.15       380 %
                         
                         
Weighted-average shares outstanding — Diluted
    51,040       54,235       (6 )%
                         
 
Total revenue increased 5% in the fourth quarter of 2010 to $1.31 billion primarily due to higher operating revenue in all our business segments and higher fuel services revenue. Operating revenue increased 4% in the fourth quarter of 2010 to $1.06 billion primarily due to higher commercial rental revenue, and to a lesser extent, improved SCS high-tech and automotive volumes. The increase in revenue was partially offset by lower full service lease revenue. Total revenue and operating revenue in the fourth quarter of 2010 included a favorable foreign exchange impact of 0.4% and 0.3%, respectively.
 
Earnings from continuing operations before income taxes (NBT) increased 56% in the fourth quarter of 2010 to $50 million which reflects significantly higher earnings in our FMS business segment driven by better commercial rental performance and improved used vehicle results. The higher earnings were partially offset by lower full service lease performance resulting from higher maintenance costs due to fleet aging and the cumulative impact of customer fleet reductions. Fourth quarter 2010 results also included a $1.5 million pension settlement charge, allocated between the FMS and SCS business segments.
 
Earnings from continuing operations in the fourth quarter of 2010 included a net benefit of $8 million or $0.15 per diluted common share related to certain tax benefits, partially offset by restructuring and other items. The tax benefits related to a favorable settlement of prior tax year’s audits and the expiration of a statute of limitation. Restructuring and other items related to costs incurred on the TLC acquisition and were partially offset by a gain on sale of an international supply chain facility. Earnings from continuing operations in the fourth quarter of 2009 included a net benefit of $1 million or $0.02 per diluted common share related primarily to changes in Canadian income tax laws partially offset by an impairment charge related to the facility sold in 2010.
 
Earnings per share growth in the fourth quarter of 2010 exceeded the net earnings growth reflecting the impact of share repurchase programs.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
In 2009, we discontinued SCS operations in South America and Europe. Accordingly, results of these operations are reported as discontinued operations for all periods presented. Pre-tax losses from discontinued operations totaled $5 million ($4 million after-tax or $0.08 per diluted share) for the three months ended December 31, 2010, compared with a loss of $15 million ($15 million after-tax or $0.28 per diluted share) in the year-earlier period. Results of discontinued operations for 2010 included a loss on a lease facility, which we no longer operate, and losses related to adverse legal developments. Results of discontinued operations for the fourth quarter of 2009 included accumulated foreign currency translation losses associated with the substantial liquidation of investments in certain discontinued operations.
 
FOURTH QUARTER OPERATING RESULTS BY BUSINESS SEGMENT
 
                         
    Three months ended December 31,   Change
    2010   2009   2010/2009
    (Dollars in thousands)    
 
Revenue:
                       
Fleet Management Solutions
    $   948,060       900,219       5 %
Supply Chain Solutions
    325,094       302,085       8  
Dedicated Contract Carriage
    121,825       119,267       2  
Eliminations
    (81,553 )     (74,603 )     (9 )
                         
Total
    $1,313,426       1,246,968       5 %
                         
Operating Revenue:
                       
Fleet Management Solutions
    $   726,254       699,452       4 %
Supply Chain Solutions
    258,309       247,596       4  
Dedicated Contract Carriage
    119,257       113,444       5  
Eliminations
    (41,881 )     (40,670 )     (3 )
                         
Total
    $1,061,939       1,019,822       4 %
                         
NBT:
                       
Fleet Management Solutions
    $   49,498       31,946       55 %
Supply Chain Solutions
    12,327       11,739       5  
Dedicated Contract Carriage
    6,529       6,922       (6 )
Eliminations
    (4,770 )     (4,883 )     2  
                         
      63,584       45,724       39  
Unallocated Central Support Services
    (10,825 )     (11,253 )     4  
Restructuring and other charges, net and other items
    (3,151 )     (2,671 )     NM  
                         
Earnings from continuing operations before income taxes
    $   49,608       31,800       56 %
                         
 
Fleet Management Solutions
 
Total revenue increased 5% to $948 million in the fourth quarter of 2010 reflecting higher operating revenue and fuel services revenue. Operating revenue increased 4% to $726 million in the fourth quarter of 2010 because of higher commercial rental revenue reflecting strong global market demand and higher pricing. The increase in operating revenue was partially offset by lower contractual revenue reflecting the cumulative impact of customer fleet downsizings.
 
FMS NBT increased 55% to $49 million in the fourth quarter of 2010 reflecting significantly better commercial rental performance, improved used vehicle sales results and lower retirement plans expense. These


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
items were partially offset by lower full service lease results, higher compensation costs and investments in sales and information technology investments.
 
Supply Chain Solutions
 
Total revenue increased 8% to $325 million in the fourth quarter of 2010 and operating revenue increased 4% to $258 million in the fourth quarter of 2010. Both total revenue and operating revenue increased primarily due to improved high-tech and automotive volumes and new business.
 
SCS NBT increased 5% to $12 million in the fourth quarter of 2010 because of better operating performance particularly in high-tech accounts partially offset by higher compensation costs and a pension settlement charge of $1 million.
 
Dedicated Contract Carriage
 
Total revenue increased 2% to $122 million in the fourth quarter of 2010 and operating revenue increased 5% to $119 million in the fourth quarter of 2010. Both total revenue and operating revenue increased due to the pass-through of higher fuel costs and net new business.
 
DCC NBT decreased 6% to $7 million in the fourth quarter of 2010 because of lower operating performance reflecting increased driver costs.
 
Central Support Services
 
Unallocated CSS costs decreased 4% to $11 million in the fourth quarter of 2010 because of lower professional fees partially offset by higher compensation costs.
 
FINANCIAL RESOURCES AND LIQUIDITY
 
Cash Flows
 
The following is a summary of our cash flows from operating, financing and investing activities from continuing operations:
 
                         
    Years ended December 31  
    2010     2009     2008  
    (In thousands)  
 
Net cash provided by (used in):
                       
Operating activities
  $ 1,028,034       984,956       1,248,169  
Financing activities
    78,166       (542,016 )     (148,152 )
Investing activities
    (982,464 )     (448,610 )     (1,103,468 )
Effect of exchange rate changes on cash
    1,723       1,794       1,408  
                         
Net change in cash and cash equivalents
  $ 125,459       (3,876 )     (2,043 )
                         
 
Cash provided by operating activities from continuing operations increased to $1.03 billion in 2010 compared with $985 million in 2009 because of reduced working capital needs primarily from lower pension contributions and compensation-related payments, partially offset by lower cash based earnings. Cash provided by financing activities increased to $78 million in 2010 from cash used in financing activities of $542 million in 2009 reflecting higher borrowing needs to fund capital spending, including acquisitions. Cash used in investing activities increased to $982 million in 2010 compared with $449 million in 2009 primarily due to higher vehicle capital spending and acquisition-related payments in 2010.
 
Cash provided by operating activities from continuing operations decreased to $985 million in 2009 compared with $1.25 billion in 2008 because of lower cash-based earnings and higher pension contributions. Cash used in financing activities increased to $542 million in 2009 compared with $148 million in 2008


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
reflecting higher net debt repayments resulting from less borrowing needs to fund capital spending, including acquisitions. Cash used in investing activities decreased to $449 million in 2009 compared with $1.10 billion in 2008 primarily due to lower vehicle capital spending and acquisition-related payments in 2009.
 
Our principal sources of operating liquidity are cash from operations and proceeds from the sale of revenue earning equipment. We refer to the sum of operating cash flows, proceeds from the sales of revenue earning equipment and operating property and equipment, collections on direct finance leases, sale and leaseback of revenue earning equipment and other cash inflows as “total cash generated.” We refer to the net amount of cash generated from operating and investing activities (excluding changes in restricted cash and acquisitions) as “free cash flow.” Although total cash generated and free cash flow are non-GAAP financial measures, we consider them to be important measures of comparative operating performance. We also believe total cash generated to be an important measure of total cash inflows generated from our ongoing business activities. We believe free cash flow provides investors with an important perspective on the cash available for debt service, acquisitions and for shareholders after making capital investments required to support ongoing business operations. Our calculation of free cash flow may be different from the calculation used by other companies and therefore comparability may be limited.
 
