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

FORM 10-Q

or

Commission File Number: 1-4364

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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
YES þ NO o

Ryder System, Inc. Common Stock ($0.50 par value per share) outstanding as of April 26, 2004 was 65,414,551.

RYDER SYSTEM, INC.
Form 10-Q Quarterly Report

TABLE OF CONTENTS

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Ryder System, Inc. and Subsidiaries
Consolidated Condensed Statements of Earnings
(unaudited)

See accompanying notes to consolidated condensed financial statements.

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See accompanying notes to consolidated condensed financial statements.

2

Ryder System, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(unaudited)

See accompanying notes to consolidated condensed financial statements.

3

Ryder System, Inc. and Subsidiaries
Consolidated Condensed Statements of Shareholders’ Equity

See accompanying notes to consolidated condensed financial statements.

4

Ryder System, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements
(unaudited)

(A) INTERIM FINANCIAL STATEMENTS

       The accompanying unaudited consolidated condensed financial statements include the accounts of Ryder System, Inc. and subsidiaries, which have been prepared in accordance with the accounting policies described in the 2003 Annual Report on Form 10-K, and should be read in conjunction with the consolidated financial statements and notes thereto. These statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (primarily consisting of normal recurring accruals) considered necessary for a fair presentation have been included and the disclosures herein are adequate. The operating results for interim periods are unaudited and are not necessarily indicative of the results that can be expected for a full year. Certain prior year amounts have been reclassified to conform to current period presentation.

(B) CONSOLIDATION OF VARIABLE INTEREST ENTITIES

       Effective July 1, 2003, we adopted Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities,” that establishes accounting guidance for identifying variable interest entities (VIEs), including special-purpose entities, and when to include the assets, liabilities, noncontrolling interests and results of activities of VIEs in an enterprise’s consolidated financial statements. As a result of adopting FIN 46, we consolidated three VIEs that were established in connection with sale-leaseback transactions of revenue earning equipment in which we sold revenue earning equipment to a special-purpose entity and then leased the revenue earning equipment back as lessee under operating lease arrangements. As part of these transactions, we provided credit enhancements and residual value guarantees that obligate us to absorb the majority of the expected losses from such entities, if any are realized. Therefore, FIN 46 required that these entities be consolidated. The credit enhancements, in the form of cash reserve deposits (included in “Direct financing leases and other assets”), as well as the revenue earning equipment under lease serve as collateral for the VIEs’ long-term borrowings. The creditors of the VIEs do not have recourse to the general assets of Ryder.

       The assets and liabilities of consolidated VIEs are measured in the amounts at which they would have been recorded in the consolidated financial statements if FIN 46 had been effective at the inception of the transactions. Accordingly, effective July 1, 2003, we recorded additional revenue earning equipment of $421.4 million and additional debt of $414.0 million associated with 15,800 units, in addition to recognizing a non-cash cumulative effect charge of $3.0 million on an after-tax basis, or $0.05 per diluted share. Concurrent with the consolidation of the VIEs, we began recognizing depreciation expense attributed to the revenue earning equipment of the VIEs and interest expense on the additional debt of the VIEs in lieu of rent expense. The cumulative effect charge primarily represented depreciation and interest expense of the VIEs that would have been recorded had FIN 46 been in effect since lease inception, in excess of rent expense recorded under operating leases. The charge is expected to reverse in operating earnings over the next three years. The consolidation of the VIEs did not have a significant impact on our consolidated net earnings. Net earnings for the period ended March 31, 2003 would not have been materially different if this standard had been adopted effective January 1, 2003. However, both net cash provided by operating activities and used in financing activities presented on our Consolidated Condensed Statements of Cash Flows for the period ended March 31, 2004 increased due to the add-back of depreciation expense on the VIEs’ revenue earning equipment and principal payments on the VIEs’ debt, respectively.

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(C) OTHER ACCOUNTING CHANGES

       Effective January 1, 2003, we adopted SFAS No. 143, “Accounting for Asset Retirement Obligations,” which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made, and that the associated asset retirement costs be capitalized as part of the carrying amount of the long-lived asset. The cumulative effect adjustment recognized upon adoption of this standard was $1.2 million on an after-tax basis, or $0.02 per diluted share, consisting primarily of costs associated with the retirement of certain components of revenue earning equipment.

(D) ACQUISITIONS

       Ruan Acquisition — On March 1, 2004, Ryder completed an asset purchase agreement with Ruan Leasing Company (Ruan) under which we acquired Ruan’s fleet of over 6,400 vehicles, 37 of its 111 service locations and more than 500 customers. Ryder also acquired full service contract maintenance agreements covering approximately 1,700 vehicles. The combined Ryder/Ruan network allows us to leverage our existing U.S. infrastructure in key markets while adding new infrastructure to strengthen our presence in targeted areas of the Midwest, Southeast, Mid-Atlantic and Southwest. The purchase price of approximately $148 million, which is subject to post closing adjustments, was allocated to the net assets acquired based on their fair values. As of March 31, 2004, approximately $140 million of the purchase price had been paid with the remaining amount expected to be paid over the next two years, subject to holdback provisions set forth in the agreement. The initial recording of the transaction was based on preliminary valuation assessments and is subject to change. The following is a summary of the estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition:

       General Acquisition — On December 31, 2003, Ryder completed an asset purchase agreement with General Car and Truck Leasing System, Inc. (General) under which we acquired General’s fleet of over 4,200 vehicles, 15 service locations and more than 700 customers. The combined Ryder/General network allows us to leverage our existing U.S. infrastructure in key markets while adding new infrastructure to strengthen our presence in targeted areas of the Midwest and Southeast. The purchase price of approximately $109 million, which is subject to post closing adjustments, was allocated to the net assets acquired based on their fair values. As of March 31, 2004, approximately $103 million of the purchase price had been paid with the remaining amount expected to be paid in 2004 and 2005, subject to holdback provisions set forth in the agreement.

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       As described in the 2003 Annual Report and in connection with the acquisition of General, the original recorded amount of net assets transferred to Ryder from General was approximately $109 million. The amount of net assets transferred was subject to a review process between both parties under terms of the agreement. The following table provides a rollforward of the original amounts disclosed:

       The results of Ruan and General have been included in the consolidated condensed financial statements from the date of acquisition. Had the results of these businesses been included in operations commencing January 1, 2003, first quarter unaudited pro forma revenue, earnings before cumulative effect of change in accounting principle and net earnings would have been $1,235.3 million, $33.7 million ($0.51 per diluted share) and $33.7 million ($0.51 per diluted share), respectively in 2004 and $1,257.6 million, $21.1 million ($0.34 per diluted share) and $20.0 million ($0.32 per diluted share), respectively in 2003. This pro forma information is not necessarily indicative either of the combined results of operations, which actually would have been realized had the acquisitions been consummated during the period for which the pro forma information is presented, or of future results.

(E) REVENUE EARNING EQUIPMENT, NET

       At March 31, 2004 and December 31, 2003, the net carrying value of revenue earning equipment held for sale was $59.3 million and $55.8 million, respectively.

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(F) GOODWILL AND OTHER INTANGIBLE ASSETS

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

(G) INCOME TAXES

       We are subject to audit 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. The audit of our federal income tax returns for 1995 through 1997 is currently in the appeals process with the Internal Revenue Service (IRS). Management believes that the ultimate outcome of the audit will not result in a material adverse impact on consolidated results of operations or financial position. In 2003, the IRS began auditing our federal income tax returns for 1998 through 2000. In the normal course of business, we are subject to challenges from the IRS and other tax authorities regarding amounts of taxes due. Assuming this audit follows normal course, we expect the nature and extent of any challenges from the IRS will become known over the next year. These challenges may alter the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions. As part of our calculation of the provision for income taxes on earnings, we record the amount we expect to incur as a result of audits. Such accruals require management to make estimates and judgments with respect to the ultimate outcome of a tax audit. The amount ultimately paid upon resolution of issues raised may differ materially from the amount accrued. Management believes that taxes accrued on the consolidated condensed balance sheet fairly represent the amount of future tax liability due by Ryder.