The following table shows the sources of our free cash flow computation:
 
                         
    Years ended December 31  
    2010     2009     2008  
    (In thousands)  
 
Net cash provided by operating activities
  $ 1,028,034       984,956       1,248,169  
Sales of revenue earning equipment
    220,843       211,002       257,679  
Sales of operating property and equipment
    13,844       4,634       3,727  
Collections on direct finance leases
    61,767       65,242       61,096  
Other, net
    3,178       209       395  
                         
Total cash generated
    1,327,666       1,266,043       1,571,066  
Purchases of property and revenue earning equipment
    (1,070,092 )     (651,953 )     (1,230,401 )
                         
Free cash flow
  $ 257,574       614,090       340,665  
                         
 
Free cash flow decreased to $258 million in 2010 compared with $614 million in 2009 primarily due to higher vehicle capital spending and lower cash-based earnings partially offset by lower pension contributions. Free cash flow increased to $614 million in 2009 compared with $341 million in 2008 as lower net capital expenditures were partially offset by lower cash-based earnings and higher pension contributions. We expect negative free cash flow in 2011 to be approximately $265 million reflecting higher capital expenditures.
 
Capital expenditures are generally used to purchase revenue earning equipment (trucks, tractors and trailers) within our FMS segment. These expenditures primarily support the full service lease product line and also the commercial rental product line. The level of capital required to support the full service lease product line varies directly with the customer contract signings for replacement vehicles and growth. These contracts are long-term agreements that result in predictable cash flows typically over a three to seven year term for trucks and tractors and ten years for trailers. The commercial rental product line utilizes capital for the purchase of vehicles to replenish and expand the fleet available for shorter-term use by contractual or occasional customers. Operating property and equipment expenditures primarily relate to FMS and SCS spending on items such as vehicle maintenance facilities and equipment, computer and telecommunications equipment, investments in technologies and warehouse facilities and equipment.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
The following is a summary of capital expenditures:
 
                         
    Years ended December 31  
    2010     2009     2008  
    (In thousands)  
 
Revenue earning equipment:
                       
Full service lease
  $ 646,671       547,750       985,924  
Commercial rental
    378,678       7,436       171,128  
                         
      1,025,349       555,186       1,157,052  
Operating property and equipment
    62,302       56,216       108,284  
                         
Total capital expenditures(1)
    1,087,651       611,402       1,265,336  
Changes in accounts payable related to purchases of revenue earning equipment
    (17,559 )     40,551       (34,935 )
                         
Cash paid for purchases of property and revenue earning equipment
  $ 1,070,092       651,953       1,230,401  
                         
 
 
(1) Capital expenditures exclude non-cash additions of approximately $2 million and $1 million in 2009 and 2008, respectively, in assets held under capital leases resulting from the extension of existing operating leases and other additions.
 
Capital expenditures (accrual basis) increased 78% to $1.09 billion in 2010 primarily as a result of a planned increase in commercial rental spending to refresh and grow the fleet. Capital expenditures decreased 52% to $611 million in 2009 as a result of reduced full service lease vehicle spending due to lower new and replacement sales in the current global economic environment, as well as increased use of lease term extensions and used vehicle redeployments. Additionally, the decrease reflects planned minimal spending on transactional commercial rental vehicles. We expect capital expenditures to increase to $1.75 billion, as we make investments in both the lease and rental fleet. We expect to fund 2011 capital expenditures with both internally generated funds and additional financing.
 
Working Capital
 
                 
    December 31  
    2010     2009  
    (Dollars in thousands)  
 
Current assets
  $ 1,023,301     $ 880,373  
Current liabilities
    1,131,519       850,274  
                 
Working capital
  $ (108,218 )   $ 30,099  
                 
 
Our net working capital (current assets less current liabilities) was $(108) million at December 31, 2010 compared with $30 million at December 31, 2009. The decrease in net working capital was primarily due to an increase of $188 million in the current portion of long-term debt. Excluding the increase in short-term debt, other working capital components increased $49 million resulting from higher cash flows partially offset by higher accrued compensation.
 
Financing and Other Funding Transactions
 
We utilize external capital primarily to support working capital needs and growth in our asset-based product lines. The variety of financing alternatives typically available to fund our capital needs include commercial paper, long-term and medium-term public and private debt, asset-backed securities, bank term loans, leasing arrangements and bank credit facilities. Our principal sources of financing are issuances of commercial paper and medium-term notes.
 
Our ability to access unsecured debt in the capital markets is linked to both our short-term and long-term debt ratings. These ratings are intended to provide guidance to fixed income investors in determining the


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
credit risk associated with particular Ryder securities based on current information obtained by the rating agencies from us or from other sources. Lower ratings generally result in higher borrowing costs as well as reduced access to unsecured capital markets. A downgrade of our short-term debt ratings to a lower tier would impair our ability to issue commercial paper. As a result, we would have to rely on alternative funding sources. A downgrade of our debt ratings would not affect our ability to borrow amounts under our revolving credit facility described below, given ongoing compliance with the terms and conditions of the credit facility.
 
Our debt ratings at December 31, 2010 were as follows:
 
                     
    Short-term     Long-term     Outlook
 
Moody’s Investors Service
    P2       Baa1     Stable (affirmed February 2011)
Standard & Poor’s Ratings Services
    A2       BBB+     Stable (raised August 2010)
Fitch Ratings
    F2       A−     Stable (affirmed March 2010)
 
We believe that our operating cash flows, together with our access to commercial paper markets and other available debt financing, will be adequate to meet our operating, investing and financing needs in the foreseeable future. However, there can be no assurance that unanticipated volatility and disruption in commercial paper markets would not impair our ability to access these markets on terms commercially acceptable to us or at all. If we cease to have access to commercial paper and other sources of unsecured borrowings, we would meet our liquidity needs by drawing upon contractually committed lending agreements as described below and/or by seeking other funding sources.
 
We can borrow up to $875 million under a global revolving credit facility with a syndicate of thirteen lending institutions led by Bank of America N.A., Bank of Tokyo-Mitsubishi UFJ, Ltd., Mizuho Corporate Bank, Ltd., Royal Bank of Scotland Plc and Wells Fargo N.A. The global credit facility matures in April 2012 and is used primarily to finance working capital and provide support for the issuance of unsecured commercial paper in the U.S. and Canada. This facility can also be used to issue up to $75 million in letters of credit (there were no letters of credit outstanding against the facility at December 31, 2010). At our option, the interest rate on borrowings under the credit facility is based on LIBOR, prime, federal funds or local equivalent rates. The agreement provides for annual facility fees, which range from 22.5 basis points to 62.5 basis points, and are based on Ryder’s long-term credit ratings. The credit facility’s current annual facility fee is 37.5 basis points, which applies to the total facility size of $875 million. The credit facility contains no provisions limiting its availability in the event of a material adverse change to Ryder’s business operations; however, the credit facility does contain standard representations and warranties, events of default, cross-default provisions, and certain affirmative and negative covenants. In order to maintain availability of funding, we must maintain a ratio of debt to consolidated tangible net worth, of less than or equal to 300%. Tangible net worth, as defined in the credit facility, includes 50% of our deferred federal income tax liability and excludes the book value of our intangible assets. The ratio at December 31, 2010 was 189%. At December 31, 2010, $506 million was available under the credit facility, net of the support for commercial paper borrowings.
 
Our global revolving credit facility permits us to refinance short-term commercial paper obligations on a long-term basis. Settlement of short-term commercial paper obligations not expected to require the use of working capital are classified as long-term as we have both the intent and ability to refinance on a long-term basis.
 
We have a trade receivables purchase and sale program, pursuant to which we sell certain of our domestic trade accounts receivable to a bankruptcy remote, consolidated subsidiary of Ryder, that in turn sells, on a revolving basis, an ownership interest in certain of these accounts receivable to a receivables conduit or committed purchasers. We use this program to provide additional liquidity to fund our operations, particularly when it is cost effective to do so. The costs under the program may vary based on changes in interest rates. The available proceeds amounts that may be received under the program are limited to $175 million. In


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
October 2010, we renewed the trade receivables purchase and sales program. If no event occurs which causes early termination, the 364-day program will expire on October 28, 2011. The program contains provisions restricting its availability in the event of a material adverse change to our business operations or the collectibility of the collateralized receivables. At December 31, 2010 and December 31, 2009, no amounts were outstanding under the program.
 
Historically, we have established asset-backed securitization programs whereby we have sold beneficial interests in certain long-term vehicle leases and related vehicle residuals to a bankruptcy-remote special purpose entity that in turn transfers the beneficial interest to a special purpose securitization trust in exchange for cash. The securitization trust funds the cash requirement with the issuance of asset-backed securities, secured or otherwise collateralized by the beneficial interest in the long-term vehicle leases and the residual value of the vehicles. The securitization provides us with further liquidity and access to additional capital markets based on market conditions. On June 18, 2008, Ryder Funding II LP, a special purpose bankruptcy-remote subsidiary wholly-owned by Ryder, filed a registration statement on Form S-3 with the Securities and Exchange Commission (SEC) for the registration of $600 million in asset-backed notes. The registration statement became effective on November 6, 2008 and remains effective until November 6, 2011.
 
On February 25, 2010, Ryder filed an automatic shelf registration statement on Form S-3 with the SEC. The registration is for an indeterminate number of securities and is effective for three years. Under this universal shelf registration statement, we have the capacity to offer and sell from time to time various types of securities, including common stock, preferred stock and debt securities, subject to market demand and ratings status.
 
In September 2010, we issued $300 million of unsecured medium-term notes maturing in March 2016. If the notes are downgraded following, and as a result of, a change of control, the note holder can require us to repurchase all or a portion of the notes at a purchase price equal to 101% of the principal amount plus accrued and unpaid interest. The medium-term notes were issued to take advantage of historically low interest rates and fund capital expenditures and debt maturities.
 
At December 31, 2010, we had the following amounts available to fund operations under the aforementioned facilities:
 
         
    (In millions)
 
Global revolving credit facility
  $ 506  
Trade receivables program
    175  


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
The following table shows the movements in our debt balance:
 
                 
    Years ended December 31  
    2010     2009  
    (In thousands)  
 
Debt balance at January 1
  $ 2,497,691       2,862,799  
                 
Cash-related changes in debt:
               
Net change in commercial paper borrowings
    174,939       148,256  
Proceeds from issuance of medium-term notes
    300,000        
Proceeds from issuance of other debt instruments
    14,169       2,014  
Retirement of medium-term notes and debentures
    (175,000 )     (276,000 )
Other debt repaid, including capital lease obligations
    (73,668 )     (243,710 )
Net change from discontinued operations
    (2,955 )     (9,427 )
                 
      237,485       (378,867 )
Non-cash changes in debt:
               
Fair market value adjustment on notes subject to hedging
    3,328       (6,290 )
Addition of capital lease obligations, including acquisitions
    2,164       1,949  
Changes in foreign currency exchange rates and other non-cash items
    6,334       18,100  
                 
Total changes in debt
    249,311       (365,108 )
                 
Debt balance at December 31
  $ 2,747,002       2,497,691  
                 
 
In accordance with our funding philosophy, we attempt to match the aggregate average remaining re-pricing life of our debt with the aggregate average remaining re-pricing life of our assets. We utilize both fixed-rate and variable-rate debt to achieve this match and generally target a mix of 25% — 45% variable-rate debt as a percentage of total debt outstanding. The variable-rate portion of our total obligations (including notional value of swap agreements) was 28% and 26% at December 31, 2010 and 2009, respectively.
 
Ryder’s leverage ratios and a reconciliation of on-balance sheet debt to total obligations were as follows:
 
                         
    December 31,
    %
  December 31,
    %
    2010     of Equity   2009     of Equity
    (Dollars in thousands)
 
On-balance sheet debt
  $ 2,747,002     196%   $ 2,497,691     175%
Off-balance sheet debt — PV of minimum lease payments and guaranteed residual values under operating leases for vehicles(1)
    99,797           118,828      
                         
Total obligations
  $ 2,846,799     203%   $ 2,616,519     183%
                         
 
 
(1) Present value (PV) does not reflect payments we would be required to make if we terminated the related leases prior to the scheduled expiration dates.
 
On-balance sheet debt to equity consists of balance sheet debt divided by total equity. Total obligations to equity represents balance sheet debt plus the present value of minimum lease payments and guaranteed residual values under operating leases for vehicles, discounted based on our incremental borrowing rate at lease inception, all divided by total equity. Although total obligations is a non-GAAP financial measure, we believe that total obligations is useful as it provides a more complete analysis of our existing financial obligations and helps better assess our overall leverage position. The increase in our leverage ratios in 2010 was driven by increased funding needs to support acquisitions and stock repurchases.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
Off-Balance Sheet Arrangements
 
Sale and leaseback transactions.  We periodically enter into sale and leaseback transactions in order to lower the total cost of funding our operations, to diversify our funding among different classes of investors (e.g., regional banks, pension plans, insurance companies, etc.) and to diversify our funding among different types of funding instruments. These sale-leaseback transactions are often executed with third-party financial institutions. In general, these sale-leaseback transactions result in a reduction in revenue earning equipment and debt on the balance sheet, as proceeds from the sale of revenue earning equipment are primarily used to repay debt. Accordingly, sale-leaseback transactions will result in reduced depreciation and interest expense and increased equipment rental expense.
 
Our sale-leaseback transactions contain limited guarantees by us of the residual values of the leased vehicles (residual value guarantees) that are conditioned upon disposal of the leased vehicles prior to the end of their lease term. The amount of future payments for residual value guarantees will depend on the market for used vehicles and the condition of the vehicles at time of disposal. See Note 19, “Guarantees,” in the Notes to Consolidated Financial Statements for additional information. We did not enter into any sale-leaseback transactions during the years ended December 31, 2010 and 2009.
 
Guarantees.  We executed various agreements with third parties that contain standard indemnifications that may require us to indemnify a third party against losses arising from a variety of matters such as lease obligations, financing agreements, environmental matters, and agreements to sell business assets. In each of these instances, payment by us is contingent on the other party bringing about a claim under the procedures outlined in the specific agreement. Normally, these procedures allow us to dispute the other party’s claim. Additionally, our obligations under these agreements may be limited in terms of the amount and/or timing of any claim. We have entered into individual indemnification agreements with each of our independent directors, through which we will indemnify such director acting in good faith against any and all losses, expenses and liabilities arising out of such director’s service as a director of Ryder. The maximum amount of potential future payments under these agreements is generally unlimited.
 
We cannot predict the maximum potential amount of future payments under certain of these agreements, including the indemnification agreements, due to the contingent nature of the potential obligations and the distinctive provisions that are involved in each individual agreement. Historically, no such payments made by Ryder have had a material effect on our consolidated financial statements. We believe that if a loss were incurred in any of these matters, the loss would not result in a material impact on our consolidated results of operations or financial position. The total amount of maximum exposure determinable under these types of provisions at December 31, 2010 and 2009, was $9 million and $11 million, respectively, and we accrued $8 million in 2010 and $9 million in 2009 as a corresponding liability. See Note 19, “Guarantees,” in the Notes to Consolidated Financial Statements for further discussion.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
Contractual Obligations and Commitments
 
As part of our ongoing operations, we enter into arrangements that obligate us to make future payments under contracts such as debt agreements, lease agreements and unconditional purchase obligations. The following table summarizes our expected future contractual cash obligations and commitments at December 31, 2010:
 
                                         
    2011     2012- 2013     2014- 2015     Thereafter     Total  
    (In thousands)  
 
Debt
  $ 417,932       980,814       558,273       763,185       2,720,204  
Capital lease obligations
    2,153       4,240       3,952       1,024       11,369  
                                         
Total debt, including capital leases(1)
    420,085       985,054       562,225       764,209       2,731,573  
                                         
Interest on debt(2)
    116,741       180,245       119,156       124,968       541,110  
Operating leases(3)
    100,156       116,839       62,839       27,230       307,064  
Purchase obligations(4)
    309,927       18,447       11,545       7,746       347,665  
                                         
Total contractual cash obligations
    526,824       315,531       193,540       159,944       1,195,839  
                                         
Insurance obligations (primarily self-insurance)
    110,697       87,669       33,756       27,214       259,336  
Other long-term liabilities(5),(6),(7)
    6,103       5,529       2,200       46,535       60,367  
                                         
Total
  $ 1,063,709       1,393,783       791,721       997,902       4,247,115  
                                         
 
 
(1) Net of unamortized discount.
 