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(H) DEBT AND OTHER FINANCING

       Ryder can borrow up to $860.0 million through a global revolving credit facility with a syndicate of lenders. The facility is composed of $300.0 million, which matures in May 2004 and is renewable annually (and is in the process of being renewed), and $560.0 million, which matures in May 2006. The primary purposes of the credit facility are to finance working capital and to provide support for the issuance of commercial paper. At Ryder’s option, the interest rate on borrowings under the credit facility is based on LIBOR, prime, federal funds or local equivalent rates. The credit facility’s annual facility fee ranges from 12.5 to 15.0 basis points applied to the total facility of $860.0 million based on Ryder’s current credit rating. At March 31, 2004, $736.4 million was available under this global credit facility. Of this amount, $300.0 million was available at a maturity of less than one year. Foreign borrowings of $63.6 million were outstanding under the facility at March 31, 2004. In order to maintain availability of funding, the global revolving credit facility requires Ryder to maintain a ratio of debt to consolidated adjusted tangible net worth, as defined, of less than or equal to 300%. The ratio at March 31, 2004 was 119%.

       During 2004, we issued 3.5% unsecured medium-term notes with an aggregate principal amount of $135.0 million, which mature primarily in March 2009. The proceeds from the notes were used to reduce other outstanding borrowings.

       During 2003, Ryder filed a universal shelf registration statement with the Securities and Exchange Commission to issue up to $800.0 million of available securities. Proceeds from debt issuances under the universal shelf registration statement are expected to be used for capital expenditures, debt refinancings and general corporate purposes. As of March 31, 2004, Ryder had $665.0 million of debt securities available for issuance under the registration statement.

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       At March 31, 2004, Ryder had letters of credit outstanding totaling $163.3 million, which primarily guarantee various insurance activities. Certain of these letters of credit guarantee insurance activities associated with insurance claim liabilities transferred in conjunction with the sale of certain businesses reported as discontinued operations in previous years. To date, the insurance claims, representing per claim deductibles payable under third-party insurance policies, have been paid by the companies that assumed such liabilities. However, if all or a portion of the assumed claims of approximately $12 million are unable to be paid, the third-party insurers may have recourse against certain of the outstanding letters of credit provided by Ryder in order to satisfy the unpaid claim deductibles. In order to reduce our potential exposure to these claims, we have received letters of credit from the purchaser of the businesses referred to above of totaling $5.5 million and are contracted to receive an additional letter of credit in the amount of $1.0 million each quarter through the third quarter of 2005. At such time, and periodically thereafter, an actuarial valuation will be made to determine the remaining amount of the insurance claim liabilities and the letters of credit issued in our favor will be adjusted accordingly.

(I) EARNINGS PER SHARE

       Basic earnings per share is computed by dividing net earnings by the weighted-average number of common shares outstanding. Restricted stock granted to employees and directors are not included in the computation of basic earnings per share until the securities vest. Diluted earnings per share reflect the dilutive effect of potential common shares from securities such as stock options and unvested restricted stock. The dilutive effect of stock options and unvested restricted stock is computed using the treasury stock method, which assumes any proceeds that could be obtained upon the exercise of stock options and restricted stock, would be used to purchase common shares at the average market price for the period.

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

(J) STOCK-BASED COMPENSATION

       Ryder’s stock-based employee compensation plans are accounted for under the intrinsic value method. Under this method, compensation cost is recognized based on the excess, if any, of the quoted market price of the stock at the date of grant (or other measurement date) and the amount an employee must pay to acquire the stock. We record compensation expense for the amortization of restricted stock issued to employees and directors.

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     The following table illustrates the effect on net earnings and earnings per share if we had applied the fair value method of accounting to stock-based employee compensation.

       The fair values of options granted were estimated as of the dates of grant using the Black-Scholes option-pricing model. Total stock-based employee compensation expense for the three months ended March 31, 2004 and 2003 includes the effect of cancelled options totaling 51,420 and 427,132, respectively.