(2) Total debt matures at various dates through fiscal year 2025 and bears interest principally at fixed rates. Interest on variable-rate debt is calculated based on the applicable rate at December 31, 2010. Amounts are based on existing debt obligations, including capital leases, and do not consider potential refinancing of expiring debt obligations.
 
(3) Represents future lease payments associated with vehicles, equipment and properties under operating leases. Amounts are based upon the general assumption that the leased asset will remain on lease for the length of time specified by the respective lease agreements. No effect has been given to renewals, cancellations, contingent rentals or future rate changes.
 
(4) The majority of our purchase obligations are pay-as-you-go transactions made in the ordinary course of business. Purchase obligations include agreements to purchase goods or services that are legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed minimum or variable price provisions; and the approximate timing of the transaction. The most significant item included in the above table are purchase obligations related to vehicles. Purchase orders made in the ordinary course of business that are cancelable are excluded from the above table. Any amounts for which we are liable under purchase orders for goods received are reflected in our Consolidated Balance Sheets as “Accounts payable” and “Accrued expenses and other current liabilities” and are excluded from the above table.
 
(5) Represents other long-term liability amounts reflected in our Consolidated Balance Sheets that have known payment streams. The most significant items included were asset retirement obligations and deferred compensation obligations.
 
(6) The amounts exclude our estimated pension contributions. For 2011, our pension contributions, including our minimum funding requirements as set forth by ERISA and international regulatory bodies, are expected to be $15 million. Our minimum funding requirements after 2011 are dependent on several factors. However, we estimate that the undiscounted required global contributions over the next five years are approximately $396 million (pre-tax) (assuming expected long-term rate of return realized and other assumptions remain unchanged). We also have payments due under our other postretirement benefit (OPEB) plans. These plans are not required to be funded in advance, but are pay-as-you-go. See Note 24, “Employee Benefit Plans,” in the Notes to Consolidated Financial Statements for additional information.
 
(7) The amounts exclude $67 million of liabilities associated with uncertain tax positions as we are unable to reasonably estimate the ultimate amount or timing of settlement. See Note 14, “Income Taxes,” in the Notes to Consolidated Financial Statements for additional information.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
Pension Information
 
Over the past few years we have made the following amendments to our defined benefit retirement plans:
 
  •   In July 2009, our Board of Directors approved an amendment to freeze our United Kingdom (UK) retirement plan for all participants effective March 31, 2010.
 
  •   In July 2008, our Board of Directors approved an amendment to freeze the defined benefit portion of our Canadian retirement plan effective January 1, 2010 for current participants who do not meet certain grandfathering criteria.
 
  •   In January 2007, our Board of Directors approved the amendment to freeze the U.S. pension plans effective December 31, 2007 for current participants who did not meet certain grandfathering criteria.
 
As a result of these amendments, non-grandfathered plan participants ceased accruing benefits under the plan as of the respective amendment effective date and began receiving an enhanced benefit under a defined contribution plan. All retirement benefits earned as of the amendment effective date were fully preserved and will be paid in accordance with the plan and legal requirements. The freeze of the Canadian defined benefit plan created a pre-tax curtailment gain in 2008 of $4 million. There was no material impact to our financial condition and operating results from the other plan amendments in 2010 or 2009.
 
Due to the underfunded status of our defined benefit plans, we had an accumulated net pension equity charge (after-tax) of $423 million and $412 million at December 31, 2010 and 2009, respectively. The higher equity charge in 2010 reflects the impact of a lower discount rate partially offset by higher actual returns compared to the expected asset returns during 2010. The total asset return for our U.S. qualified pension plan (our primary plan) was 12% in 2010.
 
The funded status of our pension plans is dependent upon many factors, including returns on invested assets and the level of certain market interest rates. We review pension assumptions regularly and we may from time to time make voluntary contributions to our pension plans, which exceed the amounts required by statute. During 2010, total pension contributions, including our international plans, were $64 million compared with $131 million in 2009. We made voluntary pension contributions of $50 million in 2010. We estimate 2011 required pension contributions will be $15 million. After considering the 2010 contributions and asset performance, the projected estimated global pension contributions that would be required over the next 5 years totals approximately $396 million (pre-tax). Changes in interest rates and the market value of the securities held by the plans could materially change, positively or negatively, the funded status of the plans and affect the level of pension expense and required contributions in future years. The ultimate amount of contributions is also dependent upon the requirements of applicable laws and regulations. See Note 24, “Employee Benefit Plans,” in the Notes to Consolidated Financial Statements for additional information.
 
We participate in twelve U.S. multi-employer pension (MEP) plans that provide defined benefits to employees covered by collective bargaining agreements. At December 31, 2010, approximately 1,100 employees (approximately 4% of total employees) participated in these MEP plans. The annual net pension cost of the MEP plans is equal to the annual contribution determined in accordance with the provisions of negotiated labor contracts. Our current annualized MEP plan contributions total approximately $5 million. Pursuant to current U.S. pension laws, if any MEP plans fail to meet certain minimum funding thresholds, we could be required to make additional MEP plan contributions, until the respective labor agreement expires, of up to 10% of current contractual requirements. Several factors could cause MEP plans not to meet these minimum funding thresholds, including unfavorable investment performance, changes in participant demographics, and increased benefits to participants. The plan administrators and trustees of the MEP plans provide us with the annual funding notice as required by law. This notice sets forth the funded status of the plan as of the beginning of the prior year but does not provide any company-specific information.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
Employers participating in MEP plans can elect to withdraw from the plans, contingent upon labor union consent, and be subject to a withdrawal obligation based on, among other factors, the MEP plan’s unfunded vested benefits. U.S. pension regulations provide that an employer can fund its withdrawal obligation in a lump sum or over a time period of up to 20 years based on previous contribution rates. Based on the most recently available plan information, collectively as of January 2009, we estimate our pre-tax contingent MEP plan withdrawal obligation to be approximately $29 million. We have no current intention of taking any action that would subject us to the payment of material withdrawal obligations; however, under applicable law, in very limited circumstances, the plan trustee can impose these obligations on us.
 
Share Repurchase Programs and Cash Dividends
 
Refer to Note 20, “Share Repurchase Programs,” in the Notes to Consolidated Financial Statements for further discussion on our share repurchase programs.
 
Cash dividend payments to shareholders of common stock were $54 million in 2010, $53 million in 2009, and $52 million in 2008. During 2010, we increased our annual dividend to $1.08 per share of common stock.
 
Market Risk
 
In the normal course of business, we are exposed to fluctuations in interest rates, foreign currency exchange rates and fuel prices. We manage these exposures in several ways, including, in certain circumstances, the use of a variety of derivative financial instruments when deemed prudent. We do not enter into leveraged derivative financial transactions or use derivative financial instruments for trading purposes.
 
Exposure to market risk for changes in interest rates exists for our debt obligations. Our interest rate risk management program objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. We manage our exposure to interest rate risk primarily through the proportion of fixed-rate and variable-rate debt we hold in the total debt portfolio. From time to time, we also use interest rate swap and cap agreements to manage our fixed-rate and variable-rate exposure and to better match the repricing of debt instruments to that of our portfolio of assets. See Note 18, “Derivatives,” in the Notes to Consolidated Financial Statements for further discussion on interest rate swap agreements.
 
At December 31, 2010, we had $1.99 billion of fixed-rate debt outstanding (excluding capital leases) with a weighted-average interest rate of 5.6% and a fair value of $2.12 billion. A hypothetical 10% decrease or increase in the December 31, 2010 market interest rates would impact the fair value of our fixed-rate debt by approximately $32 million at December 31, 2010. Changes in the relative sensitivity of the fair value of our financial instrument portfolio for these theoretical changes in the level of interest rates are primarily driven by changes in our debt maturities, interest rate profile and amount.
 
At December 31, 2010, we had $742 million of variable-rate debt, including the impact of an interest rate swap, which effectively changed $250 million of fixed-rate debt instruments with an interest rate of 6.0% to LIBOR-based floating-rate debt with an interest rate of 2.63%. Changes in the fair value of the interest rate swap were offset by changes in the fair value of the debt instruments and no net gain or loss was recognized in earnings. The fair value of our interest rate swap agreement at December 31, 2010 was recorded as an asset totaling $15 million. The fair value of our variable-rate debt at December 31, 2010 was $741 million. A hypothetical 10 basis point change in market interest rates would impact pre-tax earnings from continuing operations by approximately $0.7 million.
 
We also are subject to interest rate risk with respect to our pension and postretirement benefit obligations, as changes in interest rates will effectively increase or decrease our liabilities associated with these benefit plans, which also results in changes to the amount of pension and postretirement benefit expense recognized each period.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
Exposure to market risk for changes in foreign currency exchange rates relates primarily to our foreign operations’ buying, selling and financing in currencies other than local currencies and to the carrying value of net investments in foreign subsidiaries. The majority of our transactions are denominated in U.S. dollars. The principal foreign currency exchange rate risks to which we are exposed include the Canadian dollar, British pound sterling and Mexican peso. We manage our exposure to foreign currency exchange rate risk related to our foreign operations’ buying, selling and financing in currencies other than local currencies by naturally offsetting assets and liabilities not denominated in local currencies to the extent possible. A hypothetical uniform 10% strengthening in the value of the dollar relative to all the currencies in which our transactions are denominated would result in a decrease to pre-tax earnings from continuing operations of approximately $4 million. We also use foreign currency option contracts and forward agreements from time to time to hedge foreign currency transactional exposure. We generally do not hedge the translation exposure related to our net investment in foreign subsidiaries, since we generally have no near-term intent to repatriate funds from such subsidiaries.
 
Exposure to market risk for fluctuations in fuel prices relates to a small portion of our service contracts for which the cost of fuel is integral to service delivery and the service contract does not have a mechanism to adjust for increases in fuel prices. At December 31, 2010, we also had various fuel purchase arrangements in place to ensure delivery of fuel at market rates in the event of fuel shortages. We are exposed to fluctuations in fuel prices in these arrangements since none of the arrangements fix the price of fuel to be purchased. Increases and decreases in the price of fuel are generally passed on to our customers for which we realize minimal changes in profitability during periods of steady market fuel prices. However, profitability may be positively or negatively impacted by sudden increases or decreases in market fuel prices during a short period of time as customer pricing for fuel services is established based on market fuel costs. We believe the exposure to fuel price fluctuations would not materially impact our results of operations, cash flows or financial position.
 
ENVIRONMENTAL MATTERS
 
Refer to Note 25, “Environmental Matters,” in the Notes to Consolidated Financial Statements for a discussion surrounding environmental matters.
 
CRITICAL ACCOUNTING ESTIMATES
 
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions. Our significant accounting policies are described in the Notes to Consolidated Financial Statements. Certain of these policies require the application of subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. These estimates and assumptions are based on historical experience, changes in the business environment and other factors that we believe to be reasonable under the circumstances. Different estimates that could have been applied in the current period or changes in the accounting estimates that are reasonably likely can result in a material impact on our financial condition and operating results in the current and future periods. We review the development, selection and disclosure of these critical accounting estimates with Ryder’s Audit Committee on an annual basis.
 
The following discussion, which should be read in conjunction with the descriptions in the Notes to Consolidated Financial Statements, is furnished for additional insight into certain accounting estimates that we consider to be critical.
 
Depreciation and Residual Value Guarantees.  We periodically review and adjust the residual values and useful lives of revenue earning equipment of our FMS business segment as described in Note 1, “Summary of Significant Accounting Policies — Revenue Earning Equipment, Operating Property and Equipment, and Depreciation” and “Summary of Significant Accounting Policies — Residual Value Guarantees and Deferred


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
Gains,” in the Notes to Consolidated Financial Statements. Reductions in residual values (i.e., the price at which we ultimately expect to dispose of revenue earning equipment) or useful lives will result in an increase in depreciation expense over the life of the equipment. Based on the mix of revenue earning equipment at December 31, 2010, a 10% decrease in expected vehicle residual values would increase depreciation expense in 2011 by approximately $100 million. We review residual values and useful lives of revenue earning equipment on an annual basis or more often if deemed necessary for specific groups of our revenue earning equipment. Reviews are performed based on vehicle class, generally subcategories of trucks, tractors and trailers by weight and usage. Our annual review is established with a long-term view considering historical market price changes, current and expected future market price trends, expected life of vehicles included in the fleet and extent of alternative uses for leased vehicles (e.g., rental fleet, and SCS and DCC applications). As a result, future depreciation expense rates are subject to change based upon changes in these factors. At the end of each year, we complete our annual review of the residual values and useful lives of revenue earning equipment. Based on the results of our analysis in 2010, we will adjust the residual values and useful lives of certain classes of our revenue earning equipment effective January 1, 2011. The change will increase earnings in 2011 by approximately $5 million compared with 2010. Factors that could cause actual results to materially differ from the estimated results include significant changes in the used-equipment market brought on by unforeseen changes in technology innovations and any resulting changes in the useful lives of used equipment.
 
We also lease vehicles under operating lease agreements. Certain of these agreements contain limited guarantees for a portion of the residual values of the equipment. Results of the reviews described above for owned equipment are also applied to equipment under operating lease. The amount of residual value guarantees expected to be paid is recognized as rent expense over the expected remaining term of the lease. At December 31, 2010, total liabilities for residual value guarantees of $4 million were included in “Accrued expenses and other current liabilities” (for those payable in less than one year) and in “Other non-current liabilities.” Based on the existing mix of vehicles under operating lease agreements at December 31, 2010, a 10% decrease in expected vehicle residual values would increase rent expense in 2011 by approximately $1 million.
 
Pension Plans.  We apply actuarial methods to determine the annual net periodic pension expense and pension plan liabilities on an annual basis, or on an interim basis if there is an event requiring remeasurement. Each December, we review actual experience compared with the more significant assumptions used and make adjustments to our assumptions, if warranted. In determining our annual estimate of periodic pension cost, we are required to make an evaluation of critical factors such as discount rate, expected long-term rate of return, expected increase in compensation levels, retirement rate and mortality. Discount rates are based upon a duration analysis of expected benefit payments and the equivalent average yield for high quality corporate fixed income investments as of our December 31 annual measurement date. In order to provide a more accurate estimate of the discount rate relevant to our plan, we use models that match projected benefits payments of our primary U.S. plan to coupons and maturities from a hypothetical portfolio of high quality corporate bonds. Long-term rate of return assumptions are based on actuarial review of our asset allocation strategy and long-term expected asset returns. Investment management and other fees paid using plan assets are factored into the determination of asset return assumptions. In 2010, we adjusted our long-term expected rate of return assumption for our primary U.S. plan down to 7.65% from 7.9% based on the factors reviewed. The composition of our pension assets was 67% equity securities and 33% debt securities and other investments. As part of our strategy to manage future pension costs and net funded status volatility, we regularly assess our pension investment strategy. We evaluate our mix of investments between equity and fixed income securities and may adjust the composition of our pension assets when appropriate. For 2011, we changed our target asset allocation to 60% equity securities, 30% fixed income, and 10% all other types of investments. The rate of increase in compensation levels and retirement rates are based primarily on actual experience.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
Accounting guidance applicable to pension plans does not require immediate recognition of the effects of a deviation between these assumptions and actual experience or the revision of an estimate. This approach allows the favorable and unfavorable effects that fall within an acceptable range to be netted and recorded within “Accumulated other comprehensive loss.” We had a pre-tax actuarial loss of $658 million at the end of 2010 compared with a loss of $638 million at the end of 2009. The increase in the net actuarial loss in 2010 resulted primarily from a lower discount rate partially offset by higher than expected pension asset returns. To the extent the amount of actuarial gains and losses exceed 10% of the larger of the benefit obligation or plan assets, such amount is amortized over the average remaining life expectancy of active participants or the remaining life expectancy of inactive participants if all or almost all of a plan’s participants are inactive. The amount of the actuarial loss subject to amortization in 2011 and future years will be $484 million. The effect on years beyond 2011 will depend substantially upon the actual experience of our plans.
 