(K) SHARE REPURCHASE PROGRAM

       In September 2003, our board of directors authorized a two-year share repurchase program intended to mitigate, in part, the dilutive impact of shares issued under our various employee stock option and employee stock purchase plans. Under the program, shares of common stock are purchased in a dollar amount not to exceed the proceeds generated from the issuance of common stock to employees since January 1, 2003. As of March 31, 2004, the proceeds generated from the issuance of common stock to employees since January 1, 2003 were $89.0 million. The program, which extends through September 30, 2005, limits aggregate share repurchases to no more than $90 million. Share repurchases are made periodically in open-market transactions using our working capital, and are subject to market conditions, legal requirements and other factors.

       During the three months ended March 31, 2004, we purchased and retired 1,030,000 shares under the program at an aggregate cost of $37.7 million. As of March 31, 2004, we have purchased and retired 1,147,500 shares under the program at an aggregate cost of $41.2 million. The cost of stock repurchases is allocated between common stock and retained earnings based on the amount of capital surplus at the time of the stock repurchase.

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(L) COMPREHENSIVE INCOME

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

(M) RESTRUCTURING AND OTHER RECOVERIES, NET

       The components of restructuring and other recoveries, net for the three months ended March 31, 2004 and 2003 were as follows:

       Allocation of restructuring and other recoveries, net across reportable business segments for the three months ended March 31, 2004 and 2003 was as follows:

2004

       Restructuring recoveries, net of $(0.2) million relate primarily to employee severance and benefits recorded in prior restructuring charges that were reversed due to refinements in estimates. Other recoveries in 2004 represent the gain on sale of a property that is part of our headquarters complex and was sold in connection with the previously announced relocation of our headquarters in the second quarter of 2005. We recently entered into a contract to sell the principal headquarters facility and land for a sale price above our carrying value. The sale is subject to customary closing conditions and is expected to close in the second quarter of 2004. Upon completion of the sale, we will lease back the headquarters facility at market rates until we relocate to our new headquarters in 2005.

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2003

       Other recoveries in 2003 represent gains on sale of owned facilities identified for closure in prior restructuring charges.

       Activity related to restructuring reserves for the three months ended March 31, 2004 was as follows:

       At March 31, 2004, employee terminations from prior year restructuring plans were substantially finalized. Deductions represent cash payments made during the period of $1.3 million and prior year charge reversals of $0.4 million. At March 31, 2004, outstanding restructuring obligations are required to be paid principally over the next nine months.

(N) EMPLOYEE BENEFIT PLANS

       Components of net periodic benefit cost for the three months ended March 31 was as follows:

       We previously disclosed in the 2003 Annual Report, that we expected to contribute approximately $41 million to our pension plans during 2004. As of March 31, 2004, $4.3 million of contributions have been made. We presently anticipate contributing an additional $61 million to fund our pension plans in 2004 for a total of approximately $65 million.

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(O) SEGMENT REPORTING

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

       Ryder’s primary measurement of segment financial performance, defined as “Net Before Taxes” (NBT), includes an allocation of Central Support Services (CSS) and excludes restructuring and other recoveries, net. CSS represents those costs incurred to support all business segments, including sales and marketing, finance, corporate services, health and safety, human resources, information technology, legal and communications. The objective of the NBT measurement is to provide clarity on the profitability of each business segment and, ultimately, to hold leadership of each business segment and each operating segment within each business segment accountable for their allocated share of CSS costs. Certain costs are considered to be overhead not attributable to any segment and remain unallocated in CSS. Included among the unallocated overhead remaining within CSS are the costs for investor relations, corporate communications, public affairs and certain executive compensation. CSS costs attributable to the business segments are generally allocated to FMS, SCS and DCC as follows:

•	Sales and marketing, finance, corporate services and health and safety — allocated based upon estimated and planned resource utilization.

•	Human resources — individual costs within this category are allocated in several ways, including allocation based on estimated utilization and number of personnel supported.