Disclosure of the significant assumptions used in arriving at the 2010 net pension expense is presented in Note 24, “Employee Benefit Plans,” in the Notes to Consolidated Financial Statements. A sensitivity analysis of 2010 net pension expense to changes in key underlying assumptions for our primary plan, the U.S. pension plan, is presented below.
 
                                 
                      Effect on
 
                Impact on 2010 Net
    December 31, 2010
 
    Assumed Rate     Change     Pension Expense     Projected Benefit Obligation  
 
Expected long-term rate of return on assets
    7.65%       +/− 0.25 %     −/+ $2.0 million          
Discount rate increase
    6.20%       + 0.25 %     − $3.0 million       − $3 million  
Discount rate decrease
    6.20%       − 0.25 %     + $3.0 million       + $3 million  
Actual return on assets
    7.65%       +/− 0.25 %     −/+ $0.3 million          
 
Self-Insurance Accruals.  Self-insurance accruals were $243 million as of December 31, 2010 and 2009. The majority of our self-insurance relates to vehicle liability and workers’ compensation. We use a variety of statistical and actuarial methods that are widely used and accepted in the insurance industry to estimate amounts for claims that have been reported but not paid and claims incurred but not reported. In applying these methods and assessing their results, we consider such factors as frequency and severity of claims, claim development and payment patterns and changes in the nature of our business, among other factors. Such factors are analyzed for each of our business segments. Our estimates may be impacted by such factors as increases in the market price for medical services, unpredictability of the size of jury awards and limitations inherent in the estimation process. During 2010, 2009, and 2008, we recorded a (charge) benefit of $(3) million, $1 million, and $23 million, respectively, from development in estimated prior years’ self-insured loss reserves. Based on self-insurance accruals at December 31, 2010, a 5% adverse change in actuarial claim loss estimates would increase operating expense in 2011 by approximately $11 million.
 
Goodwill Impairment.  We assess goodwill for impairment, as described in Note 1, “Summary of Significant Accounting Policies — Goodwill and Other Intangible Assets,” in the Notes to Consolidated Financial Statements, on an annual basis or more often if deemed necessary. At December 31, 2010, goodwill totaled $356 million. To determine whether goodwill impairment indicators exist, we are required to assess the fair value of the reporting unit and compare it to the carrying value. A reporting unit is a component of an operating segment for which discrete financial information is available and management regularly reviews its operating performance.
 
Our valuation of fair value for each reporting unit is determined based on an average of discounted future cash flow models that use ten years of projected cash flows and various terminal values based on multiples, book value or growth assumptions. We considered the current trading multiples for comparable publicly-traded companies and the historical pricing multiples for comparable merger and acquisition transactions that have occurred in our industry. Rates used to discount cash flows are dependent upon interest rates and the cost of capital at a point in time. Our discount rates reflect a weighted average cost of capital based on our industry


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
and capital structure adjusted for equity risk premiums and size risk premiums based on market capitalization. Estimates of future cash flows are dependent on our knowledge and experience about past and current events and assumptions about conditions we expect to exist, including long-term growth rates, capital requirements and useful lives. Our estimates of cash flows are also based on historical and future operating performance, economic conditions and actions we expect to take. In addition to these factors, our SCS reporting units are dependent on several key customers or industry sectors. The loss of a key customer may have a significant impact to one of our SCS reporting units, causing us to assess whether or not the event resulted in a goodwill impairment loss. While we believe our estimates of future cash flows are reasonable, there can be no assurance that deterioration in economic conditions, customer relationships or adverse changes to expectations of future performance will not occur, resulting in a goodwill impairment loss. Our annual impairment test performed as of April 1, 2010 did not result in any impairment of goodwill. The excess of fair value over carrying value for each of our reporting units as of April 1, 2010, our annual testing date, ranged from approximately $2 million to approximately $597 million. The fair value of our reporting units with a material amount of goodwill significantly exceeded the carrying value. In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test, we applied a hypothetical 5% decrease to the fair values of each reporting unit. This hypothetical 5% decrease would result in excess fair value over carrying value ranging from approximately $1 million to approximately $395 million for each of our reporting units.
 
Revenue Recognition.  We recognize revenue when persuasive evidence of an arrangement exists, the services have been rendered to customers or delivery has occurred, the pricing is fixed or determinable, and collectibility is reasonably assured. In the normal course of business, we may act as or use an agent in executing transactions with our customers. In these arrangements, we evaluate whether we should report revenue based on the gross amount billed to the customer or on the net amount received from the customer after payments to third parties.
 
Determining whether revenue should be reported as gross or net is based on an assessment of whether we are acting as the principal or the agent in the transaction and involves judgment based on the terms of the arrangement. To the extent we are acting as the principal in the transaction, revenue is reported on a gross basis. To the extent we are acting as an agent in the transaction, revenue is reported on a net basis. In the majority of our arrangements, we are acting as a principal and therefore report revenue on a gross basis. However, our SCS business segment engages in some transactions where we act as agents and thus record revenue on a net basis. The impact on net earnings is the same whether we record revenue on a gross or net basis.
 
In transportation management arrangements where we act as principal, revenue is reported on a gross basis for subcontracted transportation billed to our customers. From time to time, the terms and conditions of our transportation management arrangements may change, which could require a change in revenue recognition from a gross basis to a net basis or vice versa. Our non-GAAP measure of operating revenue would not be impacted from this change in revenue reporting.
 
Income Taxes.  Our overall tax position is complex and requires careful analysis by management to estimate the expected realization of income tax assets and liabilities.
 
Tax regulations require items to be included in the tax return at different times than the items are reflected in the financial statements. As a result, the effective tax rate reflected in the financial statements is different than that reported in the tax return. Some of these differences are permanent, such as expenses that are not deductible on the tax return, and some are timing differences, such as depreciation expense. Timing differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in the tax return in future years for which we have already recorded the tax benefit in the financial statements. Deferred tax assets amounted to $365 million and $320 million at December 31, 2010 and 2009, respectively. We record a valuation allowance for deferred tax assets to reduce such assets to amounts expected to be realized. At December 31, 2010 and 2009, the deferred tax valuation


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
allowance, principally attributed to foreign tax loss carryforwards in the SCS business segment, was $39 million and $37 million, respectively. In determining the required level of valuation allowance, we consider whether it is more likely than not that all or some portion of deferred tax assets will not be realized. This assessment is based on management’s expectations as to whether sufficient taxable income of an appropriate character will be realized within tax carryback and carryforward periods. Our assessment involves estimates and assumptions about matters that are inherently uncertain, and unanticipated events or circumstances could cause actual results to differ from these estimates. Should we change our estimate of the amount of deferred tax assets that we would be able to realize, an adjustment to the valuation allowance would result in an increase or decrease to the provision for income taxes in the period such a change in estimate was made.
 
We are subject to tax audits in numerous jurisdictions in the U.S. and around the world. Tax audits by their very nature are often complex and can require several years to complete. In the normal course of business, we are subject to challenges from the Internal Revenue Service (IRS) and other tax authorities regarding amounts of taxes due. These challenges may alter the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions. As part of our calculation of the provision for income taxes on earnings, we determine whether the benefits of our tax positions are at least more likely than not of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, we accrue the largest amount of the benefit that is more likely than not of being sustained in our consolidated financial statements. Such accruals require management to make estimates and judgments with respect to the ultimate outcome of a tax audit. Actual results could vary materially from these estimates. We adjust these reserves, including any impact on the related interest and penalties, in light of changing facts and circumstances, such as progress of a tax audit.
 
A number of years may elapse before a particular matter for which we have established a reserve is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction. The tax benefit that has been previously reserved because of a failure to meet the “more likely than not” recognition threshold would be recognized in our income tax expense in the first interim period when the uncertainty is resolved under any one of the following conditions: (1) the tax position is “more likely than not” to be sustained, (2) the tax position, amount, and/or timing is ultimately settled through negotiation or litigation, or (3) the statute of limitations for the tax position has expired. Settlement of any particular issue would usually require the use of cash. See Note 14, “Income Taxes,” in the Notes to Consolidated Financial Statements for further discussion of the status of tax audits and uncertain tax positions.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
See Note 1, “Summary of Significant Accounting Policies — Recent Accounting Pronouncements,” in the Notes to Consolidated Financial Statements for a discussion of recent accounting pronouncements.
 
NON-GAAP FINANCIAL MEASURES
 
This Annual Report on Form 10-K includes information extracted from consolidated financial information but not required by generally accepted accounting principles (GAAP) to be presented in the financial statements. Certain of this information are considered “non-GAAP financial measures” as defined by SEC rules. Specifically, we refer to adjusted return on average capital, operating revenue, salaries and employee-related costs as a percentage of operating revenue, FMS operating revenue, FMS NBT as a % of operating revenue, SCS operating revenue, SCS NBT as a % of operating revenue, DCC operating revenue, DCC NBT as a % of operating revenue, total cash generated, free cash flow, total obligations, total obligations to equity, and comparable earnings from continuing operations and comparable earnings per diluted common share from continuing operations. We believe that the comparable earnings from continuing operations and comparable earnings per diluted common share from continuing operations measures provide useful information to investors because they exclude significant items that are unrelated to our ongoing business operations. As


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
required by SEC rules, we provide a reconciliation of each non-GAAP financial measure to the most comparable GAAP measure and an explanation why management believes that presentation of the non-GAAP financial measure provides useful information to investors. Non-GAAP financial measures should be considered in addition to, but not as a substitute for or superior to, other measures of financial performance prepared in accordance with GAAP.
 
The following table provides a numerical reconciliation of earnings from continuing operations before income taxes to comparable earnings from continuing operations before income taxes for the years ended December 31, 2008, 2007 and 2006 which was not provided within the MD&A discussion:
 
                         
    Years ended December 31  
    2008     2007     2006  
    (In thousands)  
 
Earnings from continuing operations before income taxes
  $ 409,288       402,204       390,275  
Net restructuring charges
    21,480       9,290        
International impairment
    1,617              
Gain on sale of property
          (10,110 )      
Pension accounting charge
                5,872  
                         
Comparable earnings from continuing operations before income taxes
  $ 432,385       401,384       396,147  
                         
 
The following table provides a numerical reconciliation of net cash provided by operating activities to free cash flow for the years ended December 31, 2007 and 2006 which was not provided within the MD&A discussion:
 
                 
    Years ended December 31  
    2007     2006  
    (In thousands)  
 
Net cash provided by operating activities
  $ 1,096,559       852,466  
Sales of revenue earning equipment
    354,736       326,134  
Sales of operating property and equipment
    18,725       6,256  
Collections on direct finance leases
    62,346       65,343  
Sale and leaseback of revenue earning equipment
    150,348        
Other, net
    1,588       2,196  
                 
Total cash generated
    1,684,302       1,252,395  
Purchases of property and revenue earning equipment
    (1,304,033 )     (1,691,007 )
                 
Free cash flow
  $ 380,269       (438,612 )
                 


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
The following table provides a numerical reconciliation of earnings from continuing operations and earnings per diluted common share from continuing operations to comparable earnings from continuing operations and comparable earnings per diluted common share from continuing operations for the years ended December 31, 2008, 2007 and 2006 which was not provided within the MD&A discussion:
 
                         
    Years ended December 31  
    2008     2007     2006  
    (In thousands)  
 
Earnings from continuing operations
  $ 257,579       251,779       246,694  
Net restructuring charges
    17,493       5,935        
Tax law changes and/or benefits from reserve reversals
    (9,545 )     (3,333 )     (6,796 )
International asset impairment
    1,617              
Gain on sale of property
          (6,154 )      
Pension accounting charge
                3,720  
                         
Comparable earnings from continuing operations
  $ 267,144       248,227       243,618  
                         
Earnings per diluted common share from continuing operations
  $ 4.51       4.19       3.99  
Net restructuring charges
    0.31       0.10        
Tax law changes/or benefits from reserve reversals
    (0.17 )     (0.06 )     (0.11 )
International asset impairment
    0.03              
Gain on sale of property
          (0.10 )      
Pension accounting charge
                0.06  
                         
Comparable earnings per diluted common share from continuing operations
  $ 4.68       4.13       3.94  
                         
 
The following table provides a numerical reconciliation of total revenue to operating revenue for the years ended December 31, 2010, 2009 and 2008 which was not provided within the MD&A discussion:
 
                         
    Years ended December 31  
    2010     2009     2008  
    (In thousands)  
 
Total revenue
  $ 5,136,435       4,887,254       5,999,041  
FMS fuel services and SCS/DCC subcontracted transportation revenue
    (1,126,946 )     (948,963 )     (1,648,434 )
Fuel eliminations
    148,750       124,221       239,473  
                         
Operating revenue
  $ 4,158,239       4,062,512       4,590,080  
                         
 
The following table provides a numerical reconciliation of total revenue to operating revenue for the three months ended December 31, 2010 and 2009 which was not provided within the MD&A discussion:
 
                 
    Three months ended December 31,  
    2010     2009  
    (In thousands)  
 
Total revenue
    1,313,426       1,246,968  
FMS fuel services and SCS/DCC subcontracted transportation
    (291,159 )     (261,079 )
Fuel eliminations
    39,672       33,933  
                 
Operating revenue
    1,061,939       1,019,822  
                 


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
The following table provides a numerical reconciliation of net earnings to adjusted net earnings and average total debt to adjusted average total capital for the years ended December 31, 2010, 2009, 2008, 2007 and 2006 which was not provided within the MD&A discussion:
 
                                         
    Years ended December 31  
    2010     2009     2008     2007     2006  
    (Dollars in thousands)  
 
Net earnings [A]
  $ 118,170       61,945       199,881       253,861       248,959  
Restructuring and other charges, net and other items(1)
    6,225       29,943       70,447       1,467        
Income taxes
    60,610       53,737       150,075       151,603       144,014  
                                         
Adjusted net earnings before income taxes
    185,005       145,625       420,403       406,931       392,973  
Adjusted interest expense(2)
    132,778       149,968       164,975       169,060       146,565  
Adjusted income taxes(3)
    (123,429 )     (121,758 )     (230,456 )     (219,971 )     (207,183 )
                                         
Adjusted net earnings [B]
  $ 194,354       173,835       354,922       356,020       332,355  
                                         
                                         
Average total debt
  $ 2,512,005       2,691,569       2,881,931       2,847,692       2,480,314  
Average off-balance sheet debt
    114,212       141,629       170,694       150,124       98,767  
                                         
Average obligations [C]
    2,626,217       2,833,198       3,052,625       2,997,816       2,579,081  
                                         
Average shareholders’ equity [D]
    1,401,681       1,395,629       1,778,489       1,790,814       1,610,328  
Average adjustments to shareholders’ equity(4)
    2,059       15,645       9,608       855       (5,114 )
                                         
Average adjusted shareholders’ equity [E]
    1,403,740       1,411,274       1,788,097       1,791,669       1,605,214  
                                         
Average adjusted capital
  $ 4,029,957       4,244,472       4,840,722       4,789,485       4,184,295  
                                         
Return on average shareholders’ equity (%) [A/D]
    8.4       4.4       11.2       14.2       15.5  
                                         
Adjusted return on average capital (%) [B]/[C+E]
    4.8       4.1       7.3       7.4       7.9  
                                         
 
 
(1) For 2010, 2009 and 2008, see Note 4, “Discontinued operations,” Note 5, “Restructuring and Other Charges” and Note 26, “Other Items Impacting Comparability,” in the Notes to Consolidated Financial Statements; 2007 includes restructuring and other charges of $11 million in the second half of 2007 and a gain of $10 million related to the sale of property in the third quarter.
 