•	Information technology — allocated principally based upon utilization-related metrics such as number of users or minutes of CPU time. Customer-related project costs and expenses are allocated to the business segment responsible for the project.

•	Other — represents purchasing, legal and other centralized costs and expenses including certain incentive compensation costs. Expenses, where allocated, are based primarily on the number of personnel supported.

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       The following tables set forth financial information for each of Ryder’s business segments and a reconciliation between segment NBT and earnings before income taxes and cumulative effect of change in accounting principle for the three months ended March 31, 2004 and 2003. In 2004, we changed our methodology of allocating sales support costs between FMS and DCC segments. Accordingly, 2003 segment NBT measures for these segments have been adjusted to provide the retroactive effect of this change. These results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented.

       The FMS segment leases revenue earning equipment and provides fuel, maintenance and other ancillary services to the SCS and DCC segments. Inter-segment revenue and NBT are accounted for at approximate fair value as if the transactions were made with independent third parties. NBT related to inter-segment equipment and services billed to customers (equipment contribution) is included in both FMS and the business segment which served the customer, then eliminated (presented as “Eliminations”).

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

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INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

THE BOARD OF DIRECTORS AND SHAREHOLDERS
RYDER SYSTEM, INC.:

       We have reviewed the accompanying consolidated condensed balance sheet of Ryder System, Inc. and subsidiaries as of March 31, 2004, the related consolidated condensed statements of earnings, shareholders’ equity and cash flows for the three months ended March 31, 2004 and the related consolidated condensed statements of earnings and cash flows for the three months ended March 31, 2003. These consolidated condensed financial statements are the responsibility of the Company’s management.

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

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

       We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Ryder System, Inc. and subsidiaries as of December 31, 2003, and the related consolidated statements of earnings, shareholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated February 4, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 31, 2003, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

       As discussed in the notes to the consolidated condensed financial statements, the Company changed its method of accounting for variable interest entities and its method of accounting for asset retirement obligations in 2003.

/s/ KPMG LLP

Miami, Florida
April 21, 2004

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — THREE MONTHS ENDED MARCH 31, 2004 AND 2003

OVERVIEW

       The following discussion should be read in conjunction with the unaudited consolidated condensed financial statements and notes thereto included under ITEM 1. In addition, reference should be made to our audited consolidated financial statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2003 Annual Report on Form 10-K.

       Our business is divided into three reportable business segments based primarily upon similar economic characteristics, products, services and delivery methods: our Fleet Management Solutions (FMS) business segment provides full service leasing, commercial rental and programmed maintenance of commercial trucks, tractors and trailers to customers, principally in the U.S., Canada and the U.K.; our Supply Chain Solutions (SCS) business segment provides comprehensive supply chain consulting and lead logistics management solutions throughout North America, in Latin America, Europe and Asia; and our Dedicated Contract Carriage (DCC) provides vehicles and drivers as part of a dedicated transportation solution, principally in North America. We operate in extremely competitive markets. Our customers select us based on numerous factors including service quality, price, technology and service offerings. As an alternative to using our services, customers may also choose to provide these services for themselves, or may choose to obtain similar or alternative services from other third-party vendors.

ITEMS AFFECTING COMPARABILITY BETWEEN PERIODS

FMS Acquisitions

       On March 1, 2004, we completed an asset purchase agreement with Ruan Leasing Company (Ruan) under which we acquired Ruan’s fleet of over 6,400 vehicles, 37 of its 111 service locations and more than 500 customers. Ryder also acquired full service contract maintenance agreements covering approximately 1,700 vehicles. Effective December 31, 2003, we also acquired substantially all the assets of Iowa-based General Car and Truck Leasing System (General), a major privately held commercial truck leasing, maintenance and rental company, including General’s fleet of over 4,200 vehicles, 15 of its 34 service locations and more than 700 customers. The combined networks will operate under Ryder’s name and will allow us to leverage our existing U.S. infrastructure in key markets while adding new infrastructure to strengthen our presence in targeted areas of the Midwest, Southeast, Mid-Atlantic and Southwest. The results of these acquisitions have been included in the consolidated results of Ryder since the date of acquisition.