(2) Includes interest on off-balance sheet vehicle obligations.
 
(3) Calculated by excluding taxes related to restructuring and other charges, net and other items, impacts of tax law changes or reserve reversals and interest expense.
 
(4) Represents shareholders’ equity adjusted for restructuring and other charges and other items, net of their related tax effects, as discussed above.
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Forward-looking statements (within the meaning of the Federal Private Securities Litigation Reform Act of 1995) are statements that relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends concerning matters that are not historical facts. These statements are often preceded by or include the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will,” “may,” “could,” “should” or similar expressions. This Annual Report contains forward-looking statements including, but not limited to, statements regarding:
 
  •  our expectations as to anticipated revenue and earnings, as well as future economic conditions and market demand, with respect to earnings per share, operating revenue, contractual and maintenance revenue improvement, positive commercial rental performance and used vehicle sales results, freight volume projections, outsourced logistics growth and increased revenue from recent acquisitions;
 
  •  our ability to successfully achieve the operational goals that are the basis of our business strategies, including improving customer retention levels, focusing on sales and revenue growth in contractual product


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)
 
offerings, delivering industry leading maintenance in a cost effective manner, offering competitive pricing, a wide range of support services and value-added differentiation, optimizing asset utilization and management, leveraging infrastructure, providing operational execution, expanding our expertise and market presence in certain supply chain industry segments and maintaining a diversified customer base;
 
  •  impact of losses from conditional obligations arising from guarantees;
 
  •  number of NLE vehicles in inventory and the size of our contractual lease and commercial rental fleets;
 
  •  estimates of free cash flow and capital expenditures for 2011;
 
  •  the adequacy of our accounting estimates and reserves for pension expense, employee benefit plan obligations, depreciation and residual value guarantees, self-insurance reserves, impairment of goodwill and other long-lived assets, revenue recognition, allowance for accounts receivable, income taxes, contingent liabilities, fair value estimates, risk of loss under derivative instruments and hedging activities and accounting changes;
 
  •  our ability to fund all of our operations for the foreseeable future through internally generated funds and outside funding sources;
 
  •  future availability and our expected use of outside funding sources;
 
  •  the anticipated impact of fuel price fluctuations;
 
  •  our expectations as to future pension expense, contributions and return on plan assets;
 
  •  our expectations relating to withdrawal liability and funding levels of multi-employer plans;
 
  •  the anticipated deferral of federal and state tax gains on disposal of eligible revenue earning equipment pursuant to our vehicle like-kind exchange program;
 
  •  our expectations regarding the completion and ultimate outcome of certain tax audits;
 
  •  the impact of recent U.S. tax law changes;
 
  •  the ultimate disposition of legal proceedings and estimated environmental liabilities;
 
  •  our expectations relating to compliance with new regulatory requirements; and
 
  •  our expectations regarding the effect of the adoption of recent accounting pronouncements.
 
These statements, as well as other forward-looking statements contained in this Annual Report, are based on our current plans and expectations and are subject to risks, uncertainties and assumptions. We caution readers that certain important factors could cause actual results and events to differ significantly from those expressed in any forward-looking statements. For a detailed description of certain of these risk factors, please see “Item 1A. Risk Factors” of this Annual Report.
 
The risks included in the Annual Report are not exhaustive. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors or to assess the impact of such risk factors on our business. As a result, no assurance can be given as to our future results or achievements. You should not place undue reliance on the forward-looking statements contained herein, which speak only as of the date of this Annual Report. We do not intend, or assume any obligation, to update or revise any forward-looking statements contained in this Annual Report, whether as a result of new information, future events or otherwise.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
The information required by ITEM 7A is included in ITEM 7 (page 50) of PART II of this report.


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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
FINANCIAL STATEMENTS
 
         
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    97  
    99  
    99  
    101  
    102  
    103  
    103  
    107  
    116  
    116  
    117  
    117  
    117  
    122  
Consolidated Financial Statement Schedule for the Years Ended December 31, 2010, 2009 and 2008:
       
    123  
 
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.


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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 
TO THE SHAREHOLDERS OF RYDER SYSTEM, INC.:
 
Management of Ryder System, Inc., together with its consolidated subsidiaries (Ryder), is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a- 15(f) under the Securities Exchange Act of 1934. Ryder’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
 
Ryder’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Ryder; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of Ryder’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Ryder’s assets that could have a material effect on the consolidated financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Management assessed the effectiveness of Ryder’s internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control — Integrated Framework.” Based on our assessment and those criteria, management determined that Ryder maintained effective internal control over financial reporting as of December 31, 2010.
 
Ryder’s independent registered certified public accounting firm has audited the effectiveness of Ryder’s internal control over financial reporting. Their report appears on page 62.


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REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM
 
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
RYDER SYSTEM, INC.:
 
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, shareholders’ equity, and cash flows present fairly, in all material respects, the financial position of Ryder System, Inc. and its subsidiaries at December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
/s/ PricewaterhouseCoopers LLP
 
February 14, 2011
Miami, Florida


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RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
 
                         
    Years ended December 31  
    2010     2009     2008  
    (In thousands, except per share amounts)  
 
Revenue
  $ 5,136,435       4,887,254       5,999,041  
                         
Operating expense (exclusive of items shown separately)
    2,441,924       2,229,539       2,959,518  
Salaries and employee-related costs
    1,255,659       1,233,243       1,345,216  
Subcontracted transportation
    261,325       198,860       233,106  
Depreciation expense
    833,841       881,216       836,149  
Gains on vehicle sales, net
    (28,727 )     (12,292 )     (39,020 )
Equipment rental
    63,228       65,828       78,292  
Interest expense
    129,994       144,342       152,448  
Miscellaneous (income) expense, net
    (7,114 )     (3,657 )     2,564  
Restructuring and other charges, net
          6,406       21,480  
                         
      4,950,130       4,743,485       5,589,753  
                         
Earnings from continuing operations before income taxes
    186,305       143,769       409,288  
Provision for income taxes
    61,697       53,652       151,709  
                         
Earnings from continuing operations
    124,608       90,117       257,579  
Loss from discontinued operations, net of tax
    (6,438 )     (28,172 )     (57,698 )
                         
Net earnings
  $ 118,170       61,945       199,881  
                         
Earnings (loss) per common share — Basic
                       
Continuing operations
  $ 2.38       1.62       4.54  
Discontinued operations
    (0.13 )     (0.51 )     (1.02 )
                         
Net earnings
  $ 2.25       1.11       3.52  
                         
Earnings (loss) per common share — Diluted
                       
Continuing operations
  $ 2.37       1.62       4.51  
Discontinued operations
    (0.12 )     (0.51 )     (1.01 )
                         
Net earnings
  $ 2.25       1.11       3.50  
                         
 
See accompanying notes to consolidated financial statements.


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RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
                 
    December 31  
    2010     2009  
    (Dollars in thousands, except per share amount)  
 
Assets:
               
Current assets:
               
Cash and cash equivalents
  $ 213,053       98,525  
Receivables, net
    615,003       598,661  
Inventories
    58,701       50,146  
Prepaid expenses and other current assets
    136,544       133,041  
                 
Total current assets
    1,023,301       880,373  
Revenue earning equipment, net of accumulated depreciation of $3,247,400 and $3,013,179, respectively
    4,201,218       4,178,659  
Operating property and equipment, net of accumulated depreciation of $880,757 and $855,657, respectively
    606,843       543,910  
Goodwill
    355,842       216,444  
Intangible assets
    72,269       39,120  
Direct financing leases and other assets
    392,901       401,324  
                 
Total assets
  $ 6,652,374       6,259,830  
                 
Liabilities and shareholders’ equity:
               
Current liabilities:
               
Short-term debt and current portion of long-term debt
  $ 420,124       232,617  
Accounts payable
    294,380       262,712  
Accrued expenses and other current liabilities
    417,015       354,945  
                 
Total current liabilities
    1,131,519       850,274  
Long-term debt
    2,326,878       2,265,074  
Other non-current liabilities
    680,808       681,613  
Deferred income taxes
    1,108,856       1,035,874  
                 
Total liabilities
    5,248,061       4,832,835