Accounting Changes

       As discussed in Note (B) to the unaudited consolidated condensed financial statements, effective July 1, 2003, Ryder consolidated three variable interest entities (VIEs) in connection with the adoption of the Financial Accounting Standards Board’s Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities.” The consolidated VIEs were established as part of previous sale-leaseback transactions of revenue earning equipment in which Ryder sold revenue earning equipment to special-purpose entities (SPEs) and then leased the revenue earning equipment back as lessee under operating lease arrangements. In connection with the sale-leaseback transactions executed with SPEs, in the form of vehicle securitizations and a synthetic leasing arrangement, we provided credit enhancements and residual value guarantees that obligate Ryder to absorb the majority of the expected losses from such entities, if any are realized. Therefore, FIN 46 required that these entities be consolidated. The consolidation of the VIEs did not have a significant impact on our consolidated net earnings for the period ended March 31, 2004; however, reported depreciation expense, equipment rental and interest expense were impacted by the consolidation of the VIEs. In addition, both net cash provided by operating activities and our free cash flow measure increased due to the add-back of depreciation expense on the VIEs’ revenue earning equipment and net cash used in financing activities also increased due to principal payments on VIEs’ debt for the period ended March 31, 2004.

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       Effective January 1, 2003 we adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations,” which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made, and that the associated asset retirement costs be capitalized as part of the carrying amount of the long-lived asset. The cumulative effect adjustment recognized upon adoption of this standard was $1.2 million on an after-tax basis, or $0.02 per diluted share, consisting primarily of costs associated with the retirement of certain components of revenue earning equipment.

CONSOLIDATED RESULTS

       Earnings before cumulative effect of change in accounting principle increased 67.3% to $35.0 million in the first three months of 2004 compared to the same period last year. The increase in earnings was primarily attributed to the impact of FMS acquisitions, improved FMS rental pricing and utilization, lower pension costs, and reductions in operating expenses stemming from cost management and process improvement actions. See “Operating Results by Business Segment” for a further discussion of operating results. The earnings growth rate in 2004 exceeded the related earnings per share growth rate because the average number of shares outstanding increased 5.2% reflecting the impact of stock issuances under employee stock option and stock purchase plans over the past twelve months.

       Revenue increased 1.5% to $1.2 billion in the first three months of 2004 compared with the same period in 2003. During 2004, FMS revenue was positively impacted by recent acquisitions, which contributed $27.3 million in revenue, and higher rental revenue resulting from better pricing and increased activity. These increases in FMS revenue were partially offset by reduced full service lease revenue on our base business (excluding acquired contracts) in the U.S. and the impact of the non-renewal of a customer contract to provide ancillary fleet services. SCS and DCC revenue decreased in 2004 compared with the same period in 2003 as a result of the non-renewal of certain customer contracts and reduced volumes. Revenue comparisons for FMS and SCS were favorably impacted by changes in foreign exchange rates.

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       Operating expense increased 5.4% to $542.7 million in the first three months of 2004 compared with the same period in 2003. This increase was principally due to higher maintenance costs as a result of a larger and older vehicle fleet. Operating expenses were also impacted by higher costs associated with an inventory procurement contract.

       Salaries and employee-related costs decreased 1.8% to $307.0 million in the first three months of 2004 compared with the same period in 2003. Salaries and employee-related costs declined primarily as a result of lower pension expense. Pension expense decreased $4.6 million to $16.4 million in the first three months of 2004 compared with the same period in 2003 and primarily impacted our FMS business segment, which employs the majority of our employees that participate in the primary U.S. pension plan.

       Freight under management (FUM) expense represents subcontracted freight costs on logistics contracts for which we purchase transportation. FUM expense decreased 13.1% to $91.1 million in the first three months of 2004 compared with the same period in 2003. The decline in FUM expense was due to revenue reductions in our SCS business segment as a result of the non-renewal of certain customer contracts.

       Depreciation expense relates primarily to FMS revenue earning equipment. Depreciation expense increased 24.7% to $175.0 million in the first three months of 2004 compared with the same period in 2003. Depreciation expense increased due to an increase in the average number of owned vehicles. The growth in the number of owned units reflects the consolidation of VIEs effective July 1, 2003, recent FMS acquisitions, the conversion of leased units to owned status as a result of lease extensions and the replacement of expiring lease units with owned units. For the first three months of 2004, depreciation expense attributable to the revenue earning equipment of consolidated VIEs approximated $21 million.

       Gains on vehicle sales, net increased 54.2% to $6.7 million compared with the first three months in 2003. The increase in gains on vehicle sales, net for the first three months of 2004 was due to an increase in the number of units sold and improved average pricing.

       Equipment rental consists primarily of rental costs on revenue earning equipment in FMS. Equipment rental costs decreased 65.1% to $25.7 million in the first three months of 2004. The decrease in 2004 was due to a reduction in the average number of leased vehicles (compared with owned) resulting from the consolidation of VIEs effective July 1, 2003, the conversion of leased units to owned status as a result of lease extensions and the replacement of expiring lease units with owned units. For the first three months of 2004, equipment rental was reduced by approximately $29 million for revenue earning equipment of VIEs consolidated effective July 1, 2003.

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       Interest expense increased 10.9% to $24.4 million in the first three months of 2004 compared with the same period in 2003. The increase in 2004 reflects the impact of higher average debt levels and interest expense of approximately $5 million on debt of VIEs’ consolidated effective July 1, 2003. The increase in debt levels was partially offset by lower interest rates during 2004.

       Miscellaneous income, net decreased to $1.9 million in the first three months of 2004 compared with $2.5 million in the same period in 2003. During the first three months of 2004, miscellaneous income, net was favorably impacted from improved market performance of investments classified as trading securities used to fund certain benefit plans, which partially offset the elimination of servicing fee income related to certain VIEs. Prior to the consolidation of the VIEs effective July 1, 2003, miscellaneous income, net included fee income related to administrative services provided to vehicle lease trusts in connection with the vehicle securitization transactions. As a result of consolidating the vehicle securitization trusts, we no longer recognize a benefit from service fee income.

       For the first three months of 2004, restructuring and other recoveries, net of $1.1 million primarily relate to the gain on sale of a facility not related to our operations. See Note (M) —  “Restructuring and Other Recoveries, Net,” in the Notes to Consolidated Condensed Financial Statements, for a complete discussion of restructuring activity.

       Our effective income tax rate on earnings increased to 37.5% in the first three months of 2004 compared with 36.0% for the first three months of 2003. In 2004, the effective income tax rate was impacted by higher net non-deductible items, a higher proportion of income in higher tax-rate jurisdictions and changes in foreign income tax regulations.

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OPERATING RESULTS BY BUSINESS SEGMENT

       We define the primary measurement of our segment financial performance as “Net Before Taxes” (NBT), which includes an allocation of Central Support Services (CSS) and excludes restructuring and other recoveries, net. CSS represents those costs incurred to support all of our business segments, including sales and marketing, human resources, finance, corporate services, information technology, health and safety, legal and communications. The objective of the NBT measurement is to provide clarity on the profitability of each of our business segments and, ultimately, to hold leadership of each business segment and each operating segment within each business segment accountable for their allocated share of CSS costs. In 2004, we changed our methodology of allocating sales support costs between the FMS and DCC segments. Accordingly, 2003 segment NBT measures for these segments have been adjusted to provide a retroactive effect of this change.

       Certain costs are considered to be overhead not attributable to any segment and remain unallocated in CSS. Included within the unallocated overhead remaining within CSS are the costs for investor relations, corporate communications, public affairs and certain executive compensation. See Note (O) —  “Segment Information” in the Notes to Consolidated Condensed Financial Statements for a description of how the remainder of CSS costs is allocated to the business segments.

       Segment NBT excludes restructuring and other recoveries, net and includes equipment contribution. The following table presents the allocation of restructuring and other recoveries, net across reportable business segments for the first three months of 2004 and 2003.